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Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy. - Leaving Cert Economics - Question b - 2018
Question b
Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy.
Worked Solution & Example Answer:Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy. - Leaving Cert Economics - Question b - 2018
Step 1
Benefits of Foreign Direct Investment (FDI)
Answer
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Creates Employment (Direct and Indirect Employment)
FDI plays a significant role in job creation within the Irish economy.
For instance, nine of the top ten global companies have operations in Ireland in sectors such as ICT, life sciences, financial services, engineering, and business services. This influx generates both direct jobs within these multinational corporations and additional indirect employment in local communities. -
Exports / Effect on Balance of Trade
The foreign payments into Ireland for goods and services exported from these companies significantly bolster the balance of trade. As these companies grow, they contribute to both the expansion and diversification of Irish exports, beneficial to the overall economy. -
Effect on Government Revenue
Foreign multinational corporations (MNCs) contribute significantly to government revenue, paying around €2.8 billion in Corporation Tax. This revenue helps reduce social welfare spending and increases government expenditure on services, benefiting society as a whole. -
Economic Growth
FDI encourages increased economic output, as rising Gross National Product (GNP) fosters further investment. This cycle encourages other firms to increase their output and boost economic growth across various sectors. -
Benefits to Workers' Productivity
FDI facilitates the transfer of modern technologies and techniques to local firms, which enhances productivity. Irish workers gain valuable skills and experiences, contributing to their productivity and fostering a more competitive workforce. -
Increases the Attractiveness of Ireland as a Location
FDI helps improve Ireland's business environment by developing its skills base and culture. This makes Ireland a more attractive destination for future investments, drawing more MNCs to the country.
Step 2
Challenges of Foreign Direct Investment (FDI)
Answer
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Taxation Issues
One of the significant challenges relates to the effective taxation of multinational corporations (MNCs). Many citizens express concern regarding the low effective tax rates that MNCs pay. Currently, MNCs contribute a major portion of Ireland's Corporation Tax, estimated at over 16% of the state's revenue. Additionally, challenges with taxing intangibles pose further complications. -
Effects on Ireland If They Re-locate
If companies decide to relocate their operations outside of Ireland, the repercussions could be substantial. For instance, over 1,100 foreign companies have shifted their operations, which could endanger over 174,000 jobs directly or indirectly linked to FDI. -
Repatriation of Profits
There is also concern regarding profit repatriation. The repatriation of profits can have negative ramifications for the Irish economy. Some critics highlight the need for measures to control or limit the repatriation of profits to ensure the benefits remain within the Irish economy. -
Current Uncertainties Re: the Location of FDI
The global landscape for FDI is changing. Economic uncertainties, such as Brexit and other geopolitical tensions, raise concerns about Ireland’s attractiveness as an FDI destination. These uncertainties make it challenging to secure future investments. -
Distribution of Benefits / Linkages with Irish Firms
There are ongoing debates regarding how to ensure that the benefits of FDI are distributed evenly across Ireland. Questions arise about how to enhance collaboration between indigenous companies and MNCs. This includes concerns whether Irish firms are positioned to attract the talent and skills being drawn towards MNCs.