Foreign Direct Investment is something we talk a lot about in Northern Ireland. In terms of the industrial development we actually talk about little else. Getting big multinational firms to invest in Northern Ireland is seen as one of the key avenues to lifting our growth rate and becoming a successful regional economy. Nearly every economy, developing and developed, has some programme to attract FDI and the Republic of Ireland is seen as the poster child for this strategy.
Last September, at the NERI, we released a report examining productivity on the island of Ireland. Productivity is a key measure of economic success and a major determinant of improved living standards. Productivity isn’t everything, but as Paul Krugman put it, in the long run, “it is almost everything”.
The results on the island of Ireland were quite stark. It should be no surprise that Northern Ireland lagged considerably behind the Republic of Ireland. In order to examine the role FDI play in productivity we then split the Republic’s economy into two parts, foreign and domestic. The statistics for the Republic allow you to differentiate between economic activity that is carried out by domestically controlled firms and that carried out by foreign controlled firms. This effectively gave us three economies on the island of Ireland; one in Northern Ireland; one in the Republic’s foreign sector; and one in the Republic’s domestic sector. Northern Ireland still came last.
Stripping out foreign firms from the Republics economy doesn’t remove all the impacts of FDI. FDI will likely have boosted the performance of domestic firms directly and indirectly. What our comparison does show is that even if FDI firms are removed from the Republic’s economy, Northern Ireland would still be very far behind it.
The figures also exposed a weakness in the Republic. While its domestic economy outshines the NI economy, it looks to be pretty average by European standards. This is a problem. While FDI is meant to bring in foreign firms and employment, it’s also meant to raise the game of existing domestic firms. These figures tell us there is a problem with that process.
In the Republic, domestic firms have benefited from FDI, but not nearly to the extent that would be expected from the scale of the investment received. More worryingly, in Northern Ireland, domestic firms do not appear to have benefited at all.
FDI policy is touted as a success in Northern Ireland and when you look at the headline figures you can see why. Northern Ireland actually has levels of FDI above the average for western European economies. We are able to attract investment, but are we really getting value for money when we do?
The basic idea with FDI is that highly competitive multi-national firms will locate in Northern Ireland and provide high-skilled, well paid jobs. That’s the easy part. These foreign firms are also expected to spread their influence by reaching out to local firms in their supply chain. They’re also meant to spread good management practice and establish knowledge flows to boost innovation. Without these extra benefits, FDI policy simply becomes a practice of purchasing particular types of employment.
The real question we have to ask is why are we not seeing these extra benefits. To understand what the problem might be I think it is worthwhile to look to sports economics. A podcast by Malcom Gladwell introduced me to the work of Chris Anderson and David Sally who wrote a book called “The Numbers Game: Why Everything You Know About Soccer Is Wrong”. In it the authors talk about the optimal strategy for buying players for a team and how this varies from sport to sport.
In basketball, for instance, having one star player is a good investment as that player can dominate the game and rachet up the scoreboard even with team members of a lesser talent. The same isn’t true in soccer.
In soccer, it’s a much longer form game and a team requires more than just one star player. It takes much more of a team effort to advance play up the field and to ultimately score. Without a good defence and midfield, a brilliant striker is likely to have a limited impact.
You may wonder where I’m going with this, but I see a parallel between industrial development and soccer. FDI can bring in star firms, world leaders in their field, but unless we have an existing team that is able to support and work with that star firm, we’re not likely to see much of the benefit.
FDI can and does work in boosting regional economic performance, but we cannot delude ourselves into thinking that simply buying in the ‘Ronaldo’ of multinational corporations is going to save us. We need to take a good look at the team we have and build an industrial policy that can actually score goals.