Foreign Direct Investment for Development - Essay Example

? Individual Case Analysis Introduction The impact of the foreign direct investments on the economic activity of the recipient country is linked withthe role of the MNEs in the global economy. The country of Ireland has followed the policy of promotion of export platform inward investment mainly for the manufacturing sector. This practice has been followed for over four decades. Ireland benefitted from the increased scale of global FDI in the 1960s (Casey, 3). They paved a path for establishment of a more fiscal and financial environment among the other European countries. The country entered into the European community in the 1970s and it further enhanced the path to attract more FDI into the country. Ireland is a manufacturing base with low costs for the manufacturing of US enterprises. The policy towards FDI became more selective in the 1970s which encouraged flow of investments in the production of goods that are produced through modern technology (Ruane & Buckley, 2006, 4-5). Body In the decade of 1990-2000, the country witnessed massive economic transformation. The growth in GDP took the rising curve and fiscal surplus became the norm. The resurgence of the economy earned a great deal of worldwide attention. The experts opined the policies relating to collective bargaining and reforms in the education sector along with exchange rate reforms contributed in the resurgence. But some regarded FDI as the factor that is responsible. The performance of the country was primarily driven by the foreign owned firms serving the EU market. The high performance of the small firms nullified the poor performance of the indigenous sector. Many experts believed that the rising costs along with shortages in labor supply which act as the barrier to competitiveness of the country. The real wages seemed to increase faster than the productivity and reduce the incentive from FDI. Two acts were introduced by the Valera government namely the Finance Act of 1932 and the Control of Manufactures Act of 1932 (Baccaro & Simoni, 7-8). The economic stagnation in 1950 demanded changes in economic regulations. In order to boost the economy, several laws were passed. The country in collaboration with the IMF the World Bank relaxed the restrictions on the control of Manufactures Act. In 1958, there was a shift from protectionism to free trade regime and the government encouraged foreign investments through concessions in tax and incentive grants. The tariff got lowered in the period between 1962 and 1964. In spite of the turbulence faced by the country in 1970s the FDI continued to grow. Industrial development Authority believed that the agency led foreign investment strategy had done little to lift the economy. The success witnessed by some sectors did not trickle down to the rest of the economy. The linkage between the foreign investors and local industries was limited. The initiatives to promote foreign investment were not fruitful (Velde, 6). The support provided to the foreign firms particularly operating in the electronics sector was excessive. The MNCs were not blamed for the failure of the strategies as the suppliers lacked the required technical expertise. The IDA holds the mismanagement from the part of the government and is responsible for the situation particularly during the times of high inflation rates. Excessive government spending as well as high rates of unemployment took toll from the economy. The need for resurgence was felt from all sectors and the government took advantage of the situation and forged to create social partnerships across political and social sectors. The IDA took the initiative to promote labor industries of Ireland. A policy of advertising campaign was followed. The emphasis was shifted from tax and financial incentives to building up an educated workforce. The resultant was immigration of new firms into the country. The importance of Ireland among the EU was soon felt. Direct transfers were made into the country through the Single European Act. Funds for development of infrastructure and farming subsidies were also transferred through the act. The economic survey conducted by the Organization for Economic Corporation and Development in 1999 reported that the massive flow of direct investment into the economy has been a major positive shock which influenced the economy (Organization for Economic Corporation and Development, 1999). It was realized that the Irish exports contributed much to the success of the foreign sector. The indigenous exports were flat in real terms and the domestic economy lagged behind. The FDI led policy provided jobless growth and a gap came up between the GDP and GNP of the country (Foxley, 7). Global financial crisis During the periods prior to the financial crisis, Ireland was also enjoying the construction and the house price bubble. This played no role in the financial innovations as it was the case in United States. The construction bubble fuelled the borrowings of the bank by huge amounts. The change in foreign sentiments triggered the vulnerability of the Irish banks. After the bubble burst it became far more difficult for the banks to roll over the available funds. It would be unwise only to blame the sudden freezing of the world credit markets. The willingness to finance an economy still unsustainable drove the price to such a level that it became unaffordable. The banks operating in Ireland were thus left with a lopsided portfolio of assets. They relied heavily on the assets related to property even when the housing prices were falling in every month. The unemployment rate was ever rising and it became increasingly difficult for the people to service the loans (Honohan, 4). The employment opportunities created through FDI has helped to curb out the economic crisis since 2008 in Ireland. The influence of FDI company exports can be demonstrated through the performance in current exports (Berry, 3). The export performance for the year 2011 implicates that the reduction in costs has nullified the inability to adjust through currency devaluation. The country has been able to gain competitiveness through the adjustments made in domestic and internal adjustments. Ireland also performed exceptionally well among the EU countries in 2011 (Clear, Quaile & O’Byrne, 5). Therefore it can be stated that FDI is good for the country. Conclusion A relatively small population characterizes the country of Ireland. The country has abundant resources to promote intense capitalism. The priority for the government in recent times is how to create more jobs and restore the path to development. The acute problem or question that arises is should the country continue to attract sustained inflows of FDI. However the government took no steps to follow a system that allows the MNEs to evade taxes. The idea of the government was to disabuse critics of the country’s reputation as a corporate tax haven by bringing the regime of tax in line with the ones followed by the trading partners. The new tax regime came into being and the experts were under the opinion that the competitive strengths of the country will remain intact. The importance of FDI and domestic capital cannot be ignored both in the long and in the short run. The growth that is led by FDI is valid for the economy of Ireland. Therefore, FDI for the economy of Ireland has got positive growth impact. The actions from the part of the government are necessary to unleash economic growth through the process of attracting FDI (Kim and Bang, 41-42). References Baccaro, L. and Simoni, M. The Irish social partnership and the “celtic tiger” phenomenon. 2004. 26th June, 2012. Berry, R. U.S. Foreign Direct Investment in Ireland: Making the Most of Other People’s Money. 26th June, 2012. Casey, W. Foreign investments (Forecasts and trends). 2011. 26th June, 2012. Clear, S., Quaile, D. and O’Byrne, D. What does FDI do for Ireland? 2012. 26th June, 2012. Foxley, A. Impact of the Global Financial Crisis: Predictions Gone Wrong. 2011. 26th June, 2012. Honohan, P. THE FINANCIAL CRISIS: IRELAND AND THE WORLD. 2008. 26th June, 2012. Kim, K. and Bang. H. The impact of Foreign Direct Investment on Economic Growth: A case of Ireland. 2008. 26th June, 2012. Organization for Economic Corporation and Development, Economic Survey, 1999. 26th June, 2012. Ruane, F. and Buckley, P. Foreign Direct Investment in Ireland: Policy Implications for Emerging Economies. 2006. 26th June, 2012. Velde, D. Foreign Direct Investment for Development. 2002. 2006. 26th June, 2012. Read More