Evaluating Fdi-Led Development: The Celtic (Paper?) Tiger ₁

Eileen M. Doherty

Case Western Reserve University

Browne Center for International Politics

January 1998

We have staked our money on the hare of foreign enterprise rather than on the tortoise of native industry. ₂

Introduction

As liberalization trends sweep the international political economy, there has been a stark shift in the nature of development strategies that industrializing countries are following. In country after country, policymakers have embraced strategies designed to pursue industrialization by utilizing foreign capital rather than relying primarily on domestic investment, and by extension, by inserting their countries into cross-national production networks rather than encouraging an independently strong indigenous industrial base. Foreign investment has become the key to development strategies. ₃ At a minimum, this means that developing countries are opening domestic markets, liberalizing trade rules and dismantling regulations regarding foreign direct investment (FDI). Additionally, it often means proactive policies to lure foreign-owned firms into a given country -- especially by offering government incentives for foreign export-oriented and high value-added manufacturing activities.

This paper will offer some hypotheses regarding the consequences of FDI-led development strategies. In order to do so, it will be useful to examine the experiences of a country with a relatively long history of such a strategy. Ireland is a particularly informative case in this regard. Ireland embraced investment-led development much earlier than Southeast Asian, Latin American or Eastern European governments. Dublin began the liberalization process in the late 1940s, and by 1956 had fully embraced a development strategy that relied upon foreign investment as the key to building up Irish domestic industry. Moreover, similar to countries in Southeast Asia, Latin America and Eastern Europe, Ireland embraced an FDI-led strategy before a strong indigenous manufacturing base had emerged in the country. The paper will argue that the long-term effects of FDI-led development for Irish economic development have been mixed. On the positive side, the strategy ultimately contributed -- especially in the last decade -- to strong macroeconomic growth and an improvement in aggregate employment patterns. However, these benefits have been accompanied by serious drawbacks. Specifically, critics have pointed to the lack of technological and other spillovers from foreign firms to indigenous firms. Moreover, the strategy has exacerbated the problem of social stratification: economic opportunities seem to be expanding for well-educated and skilled workers, but FDI-led development has done little to ameliorate the problems of structural unemployment and the lack of opportunities for lesser-educated workers.

The Global Turn Toward Investment-Led Growth

The current era is revolutionary in that industrializing countries have embraced development strategies that entail liberalization before export-oriented industrialization. That is, contemporary investment-led development strategies rely on foreign investment to spur the creation of an internationally-competitive indigenous industrial base. ₄ This is a very different strategy than those embraced by other late developers -- for example, Japan, Korea and Taiwan. These countries relied upon import barriers while they nurtured internationally-competitive domestic industries. Trade liberalization occurred only after indigenous industries were able to compete successfully in international markets. The domestic manufacturing base was built through domestic investments (or foreign borrowing), not by relying on the presence or capital of foreign multinational firms. Even today, Japan and Korea continue to be wary of foreign investment as a means of creating domestic competitive advantage. And although Taiwan liberalized its investment regime in the 1960s as it moved from import substitution policies to export-led growth, the aim was to generate spillover effects for a by-then well-established indigenous manufacturing base.

In the current international environment, developing countries no longer have the option of attempting to build internationally-competitive industries behind a curtain of import barriers. Flows of goods, services and capital across international borders have increased dramatically in recent years, making it much more difficult to craft (much less implement) "national" or "autonomous" development strategies. Negotiations at the WTO and regional forums to liberalize trade have reinforced this trend, meaning that developing countries must pursue economic development in a far more open environment than earlier developers did. New strategies are necessary, strategies that recognize and take advantage of increasingly integrated economies.

Contemporary developing countries are therefore attempting to accomplish something unprecedented: explicit reliance on multinational corporations and foreign capital to generate sustainable economic growth and spur the creation of domestic export manufacturers. Southeast Asian countries have embraced unilateral liberalization measures, ₅ have formed the Asian Free Trade Association (AFTA) partly as a means of attracting more foreign investment flows, ₆ and have thrown their support behind the Asia-Pacific Economic Cooperation (APEC) forum. In Latin America, the turn toward liberalization is marked by the North American Free Trade Agreement (NAFTA), as well as the implementation of liberalization and privatization schemes throughout the region. And in Eastern Europe, where the post-communist industrial landscape is only just beginning to emerge, the emphasis is increasingly on creating new industrial competitiveness by facilitating linkages with foreign industry, especially by joining the European Community. ₇ Increasingly, industrial policies that entail import substitution industrialization (ISI), choosing national winners and losers, and other specific government planning mechanisms are being dismissed as non-viable in an increasingly globalized world. ₈

The rationale behind an FDI-led strategy is straightforward. Theoretically, the presence of foreign manufacturing activities will generate a broad spectrum of benefits, ranging from increasing economic growth (at the broadest level) to the emergence of an export-competitive manufacturing base (at a more specific level). Thus, roughly in order of increasing specificity, the benefits for foreign direct investment are:

• Increased production activities -- especially in technology intensive industries -- will spur overall economic growth, and therefore create a rise in gross domestic product;

• Increased export activities will generate foreign exchange, thereby improving national balance of payments accounts;

• The establishment of new enterprises will create new jobs in the host country;

• New enterprises will generate a demand for local inputs, thereby creating a beneficial spillover effect in for local manufacturers and service providers;

• To the extent that new enterprises engage in high value-added activities, there is likely to be transfer of technology and know-how to local employees -- which will flow more or less naturally to indigenous firms as local employees of MNCs change jobs.

• The increased demand for local inputs, in combination with technology/know-how transfer to indigenous industry, will create a development trajectory that sustains industrial upgrading, technological innovation, and international export competitiveness.

A major question facing developing country policymakers must be the extent to which these benefits do in fact flow from increased FDI activities. If they do flow, then development strategies that emphasize liberalization are indeed likely to generate sustainable economic growth. But if they do not flow as hoped -- if bottlenecks impede the flow of FDI benefits, if the flow is spotty rather than diffuse, or if in some areas there is no real flow of benefits from foreign-owned firms to the rest of the economy -- then government liberalization policies and investment incentives are not enough. Rather, host country policymakers must devise ways to ensure the creation and transfer of these economic benefits. While there is evidence that foreign investment can facilitate broad economic growth, ₉ there is no reason to assume that it necessarily will. The interests of foreign capital do not always match the interests of host countries. The experiences of Latin American countries in the 1970s are testimony to the fact that the activities of MNCs may generate economic and political instability rather than stability. ₁₀

More importantly, for an FDI-led development strategy to be successful, it must do more than contribute to short-term economic growth. Success cannot be measured simply looking at immediate increases in gross national product. It must also be gauged by firm-level effects, that is, the extent to which FDI creates dynamic benefits that sustain development. Such benefits include technology transfers that promote domestic industrial upgrading; the creation rather than elimination of jobs; and the development of skills, training and know-how among indigenous employees. Investment without significant technology transfer or local skills development risks "freezing" the industrial base at a particular stage of economic development rather than allowing upgrading, innovation, and reinvestment in higher value-added activities. Therefore, a major risk of an FDI-led development strategy is that the host country may find itself stuck at a low rung in the international division of labor.

Host country governments in Asia, Latin America and (more recently) Eastern Europe have recognized this risk and have therefore sought to develop policies that avoid a "maquiladorization" effect. They have done so by crafting government incentive packages aimed at attracting particular industries. Specifically, investment laws are often written to privilege high-technology and high value added manfacturing investments rather than assembly operations, low value-added manufacturing or primary product extraction activities. The electronics industry, more than any other, has been targeted in country after country as the key to successful development. ₁₁ The rationale is that the interests and activities of high-tech industries are most likely to jibe with the host country's industrialization goals. First, the electronics industry covers the entire chain of production -- from labor-intensive assembly on the low end to sophisticated component and software production on the high end. With such a diverse chain of activities, the opportunities for technological spillovers and industrial upgrading seem immense. Second, the technological spillovers associated with electronics are broadly applicable to other industries, including for example, textiles and automobiles. Third, there are examples of success stories, that is, late developers who successfully embraced electronics as the linchpin of their national development strategies. Taiwan, for example, stands as proof that a late developer can develop an internationally competitive indigenous electronics industry. ₁₂

Assuming that investment liberalization is successful in attracting more technology-intensive FDI, should we assume that this will necessarily generate sustainable economic development? To what extent will the benefits of technology transfer, job creation and skills formation flow naturally from MNCs to indigenous firms in host countries? If this flow is not automatic, then can a largely foreign-owned industrial base form the basis for sustainable economic development in host countries? If this too is not automatic, can host government policies induce the emergence of foreign/indigenous linkages that do create the kinds of dynamic benefits that are required for sustainable development?

These are not easy questions, precisely because they are largely untested questions. The revolutionary nature of FDI-led development suggests that it is critical to evaluate the consequences of launching the industrialization process with a foreign-dominated industrial base. To do so, we must examine not just broad patterns of FDI activities in a given country, but the relationship of foreign-owned industries to indigenous firms. But the relative newness of the FDI-led strategy in Asia, Latin America and Eastern Europe makes it difficult to gauge the long-term consequences of this kind of development. ₁₃ Even in the most apparently successful case, Southeast Asia, the jury is still out as to the long-term impact of foreign investment on national development trends. Economic growth rates are impressive, but there are also troubling signs: potentially politically explosive trade imbalances with Japan and the United States; uneven urban/rural development patterns; uneven development among various sub-regions within Asia; apparent bottlenecks in technology flows from MNCs to local firms; and growing shortages of skilled domestic labor.

As mentioned above, Ireland is a particularly instructive test case in evaluating the costs and benefits of FDI-led development. If any country might be expected to successfully implement an FDI-led strategy, it would be Ireland. Geographically, Ireland sits as a gateway to the European Community. Membership in the EEC nicely complemented Dublin's FDI-led strategy, since it allowed Ireland to offer US firms the possibility of using its market as an export platform to the rest of Europe (a benefit that US multinational firms in particular have recognized enthusiastically). Domestically, the country offers political stability, a well-educated labor force (at a lower cost than most EC countries), and an English-speaking environment (another advantage for US firms). Moreover, the strategy was coherent, consistent and efficiently implemented. The Irish Development Agency quickly gained a reputation as a world-class operation, channeling information and incentives to foreign firms interested in establishing operations in Ireland. All these factors -- the position of Ireland as an access point to the EEC; the domestic benefits of political stability and a relatively cheap, well-trained, English-speaking labor force; and the effective implementation of investment incentives -- might lead us to expect that the investment-led strategy would be well suited for Dublin's development goals. Consequently, Ireland should be a "most likely case" for investment-led development, and indeed, the Republic has been highly successful in attracting foreign firms to locate production in the country. As we shall see, however, whether the presence of these firms has generated the expected development benefits, however, is less clear. ₁₄

Ireland: An Early Case of Investment-Led Development Strategy

The Government of Ireland has given itself a new nickname: the "Celtic Tiger." Others in Ireland prefer a different title: "Europe's Offshore Silicon Valley." Whatever the appellation of choice, Irish government publications now laud the country's economic dynamism and prosperity. Ireland's growth in gross domestic product has been strong since the late 1980s, and in the period 1994-97, averaged over eight percent annually. The primary reason for success, according to the government: foreign direct investment. Consider the following summary by Ireland's Industrial Development Authority:

Ireland's economic growth rates over recent years have been impressive -- consistently amongst the highest of the OECD countries. Exports account for three-quarters of national output, which is a level unique in Europe. That success has been in large measure to the contribution of overseas companies which have found Ireland to be a highly competitive location from which to serve international markets.

Ireland offers a well managed and stable economy which has achieved high growth in a consistently low inflation, low cost and low corporate tax environment. That is why this "Celtic Tiger" of Europe wins close to a quarter of all available US manufacturing in Europe, although it accounts for just 1% of the population. ₁₅

The emphasis on foreign investment as the key to economic development has a long pedigree in Ireland. After achieving statehood in 1922, the newly-created Republic of Ireland faced the problem of how to create an industrial base in an overwhelmingly agricultural economy. ₁₆ Until W.W.II, Dublin's first priority was to decrease the country's economic dependence on Britain, which it attempted to do by enacting tariffs and other protective measures. After World War II, however, this strategy was quickly dismissed as infeasible. The Irish economy was in a serious crisis. Domestically, the country was suffering industrial stagnation, slow economic growth, and staggering emigration flows. Internationally, rising US imports created a dollar shortage in the country, which was exacerbated by the fact that the overwhelmingly agricultural orientation of the economy allowed Ireland to earn very little foreign exchange through exports. The result was a serious balance of payments difficulties by the early 1950s.

Economic crises create windows of opportunity for dramatic policy shifts. In Ireland, the post-war economic downturn constituted just such a crisis. The direction of change was not pre-ordained, as evidenced by the initially vehement inter-bureaucratic disagreements on optimal policies. A "deflationary" coalition headed by the Department of Finance called for adjustment through monetary discipline. ₁₇ An "expansionist" coalition headed by the Industry and Commerce Department argued for a policy that essentially entailed growing out of the economic problems by encouraging industrial expansion pubic investment and government incentives to industry.

During the early 1950s, the Department of Finance prevailed over the Department of Industry and Commerce in its call for deflation rather than industrial expansion. But four years of deflationary policies during the period 1952-56 resulted in negative growth rates, falling employment, serious discontentment among Irish business and labor, and more than a 2 percent drop in population due to emigration. ₁₈ Irish citizens continued "voting with their feet" in search of job opportunities in Great Britain, the United States and elsewhere, and emigration steadily whittled away at the country's population figures.(Ireland's population has fluctuated wildly throughout history, moving from a level of roughly eight million in the 1840s to a nadir of 2.8 million in 1961, to roughly 4.5 million today.) If Dublin was to restore economic health and stem the tide of emigration, an expansionary policy was necessary.

Internationally, there were strong pressures on Dublin to pursue this expansion through open economic policies. Strong pressure came in the form of the United States European Recovery Program (Marshall Plan), which was announced in 1948 -- and was explicitly designed to promote industrial expansion. But there were strings attached to the aid: Marshall Aid assistance was linked to membership in the Organization for European Economic Cooperation (OEEC) as well as the gradual loosening of trade restrictions among member countries. Thus, already by the early 1950s, Ireland was in a position in which it had ready access to aid flows for industrial expansion, but was constrained in the choice of policies by international pressures for liberalization.

Given this context, Irish policymakers had to develop a strategy that would simultaneously be liberal in orientation, export-oriented, and capable of creating domestic jobs. Ideally, said Taoisach John Costello in an October 1956 speech, expansion could be achieved with a policies to "favour home investment rather than foreign investment." ₁₉ But the prognosis for a domestic investment-led strategy seemed dim. Ireland's Industrial Development Authority, which had been created in 1949 to encourage industrial development and export expansion in the country, issued a series of pessimistic reports suggesting that domestic capital was inadequate for national development purposes. Given the paucity of domestic capital, alternative agents of modernization had to be found. The obvious candidates were foreign manufacturers. Thus, policymakers began to focus on multinational corporations as the key to job creation, industrial development and export expansion. As one "early and influential" advocate of investment-led development argued:

By far the most hopeful means of getting good management, technical knowledge, and capital all at once is from subsidiaries of large foreign companies...a plant which is paid for by foreign capital is a great deal better than one which has to be paid for from the scanty saving of the Republic." ₂₀

Added to this sentiment was the popular conviction that it was better to find ways to attract foreign industry than let thousands of young people move emigrate in pursuit of jobs. The idea was simple: Better to bring foreign jobs to the Irish people rather than send Irish people to foreign jobs.

After 1956, the country moved quickly to attract foreign investment to the country. Dublin expressed a firm commitment to drawing foreign manufacturing firms (especially US firms) into Ireland, with the hope that those firms would create jobs for Irish workers and export the bulk of their goods, thereby ameliorating the country's balance of payments difficulties. The government structured tax and other incentive to draw foreign multinationals into Ireland. The incentives were targeted explicitly at export-oriented industries, especially in sectors that were not already well served by Irish industry. High tech firms were given highest priority, while non-manufacturing activities were received low priority. Thus, the IDA actively identified, contacted and lobbied U.S. electronics and other high-tech firms. It did little to encourage foreign real estate investment; moreover, it designed separate (less concessionary) investment regimes for extractive industries (such as mining and exploration) or service industries (such as banking). While the latter industries were not actively discouraged, Dublin's incentive structures were aimed clearly at foreign export-oriented manufacturers. ₂₁

Moreover, Ireland was the first country to establish an export processing zone. The Shannon Free Trade Zone (located at Shannon International Airport) was established in 1947 -- and was augmented in 1958, when the government passed legislation that empowered the local development authority, the Shannon Free Airport Development Corporation (SFADCo) to set up an industrial estate next to Shannon International Airport in the western part of Ireland. ₂₂ Government legislation also provided that the profits from all exports from the industrial estate were tax-free for 25 years. Profits on exports from outside the estate were given tax-free status for ten years. (The tax exemption was extended twice -- and lasted until the mid-1980s, when the government decided to replace export profit tax relief with a 10 percent corporate tax.) The free trade zone continues to be attractive to US firms, who use its facilities to import duty-free components and materials; to process, sort and repackage goods; to store items with low inventory costs; and re-export goods to other EC countries.

Other investment incentives in Ireland are also extremely generous. The IDA provides information, advice and financial assistance to MNCs who are interested in establishing operations in Ireland. US investors are the primary focus -- and US firms are given national treatment (including access to government loans and grant aid). This means that there no general restrictions on the foreign majority ownership in Irish companies or other properties; nor are there nationality requirements regarding directors and shareholders of Irish firms. Irish law gives duty-free status to raw materials and partially finished items that are processed and re-exported. Moreover, taxation policies are highly favorable to foreign investors. In addition to country's 10 percent corporate income tax for export-oriented manufacturing (compared with a 38 percent tax on non-exporting -- largely indigenous -- manufacturers), foreign nationals enjoy favorable personal income tax regulations. ₂₃ Specific investment incentive packages are negotiated on a case-by-case basis with the IDA, but can include any number of concessionary elements, including:

• tax-free grants for employee training

• accelerated depreciation

• low-cost facilities for rent or sale in industrial estates

• export-risk guarantee programs ₂₄

The centrality of the investment-led strategy is highlighted in a 1996 summary of government policy:

The Irish Government is actively promoting American and other foreign investment. Economic policies are designed to foster a climate conducive to business and economic development and to attract foreign investment that will expand employment opportunities...Attracting foreign capital and modern production techniques is considered an effective means of stimulating the expansion of industry and the creation of competitive new enterprises. ₂₅

The pro-investment policies of the Irish government decreased the costs for foreign investors -- and Ireland became a highly profitable investment site for US firms. According to promotional brochures published by the IDA in 1983 and 1985 (based on US Department of Commerce data), US manufacturers made a higher average rate of return in Ireland than any other country in the world! (The average return in the 1978-82 period was 30.7 percent.) ₂₆

Not surprisingly, then, FDI flowed freely to Ireland -- and soon exceeded the levels that might be expected on the basis of Ireland's population or GDP figures. ₂₇ The country was particularly popular among US firms trying to gain access to the European market. During 1978-82, for example, the average annual growth of US manufacturing investment in Ireland was 36.6 percent -- four times higher than the average for the EC and the world. By 1996, over 900 MNCs had established operations in Ireland. More than one-third of these were US firms, which accounted for roughly half the value of total FDI.

Evaluating Investment-Led Growth

Initially, Ireland's investment led strategy appeared to be a smashing success. With the influx of new foreign firms, Irish gross domestic product soared. Emigration abated, and the population slowly rose to its current level of roughly 4.5 million. New investments in the country created jobs for Irish workers -- and foreign firms soon accounted for more than 1/3 of all manufacturing jobs in the country. Moreover, foreign industry constituted an export-oriented industrial base in Ireland, thereby transforming an overwhelmingly agricultural society into a producer and exporter of manufactured goods. ₂₈ The policy also reduced Ireland's dependence on the British market: whereas the United Kingdom accounted for 75 percent of Irish exports in 1960, the figure declined steadily to below 35 percent. ₂₉

When Ireland joined the European Economic Community in 1973, policymakers expected still better results from their policy. The IDA predicted that joining the EEC would allow Ireland to generate 10,000 new manufacturing jobs a year. ₃₀ Government policies optimistically forecast new surges of FDI into the country, and in anticipation of these investments, poured money into establishing engineering and other technical institutes throughout the country.

But accession to the EEC coincided with the 1973 oil shock. When the first oil shock hit after 1973, the chinks in the development strategy started to show. A slowdown of manufacturing production coincided with a leveling off of new investment activity. Downsizing became a priority for firms who were struggling to survive in the recessionary environment -- and job shedding occurred to a greater extent among foreign owned firms than indigenous firms. Jobs lost in foreign-owned firms during the 1973-80 period constituted 29 percent of 1973 total foreign sector jobs; among indigenous firms, the percentage of jobs lost in the same period was only 16 percent. ₃₁

Thus, what had appeared to be a successful development strategy in the 1960s seemed much less rosy in the 1970s. Foreign investment was lagging, job losses were mounting and domestic firms were finding it necessary either to scale back their operations or fold altogether. Irish graduates of the new technical schools found themselves without jobs. Throughout the 1970s, perceptions mounted that the very companies that were most targeted by the IDA -- US electronics firms -- were creating virtually no spillovers in the Irish economy. The firms tended to locate in isolated areas of Ireland (or the far outskirts of Dublin), to do assembly work or low-end manufacturing, and to generate little visible demand for domestic support industries.

These factors led the Dublin government to commission a report evaluating the state of Irish industrial policy. The result, "A Review of Industrial Policy" was published in 1982 (and was popularly dubbed the Telesis Report after the group commissioned to write it). The report was an indictment of the government's development strategy. Telesis highlighted the costs -- both material costs and competitive consequences -- of a foreign-investment dominated economy. In terms of material costs, Telesis estimated that some IR( 138.6 million in government revenue was lost just for the 1978-80 period, as well as IR( 117 million that financed tax based bank lending to companies (a source of inexpensive financing). ₃₂ These revenues, hardly trivial under any circumstances, were even more significant for a government that was facing mounting foreign debts.

But more fundamental than material costs of investment incentives were the competitive consequences of FDI-led growth. Specifically, the report argued, IDA incentives to foreign-owned firms reinforced that sector's export orientation, but national incentive programs for indigenous firms reflected no such coherent vision. Telesis argued that small Irish firms in the "untraded" sector -- i.e., servicing the domestic market -- received government grant money that could be better spent in nurturing larger-scale domestically-owned exporters. Current policies, it argued, simultaneously fostered domestic uncompetitiveness and gave too much preference to MNCS, who presumably had looser loyalties to Ireland than domestically-owned firms. More specifically, it identified a list of development bottlenecks that had resulted from the country's economic strategy:

• an industrial base with few high skill, high technology firms;

• an extremely limited number of indigenous export firms;

• a predominance of small firms engaging in low-skill activities in areas in which foreign competition was minimal;

• minimal cooperation between primary product industries and processors of Irish raw materials;

• little promise that the existing activities of foreign-owned industries would redress the development problems facing Ireland. ₃₃

In short, the IDA's development policy (according to Telesis) had resulted in a disconnect between the foreign and indigenous sectors in Ireland. To illustrate its argument, the Telesis report examined the electronics sector. Of twenty-three sample firms that assembled and tested electronics products in Ireland, Telesis noted that only two were engaged in local fabrication, marketing and R&D activities. ₃₄ The report argued that Dublin's industrial policy should promote the emergence of a limited number of medium and large domestic companies that would produce for the Irish, British and other EC markets. The report argued that government policies should ensure that the activities of foreign manufacturers strengthen (not weaken) indigenous industry. The emphasis must be on strengthening domestic-owned industry since, according to the report, "[N]o country has succeeded in developing high levels of industrial income without developing a strong indigenous sector." ₃₅

Other studies reinforced the proposition that a chasm existed between foreign and domestic industries in the country. As one student of Irish investment patterns noted:

[E]ven the most casual observer of the industrial scene in Ireland cannot but be struck by the widespread belief that there are systematic differences between foreign and indigenous manufacturing industry. This may be an example of the self-fulfilling prophecy insofar as the more powerful belief that native industry is inferior and unreliable, the more likely is this actually to become so. ₃₆

As a result, several studies of Irish production patterns found that exporters generally did not rely on Irish-made inputs for their production. To the extent that Irish-made goods were used, they were generally low-end products, such as packaging materials. While studies have varied in their assessment of the consequences of this phenomenon, they have been remarkably consistent in their conclusion that foreign firms spend less money on Irish-made inputs than domestically-owned firms do. ₃₇ Interview data in the mid-1980s suggests that even where components were locally available, MNC managers were reluctant to source domestically because of doubt regarding the quality, price competitiveness or delivery of Irish suppliers. ₃₈

The Telesis Report stands as a turning point in Irish development strategy, not because it changed the government's support for FDI-led development, but rather because it highlighted the need for active government promotion of domestic/foreign linkages in Ireland. Although the IDA took strong exception to some elements of the report, it also initiated some policy changes that implicitly acknowledged the overall thrust of the Telesis argument. ₃₉ Thus, in 1984 Dublin launched a National Linkages Programme; the idea was to devise policies to maximize the levels of raw materials, components and services that were locally sourced by MNCs. The Programme exists to provide information to foreign and domestically-owned firms, to match suppliers with purchases, and to develop a stronger local supply infrastructure in the country. ₄₀

In 1990, the Department of Industry and Commerce stated the change in policy even more explicitly, when it published a report stressing that government financial incentives for foreign firms should not be given at the expense of government initiatives to promote the emergence of medium and large indigenous firms. Since 75 percent of Irish exports are generated by MNCs, the new goal is to integrate domestic firms into international markets.

To date, however, the new policy remains more rhetoric than reality. The Industrial Development Authority continues to focus its efforts on attracting new investors rather than assisting local firms market their goods internationally -- even though it has the mandate to provide both services. Thus, for example, when turf battles emerged during the early 1990s over which agency was reponsible for export marketing assistance, the IDA succeeded in absorbing the formerly-autonomous Irish Export Board. There, the Board has languished. Very little effort has been devoted to developing the capability to assist local exporters; rather, the IDA has concentrated its energies in courting MNCs into Ireland. ₄₁ The result is that local firms generally do not export (and hence are subject to the 38 percent corporate tax), while foreign MNCs overwhelmingly do export (and hence receive the 10 percent rate). Irish firms continue to have a reputation for their lack of export competitiveness, while foreign MNCs continue to generate high profits by using Ireland as an export base to the EC (see table).

Table 1:
Employment and Export Performance of Irish Industry by Type of Firm ₄₂

	Number of Employees	Percentage of Manufactured Exports
Overseas	90,000	75
Medium/large Indigenous	168,000	20
Small	60,000	5
Total	218,000	100

Indeed, where an internationally competitive local industry has emerged, it has not been because of MNC spillovers. Rather, during the 1990s, an indigenous software industry emerged as an accidental consequence of the country's education policy. ₄₃ When students at the newly-established technical institutes graduated, they found that jobs were scarce in Ireland during the 1980s. Some of these graduates founded local start-ups, specializing in producing technical software for niche markets, primarily in the United States. The emergence of this industry occurred almost completely in isolation of the US software multinationals operating in Ireland. The marked influx of US software firms into Ireland in the late 1980s and early 1990s (for example, Lotus, Microsoft, Novell, Claris and Oracle) was aimed at an entirely different activity: the reproduction and packaging of software for export to the European market. In other words, Irish-owned and foreign-owned software companies exist in Ireland, but they do different things, locate in different geographic areas (most local firms clustered in the center of Dublin and most MNCs located in the outskirts) and engage in virtually no foreign/local business exchanges.

Most industries in Ireland today are either virtually entirely foreign-owned or virtually entirely domestically-owned. The software industry stands as an exception; in the 1990s, software firms were roughly half-locally and half-foreign owned. But software may be the exception that proves the rule. Local industry emerged and thrived in isolation from the foreign sector -- largely as a result of government investments in technical education rather than increased spillovers or demand generated by foreign-owned firms. In short, Dublin's strategy of encouraging the emergence of foreign/indigenous linkages has so far remained more rhetoric than reality. ₄₄

The 1990s: Social Partnership, Economic Stability and Foreign Investment

At a broader level, Ireland responded to the economic crisis of the 1980s by reinforcing its commitment investment-led growth, and to creating an attractive investment climate through traditional corporatist social partnership strategies. Thus, in 1987, Ireland government, business and labor leaders made an explicit commitment to centralized bargaining as the way to deal with the economic decline, alarmingly high emigration figures, inflation, steep unemployment, and rising interest rates. ₄₅

A main component of the adjustment process since 1987 has been experimentation with new forms of centralized bargaining  with nationallevel negotiations that are modeled on the National Wages Agreements and National Understandings of the 1970s, but with modifications to reflect and respond to changing competitive challenges. Therefore, the content of national agreements has evolved over the years. In the past, agreements focused on traditional issues such as wages. Over time, government economic policy has also been on the bargaining table, and more recently, such "competitiveness" issues as worker training and small business development. As economic growth was achieved in the early 1990s, official statements began to explicitly credit Ireland's economic prosperity to the social partnership model.

The result has been a new generation of National Agreements. The overall theme in negotiating national agreements has been to devise ways to make Ireland an attractive partner in the international economy. The national agreements have retained their traditional focus on wage restraint, price stability, and job creation. However, since 1987, centralized discussions have also included a range of other social and economic issues. On the table for negotiations have been such issues as taxation policies, as well as unemployment and antipoverty programs. ₄₆ The new generation of national agreements are as follows:

Programme for National Recovery 198890 (PNR)

Programme for Economic and Social Progress 199193 (PESP)

Programme for Competitiveness and Work 199496 (PCW)

Partnership 2000 1997-1999 (P 2000)

The result of the 1987 policy shift has been the stabilization of the economy, and several years of economic growth. Unemployment fell, although it has continued to hover in the double digits. By mid1996, unemployment stood at 12.4 percent  down from over 15 percent in 1994 and approaching the average for the European Union – but still considered a major policy problem in Ireland. ₄₇

In broad economic terms, then, the reaffirmation of social partnership in 1987 has been a phenomenal success. In the seven years to 1995, economic growth averaged over five percent annually (according to Irish government officials, the most successful rate among EU member countries), inflation has remained at 22.5 percent, and total employment increased by 1 3/4 percent annually (again a high rate compared to other EU countries). The government budget deficit has remained around 2 to 2 1/2 percent of GDP. The reasons for these successes have been attributed to appropriate economic policies (by different governments), as well as strategic use of EU structural funds. With regard to economic policy, the succession of national agreements reflected and reinforced the importance of Social Partnership in gaining a consensus on national economic goals, wage restraint, and a commitment to economic growth and job creation. ₄₈

Another criterion of success for Ireland has been the extent to which the country has decreased dependence on Great Britain. On this score, too, the figures appear encouraging. Ireland is the location for nearly 25 percent of all available US manufacturing investment in Europe, though the country accounts for only one percent of Europe's population." ₄₉ In term of export diversification, there has also been some success. The UK continues to be the most important export destination, accounting for 25 percent of Ireland's exports  but this is a significant drop from the 37 percent share that the UK accounted for in the early 1980s. Exports to other EU countries increased from 32 percent in 1983 to nearly 47 percent in 1995. Ireland has also looked beyond Europe; trade with Singapore increased by 93 percent in 1995, and by 75 percent with Malaysia during that same year. (These high percentage increases are partly attributable to the low base figures, of course.) ₅₀ Thus at first glance, the post-1987 economic adjustments appear to have taken care of the shortcomings that were discussed in the previous section.

Looking underneath the macroeconomic figures to more specific numbers highlights some lingering problems in Ireland, however. First, the growth rate itself has been challenged by some as a misleading statistic. ₅₁ Given the generous investment incentives that Dublin gives to MNCs, there are strong reasons for firms to engage in transfer pricing -- to attribute production to an Irish affiliate for tax purposes, even when actual production has taken place elsewhere. Transfer pricing is nearly impossible to measure. However, one might get a rough sense of the extent to which it occurs in Ireland by comparing productivity figures for foreign-controlled versus domestic-controlled firms. ₅₂ In 1993, multinationals in Ireland (excluding food, drinks and tobacco manufacturers) produced a net output that ranged from IR( 165,000 to IR( 487,000 per employee; the comparable figure for employees in Irish-owned manufacturing enterprises was IR( 29,400. The productivity figures are equally stark if the comparison is limited to the top foreign-owned and Irish-owned companies. In 1993, the top ten foreign-owned firms in Ireland averaged an output of IR( 814,000 per employee, while the top ten Irish-owned companies averaged only IR( 128,000 per employee. The size of this gap suggests that, even assuming higher capital ratios and better management techniques in the foreign sector, transfer pricing accounts for a significant portion of the recorded output levels of MNCs in Ireland. ₅₃

Second, although unemployment figures have dropped, they remain in the double-digit range. A major problem facing Ireland is longterm unemployment (over three years), particularly among workers without a university education. This is a particularly poignant problem in light of the publicity given to the return to of skilled Irish emigrants to Ireland, and to the "We need you back in Ireland" ads that corporations are using to lure Irish citizens abroad back home. ₅₄ Indeed, the government has recognized that the current economic policy will not in itself allow longterm unemployed workers to find jobs. As Minister Minister of State for Labour Affairs Eithne Fitzgerald said:

Creating new jobs through economic growth is clearly important. But it is not enough in itself to tackle the problem of longterm unemployment. The rising tide does not lift all boats. Indeed, the experience of European recession and recovery has been that long term unemployment continues to rise during the recovery period." ₅₅

Youth unemployment is almost twice the rate of adult unemployment. A major fear is that unemployed youths will drift into the category of longterm unemployed, and consequently, the government has made youth employment a major goal. In 1997, the Department of Commerce, Science and Technology and the Department of Social Welfare unveiled a New Government Pilot project (STEP), which aims at assisting eighteen and nineteen year olds find employment. ₅₆

Conclusion

Ireland's post-war economic growth has been linked inextricably to the presence of foreign manufacturers on Irish soil. Foreign firms responded to Dublin's incentive program -- and generated a thriving export business in the country. While there were some government incentive programs for domestic investments and the strengthening of domestic industry, these programs were not well integrated into a broader government scheme to foster foreign/domestic business linkages. Hence, the linkages that policymakers hoped would develop naturally between foreign and indigenous firms did not emerge. The result was an export-oriented foreign sector and a largely uncompetitive indigenous sectors that serviced the domestic market.

Indeed, as the foreign sector thrived in Ireland, indigenous firms fought the battle of ever-increasing import competition associated with the unilateral tariff liberalizations of the 1960s and the 1973 EC accession. As one observer noted of the process: "On the whole, the belief that competition would whip native industries into shape has not been sustained. Instead, it has snuffed them out." ₅₇ To the extent that indigenous firms did benefit (the software industry), this happened as a result of government investment in scientific and technical education -- rather than through relationships that evolved between foreign and local firms.

To be sure, Ireland's economic performance as measured by GDP is impressive. Looking underneath the macroeconomic figures, however, suggests some unresolved problems facing Ireland's political economy. At the very least, this analysis suggests that we should not accept without question the claim that Ireland has launched a dynamic, sustainable development program. Much may depend on success of Dublin's stated policy of fostering foreign/indigenous linkages and promoting indigenous export capabilities. The policy is still relatively new -- and so far is very much a poor cousin to the IDA's emphasis on foreign investment. Whether this will change is not clear. But the extent to which it does change may be key.

Consider again our broader question. Can a country achieve development goals and sustain economic prosperity with a largely foreign-owned industrial base? The Irish case does not provide conclusive answers, but it does suggest that an FDI-led development strategy will not automatically create benefits that "trickle down" naturally to indigenous industry. The presence of foreign multinationals, even in high-tech industries (rather than the extractive activities that prompted the emergence of the dependencia literature), will not necessarily invigorate domestic supplier industries. Rather, active government policies to encourage foreign/domestic linkages may be necessary to reap the benefits of foreign capital. Nor should we conclude that the risks of an investment-led strategy inhere simply in the limited benefits of unrestricted foreign capital. Rather, the strategy also entails clear costs. The extent to which these costs are outweighed by benefits must be an active concern of host country government.

Specifically, three cautions must be raised regarding the effects of FDI-led development. First, investment-led strategies entail enhancements for foreign firms. These enhancements -- such as tax breaks and government assistance packages -- are lost revenue for host country governments. For countries that are resource poor or facing balance of payments difficulties, this is a serious issue.

Second, to the extent that economic growth associated with FDI is apparent, but illusory (e.g., the transfer pricing problem), a country may risk losing other benefits that might foster economic development. Such benefits as access to EU Structural Funds or Generalized System of Preferences status may be lost. In Ireland, for example, the artificial inflation of GDP figures has implications beyond the extent to which it misleads observers about the health of the economy. As Shirlow points out, if the country's GDP rises to more than 75 percent of the EU average, Ireland will no longer be eligible for EU Structural Funds. Because Structural Funds have accounted for more than 10 percent of the country's gross domestic product in recent years, the loss of these funds would create a signficant financial burden. ₅₈

Third, to the extent that investment-led strategies create a disjuncture between foreign and indigenous firms, the costs may be even greater. One real (although difficult to measure) cost is the popular resentment and social tension that can result from government policies that appear to tax local citizens in order to privilege foreign actors in the economy. Fourth, the resources that governments spend on investment incentives represent not just lost government revenues, but the opportunity costs of developing programs that will foster foreign/local linkages or create competitive local industries.

Liberalization means (by definition) that host governments give up some control over industrial policy and economic development. This makes it more difficult to shape the kinds of investments that enter the country -- and to ensure that that the investments generate value-added production and technology transfer. FDI-led strategies, taken alone, are likely to mean that the decisions of multinational firms (not host country governments) affect the kinds of technological innovation, marketing linkages and other spillovers that occur in the host country. As competition for FDI expands, host countries will not likely be able to impose new restrictions on MNCs. Rather, they are likely to find themselves developing new and innovative incentive mechanisms to facilitate foreign/indigenous linkages.

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Notes:

Note 1: An earlier version of this paper was presented at the Annual Meeting of the International Studies Association (1996). I would like to thank Steven Weber, James Caporaso, and Rudra Sil for helpful comments and suggestions. Back.

Note 2: Kieran A. Kennedy, Ireland: The Revolution Unfinished,” in Kieran A. Kennedy (ed.) Ireland in Transition (Cork : Published in collaboration with Radio Telefis Eireann by the Mercier Press, 1986), p. 48. Back.

Note 3: There is a growing literature on the internationalization of production -- its implications for global cooperation, for corporate organizational strategies, for the international competitiveness of home (investor) countries, and for the development prospects of host countries. See, for example, Gary Gereffi, “Global Production Systems and Third World Development” in Barbara Stallings (ed.), Global Change, Regional Responses: The New International context of Development (New York: Cambridge University Press, 1995); Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity Chains and Global Capitalism (Westport, CT: Greenwood Press (hardcover) and Praeger (paperback), 1994); Eileen M. Doherty (ed.), Japanese Investment in Asia: International Production Strategies in a Rapidly Changing World (Berkeley: Berkeley Roundtable on the International Economy, 1995; Mark Mason and Dennis Encarnation (eds.), Does Ownership Matter? : Japanese Multinationals in Europe (New York : Oxford University Press, 1994); Dennis Tachiki, “Striking Up Strategic Alliances: The Foreign Direct Investments of the NIEs and ASEAN Transnational Corporations,” RIM, Vol. 21 (September), 1993. Back.

Note 4: This point is well made in Mitchell Bernard and John Ravenhill, “Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia,” World Politics, Vol. 47, No. 2, January 1995, especially pp. 195-200. Back.

Note 5: Certainly, there are variations among Asian countries regarding how far the liberalization process has gone. Thailand has adopted a development strategy at the “open” end of the spectrum: the country has a long-standing policy of openness toward FDI. Thailand does not distinguish between foreign and domestic investment in most industries (although there are local equity requirements). At the “closed” end of the spectrum lies Korea, which moved toward some liberalization in recent years, but at least until the recent economic crisis in the country, has continued to rely on a “home-grown” approach that is much less open to FDI and international trade. Most Asian host countries lie somewhere between Thailand and Korea in their liberalization record. Malaysia, for example, has demonstrated ambivalence toward full liberalization. After a serious recession in the mid-1980s, Kuala Lumpur took steps to liberalize investment, but regulations continue to favor inclusion of the Bumiputra (ethnic Malay) group in business ventures. Still, the overall trend has been toward deregulation and market liberalization. Back.

Note 6: The presence of China as a competitor for Japanese, US and other regional investment propelled the logic of this move. ASEAN countries, standing alone, cannot compete with the lure of a 1.2 billion person market. The creation of AFTA was partially a mechanism to increase the size, hence attractiveness of the “Southeast Asian market” to foreign investors. Back.

Note 7: For a discussion of the potential benefits and limitations of investment-led development in Eastern Europe, see John Zysman, Eileen Doherty and Andrew Schwartz, “Tales from the ‘Global’ Economy: Cross-National Production Networks and the Reorganization of the European Economy,” Structural Change and Economic Dynamics, Vol. 8, No. 1, March 1997; and Beverly Crawford, Markets, States and Democracy: The Political Economy of Post-Communist Transformation (Boulder, CO: Westview Press, 1995). Back.

Note 8: For a discussion of some consequences of international political economy in a more “globalized” international environment, see Steven Weber, “Globalization and The International Political Economy,” Briefing paper written for the Berkeley Roundtable on the International Economy Working Meeting on Globalization, held at the University of California, Berkeley, March 8, 1996. For a discussion of the extent to which “globalization” implies a convergence of national political economies, see Suzanne Berger, “Introduction” in Suzanne Berger and Ronald Dore (eds.), National Diversity and Global Capitalism (Ithaca, NY: Cornell University Press, May 1996). See also Robert Wade, “Globalization and Its Limits,” in the same volume. Back.

Note 9: The phenomenal growth of the Asia-Pacific region in the 1980s and early 1990s occurred in the context of deepening trade and investment linkages within the region. By 1994, growth rates in every Asian country except Japan exceeded four percent. Even more impressively, several countries in the region -- China, South Korea, Malaysia, Singapore, Thailand and Vietnam -- experienced real growth of over eight percent. Pacific Economic Cooperation Council, Pacific Economic Outlook: 1995-96 (San Francisco: The Asia Foundation, 1995). See especially Table 1, p. 63. A major question, of course, is whether the current financial crisis is a temporary setback in a broader pattern of strong long-term growth – or is indicative of fundamental weaknesses in the economies and development strategies of those countries. Back.

Note 10: Historical instances of US multinational influence in Latin America -- in ways that clashed with the domestic interests of host governments -- are well known and need not be retold here. For an overview, see Joan Spero and Jeffrey Hart, The Politics of International Economic Relations (New York: St. Martin’s Press, 1997), Chapters Three and Eight. See also Robert Gilpin’s classic work, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books, 1975). Back.

Note 11: For a good discussion of the reasons that the electronics industry has become a pillar of national economic development strategies, see Bjorn Wellenius, Arnold Miller, and Carl J. Dahlman (eds.) Developing the Electronics Industry (Washington, DC: World Bank, 1993). Back.

Note 12: Taiwan relied heavily on foreign investment to spur the growth of its domestic electronics industry, moving from low value added activities to its current position as a leading producer of personal computer. It should be noted that Taiwanese industrialization was launched in the context of strong ISI policies, import barriers and US government assistance -- all of which contributed to the creation of a domestic industrial base. Moreover, FDI activities in Taiwan in the 1960s and 1970s were regulated by stringent domestic content requirements, and that the government actively intervened to channel information and technology to domestic firms. See Robert Wade, Governing the Market (Princeton: Princeton University Press, 1990), especially Chapter Four, “State-Led Industrialization, 1930s-1980s.” Hence, while Taiwan stands as a success story of a late developer building and increasingly value-added electronics industry, it cannot be a test case of the FDI-led development strategy under discussion here. Back.

Note 13: In Latin America, several countries have a long history of open investment regimes, but these have been substantially different than the investment strategies of the 1990s. First, the FDI that flowed to Latin America in the past was often in extractive rather than productive sectors. This investment history provides little insight into the impact of foreign manufacturing firms on the economic development trajectory of the host country. Second, Latin American investment policies in the 19th and most of the 20th century were generally not linked to an explicit economic development strategy. (Note, for example, the preponderance of Latin American policies discussions throughout much of the 20th century on the need to control the activities of MNCs, rather that to need to encourage new capital inflows or to design incentives for particular kinds of inflows.) Third, to the extent that FDI to Latin America was concentrated in the manufacturing sector (for example, in Brazil), this was often not in response to investment incentives, but rather was motivated by a desire of foreign MNCs to circumvent the trade barriers that accompanied Brazil's ISI development strategy. Back.

Note 14: Two caveats are in order. The first concerns the dangers of making overly-hasty cross-national comparisons. This paper makes no claim that the “lessons” of Ireland need necessarily apply, for example, to Thailand, to Argentina, or to Hungary. The purpose is simply to draw out some tentative hypotheses about the consequences of embracing an open investment regime in the absence of a strong indigenous industrial base. Ideally, these tentative hypotheses can be examined against other cases. Second, data on Irish economic development are limited, especially with regard to the specific firm-level effects of Ireland’s open investment regime. Thus, what follows is a preliminary assessment. Back.

Note 15: ”Ireland: A Winning Economy,” IDA Ireland home page. Back.

Note 16: The problem was exacerbated by the fact that Ireland’s most industrialized region, Belfast, was one of the six counties that Great Britain retained after the 1921 partition. Belfast was a center of shipbuilding and linen production; its exclusion from the newly created Republic was an immediate economic handicap. Back.

Note 17: These terms come from Denis O’ Hearn, “The Road from Import-Substituting to Export-Led Industrialization in Ireland: Who Mixed the Asphalt, Who Drove the Machinery, and Who Kept Making Them Change Directions?” Politics & Society, Vol. 18, No. 1 (1990): 1-38. O’Hearn details the internal policy debates in post-war Ireland, as well as the international pressures on Dublin to liberalize its trade and investment regimes. Back.

Note 18: Ibid., pp, 26-27. Back.

Note 19: Ibid., p. 28. Back.

Note 20: Charles Carter, "The Irish Economy Viewed from Without," Studies 46: 137-43, quoted by Denis O’ Hearn “The Irish Case of Dependency: An Exception to the Exceptions?” American Sociological Review, 1989 August, Vol. 54, p. 581 Back.

Note 21: “Ireland in the World Economy,” in Kieran A. Kennedy (ed.) Ireland in Transition (Cork : Published in collaboration with Radio Telefis Eireann by the Mercier Press, 1986), p. 25. Back.

Note 22: Leslie Sklair, Foreign Investment and Irish Development : A Study of the International Division of Labour in the Midwest Region of Ireland, Progress in Planning series V. 29, Pt. 3. ( New York : Pergamon Press, 1988), p. 153. Back.

Note 23: Non-residents are taxed only on the portion of their income earned in Ireland. Moreover, individuals who work for foreign firms without legal resident status are taxed on a remittance basis only. Additional tax incentives for firms include tax programs to encourage business development and job creation; tax breaks for investment in basic R&D; and tax incentives for expenditures that encourage urban renewal and development. See the Irish Trade Web, “Overview of Taxes,” http://www.itw.ie/Itw/taxes.html Back.

Note 24: Irish Trade Web, “Investment Climate,” http://www.itw.ie/Itw/invest.html Back.

Note 25: The Irish Trade Web, a private enterprise established in 1995 to promote Ireland and Irish business in international markets. See their discussion of “Investment Climate,” http://www.itw.ie/Itw/invest.html Back.

Note 26: Sklair, p. 158. Back.

Note 27: McAleese, “Ireland in the World Economy, op. cit., p. 26. Back.

Note 28: In the late 1950s, some 10 percent of Irish manufactured products was exported; by 1985, roughly half of the country's manufacturing output was for export. McAleese, “Ireland in the World Economy,” op. cit., p. 20. Back.

Note 29: McAleese, “Ireland in the World Economy”, op. cit., p. 20. Back.

Note 30: Kieran A. Kennedy, “Ireland: The Revolution Unfinished,” op. cit., p, 43. Back.

Note 31: Telesis report, pp. 294, 362, 415-16 as cited in Sklair, p. 192. Back.

Note 32: OECD data, as cited by Sklair, p. 183. Back.

Note 33: Kieran A. Kennedy, “Ireland: The Revolution Unfinished,” op. cit., p, 49. Back.

Note 34: The report noted that two other firms did some local fabrication, but the others were engaged only in assembly activities. Value-added production and marketing activities were generally conducted in the United States and the United Kingdom; research and development was by and large concentrated in the United States. Telesis Report, p. 375 in Sklair, p. 200. The IDA objected to the analysis and charged that the Telesis group “inadequately understood the overall strategy adopted by the IDA for the development of the [electronics] industry and reflects most unfairly on the performance in Ireland, in a short space of years.” IDA, News Release on Telesis Report, Dublin, October 1982, item 5 as quoted in Sklair. Back.

Note 35: Kieran A. Kennedy, “Ireland: The Revolution Unfinished,” op. cit., p, 47. Back.

Note 36: Sklair, p. 190. Back.

Note 37: Sklair, p. 185. Back.

Note 38: Sklair, p.187. Back.

Note 39: As noted above the IDA publicly challenged some of the Telesis findings in its News Release on Telesis Report, IDA, Dublin, October 1982. Back.

Note 40: See “National Linkages Programme - Forbairt,” http://www.commerce.ie/linkage/index/html Back.

Note 41: Remarks of Sean O’Riain, "A Celtic Tiger? Ireland as Europe's Offshore Silicon Valley." Center for Western European Studies colloquium, University of California, Berkeley, April 10, 1996. Back.

Note 42: Department of Industry and Commerce, Review of Industrial Performance, 1990 (Dublin: Department of Industry and Commerce, 1990) as discussed in S. Grimes, “Indigenous Entrepreneurship in a Branch Plant Economy: The Case of Ireland,” Regional Studies, Vol. 27, No. 5, 1993, pp. 484-489. The strategy of promoting medium and large scale enterprises is not uncontroversial. Grimes argues that a more appropriate emphasis would be to nurture networks of small enterprises that achieve economies of scale and scope by sharing specialized areas of competence. Back.

Note 43: Information on Ireland’s software industry is drawn from O’Riain, op. cit. Back.

Note 44: Of course, such linkages need not develop within a particular industry, but could also emerge across industries. However, because most of the foreign manufacturers tend to focus on low-end activities, cross-industry linkages have not emerged to any great degree, either. Where they have, they have tended to focus on low-end support industries. (For example, there has been a dramatic expansion of locally-owned printing firms in response to the demand by US software firms for instruction manuals.) Back.

Note 45: In this sense, Ireland stands in stark contrast to Great Britain, where the Winter of Discontent in 1979 led to Margaret Thatcher's elections and the resultant splintering of unions and the demise of negotiations regarding such issues as incomes policies. Back.

Note 46: Address by Minister Fitzgerald at INOU Conference," http://www.irlgov.ie/entemp/23ca.htm Back.

Note 47: According to Central Statistics Office figures for May 1997, unemployment dipped below 250,000 for the first time in six years. The reduction of unemployment continues to be an important priority, however, especially longterm unemployment. Government officials recognize that most of the people who move off the Live Register and back to work are those who have been unemployed for less than a year. Department of Social Welfare press release, "De Rossa Welcomes Live Register Drop of 7,000," June 6, 1997, http://www.welfare.ie/dept/pr/pr060697/htm Back.

Note 48: Department of Finance press release, "Speech by Minister to the European Parliament (regional affairs committee), July 5, 1996, http://www.irlgov.ie/finance/215a.htm Back.

Note 49: Department of Finance press release, "Address by Mr Ruairi Quinn, Minister for Finance, to the IBEC Annual Business Conference on Thursday 29th May 1007, Dublin Castle, 'Celtic Tiger in a Global Jungle,' mAY 29, 1997, http:/www.irlgov.ie/finance/225a.htm Back.

Note 50: Department of Finance press release, "Address by Mr Ruairi Quinn, Minister for Finance, to the IBEC Annual Busines Congerence on Thursday 29th May 1007, Dublin Castle, 'Celtic Tiger in a Global Jungle,' May 29, 1997, http:/www.irlgov.ie/finance/225a.htm Back.

Note 51: See, for example, Clifford Cobb, Ted Halstead and Jonathan Rowe, “If the GDP is Up, Why is America Down?” The Atlantic Monthly, October 1995. Back.

Note 52: The point here is not to argue that Irish-owned firms are just as productive as foreign firms, but rather to show that the difference in claimed productivity rates is so wide as to suggest a large degree of transfer pricing exists among Irish-based MNCs. For a discussion of real differences in productivity between domestic and foreign firms, see J.E. Birnie and D.M.W.N. Hitchens, “Comparative Manufacturing Productivity in the Republic of Ireland,” Regional Studies, Vol. 28, No. 7, November, 1994, pp. 747-753. Back.

Note 53: Shirlow, p. 689. Back.

Note 54: See, for example, “Irish Eyes Turning Homeward as a Country’s Moment Comes,” New York Times, March 23, 1997, p. 1. Back.

Note 55: "Address by Minister Fitzgerald at INOU Conference" http://www.irlgov.ie/entemp/23ca.htm Back.

Note 56: The program provides and income supplement for 18 and 19 year olds who have been unemployed for six months, and who find full-time jobs. See "Rabbitte Announces New Government Pilot Program (STEP), Department of Enterprise and Employment, http://www.irlgov.ie/entemp/25f6.htm Back.

Note 57: Kieran A. Kennedy, “Ireland: The Revolution Unfinished,” op. cit., p, 45. Back.

Note 58: Shirlow, op. cit., p. 688. Back.