ICT FDI ‘not dependent’ on corporation tax
An ESRI study shows that many factors influence the decisions of ICT companies to locate in Ireland.
Dublin think tank the Economic and Social Research Institute (ESRI) has published the findings of an important study which sought to identify the key considerations influencing international ICT companies when deciding whether or not to locate in Ireland.
And the findings are perhaps quite different from what many involved in promoting Ireland as a location for foreign direct investment might have expected. It is not just about selling Ireland’s famously low headline rate of corporation tax.
The report entitled ‘Boosting Foreign Direct Investment in the Information Technology Sector: What Works?’ was authored by Iulia Siedschlag. It was based on research into the location decision of newly established foreign affiliates of multi-national enterprises in the ICT sector in regions within EU countries in the period 1998 to 2008.
As Head of the ESRI’s Centre for Internationalisation and Competitiveness, Iulia Siedschlag was concerned that until now research into something as important as FDI location decisions in the ICT sector had been limited to individual case studies. Her report nows sets out the key locational deciding factors based on considerable real evidence.
Although the prevailing rate of corporation tax was an important consideration – more so for US-based multi-nationals than for EU-based corporates – many other factors were key to the location decision.
In ICT manufacturing as well as in ICT services, the location probability of foreign affiliates increased with determinants such as market size and market potential as well as human capital intensity i.e. the ICT ‘quality’ of the available workforce. Potential investors also looked at overall labour costs, the rate of personal income tax, and the quality of the services sector in the particular region.
Also very important was the extent to which other ICT multi-nationals, despite being competitors, were physically present in that region or marketplace.
Decisions about location also took account of the innovational intensity of the subject region and neighbouring regions, although this factor was more important for manufacturing FDI than for services sector corporates.
All of these findings have clear implications for Ireland, north and south, as attracting good quality FDI in the ICT sector is a key component of industrial development policy and broader economic strategy in both jurisdictions.
The ESRI suggests three policy implications.
Firstly, building the knowledge base of regional economies by developing human capital and innovation intensity will undoubtedly increase their attractiveness as locations for ICT foreign direct investment.
Secondly, clustering of foreign affiliates, despite any competitive tension is a major plus factor in drawing in more ICT companies.
Thirdly, there are clear differences between the decision considerations of ICT manufacturers and service providers and also between corporates who originate in Europe and those who are headquartered in North America. Therefore Irish Government FDI policies and incentivisations should be more tailored and targeted.
The overall conclusion of this very interesting ESRI study is that success in attracting foreign direct investment in the ICT sector in EU countries and regions is linked to a mix of policies and not just to one single policy instrument such as low corporation tax.
The report is available at www.esri.ie/publications
