Inward Foreign Direct Investment (FDI) provides numerous benefits to host countries in terms of technological transfer of resources, improved capital inflows, trade integration and increased employment opportunities due to industrial growth which accelerates growth and economic transformation of a country. This case study analyzes Ireland's attractiveness as a destination for FDI by assessing its political, economic, legal, social, technological and legal systems using PESTEL analysis.


Political Factors:

Ireland's transformation a from a poor struggling economy during independence to a global competitive economy in the world is commendable. A combination of factors like low corporate taxes, favourable business environment, well-qualified English speaking workforce, lower costs, a single European market , stable political government, intellectual property rights contribute to Ireland's attractiveness as an investment destination (Hill, 2007). The Irish government removed trade barriers by eliminating foreign ownership restrictions in 1950 and granted tax free status to firms interested in exports, which marked the entry of FDI in Ireland, because companies can easily run their operations without any restrictions (Hill, 2007). Ireland offered one of the lowest corporate tax rates of 12.5% on profits to investors, which is one of the lowest rates among all the countries as shown in figure 1. The intellectual property (IP) protection offered by government to safeguard the research and development works (Enterprise-Ireland, 2009) along with these low tax rewards of Ireland attracted MNC's who want to accommodate intellectual property in low tax environment and repatriate profits (International Tax Review , 2003).


The Anglo- Irish Free Trade Area Agreement (AIFTA) increased trade between Ireland and UK as tariffs on import and exports were eliminated and by 1960, Ireland had become an industrialized nation due to increased FDI. By, 2000 government performed a structural change by privatizing all companies and restrict its role to few industries of the state. Private sector ownership combined with property rights and tax incentives increased FDI (Hill, 2007). Wage agreements by government fostered industrial peace, controlled wage inflation and improved labour relations. The Irish government took various measures to increase FDI: quick response of government in solving business problems; new industrial policies and regulations acts for development of new sectors like pharmaceuticals, financial services, telecommunications, etc. were introduced; monetary grants to foreign investors including training grants for employees by IDA ; liberalization of transport sector; formed state organizations like IDA(Industrial Development Agency) and many others to promote FDI; investments in education, infrastructure and technology(Hill, 2007). All these efforts of government created a professional business environment along with technology, skilled workforce and low cost availability for the foreign investors. There were some conflicts in North Ireland which led to a political instability in Ireland for a time being. However they ended by the Good Friday Agreement in 1998 (Byrne, Matic and Fissuh, 2007) and since then there is an increase in FDI.


Economic Factors

Ireland's economic growth can be assessed through its Gross Domestic product (GDP). From figure 2, it can be seen that Ireland's GDP growth from 1999 � 2004 was continuously rising and it grew faster than any of the OECD (Organization for economic co-operation and development) countries (IDA Ireland, 2009). Irelands rising GDP growth and its open economy was one of the ability of Ireland to attract FDI, as investors want to invest in countries with growing economy.

Ireland's membership in European Economic Community (EEC) in 1973, made the economy stronger as Ireland got access to the European markets and industries of EU-member nations, agricultural subsidies and EU funds (Hill, 2007). This EU membership transformed Ireland from an agricultural to high-technology export-oriented economy with exports making 95 % of GDP. Ireland's exports started expanding to other European countries and majority of U.S. companies chose Ireland as an attractive manufacturing location for entry in European markets with U.S. exports accounting to half of Ireland's total exports in 2001 (Hill, 2007). The economic crisis of 1980's in Ireland attributed to inflation, unemployment, heavy debt and emigration of people due to unemployment was overcome through well pursued economic policies, cuts in government expenditure and wage bargaining through social partnership agreements started since 1987; The wage control through these agreements was responsible for increase in employment through moderate wage growth, income tax cuts and removing industrial disputes (Honohan and Walsh, 2002). This improved Ireland's competitiveness and its industrial relations environment, which led to revival of economy and more inflows of foreign capital.

A macroeconomic climate formed by the government by reducing annual budget deficit and national debts was appropriate for FDI, as investors look for countries with stable economy, low inflation and good employment which were supported by Ireland's macroeconomic climate. The Maastricht Treaty by EU in 1991 with compliance to EMU (Economic and Monetary Union) criteria adopted a single European currency which removed exchange-rate uncertainty for investors, provided stable economy, raised currency and boosted employment and economic growth. It led to European integration and a single lucrative EU market (CooperandTomic, 2007). EU funds were used by Ireland in different sectors like tourism, agriculture, transport etc. which supported Ireland's economic growth. Irish GDP grew at 9.9% annually between 1996-2000. The reforms in economic and political decisions in 1980 supported by EU membership and funds made a turn around and Ireland's became one of the fastest growing economies in EU in 1990's.

Due to single currency, Irelands annual average GDP growth was the highest, 6.6 % in Euro Area, from 1999-2006 (Traistaru-Siedschlag, 2007).


Social:

American firms were major investors in Ireland for the EU Market. The well-qualified English speaking workforce of Ireland was the major reason for FDIs to invest in Ireland, as it eliminated language barriers (Hill, 2007).


Technological:

Ireland is recognized as a word class research and innovation location (IDA Ireland, 2009) due to its continuous innovation, excellent technology and infrastructure and workforce with strong technical and business skills. The Irish government promoted research and development activities in Ireland and spent millions of amount to set up research institutes like the gene therapy research institute; provide broadband connectivity to all parts of Ireland; invested millions in education funds and encouraged students to pursue science and technology, creating high-technology skilled workforce for future.

Due to increased demand in software market, Ireland had become the base for software-localization and translation in Europe, and was considered as the premier location for Software Development in whole Europe. Majority of software products supplied in Europe were produced in Ireland. This flourishing demand for the software industry attracted many MNC's which included the top software companies in the world. This benefits complemented by R&D tax credit, and governments research development and innovation model encouraged foreign investments in Ireland (IDA Ireland, 2009).


Legal:

The government had enacted several laws and acts to protect the foreign companies in Ireland. A Communications Regulatory Act was passed in 2002 by the government to regulate and control the telecommunications sector because of growing competition (Hill, 2007). Ireland faced high insurance costs due to high litigation rates in Europe, therefore a Personal Injuries Assessment Board (PIAB) was set up to reduce the insurance costs. It resulted in a reduction of insurance premiums for both consumers and businesses and relieved people from going to courts, through which business and consumers both saved a lot of money.

American companies accounted a major investment in Ireland because of its better regulations for workplace, improved labour relations and also as strikes between the workers and companies were very rare in Ireland, which reflects that the workforce is co-operative and there are no conflicts. The government passed several other laws and regulations pertaining to competition, merger and takeovers, companies act, employment, intellectual property, security and environmental protection at the EU level (Hill, 2007). The protection and benefits offered by the laws to business, helped Ireland to raise more FDI inflows.


References:

IDA Ireland (2009) IDA-Ireland-Publications, viewed 03 October 2009,

http://www.idaireland.com/news-media/publications/library-publications/ida-ireland-publications/

IDA Ireland (2009) Tax Regime viewed 03 October 2009,

http://www.idaireland.com/why-ireland/tax/

Honohan, P. and Walsh, B.(2002). Catching up with the leaders: The Irish hare. Brookings Papers on Economic Activity, 1,pp. 1-77.

Hill, C. (2007) International Business: competing in the global marketplace, 6th Edn, p.335

Traistaru-Siedschlag, I.(2007). MACROECONOMIC ADJUSTMENT IN IRELAND UNDER THE EMU*. Quarterly Economic Commentary, p.78.

International Tax Review (2003),London, p. 1.

Enterprise-Ireland (2009) Intellectual Property, viewed 07 October 2009,

http://www.enterprise-ireland.com/ResearchInnovate/Research+Commercialisation/IP.htm

Byrne, S., Matic, M. and Fissuh, E. (2007). THE EUROPEAN UNION PEACE AND RECONCILIATION FUND IMPACT ON NORTHERN IRELAND. International Journal on World Peace, 24, 2,pp. 85-109.

Cooper,L.,andTomic,A. (2007). EUROPEAN MONETARY UNION (EMU) AND THE SINGLE CURRENCY: ITS CURRENT STATUS.Journal of International Business Research,6, 2, pp.59-68.

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