the irish-us economic relationship 2015 · 2016-01-15 · am delighted to present the irish-us...

The Irish-US Economic Relationship 2015

Joseph P. Quinlan

www.amcham.ie

About the Author 4

Authors note 5

About the American Chamber of Commerce 6

Forwards 7

Chapter 1: Irish-U.S. Linkages: Emerging Stronger and Deeper 11

Chapter 2: The Ties that Bind: The Nexus between Foreign Investment and Trade 31

Chapter 3: On the way back: Ireland’s Economic Outlook 43

Chapter 4: The Future of the Transatlantic Economy: Diverging or Coming Together? 53

Chapter 5: The Road Ahead for Irish-US Commercial Relations 67

Key terms and definitions 71

Contents

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About the Author

Joseph Quinlan is a Transatlantic Fellow at both the German Marshal Fund in Washington D.C. and at the Centre for Transatlantic Relations, the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University, Washington D.C. He also served as a Bosch Fellow at the Transatlantic Academy in Washington, D.C. in 2010/11.

Quinlan is the co-author of the influential annual publication, “Transatlantic Economy Survey,” and the author of “Built to Last: The Irish-U.S. Economic Relationship” (September 2011) and ‘The Case for Investing in Europe,” (March 2013).

In 2006, the American Chamber of Commerce to the European Union awarded Mr. Quinlan the 2006 Transatlantic Business Award for his research on U.S.-Europe economic ties. In 2007, he was a recipient of the European-American Business Council Leadership award for his research on the transatlantic partnership and global economy.

Mr. Quinlan lectures on finance and global economics at New York University, where he has been a faculty member since 1992. He also lectures at Fordham University and regularly speaks at various universities around the world. He is presently a visiting professor at Wuhan University, Wuhan, China.

A veteran Wall Street global economist/strategist, Quinlan was named on the 2011 Irish America Wall Street 50 list, a list comprised of accomplished and leading financial professionals on Wall Street with Irish heritage.

Mr. Quinlan regularly debriefs policy makers and legislators on Capitol Hill on global trade and economic issues. He has testified before the European Parliament and has served as a consultant to the U.S. Department of State. He is also a board member of Fordham University’s Graduate School of Arts and Science and serves on Fordham University’s President Council.

He is the author, co-author, or contributor to eighteen books. His most recent book, “The Last Economic Superpower” was released by McGraw Hill in November 2010 and was selected as one of the best books on globalization by Axiom Business Book Awards in 2011. He has published more than 125 articles on economics, trade and finance that have appeared in such publications as Foreign Affairs, the Financial Times, The Wall Street Journal and Barron’s. He regularly appears on CNBC, as well as Bloomberg television, PBS and other media venues.

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Author’s acknowledgement

Although I have benefitted from the insights of many during this project, I carry sole responsibility for the content of this report. The views expressed here are my own, and do not necessarily represent those of any sponsor or institution.

I am particularly indebted to many people at the American Chamber of Commerce Ireland for help in preparing this report. Many thanks to the communications and policy team of Brian Harrison and Jonathan Small for assistance in overseeing this production. To Mark Redmond, Chief Executive at the Chamber, thank you for your support, critical insights and your energetic leadership in strengthening the Irish-U.S. relationship.

Finally, I am particularly indebted to Brian Cotter of the American Chamber of Commerce Ireland. Brian was instrumental in launching the first report of this series (“Built to Last”), and was again intimately involved with this project, providing invaluable guidance and assistance to the final report. Brian remains one of the leading voices in strengthening not only the Irish-U.S. partnership but also the transatlantic partnership. It is always a pleasure working with Brian and the American Chamber of Commerce Ireland.

About the American Chamber of Commerce Ireland

The American Chamber of Commerce Ireland is the leading international business organisation in the country. We represent the vibrant US multinational sector and our membership is comprised of the leading businesses within this 700 strong community.

The American Chamber is the voice of US companies in Ireland and its role is to position the country as the global location of choice for US investment. Membership of the American Chamber places businesses at the centre of the US business community in Ireland, alongside leading players in the Data, Digital, Life Sciences, Financial Services and ICT sectors. The key benefits of membership include:

NetworkingThrough the American Chamber companies become part of the US business community in Ireland that now accounts for over a quarter of Irish GDP. Engagement with members is at a leadership level to ensure that only very senior networking opportunities arise at every event.

RepresentationThe American Chamber is consistently recognised as one of the most influential business groups in the country. The agenda and priorities of the Chamber are driven solely by the feedback of our members. Membership of the Chamber provides companies with a powerful voice as part of Ireland’s leading international business organisation.

Business GrowthThe American Chamber runs a high quality event programme covering a range of subjects to support our members to grow business in Ireland. Multiple contacts within our member companies can attend these events to learn from each other and share best practices in areas such as innovative people management and business transformation.

For more info log on to www.amcham.ie

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Through its member companies and its own efforts the American Chamber of Commerce Ireland is an important and very active participant in the economic development of this country. I am delighted to have been asked to write a forward for this report, the fourth in the series looking at the Irish-US economic relationship.

This report provides an important contribution to our understanding of that relationship, providing a snap-shot of where we are today, why that relationship is so strong and suggesting some of the things that might be done to develop it into the future.

At the time of the last such report in 2013 Ireland was showing clear signs of emerging from economic crisis. That economic revival has continued. Ireland’s economic recovery has gained a strong momentum in the past 12 months, based on solid growth and job creation. We had the fastest growing economy in the European Union in 2014, with GDP growth of almost 5%, and we expect to retain this lead position in 2015. A significant role in that economic revival has been played by the strengthening of Irish-US economic relations. Irish-US relations have never been stronger. The United States is Ireland’s largest single export market for goods while the US has significant service exports to Ireland. Ireland receives the largest proportion of FDI from the US in the EU while also being a significant source of FDI for the US. Many thousands

work in Irish companies in the US and US companies in Ireland.

However, there is always room to improve and capacity to enhance our important economic relationships - one of my first trips abroad as Minister for Foreign Affairs and Trade was to the United States where I was pleased to undertake a number of trade engagements. The Irish government continues to look for new opportunities, such as those which might be provided by the EU-US Transatlantic Trade and Investment Partnership, and to further develop all aspects of our relationship with the US. We also recognise the need to continually adjust and enhance Ireland’s appeal as a place to do business in what is a dynamic and ever more competitive global market. This report is also a very helpful reminder of some of the issues which must continue to be addressed in that regard.

This work is being carried out across government and its agencies, while my own Department has expanded its footprint in the US by opening a new Consulate General in Austin and increasing the number of diplomats assigned to our Embassy in Washington DC. Together with Ireland’s trade, investment and tourism agencies and with the help of important partners like Amcham, we can make a great relationship greater still in 2015 and beyond.

Foreword

Charles Flanagan, T.D. Minister for Foreign Affairs and Trade

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Ireland’s journey, in the 100 years since my grandparents emigrated from Co. Mayo, has been an extraordinary story. My time here in Ireland as United States Ambassador has offered a first-hand education in the incredible dynamism of the U.S.-Irish business relationship. It comes as little surprise to me that Ireland and America now stand as two of the strongest growing economies in the transatlantic partnership.

I want to highlight the important role that over 700 U.S. companies here, employing 115,000 Irish, have had in getting the Irish economy growing again. According to this report, in 2013 Ireland ranked as the number one destination in the world for U.S. foreign direct investment. Ireland is a very attractive place for companies to invest in because of its language, skilled workforce and location as a gateway to Europe. Continued investment in Ireland by U.S. corporations will bring new jobs and opportunities, particularly for young people.

But this investment is not one way. The report states that Ireland invested a record $26.2 billion in the United States for 2013. This is an incredible statistic for a relatively small country. Successful Irish multinationals have led the way for Irish start-ups who are increasingly looking to the U.S. as a first step in their path towards internationalization.

Many Irish companies choose to locate in the U.S. to be close to their customers, to access the market of 317 million consumers, to nurture R&D links with universities or to use their U.S. operations as an export base for other North and South American markets.

I want to applaud the efforts of the American Chamber of Commerce in promoting U.S. multinational activity throughout Ireland. For my part, I am determined to do what I can to strengthen the already robust trade and investment ties between our two countries in order to help ensure and increase our shared prosperity. That means harnessing our common enthusiasm in support of an ambitious Transatlantic Trade and Investment Partnership agreement. It means building on our shared strengths around innovation and entrepreneurship. And it means working together with our international partners to find opportunity in common challenges. President Obama’s strategy to boost American innovation is linked closely to economic policies that support entrepreneurship, technological progress and scientific research. There is much we can do together in these areas and I look forward to finding ways of capitalizing on our common strengths to deepen the amazing economic relationship our two nations already share.

Foreword Kevin O’Malley, U.S. Ambassador to Ireland

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On behalf of the American Chamber of Commerce Ireland I am delighted to present the Irish-US Economic Relationship 2015.

An understanding of the deep dynamics of any relationship, whether personal, business or political, is necessary to develop its future success. In publishing this report I believe that we are providing valuable insight into the depth of this relationship. This in turn should help to shape the US Ireland economic relationship and the actions necessary to develop it further.

The timing of this publication is quite deliberate as Ireland will be the centre of global attention during the upcoming St. Patrick’s Day celebrations. This report will also be presented at a special event in New York hosted by the Irish Consulate.

This report tells in numbers the story that those of us who work in US companies in Ireland have been experiencing in recent years. This is the story of how the Irish US economic relationship has gone from strength-to-strength and been a

significant bright spot in our economy. This is a testament to the strength, depth and resilience of this great relationship that for so long has played such an important role in Ireland’s success.

An important part of the Irish-US relationship is its reciprocal nature. This report illustrates that Irish investment into the US is substantial and proves that this relationship is a two-way street with benefits for both countries.

The importance to US companies of their Irish operations was summed up by the finding that in 2013, the last year of complete data, Ireland ranked as the number one destination in the world for US foreign direct investment. Inflows totaled nearly $19 billion and represented over 12% of US investment worldwide. This is a stunning achievement of which we can be very proud and upon which we can capitalise in the years ahead.

Foreword Eamonn Sinnott, President of the American Chamber of Commerce

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Chapter 1:

Irish-U.S. Linkages: Emerging Stronger and Deeper

Chapter 1 highlights:

• From the economic tumult of the past half-decade, Ireland and the United States now stand as two of the strongest growing economies in the transatlantic partnership. Both economies are expected to expand by 3% or better this year, double the pace of growth expected from the European Union (estimated at 1.7%).

• Total U.S. investment to Europe in the first nine months of 2014 fell 19% from the same period in 2013, to $115 billion, while U.S. flows to Ireland surged nearly 42%, to roughly $37 billion.

• U.S. direct investment stock in Ireland totalled a record $240 billion in 2013, a greater investment stake than Germany and France combined ($196 billion).

• U.S. companies have invested roughly $277 billion in Ireland since 1990; the comparable figure for Brazil: $92 billion; for Russia: $10 billion; for India: $32 billion; and China: $51 billion.

• It’s not all one way; Ireland’s investment stakes in the United States are substantial and bestow significant benefits on the U.S., whether through rising output and employment, or increasing levels of investment and R&D expenditures.

• Ireland’s overall investment position in the United States totalled a record $26.2 billion in 2013, a U.S. investment stake larger than many other nations like Italy, Denmark and Finland. Irish affiliates generated some $62 billion in affiliate sales in 2012, the last

year of available data, and some $24 billion in U.S. economic output.

• US affiliate output in Ireland totalled nearly $82 billion in 2012, a five-fold increase from the start of the century. For the year, US affiliates produced more output in Ireland than in China ($46.4 billion) and India ($21 billion) combined. Ireland accounted for 12.2% of total US affiliate output in Europe in 2012, up from 5% in 2000.

• R&D outlays by US affiliates in Ireland totalled $1.5 billion in 2012, a significant jump from the levels of 2000 ($465 million). Ireland’s share of US affiliate R&D in Europe rose to 5.5% in 2012, up from a share of 3.6% in 2000. On a global basis, Ireland accounted for 3.3% of total US affiliate R&D in 2012, up from 2.3% at the start of the century.

• The sales of US majority-owned affiliates in Ireland rose nearly five-fold between 2000 and 2012, with Ireland’s share of US-owned European affiliate sales jumping from 5.3% at the start of the century to 11.5% in 2012. The large increase reflects the rising export-intensity of U.S. affiliates and a rebound in local demand.

• For decades, US firms in Ireland have been instrumental in creating jobs and income for Irish workers, profits for indigenous firms, and tax revenues for local and national governments. Due in part to the large presence of US affiliates, Ireland has been transformed from one of the more underdeveloped nations of Europe into one of the most prosperous over the past 50 years.

12Out of the ashes of the global financial crisis-cum-recession of 2008/09, an unexpected transatlantic trade and investment power couple has emerged. From the economic tumult of the past half-decade, and amid the ongoing economic crisis in the euro zone, Ireland and the United States now stand as two of the strongest growing economies in the transatlantic partnership, with each party’s underlying strength, due in part, to the thick two-way investment and trade ties that mutually bind the two nations together.

Remarkably, Ireland, following a protracted economic downturn over 2008-11 that required the nation to seek financial assistance from the IMF and EU, emerged as Europe’s growth leader in 2014. The economy expanded by an estimated 4.8% in 2014, light years ahead of the euro zone average (0.8%) and European Union (1.3 %), and even better than the growth rates of many of the world’s emerging markets.

The rise of Ireland from a sharp economic shock to become a growth leader within the economic hierarchy of the European Union reflects in large part the Irish economy’s ability to adjust flexibly to those challenging circumstances as unit labour costs, public sector expenditures and related measures of international competitiveness adjusted faster in Ireland than in other European states, helping to accelerate and deepen the nation’s economic recovery.

Ireland’s transatlantic partner, the United States, has been just as quick to adjust to the post-crisis environment. Aggressive monetary easing from the Federal Reserve, along with America’s energy renaissance and resilient private sector, helped boost real GDP growth by 5% in the third quarter of 2014. Due to a widening trade deficit, growth decelerated to 2.6% in the fourth quarter, although final demand in the U.S. remains robust.

As 2015 begins, U.S. real GDP growth this year is expected to be stronger than real growth within emerging markets for the first time in over a decade. America is on course to contribute more to global growth this year than even China.

On balance, as the transatlantic economy finds its footing and puts the financial crisis behind it, Ireland and the United States have moved onto a firm growth path. Both economies are expected to expand by 3% or better this year, double the pace of growth expected from the European Union in general (just 1.7%). Importantly, both economies are adding jobs and reducing the unemployment ranks. Given this backdrop, it is little wonder Irish-US commercial linkages have become stronger and deeper over the year. Strength is attracted to strength. And while there are increasing signs of the U.S. and Europe diverging economically, all indicators point towards Ireland and the U.S. intensifying well- established trade and investment relationships.

Consider:First, total U.S. investment to Europe in the first nine months of 2014 fell 19% from the same period a year ago, to $115 billion, while U.S. flows to Ireland surged nearly 42%, to roughly $37 billion.

Second, U.S. investment flows to Ireland have easily surpassed pre-crisis levels; however, U.S. investment to Germany, France, Spain and many other nations remain below pre-crisis levels. While Ireland accounted for 6.4% of total U.S. investment in Europe in 2007, the nation’s share had surged to 17.1% by 2013.

Third, U.S. direct investment stock in Ireland totalled a record $240 billion in 2013, a greater investment stake than Germany and France combined ($196 billion).

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Fourth, U.S. investment stock in Ireland surged 15.6% in 2013, well above the global growth rate of 6.2%. Ireland now accounts for just over 10% of total U.S. foreign direct investment in the European Union.

Fifth, since 2000, the stock of U.S. foreign investment in Ireland has soared by more than six-fold, or from $36 billion in 2000 to $240 billion in 2013.

Sixth, U.S. investment stakes in Ireland are easily in excess of total U.S. investment in South America ($169 billion), Africa ($60 billion), and the Middle East ($45 billion)

Seventh, U.S. companies have invested roughly $277 billion in Ireland since 1990; the comparable figure for Brazil: $92 billion; for Russia: $10 billion; for India: $32 billion; and China: $51 billion.

Finally, when U.S. foreign direct investment flows to Ireland are adjusted to account for the role of U.S. holding companies in driving flows of investment globally, the nation’s position as a premier destination for U.S. firms is reinforced. Indeed, in 2013, the last year of complete data, Ireland ranked as the number one destination in the world for U.S. foreign direct investment under this lens.

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82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

(Billions of $)

TOTAL US FOREIGN DIRECT INVESTMENT STOCK IN IRELAND

Source: Bureau of Economic Analysis.

FIGURE 1.1 TOTAL US FOREIGN DIRECT INVESTMENT STOCK IN IRELAND

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81.1

29.8

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Ireland Brazil China India Russia

U.S. Cumulative FDI: 2008-2013 (Billions of $)


MOST FAVOURED NATION: IRELAND VERSES THE BRICS

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The Transatlantic Economy remains one of the most important arteries of commercial activity and exchange in the globe. Within that relationship Europe does face a number of economic and policy challenges that threaten to undermine growth and potentially weaken this transatlantic economy as a whole which will be discussed in later chapters. However, there

is little uncertainty or wonderment as to the present and future state of Irish-US commercial relationships. As the following pages make very clear, bi-lateral commercial ties of all types have become stronger and deeper, not weaker and thinner, in the post-crisis world. As we barrel into the second half of this decade, Irish-US relations have never been stronger.

FIGURE 1.2 MOST FAVOURED NATION: IRELAND VERSUS THE BRICS

16Investment flows demonstrate the substantive nature of investments:

In this report, our fourth edition on Irish-U.S. economic relations, we have adjusted the foreign direct investment figures provided by the Bureau of Economic Analysis (BEA) to account for the role of U.S. holding companies in determining U.S. investment flows to Ireland.

This analytical lens is warranted since U.S. parent companies have been apportioning an increasing share of their foreign direct investment (FDI) to Ireland and the world at large through holding companies. In 2003, the figure was 16% of the total. Globally, while the BEA reports that U.S. FDI for the year amounted to $328 billion, more than half of the total (or $154 billion) was classified as flows from holding companies.

As the BEA notes, “The growth in holding-company affiliates reflects a variety of factors. Some holding-company affiliates are established primarily to coordinate management and administration of activities—such as marketing, distribution, or financing—worldwide or in a particular geographic region. One consequence of the increasing use of holding companies has been a reduction in the degree to which the US Direct Investment Abroad position (and related flow) estimates reflect the industries and countries in which the production of goods and services by foreign affiliates actually occurs.”

Adjusted numbers but the same narrative

Even after adjusting for U.S. FDI flows to Ireland from holding companies, U.S. FDI flows to Ireland remain substantial and critical to the underlying success of U.S. firms, with Ireland clearly among the most favoured nations in the world for Corporate America.

Case in point:• In 2013, the last year of complete data, Ireland

ranked as the number one destination in the world for U.S. foreign direct investment. U.S. FDI to the nation totalled nearly $19 billion, a record high. The figure was just over 12.2% of the global total.

• In 2013, U.S. investment to Ireland rose roughly 70% from the prior year, while U.S. FDI to the European Union declined 9.5%. On a global basis, US FDI outflows also declined, by 8.8%.

• Ireland accounted for 36.4% of total US FDI to the European Union in 2013, a record high.

• Over the 2008-2013 timeframe, cumulative U.S. FDI flows to Ireland tallied $81.1 billion, representing 21.3% of aggregate US FDI to the European Union and 8.4% of the global total.

• Over the 2008-13 span, at 8.4% Ireland ranked as the third most attractive market in the world for U.S. FDI, trailing only the United Kingdom (12.1%) and Canada (9.3%).

• In the post-crisis era (the 2008-13 period), U.S. firms have invested more capital in Ireland ($81.1 billion) than the BRICs combined ($52 billion). Corporate America’s investment in Ireland since 2008 is five times larger than comparable investment levels in China and 16 times greater than U.S. FDI in India.

• America’s investment stock in Ireland remains sizable—even after adjusting for flows associated with holding companies. In 2013, U.S. capital

17stock in Ireland totalled $128 billion, well above comparable figures in Germany ($87 billion) and France ($65 billion), and figures from China ($58 billion) and India ($24 billion).

• Between 2003 and 2013, America’s investment stock in Ireland (minus capital from holding companies) expanded 149%; over the same period, U.S. investment stock in the EU rose 96%.

• As noted earlier, by all indications, U.S. FDI flows to Ireland at nearly $37billion remained strong for the first nine months of 2014. Even after adjusting for flows from holding companies, U.S. FDI to Ireland likely topped $20 billion last year, which would represent another record high.

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U.S. FOREIGN DIRECT INVESTMENT STOCK IN IRELAND (MINUS HOLDING COMPANIES)


(Billions of $)

FIGURE 1.3 U.S. FOREIGN DIRECT INVESTMENT STOCK IN IRELAND (MINUS HOLDING COMPANIES)

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Canada

Singapore

Australia

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Switzerland

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United Kingdom

Ireland

TOP U.S. FDI DESTINATIONS: Q1-Q3 2014*

0 5 10 15 20 25 30 35 40

*Total FDI Flows: Includes Flows to Holding Companies. Sources: Bureau of Economic Analysis..

(Billions of $)

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

IRELAND FDI STOCK IN THE U.S. (Billions of $)

Data as of February 2014. Source: Bureau of Economic Analysis.

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FIGURE 1.4 IRELAND FDI STOCK IN THE U.S.

FIGURE 1.5 TOP U.S. FDI DESTINATIONS: Q1-Q3 2014*

20Ireland’s sizable presence in the United States

As the largest recipient of FDI in the world, the United States receives capital from many nations around the world, Ireland included. In 2013, for instance, U.S. foreign direct investment inflows from Ireland strengthened from the depressed levels of 2009-12 period, when many Irish firms decamped the United States in the wake of the financial crisis. The rebound in inflows in 2013 helped boost Ireland’s overall investment position in the United States. Following the outsized gains of 2013, Irish inflows to the U.S. totalled an estimated $4.3 billion in 2014. On a historic cost basis, Ireland’s investment stock in the U.S. totalled a record $26.2 billion in 2013, a U.S. investment stake larger than many other nations like Italy, Denmark and Finland.

In general, the activities of Irish firms in the United States remain substantial—to this point, Irish affiliates generated some $62 billion in affiliate sales in 2012, the last year of available data, and some $24 billion in U.S. economic output. According to data from the BEA, these firms spent over $2 billion on research and development in the United States.

All of the above is another way of saying that Ireland’s investment stakes in the United States are substantial and bestow significant benefits on the U.S., whether through rising output and employment, or increasing levels of investment and R&D expenditures.

Understanding how U.S. firms compete in the global economy

We may be well into the 21st century but the metric by which nations gauge and measure

bi-lateral commerce is a 19th century relic. Bi-lateral trade (traditional export and import figures) is the official measurement of global commerce, yet global engagement is far more complex and intricate than the simple cross-border exchange of goods and services. American firms deliver products to foreign customers via not one but two principal means: either through exports (trade) or through their overseas foreign affiliates (investment). Often, firms deploy both modes of delivery.

Competing through foreign direct investment has long been a hallmark of Corporate America, whose global footprint via overseas investment dates back to the mid-1800s. One of the first U.S. firms to lay stakes in Europe in general and Ireland in particular was Ford Motor, who opened a tractor manufacturing plant in Cork in 1917. Two World Wars and the Great Depression suppressed the desire of U.S. firms to venture too far from home in the first half of the 20th century. Things changed in the post-war era, however. The outward stock of Corporate America was roughly $12 billion in 1950, and nearly evenly divided between the developed and developing nations. Europe accounted for just 15% of the total, although beginning in the 1960s, the strategies and hence geographic preferences of U.S. multinationals began to shift. Cumulative U.S. foreign direct investment more than doubled in the 1960s and then tripled in the 1970s, with Europe clearly emerging as America’s top overseas destination.

As Europe rebuilt and recovered from the ravages of war and moved slowly towards the creation of a common market, U.S. firms were quick to seize

21on the market opportunities across the Atlantic. As Europe evolved into an even larger and more integrated economic entity in the intervening decades, knocking down barriers to growth and emerging as the largest and wealthiest economic bloc in the world, U.S. firms became even more entrenched in the region, with many becoming more pan-European than many European firms themselves. Over most of the post-war era, Europe has accounted for at least half of total U.S. foreign direct investment. While U.S. foreign direct investment has become more dispersed in the past few years, with a growing emphasis on the developing nations, Europe still accounts for roughly half of total U.S. overseas investment stock. The region, in other words, remains hugely important to the economic success and long-term prosperity of Corporate America.

Why Ireland?

Simply put, there is more to Ireland than its long-standing commitment to providing an attractive taxation rate to stimulate inward investment. Indeed, the nation’s success in attracting large amounts of foreign direct investment from some of the largest multinationals in the world is due to a number of reasons working together including access to the European Union marketplace; a young, educated and English-speaking labour force that continues to grow; a resilient economy able to adapt flexibly to ever-changing circumstances; an internationally respected and transparent tax and legal framework; political stability; a strategic focus and ensuing policies designed to develop high-value added industries like electronics, computer software, medical instruments and finance; attractive R&D tax credits; liberal approach to the movement of

capital, repatriation of earnings, royalties or interest; and competitive costs relative to the rest of Europe.

It is not one variable but many variables—a bundle of attributes—that accounts for Ireland being among the most attractive destinations in the world for foreign capital, notably capital from the United States. As the largest foreign investor in Ireland, the footprint of Corporate America in Ireland is sizable and beneficial to both parties.

Only by understanding the extent of U.S. investment flows to Ireland can one begin to understand the depth of commercial linkages between the two parties and how critical Ireland is to the global success of U.S. firms. Trade figures—the conventional measurement of global engagement—hardly begin to capture the depth and breadth of the Irish-U.S. relationship. Figure 1.6 makes clear, how U.S. firms engage with Ireland is really a tale of two stories. Exports figure only nominally in the equation, while foreign affiliate sales, reflecting the larger US investment position in Ireland, are the overwhelming means by which American firms deliver goods and services to Irish customers and third parties. This is illustrated by the difference between U.S. exports of goods and services to Ireland in 2013 ($38.5 billion) and the estimated foreign affiliate sales in Ireland the same year ($350 billion).

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Total Sales (Goods and Services) of U.S. Foreign Affiliates in Ireland Total U.S. Exports (Goods and Services) to Ireland

U.S. SALES OF FOREIGN AFFILIATES* IN IRELAND EXCEED U.S. TOTAL EXPORTS TO IRELAND*

*Majority-owned nonbank affiliates (2006-2008). Majority-owned bank and nonbank affiliates 2009-2013. Source: Bureau of Economic Analysis

(Billions of $)

A minor player to the commercial interests of the United States becomes a global strategic giant when one realizes how foreign direct investment—not trade—has bound Ireland and the U.S. together.

The critical role of US foreign affiliatesFigure 1.7 outlines the extensive presence of Corporate America in Ireland. The figures for 2013 are the author’s estimates but before delving into the specifics, it is worth highlighting the deep integration of Ireland and the United States over the past dozen years.

FIGURE 1.6 U.S. SALES OF FOREIGN AFFILIATES* IN IRELAND EXCEED U.S. TOTAL EXPORTS TO IRELAND*

24 FIGURE 1.7 The Growing Presence of U.S. Foreign Affiliates* in Ireland(Millions of Dollars)

2013** 2012 2010

$ $ % of Europe % of World $ % of Europe % of World

Affiliate Gross Product 85,476 81,796 12.2% 5.8% 61,741 10.3% 5.0%

Affiliate Assets 1,232,254 1,173,576 9.0% 5.4% 840,882 7.4% 4.3%

Affiliate Employment*** 106.5 105.4 2.5% 0.9% 98.0 2.4% 0.9%

- Manufacturing*** 47.0 47.7 2.7% 1.0% 54.4 3.1% 1.2%

R&D of Affiliates 1,500 1,472 5.5% 3.3% 1,431 6.0% 3.6%

Foreign Affiliate Sales 350,000 321,568 11.5% 5.4% 269,639 10.8% 5.2%


*Majority-owned nonbank affiliates (1985-2008). Majority-owned bank and nonbank affiliates 2009-2013.

**Author estimates.

***Thousands of employees.

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$ % of Europe % of World $ % of Europe % of World $ % of Europe % of World

16,420 5.0% 2.7% N/A N/A N/A N/A N/A N/A

106,276 3.7% 2.2% 14,546 2.0% 1.1% 6,531 2.2% 1.0%

90.5 2.4% 1.1% 43.0 1.7% 0.8% 33.4 1.6% 0.7%

66.5 3.5% 1.5% 39.7 2.5% 1.2% 30.3 2.0% 0.9%

465 3.6% 2.3% 539 6.8% 5.3% N/A N/A N/A

68,626 5.3% 2.7% 13,384 1.9% 1.1% 5,549 1.5% 0.8%

26US affiliate output in Ireland totalled nearly $82 billion in 2012, a five-fold increase from the start of the century. For the year, US affiliates produced more output in Ireland than in China ($46.4 billion) and India ($21 billion) combined. Ireland accounted for 12.2% of total US affiliate output in Europe in 2012, up from 5% in 2000.

US affiliate assets in Ireland topped $1 trillion for the first time in 2011 and amounted to $1.2 trillion in 2012. The figure is well in excess of France ($376 billion) and Germany ($711 billion) but that aside, it must be noted that the assets of foreign affiliates include current assets (or assets that can be temporary in nature and can be changed into cash within a short period); a fixed asset which is durable and can be used repeatedly; a floating asset which can be quickly converted to cash at or near book value; an intangible asset which has not material substance like goodwill; and a liquid asset which can very easily be converted into cash without appreciable loss in value. These assets are in constant flux,

but that said, year after year, the asset base of US affiliates in Ireland ranks as one the largest in the world.

In terms of employment, overall US affiliates added roughly 15,000 Irish workers to their payrolls between 2000 and 2012; manufacturing employment, however, has steadily declined over the past few years, falling from 66,500 in 2000 to 55,000 in 2010 to stabilize at 48,000 in 2012. While much of Ireland’s modern advanced manufacturing base has continued to expand since 2005, this downtrend employment trend reflects; increasing capital intensity within the sector; the leveraging of higher skills within industry; the relocation of lower value activities to more competitive locales in central Europe and elsewhere; and the impact of both process and production automation. Counter to this, there has been a greater emphasis by US affiliates on knowledge-based, service-led activities in Ireland, and this has resulted in overall employment growth by US affiliates in Ireland.

27

04 05 06 07 08 09 10 11 12 13* 14*

MANUFACTURING EMPLOYMENT OF U.S. FOREIGN AFFILIATES** IN IRELAND (Thousands of Employees)

*Author estimates

**Majority-owned nonbank affiliates (1983-2008). Majority-owned bank and nonbank affiliates 2009-2014.


70

65

60

55

50

45

40

35

30

25

20

FIGURE 1.8 MANUFACTURING EMPLOYMENT OF U.S. FOREIGN AFFILIATES** IN IRELAND

28

As for research and development expenditures, outlays by US affiliates in Ireland totalled $1.5 billion in 2012, a significant jump from the levels of 2000 ($465 million). A very attractive R&D tax credit regime, the availability of highly skilled labour, the participation of key Irish universities in deepening R&D centres, the establishment of organizations that promote R&D—all of these variables, and more, helped boost Ireland’s share of US affiliate R&D in the Europe to 5.5% in 2012, up from a share of 3.6% in 2000. On a

global basis, Ireland accounted for 3.3% of total US affiliate R&D in 2012, up from a share of 2.3% at the start of the century.

US sales of majority-owned affiliates in Ireland rose nearly five-fold between 2000 and 2012, with Ireland’s European share of US affiliate sales jumping from 5.3% at the start of the century to 11.5% in 2012. The large increase reflects the rising export-intensity of U.S. affiliates and a rebound in local demand.

29

On balance, the depth and breadth of US affiliates in Ireland is remarkable. The following figures depict the extent to which U.S. firms have become embedded in the Irish economy. This immense presence not only benefits US parent firms who have turned to Ireland to boost their global reach, competitiveness and thus profitability. Significant benefits also accrue to various Irish stakeholders.

For decades, US firms in Ireland have been instrumental in creating jobs and income for Irish workers, profits for indigenous firms, and tax revenues for local and national governments. Higher wages, net employment gains, increased trade, the transfer of technology, the upgrading of managerial and technical skills, access to global markets—the benefits of foreign direct

investment for the host nation run the gamut, and hence the global premium governments place on attracting capital investment from the best companies in the world.

US affiliate activity not only provides jobs and income to Irish workers, it also boosts the business and competitiveness of indigenous firms. The presence of US affiliates mean more output and sales for local companies, and the rising potential for technology uplift, developing skills and sharing best international business practices. These linkages help boost the production, the efficiencies and technological capabilities of Corporate Ireland.

U.S. IN IRELAND IRELAND IN U.S.

Foreign Direct Investment* 239.6 26.2

Total Assets of Affiliates** 1,232.0 219.3

Foreign Affiliate Sales** 350.0 66.9

Value Added of Affiliates** 85.5 24.9

* Based on a historic-cost basis.

**Author estimates.

Data are for majority-owned bank and nonbank affiliates.

Source: Bureau of Economic Analysis

FIGURE 1.9 IRELAND - U.S. GLOBAL LINKAGES, 2013 (BILLIONS OF DOLLARS)

30

And finally, there are plenty of benefits to the Irish government. Due in part to the large presence of US affiliates, Ireland has been transformed from one of the more under-industrialised nations of Europe into one of the most prosperous over the past 50 years. During the financial crisis, these same linkages helped cushion the brutal blow from the global economic meltdown and ensuing Eurozone recession. As expected, continued deep linkages with US multinationals,

combined with tough internal adjustment measures implemented by the government, has made Ireland today among the fastest growing in Europe.

In 2015, the evidence shows that at the end of the day Ireland—thanks to its bundle of attributes—remains among the most favoured destinations in the world for U.S. multinationals.

1 European Commission, Winter Economic Forecast,

5th February 2015

31

Chapter 2:

The Ties that Bind: The Nexus between Foreign Investment and Trade


• U.S. investment in Ireland has been largely trade-creating for both parties, and in both goods and services, but notably in the latter. Ireland is a critical source of service exports (receipts) for the U.S., while the U.S. is a key market for Irish goods exports.

• Over 35% of U.S. exports (goods) to Ireland were classified as related-party trade in 2013, the highest share since 2002. Meanwhile, over 90% of U.S. imports were designated as related party trade, testimony to the fact that U.S. parents remain dependent on their Irish affiliates for specialized goods and in many cases, services.

• US services exports to Ireland are far more prominent than exports of goods, an anomaly by the standard U.S. trade flows, whereby goods exports almost always exceed service exports. In 2013, for instance, U.S. exports of goods to Ireland were a fraction of U.S. service exports--$5.7 billion in goods versus nearly $32 billion in service exports.

• It is trade in services where the link between U.S. foreign direct investment and trade is most evident, with Ireland ranked as the fifth largest market in the world for U.S. service exports in 2013. Only Canada, ranked first, followed by the United Kingdom, Japan and China ranked ahead of Ireland.

• Trade flows in two directions; the U.S. remains among the largest markets in the world for Irish exports. For instance, over the January-July 2014

period, the U.S. accounted for 21.1% of total Irish exports of goods. U.S. imports of goods from Ireland totalled $34 billion in 2014, up 7.9% from a year earlier.

• U.S. affiliate operations in Ireland are primarily geared for exports—notably to the European Union, with Ireland serving as a strategic beachhead to one of the largest and wealthiest economic entities in the world. In 2012, less than a one quarter of affiliate sales were for the local market, while 3rd markets (notably the EU) accounted for 56% of the total, with the U.S. market accounting for the rest, or 21%.

• However, local affiliate sales in Ireland totalled $72 billion in 2012, a record high, with local sales greater than comparable figures in such nations as Belgium, Russia, Spain, and South Korea. On a global basis, Ireland was ranked as the 13th largest market in the world for local affiliate sales in 2012. Ireland’s strategic role as a U.S. export platform is evident from the following: U.S. affiliate exports from Ireland totalled $241 billion in 2012, trailing only Singapore, but ahead of Switzerland and the United Kingdom.

• U.S. affiliate exports from Ireland were more than four times larger than comparable exports from China in 2012. On a standalone basis, U.S. affiliate exports from Ireland are greater than most nations total exports.

• Of the top twenty exporting companies in Ireland, the majority are domiciled in the United States.

32Cross-border investment and trade rarely occur in isolation, notably when two economic entities are as integrated and interdependent as Ireland and the United States. The two variables are highly correlated; they are more compliments than substitutes, which is counter to the common narrative that most U.S. foreign direct investment obviates the need for cross-border trade.

In the case of Ireland, it is important to note that U.S. affiliates in the nation are not stand-alone entities. Rather, they are tightly bound and integrated with their parent firm in the United States, meaning that parent and affiliates are constantly exchanging ideas, goods, intellectual properties, capital, and other resources. These activities are referred to as intra-firm activities, with the latter notably important and instrumental to Irish-U.S. commercial ties.

What does this mean in reality? It means that affiliates are constantly generating demand for

goods and services from their parent company, and vice versa, whether the goods are specialized parts and components manufactured by the parent, or high-value added services, like intellectual property rights that are channelled between the two parties. This type of trade typically leads to trade creation for the home and host nation.

Quantifying this dynamic, according to the U.S. Census Bureau, over 35% of U.S. exports (goods) to Ireland were classified as related-party trade in 2013, the highest share since 2002. Meanwhile, over 90% of U.S. imports were designated as related party trade, testimony to the fact that U.S. parents remain dependent on their Irish affiliates for specialized goods and in many cases, services. The deeper the links between parent firms and their affiliates, the thicker the web of related-party trade.

33FIGURE 2.1 Related Party Trade: Ireland(Millions of Dollars)

U.S. Imports: U.S. Exports:

Total Trade Related TradeRelated Party

Trade as a % of Total

Total Trade Related TradeRelated Party

Trade as a % of Total

2002 22,374 19,506 87.2% 6,387 2,403 37.6%

2003 25,766 22,459 87.2% 7,226 2,147 29.7%

2004 27,401 24,480 89.3% 7,615 2,361 31.0%

2005 28,385 24,294 85.6% 8,702 2,710 31.1%

2006 28,921 25,833 89.3% 7,825 2,356 30.1%

2007 30,292 26,867 88.7% 8,427 2,544 30.2%

2008 31,298 27,772 88.7% 8,080 2,263 28.0%

2009 28,102 23,808 84.7% 6,969 2,118 30.4%

2010 33,822 28,004 82.8% 6,489 1,727 26.6%

2011 39,072 34,593 88.5% 6,189 1,483 24.0%

2012 33,198 29,857 89.9% 6,093 1,869 30.7%

2013 31,336 28,660 91.5% 5,659 1,994 35.2%

Source: U.S. Census Bureau

Digging deeper, while U.S. goods exports to Ireland are rather small, service exports are much larger. Indeed, what is notable about U.S. exports to Ireland is the following: services exports are far more prominent than exports of goods, an anomaly by the standard U.S. trade flows, whereby goods exports almost always exceed service exports. In 2013, for instance, U.S. exports of goods to Ireland were a fraction of U.S. service exports - $5.7 billion in goods versus nearly $32 billion in service exports. Why the anomaly or gap?

It is trade in services where the link between U.S. foreign direct investment and trade is most evident, with Ireland ranked as the fifth largest market in the world for U.S. service exports in

2013. Only Canada, ranked first, followed by the United Kingdom, Japan and China ranked ahead of Ireland.

In the end, U.S. investment in Ireland has been largely trade-creating for both parties, and in both goods and services, but notably in the latter. Ireland is a critical source of service exports (receipts) for the U.S., while the U.S. is a key market for Irish goods exports. But beyond transatlantic trade flows supported by foreign direct investment, there is yet another component of Irish-U.S. trade that is critically important to both parties. This is the role U.S. affiliates play in driving Irish trade with the rest of the world.

34 FIGURE 2.2 U.S. Service Exports, by Country 2013(Millions of Dollars)

Rank Total services Maintenance and repair

servicesTransport Travel

Insurance services

Financial services Charges for the use of intellectual property

Telecommunications, computer, and

information services Other business services

Government goods and services

All countries 687,410 16,295 87,267 173,131 16,096 84,066 129,178 33,409 123,447 24,522

Total for the 10 largest countries* 371,621 7,336 48,431 103,349 8,611 36,843 79,982 17,216 65,533 2,863

1 Canada 63,281 1,483 8,280 22,737 2,869 5,545 9,916 2,661 9,365 425

2 United Kingdom 60,269 1,816 7,948 9,834 1,611 13,976 8,980 4,936 10,818 350

3 Japan 46,270 702 9,282 12,152 1,685 3,156 9,535 1,222 8,073 463

4 China 37,761 789 4,813 18,694 125 2,799 5,780 492 3,930 338

5 Ireland 31,740 (D) 668 1,307 475 2,395 14,395 (D) 11,012 33

6 Mexico 29,855 739 4,228 14,998 483 1,594 3,266 907 3,246 395

7 Germany 27,529 568 4,874 5,552 281 3,085 6,441 1,133 5,360 234

8 Switzerland 27,372 124 1,845 1,948 441 1,255 10,150 1,344 10,204 61

9 Brazil 26,640 654 4,297 9,237 313 2,115 4,238 4,222 1,346 218

10 South Korea 20,904 461 2,196 6,890 328 923 7,281 299 2,179 346

All other countries 315,789 8,959 38,836 69,782 7,485 47,223 49,196 16,193 57,914 21,659

Before delving into the specifics of U.S. affiliate trade from Ireland, it is worth noting that the U.S. remains among the largest markets in the world for Irish exports. For instance, over the January-July 2014 period, the U.S. accounted for 21.1% of total Irish exports of goods, up from a share of 19.7% from the same period in 2013. The numbers are sourced from the International Monetary Fund.

According to data from the Bureau of Economic Analysis, U.S. imports of goods from Ireland totalled $34 billion in 2014, up 7.9% from a year earlier. “Chemicals” were classified as the largest import from Ireland, representing over 70% of the total, and most likely reflects large intra-firm trade between U.S. parent and Irish affiliates in the pharmaceutical sector.

35FIGURE 2.2 U.S. Service Exports, by Country 2013(Millions of Dollars)

Rank Total services Maintenance and repair

servicesTransport Travel

Insurance services

Financial services Charges for the use of intellectual property

Telecommunications, computer, and

information services Other business services

Government goods and services

All countries 687,410 16,295 87,267 173,131 16,096 84,066 129,178 33,409 123,447 24,522

Total for the 10 largest countries* 371,621 7,336 48,431 103,349 8,611 36,843 79,982 17,216 65,533 2,863

1 Canada 63,281 1,483 8,280 22,737 2,869 5,545 9,916 2,661 9,365 425

2 United Kingdom 60,269 1,816 7,948 9,834 1,611 13,976 8,980 4,936 10,818 350

3 Japan 46,270 702 9,282 12,152 1,685 3,156 9,535 1,222 8,073 463

4 China 37,761 789 4,813 18,694 125 2,799 5,780 492 3,930 338

5 Ireland 31,740 (D) 668 1,307 475 2,395 14,395 (D) 11,012 33

6 Mexico 29,855 739 4,228 14,998 483 1,594 3,266 907 3,246 395

7 Germany 27,529 568 4,874 5,552 281 3,085 6,441 1,133 5,360 234

8 Switzerland 27,372 124 1,845 1,948 441 1,255 10,150 1,344 10,204 61

9 Brazil 26,640 654 4,297 9,237 313 2,115 4,238 4,222 1,346 218

10 South Korea 20,904 461 2,196 6,890 328 923 7,281 299 2,179 346

All other countries 315,789 8,959 38,836 69,782 7,485 47,223 49,196 16,193 57,914 21,659

36

The export-propensity of US foreign affiliatesU.S. affiliates in Ireland play a unique role for U.S. parent firms. Rather than being designed to serve the local Irish market, U.S. affiliate operations in Ireland are primarily geared for exports—notably to the European Union, with Ireland serving as a strategic beachhead to one of the largest and wealthiest economic entities in the world. It is Ireland’s membership of this cluster of wealthy nations that is highly valued by U.S. multinationals, since U.S. exports to the EU do not enjoy the same preferential treatment as exports from Ireland. Against this backdrop, it is very hard to make the case that U.S. foreign direct investment in Ireland is destroying trade in the United States, or that U.S. FDI is deleterious to the jobs and incomes of U.S. workers.

To the contrary, foreign affiliate engagement in Ireland is critical to the success of many U.S. firms, with Ireland’s strategic access to the EU allowing U.S. firms to boost the scale and scope of their operations in Europe in a cost efficient manner, generating, in turn, greater profits, exports, investment and jobs and income in the United States. The greater the output and activity of U.S. affiliates in Ireland, the greater the demand for goods and services from the parent firm in the United States. This, in turn, generates more output for the parent firm. As we have highlighted elsewhere, the activities of U.S. parent’s and their affiliates are closely bound together, with goods and services being “pushed” and “pulled” between both parties. Figure 2.4 underscores the growth in strategic

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

U.S. IMPORTS OF GOODS FROM IRELAND (Billions of $)

Source: U.S. Census Bureau.

Data as of February 2015.

40

35

30

25

20

15

10

FIGURE 2.3 U.S. IMPORTS OF GOODS FROM IRELAND

37importance of Irish based units of US firms. Note that in 1982, the split between U.S. foreign affiliate sales in Ireland versus sales for export was roughly 40:60. By 2012, the last year of available data, local sales had dropped to below 25% of the total, while affiliate exports surged to 77% of the total. For the year, less than one-fourth of affiliate sales were for the local market, while 3rd markets (notably the EU) accounted for 56% of the total, with the U.S. market accounting for the rest, or 21%.

Notice that for the entire European Union, U.S. affiliate sales are generally geared towards local markets (with local affiliates sales accounting for over half of total sales in 2012), followed by exports to 3rd markets and the U.S., a distant third. Hence, Ireland’s U.S. FDI base serves as a pan-European platform for those firms – reflecting its status as a gateway to the continent.

While local affiliate sales in Ireland accounted for just 23% of total sales in 2012, one of the smallest host-sales ratios in Europe, that number is deceiving. It is not that U.S. affiliates are not selling any goods locally to Irish consumers. To the contrary, foreign affiliate sales to the local market totalled $72 billion in 2012, a record high, with local sales greater than comparable figures in such nations as Belgium, Russia, Spain, and South Korea. On a global basis, Ireland was ranked as the 13th largest market in the world for local affiliate sales in 2012. Another note of interest: local foreign affiliates sales of $72 billion in 2012 easily dwarfed US exports of goods and services in the same year (roughly $36 billion), illustrating the sophisticated and complex nature of Irish-U.S. commercial engagement.

Ireland’s strategic role as a U.S. export platform is all too evident in Figure 2.4. In 1982, the nation ranked well down the list as a strategic beachhead for U.S. firms, with Ireland ranked 13th in the world in terms of U.S. foreign affiliate exports. Then, U.S. affiliate exports totalled $2.8 billion, although exports grew to $9.5 billion in 1990 and to $51 billion by 2000. In the first decade of this century, as the industrial capacity of U.S. affiliates in Ireland surged, so did U.S. affiliate exports. The latter exploded, soaring nearly five times between 2000 and 2012. Affiliate exports totalled $241 billion in 2012, trailing only Singapore, but ahead of Switzerland and the United Kingdom. Note how much more U.S. multinationals have turned to Ireland as an export base versus low cost locales like Mexico, Hong Kong and China. The latter ranked 12th, with U.S. affiliate exports from Ireland more than four times larger than comparable exports from China. On a standalone basis, U.S. affiliate exports from Ireland are greater than most nation’s total exports. Such is the export-intensity of U.S. affiliates in Ireland and the strategic importance of Ireland to the corporate success of U.S. firms operating in Europe.

As for these U.S. firms, Figure 2.5 lists the top twenty export companies in Ireland. The majority are domiciled in the United States or look to the US as their largest export market—which is hardly surprising given the intensive trade and investment links between the U.S. and Ireland.

Summarizing all of the above, expanding Irish-U.S. investment ties have been trade-creating and trade-supporting for both parties. Cross border trade flows are part of the glue that binds the U.S. and Ireland together, to the mutual benefit of all stakeholders.

38

Calendar 1982: Calendar 1990:

RegionLocal

MarketExports to 3rd Market

Exports to U.S.

Local Market

Exports to 3rd Market

Exports to U.S.

World 63.7% 25.6% 10.7% 67.0% 22.8% 10.2%

Europe 61.4% 35.0% 3.6% 64.8% 31.2% 4.0%

Austria na na na 77.8% 21.1% 1.1%

Belgium 39.7% 57.2% 3.1% 41.5% 55.5% 3.0%

Denmark n.a. n.a. n.a. 75.7% 20.0% 4.3%

Finland 97.6% na na 97.4% 2.3% 0.4%

France 74.1% 24.0% 1.9% 72.4% 24.6% 3.0%

Germany 69.8% 28.1% 2.1% 68.4% 29.0% 2.6%

Ireland 39.5% 56.7% 3.8% 29.3% 64.9% 5.8%

Italy 83.0% 16.0% 1.0% 82.3% 16.2% 1.5%

Netherlands 44.1% 53.0% 2.9% 41.8% 55.7% 2.5%

Norway 45.7% 41.7% 12.6% n.a. 37.7% n.a.

Poland n.a. n.a. n.a. n.a. n.a. n.a.

Portugal 76.6% 22.8% 0.6% 79.5% 20.1% 0.4%

Spain 72.9% 25.8% 1.3% 74.7% 23.7% 1.7%

Sweden 81.0% 18.1% 0.9% 78.8% 19.1% 2.1%

Switzerland 12.4% 81.3% 6.3% 25.4% 63.5% 11.1%

United Kingdom 68.3% 26.4% 5.3% 74.6% 20.3% 5.1%

Source: Bureau of Economic Analysis

Calendar 2012:

Local Market

Exports to 3rd Market

Exports to U.S.

59.5% 30.4% 10.1%

52.9% 39.8% 7.3%

62.2% 33.7% 4.1%

36.7% 60.5% 2.8%

53.1% 43.2% 3.7%

60.4% 34.4% 5.2%

68.4% 28.6% 3.0%

64.0% 31.3% 4.7%

23.1% 55.9% 21.0%

74.1% 22.2% 3.7%

44.0% 51.6% 4.4%

48.1% 48.3% 3.6%

62.1% 36.2% 1.8%

75.0% 19.9% 5.1%

66.8% 30.5% 2.7%

65.1% 30.3% 4.7%

24.7% 65.5% 9.8%

68.1% 24.8% 7.1%

FIGURE 2.4 U.S. Affiliate Sales in Europe by Destination(% of Total)

40

1982 1990

Rank Country Value Country Value

1 United Kingdom $33,500 United Kingdom $51,350

2 Switzerland $27,712 Canada $46,933

3 Canada $25,169 Germany $41,853

4 Germany $19,117 Switzerland $38,937

5 Netherlands $15,224 Netherlands $33,285

6 Belgium $11,924 France $24,782

7 Singapore $11,579 Belgium $21,359

8 France $11,255 Singapore $15,074

9 Indonesia $8,289 Hong Kong $9,951

10 Hong Kong $4,474 Italy $9,562

11 Italy $3,993 Ireland $9,469

12 Australia $3,710 Spain $7,179

13 Ireland $2,842 Japan $7,066

14 United Arab Emirates $2,610 Australia $6,336

15 Brazil $2,325 Mexico $5,869

16 Japan $2,248 Indonesia $5,431

17 Malaysia $2,046 Brazil $3,803

18 Panama $1,662 Norway $3,565

19 Spain $1,635 Malaysia $3,559

20 Mexico $1,158 Nigeria $2,641

All Country Total $252,274 All Country Total $398,873

Source: Bureau of Economic Analysis.*Destination = 3rd Market + Sales to U.S. for majority-owned bank and nonbank foreign affiliates.

FIGURE 2.5 Top 20 U.S. Affiliate Sales Abroad by Destination*(Millions of Dollars)

41

2000 2012

Country Value Country Value

United Kingdom $94,712 Singapore $262,260

Canada $94,296 Ireland $240,441

Germany $69,522 Switzerland $219,254

Netherlands $67,852 United Kingdom $198,018

Singapore $56,961 Canada $164,184

Switzerland $56,562 Netherlands $122,407

Ireland $51,139 Germany $117,298

Mexico $37,407 Belgium $84,987

France $35,797 Mexico $69,171

Belgium $32,010 France $65,413

Hong Kong $22,470 Hong Kong $58,041

Malaysia $16,013 China $53,615

Sweden $15,736 Australia $41,936

Italy $14,370 Brazil $35,354

Spain $12,928 Norway $30,308

Japan $11,845 Italy $28,639

Australia $9,370 Malaysia $25,583

Brazil $8,987 Spain $24,616

China $7,831 S. Korea $23,500

Norway $6,238 Japan $21,568

All Country Total $857,907 All Country Total $2,325,824

FIGURE 2.5 Top 20 U.S. Affiliate Sales Abroad by Destination*(Millions of Dollars)

42

RANK COMPANY NAME

1 Google Ireland LTD

2 Microsoft Ireland LTD

3 Johnson & Johnson

4 Dell Products

5 Smurfit Kappa Group

6 Oracle Emea LTD

7 Intel Ireland LTD

8 Kerry Group PLC

9 Pfizer

10 Apple Computer LTD

11 BSC International Holding LTD

12 Sandisk International LTD

13 IBM Ireland LTD

14 Gilead Sciences

15 The Irish Dairy Board Co-operative LTD

16 Glen Dimplex

17 Glanbia PLC

18 ABP Food Group

19 Warner Chilcott PLC

20 Facebook Ireland LTD

Source: Irish Exporters Association. Data as of January 2015.

FIGURE 2.6 TOP 20 EXPORT COMPANIES IN IRELAND

43

Chapter 3:

On the way back: Ireland’s Economic Outlook


• The evidence shows that Ireland’s competitiveness responded faster than any other European nation in the post-crisis era helping to reboot its economy. This, combined with a flexible and highly skilled labour force have engineered a remarkable economic turnaround. According to The Economist, “the Celtic Tiger is roaring again”.

• While real GDP growth across Europe was anaemic again in 2014, with only a slight improvement expected in 2015, Ireland bucked the trend, emerging as one of the few bright spots last year in an otherwise depressed landscape.

• Ireland’s economy surged 4.8% in 2014 according to estimates from the European Commission. The European Commission expects the Irish economy

to expand by 3.5% in 2015, well ahead of the EU expected annual average growth rate of 1.7%.

• In terms of growth, both Ireland and the United States are positioned as transatlantic growth leaders in the near-term. At the macro level, the economic transformation of both parties has been remarkable and underscores the resiliency of both Ireland and the United States.

• While the nation’s jobless rate remains elevated—and is nearly double the level in the United States—the worst of the unemployment crunch in Ireland is over. Given the nation’s strong ties with the United States, and assuming a modest pickup in growth in the EU over the medium term, Ireland’s unemployment rate is expected to trend lower over the next few years.

44

• In addition to favourable macro conditions, the transformational capacity of Ireland also reflects many micro traits. These micro characteristics—skills availability, physical and digital infrastructure, established industrial clusters and a growing recognition as a source of innovation–are extremely important in terms of sustaining growth and boosting the productivity of the nation.

• Ireland ranks well in a number of salient benchmarks of global competitiveness. For instance, in the latest readings from the IMD World Competitiveness Yearbook rankings, Ireland not only moved up two notches, from 17th to 15th, but also exhibited considerable improvement over the past few years.

• The World Bank annually ranks the regulatory environment of 189 nations, and in the latest survey, Ireland ranked 13th.

• In the latest DHL Global Connectedness Index 2014 survey, Ireland ranked second overall out of a pool of 140 nations, trailing only the Netherlands. Ireland’s ranking underscores the breadth and depth of the nation’s global connectedness, with the nation scoring relatively well on all four pillars of the Index: trade, capital, information and people. Notably strengths were in trade and capital given the fact that Ireland is among the most open and connected economies in the world.

• Ireland is well positioned to prosper in the future. At both the macro and micro level, the nation has done an admirable job of differentiating itself not only from the rest of Europe but also from many hyped emerging markets in the southern and eastern hemispheres. This has not gone unnoticed by U.S. multinationals.

45A flexible and skilled English-speaking labour force, membership of the European Union, attractive corporate tax rates, decades of success in attracting and retaining foreign investment, pro-business government policies—these primary attributes make Ireland among the most favoured destinations in the world for foreign direct investment. Enterprise and its monetary and intellectual capital migrates to where it is treated well, and Ireland is a global trend-setter when it comes to welcoming foreign direct investment.

Yet another quality of Ireland: the nation’s ability to adapt and adjust to shifting economic circumstances, and make challenging political and economic decisions in the face of turbulent and uncertain times. Its industry has a reputation of being responsive to change, and that agility in the face of fast shifting global markets is a competitive advantage that commands a premium among foreign investors.

Case in point: the global financial crisis and its induced recession of 2008/09 that impacted Ireland, as well as most of Europe. A small and open economy, Ireland was squeezed by the global credit crunch, the shock to global trade and the recessionary forces that engulfed the United States and Europe. From peak to trough, output in Ireland fell by 21% in nominal terms, while the unemployment rate soared from below 5% pre-crisis to 15% at the height of the country’s adjustment. The domestic construction industry initially collapsed and the housing market deflated dramatically. The banking sector came near to its knees – needing Government intervention and ECB liquidity support, with all of the above contributing to a great surge in public sector debt.

Prior to 2007, the nation ran small fiscal surpluses in ten out of eleven years, although post-crisis fiscal deficits averaged around 13% of GDP between 2010-2012. In 2010, Ireland entered an EU-bailout plan, with an agreed programme of €85 billion in funding organized by the troika of the IMF, the ECB and European Union. By 2013, Ireland’s public debt has climbed to a peak of 124% of GDP, triggering genuine concern about the potential for a “lost decade” of economic opportunity.

Real GDP collapsed in the post-crisis aftermath. After expanding by an annual average rate of 7.2% between 1996-2005 —one of the best in Europe—Ireland’s domestic non-traded economy experienced a sudden sharp downturn. Based on statistics from the International Monetary Fund, real output declined 2.6% in 2008, 6.4% in 2009, and 0.3% in 2010 as falling consumer demand, combined with public sector pay cuts and a decline in capital investment to put downward pressure on the broad economy. The following year, the Irish economy expanded by 2.8%, and the worst looked to be over. However, as the European Union stumbled into recession in 2012, growth weakened in Ireland. The economy contracted again in 2012 (by -0.3%) before posting modest growth in 2013 (0.2%).

In the post-crisis era, Ireland was considered part of Europe’s troubled periphery and categorized with the slow-growth, structurally-flawed nations of the Mediterranean. But the facts since the crisis proves that this label was misguided.

46

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

IRELAND VERSUS CLUB MED Real GDP (annual percent change)

Ireland

Spain Portugal

Italy

7

5

3

1

-1

-3

-5

-7

*Estimates Data as of January 2015 Source: IMF

Ireland has moved faster than any other European nation in the post-crisis era—notably the Club Med countries—to reset and reboot its economy. Unit labour costs, and related measures of cost competitiveness have all adjusted faster in Ireland than in other European states. This, combined with Ireland’s other economic attributes like lower corporate taxes, a flexible and highly skilled workforce, and pro-business policies, have not only maintained Ireland’s attraction as a base for foreign direct investment but also engineered a remarkable economic turnaround. According to The Economist, “the Celtic Tiger is roaring again”.i

That might be an overstatement given the myriad of challenges before the nation, but there is no mistaking the fact that Ireland’s economic prospects have improved dramatically over the past year. Indeed, while real GDP growth across Europe was anaemic again in 2014, with only a slight improvement expected in 2015, Ireland bucked the trend, emerging as one of the few bright spots last year in an otherwise bleak economic landscape. After expanding by just 0.2% in 2013, Ireland’s economy surged 4.8% in 2014 according to estimates from the European Commission.

FIGURE 3.1 IRELAND VERSUS CLUB MED

47

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Real GDP (annual percent change)


Ireland EU

7

5

3

1

-1

-3

-5

-7

In the first half of 2014, the economy advanced nearly 6%, with growth propelled by strong merchandise exports as well as a pickup in domestic demand. The former rose by roughly 8% in 2014, helped along by rising demand in Ireland’s main export market, the United States. Indeed, a weakening of the Euro against both the US and UK currencies suggests further gains this year in these two markets which together account for 35% of Ireland’s export base. The outlook for export growth to Ireland’s export markets in the rest of the EU (excluding the UK) looks very different with the IMF suggesting that the chances of outright recession in the Eurozone have been rising, in spite of some positive signs

of consumer and investor confidence in Germany, the block’s dominant economy.

Private consumption finally turned positive in 2014, rising 1.4%, after declining three years in a row, according to figures from the European Commission. Public consumption expenditures were also positive last year, rising 1.5% following a three year slump. Following a near 3% decline in 2013, gross fixed capital investment surged by 9.3% in 2014, a concrete sign of rising confidence among businesses, large and small. Companies have not only begun to invest more, they are also hiring more workers, with Ireland’s unemployment rate falling to an average of

FIGURE 3.2 IRELAND VERSUS THE EUROPEAN UNION

48 11.1% in 2014, down from 13.1% in 2013 and nearly 15% in 2012 and 2011. In December, the unemployment rate stood at 10.6% and continues to fall in the early part of 2015. While the nation’s jobless rate remains elevated—and is nearly double the level in the United States—the worse of the unemployment crunch in Ireland is over. Given the nation’s strong ties with the United States, and assuming a modest pickup in growth in the EU over the medium term, Ireland’s unemployment rate is expected to trend lower in the next few years.

Rising exports responding to improvements in the terms of trade, an increase in consumer spending owing to an improving jobs market, and accelerating capital investment—all three variables will have helped broaden the growth dynamic of the economy and —without any fanfare—are turning Ireland into one of the strongest growth economies in the world.

In turn, the underlying strength of the economy has helped improve the financial health of the state and government. More employment has translated into more consumption, which has helped boost revenues of personal income taxes and VAT. By year end 2014, tax receipts were more than €1.25 billion ahead of target. More tax revenue, along with lower welfare payments thanks to the decline in unemployment have also translated an improving government budget deficit, with the latter now expected to decline to approximately 3.7% of GDP in 2014. That is down from the punishingly levels of 12.6% of GDP in 2012, 8% in 2013 and 5.7% in 2014.

In terms of government finances, Ireland’s cost of borrowing has improved over the past year,

with the yield on the nation’s 10-year sovereign debt under 1.2 percent in early 2015. That is less than half the level of late 2013, with Ireland’s stronger-than-expected real growth, along with the nation’s debt being restored to investment grade status, helping to lower borrowing costs. Indeed 2015 began with the Government’s National Treasury Management Agency raising €4b from the sale of the state’s first 30-year bond at an annual yield of just over 2%. The nation’s gross public debt, while still high at an estimated 110.5% of GDP in 2014, has declined over the past few years, and is now off its peak of 124% in 2013.

All in, Ireland was not only home to the fastest growing economy in Europe last year but also emerged as a global growth leader, with the nation’s near-5% growth figure easily better than the United States and many hyped emerging markets of the southern and eastern hemispheres. Ireland’s economic growth rate handily outpaced the average for the euro zone—0.8% in 2014—and the world economy in general, which expanded by roughly 3.3% last year.

The outperformance will continue in 2015. The European Commission expects the Irish economy to expand by 3.6% this year, well ahead of the EU expected annual average growth rate of 1.7%. In terms of growth, both Ireland and the United States are positioned as transatlantic growth leaders in the near-term. At the macro level, the economic transformation of both parties has been remarkable and underscores the resilience of both Ireland and the United States.

49

The growth dynamic of Ireland, in addition to the nation’s ability to adapt to prevailing global conditions, makes the nation a natural economic partner for the United States. This helps to explain the dichotomy between declining levels of U.S. investment in Europe on the one hand juxtaposed against still rising levels of U.S. investment in Ireland on the other hand. Favourable micro components also help to explain this divergence, and these are the topics of the next section.

The view from the micro levelIn addition to encouraging macro conditions (above average growth, competitive corporate taxes, etc.), the transformational capacity of

Ireland also reflects many micro traits. These micro characteristics—skills availability, physical and digital infrastructure, established industrial clusters and a growing recognition as a source of innovation–are extremely important in terms of sustaining growth and boosting the productivity of the nation. Such variables are critical in determining the overall competitiveness of a nation; in turn, a country’s overarching competitiveness acts as a key signal or metric for multinationals when deciding where to invest capital in either Country A or Country B. For its part, Ireland, based on various global competitive rankings, ranks as one of the most competitive in the world, a variable that underpins the economy’s underlying attractiveness to multinationals.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Real GDP (annual percent change)

China India

Ireland

Brazil

Russia

20

15

10

5

0

-5

-10


FIGURE 3.3 IRELAND VERSUS THE BRICS

50

Three different rankings highlight this dynamic:

The IMD Competitiveness RankingsIn the latest readings from the IMD World Competitive Yearbook rankings ii, Ireland not only moved up two notches, from 17th to 15th, but also exhibited considerable improvement over the past few years. In 2011, for instance, Ireland ranked 24th as the country struggled to come to grips with the fallout from the 2008/09 recession. In 2012, however, Ireland jumped 4 places, to 20th, and has improved each consecutive year. Among the top variables cited by respondents as key attributes of Ireland; a competitive tax regime, a business-friendly environment, a skilled/ educated labour force and policy stability were specifically highlighted. Relative to the prior year, Ireland also improved its score in such key areas as the resilience of the economy, investment in telecommunications, and public finances.

That said, where Ireland really moved the needle was in the ranking of “business efficiency”, where Ireland ranked 4th overall in the world, up from 13th in 2013 and 18th in both 2010 and 2011. In such sub-categories as “productivity & efficiency”, Ireland ranked 5th, 6th in terms

of management practices, and notably first in “attitudes and values”.

Separately, in a Eurostat reportiii issued in January 2015, Irish companies ranked in the top three for innovation in Europe. This European Union study shows that close to 60% of Irish companies recorded innovation activity between 2010- 2012 as it chased German business for leadership position in these rankings.

All the variables just mentioned are rarely discussed in the popular media and only occasionally make headlines. But these micro metrics are extremely important to multinationals; these variables are the nuts and bolts to foreign direct investment, and key determinants as to where multinationals decide to invest.

Overall, Ireland always has room to improve but it presently ranks as one of the most competitive nations in the world.

The Ease of Doing Business Report from the World BankWhile the rate by which a particular economy grows and expands certainly matters to U.S. multinationals, the ease of doing business in a

MEASURE YEARINDEX AND

RANK

DHL Global Connectedness Index 2014 (2/140)

World Bank "Ease of Doing Business" Rank 2015 (13/189)

IMD World Competitiveness Rank 2014 (15/60)

Source: DHL, World Bank, IMD. Data as of January 2015.

FIGURE 3.4 HOW IRELAND STAKES UP IN THE GLOBAL COMPETITIVENESS RANKINGS

51given location is also immensely important to firms. Country and industry rules and regulations can either help or hamper the foreign activities of U.S. multinationals, and thus negate the positive macro dynamics of economic growth, market size and related variables.

The World Bank annually ranks the regulatory environment of 189 nations, and in the latest survey, Ireland ranked rather well: 13th out of a sample of 189 nations. Denmark (4th), Norway (6th), Finland (9th), Sweden (11th) and Iceland (12th) ranked above Ireland, with the likes of Germany (14th), Switzerland (20th), and Portugal (25th) lagging behind.iv

Per the specifics, Ireland scored highly in the following key categories: days it takes to start a business, registering property, getting credit, trading across border, and enforcing contracts. All of these are micro and granular in nature yet critical to the success of any firm operating in-country. These functions are about the details—and on this score, Ireland gets the details right.

The DHL Global Connectedness IndexGlobal connectivity or connectedness is a metric of globalization and can serve as an engine of growth; global connectedness is closely correlated to a nation’s or region’s economic development, real growth, per capita income and cross border trade and investment. The more connected/integrated an economy is to the

boarder global economy, the better the prospects for foreign direct investment-led growth.

Ireland stands out in this regard.

Indeed, in the latest DHL Global Connectedness Index 2014 survey, Ireland ranked second overall out of a pool of 140 nations, trailing only the Netherlands. Ireland’s ranking underscores the breadth and depth of the nation’s global connectedness, with the nation scoring relatively well on all four pillars of the DHL Global Competitiveness Index: trade, capital, information and people. Notably strengths were in trade and capital (FDI and portfolio) given the fact that Ireland is among the most open and connected economies in the world.v

In summary, as Figure 3.4 highlights, Ireland ranks rather well in a number of salient benchmarks of global competitiveness. Yes, there is room for improvement on many different fronts. But Ireland is well positioned to prosper in the future. At both the macro and micro level, the nation has done an admirable job of differentiating itself not only from the rest of Europe but also from many hyped emerging markets. This has not gone unnoticed by U.S. multinationals, which, as we have argued many times before, are attracted to Ireland as its consistently scores well on their portfolio of key attributes to consider when making a long term investment decision.

i See “The Emerald shines again,” The Economist, November 8, 2014, page 57.ii See: http://www.imd.org/wcc/wcy-world-competitiveness-yearbook/iii Eurostat, ‘European Community Innovation Survey’ 15/2015 - 21 January 2015iv See: http://www.doingbusiness.org/reportsv See: http://www.dhl.com/en/about_us/logistics_insights/studies_research/global_connectedness_index/

53

Chapter 4:

The Future of the Transatlantic Economy: Diverging or Coming Together?


• The Transatlantic Economy remains one of the most important arteries of commercial activity and exchange in the global economy. Ireland is one of the transatlantic economy’s most important gateways of activity and sustaining this is dependent on the health of both sides of this great commercial relationship.

• A successful EU-US trade and investment agreement currently under negotiation could add 1.1% to Irish GDP with particular benefits to its medical technologies, pharmaceutical, information technology and broad-based manufacturing sectors. Ireland’s position as a transatlantic trade and investment gateway suggests it’s in a very good place to benefit from an agreement as the US is a vital market, consuming over 20% of Irish exports

including some €500m from the fast growing food and drink sector.

• But, a successful completion of a comprehensive trade and investment agreement between the US and the EU cannot be taken for granted.

• Six years after the global economic meltdown of 2008-09, the transatlantic economy remains largely out of sync; the economic paths of the United States and Europe have diverged, and this divergence comes with costs and consequences.

• The transatlantic economy is a tale of two economies: one economy—the United States—has a spring in its step, expanding by roughly 4% on an annualized basis over the second half of 2014. The other half of the transatlantic economy—Europe—is still struggling in the post-crisis world.

54 • Aggressive monetary easing from the U.S. Federal Reserve, juxtaposed against a more cautious and conservative ECB has created a monetary gap between the U.S. and Europe. While the ECB is set to launch its own version of quantitative easing in 2015 (monetary easing), the Fed Reserve is poised to raise interest rates (monetary tightening). The divergence has triggered a steep slide in the euro against the US dollar.

• Divergence in energy policy, job creation, the development of a digital economy and investment in technology and imbalance in trade between the two economic blocs presents real challenges to a true ‘partnership’.

• The transatlantic economy needs a catalyst—or a Big Bang, so to speak, to refocus the minds and energy of US-European policy makers. Hence, the importance of the Transatlantic Trade and

Investment Partnership—or TTIP—a critical trade/investment deal that is presently being negotiated between the US and Europe.

• It is estimated that that the EU’s economy would be boosted by as much as €119bn a year leading to tangible benefits to jobs and incomes as EU exports to the US rise by +25%.

• This Partnership has the potential to be a significant step towards the deeper economic integration of the United States and Europe, and by extension, the US and Ireland.

• The benefits to both parties would be substantial, with any moves to strengthen and deepen the transatlantic economy quite beneficial to America’s primary bridge to the EU market: Ireland.

55The Transatlantic Economy remains one of the most important arteries of commercial activity and exchange in the global economy. While the United States is hardly a picture of economic health, the nation, much like Ireland, has emerged energetically from the crisis and is poised to continue on a path of growth while much of Europe struggles to put the past behind it. Ireland is one of the transatlantic economy’s most important gateways of activity and sustaining this is dependent on the health of both sides of this great commercial relationship.

But it needs momentum, balance and confidence that encourages policy makers and business to invest in building closer economic and business ties. A successful completion of a comprehensive trade and investment agreement between the US and the EU could provide one of a number of important positive contributions to this goal. But this cannot be taken for granted.

Growth and potential in the transatlantic economy is currently diverging. One economy—the United States—has a spring in its step, expanding by roughly 4% on an annualized basis over the second half of 2014. Growth has been propelled by a steady rise in employment levels and private capital investment, as well as falling energy prices, favourable credit conditions and a buoyant stock market. Considered by many a spent and exhausted economic force a few years ago, the U.S. economy has emerged as one of the strongest economies in the world, growing much faster than Europe and many hyped emerging markets.

In sharp contrast, the other half of the transatlantic economy is still struggling six years after the global economic meltdown of

2008-09. Across most of Europe, broad-based growth remains feeble, unemployment remains stubbornly high, and the threat of deflation looms large. Real GDP in the Eurozone has yet to climb back to pre-crisis levels—such has been the difficulties of sustaining growth in much of Europe. Monetary and fiscal policies have been far more constrained in Europe than the United States, precipitating weak or no growth in much of the European continent in 2014 and an ever widening economic gulf between the two economic partners.

When one half of a partnership outshines and outperforms the other, gaps emerge and become more pronounced with time. The longer the gaps persist, the harder the task to bridge the divide. So it is with the United States and Europe, with multiple transatlantic gaps materializing over the past few years. These gaps are both cyclical and structural in nature; more importantly, they are politically unsustainable and threaten to undermine an expressed desire on both sides for better and deeper economic and business cohesion.

As the second half of this decade begins, the transatlantic partnership needs to find its common footing and re-commit to shared values and goals. Seeking deeper coordination and economic ties presents such an opportunity.

Minding the transatlantic gapsThe growth gapIn the aftermath of the financial crisis-cum-recession of 2008/09, transatlantic output declined on both sides of the pond. The global credit crisis hurt the United States and virtually every economy in Europe, curtailing investment and personal consumption, as well as credit

56 lending and cross border trade, triggering a 2.8% decline in U.S. growth in 2009 and an even steeper plunge in output in the Euro area (4.4%). The crisis damaged both parties. Since then, however, the U.S. and Europe have followed different economic paths.

In the United States, while the current economic recovery has been sub-par by historical standards, the economy has nevertheless been on a sustainable path of growth since emerging from recession in June 2009. By the end of 2013, the U.S. GDP (in nominal US dollars) was some 14% larger than the pre-crisis level of 2008; the EU’s aggregate GDP, in contrast, was roughly 6% below pre-crisis levels. Changes in exchange rates, of course, can swing the underlying value output. That said, however, the fact that the U.S. economy is now in its sixth year of recovery while Europe struggled in 2014 to avoid a triple-dip, or a third recession in six years, speaks volumes about the transatlantic growth gap.

As 2014 came to a close, the U.S. was one of the strongest economies in the world, with the economy expanding by a 5% annualized rate in the third quarter of the year, one of the fastest growth rates in decades. Growth decelerated in the fourth quarter, with the economy expanding by 2.6%, although the slowdown was due to the widening trade deficit, which subtracted from growth. Final demand in the U.S. remained quite robust. In contrast, Europe and Japan have continued to splutter along. In the third quarter of 2014, the euro zone grew by just 0.6% on an annualized basis, while Japan spent most of 2014 in recession.

Why the contrasting growth patterns of the U.S. and Europe? One key lies with the divergence in monetary policy between the U.S. Federal Reserve and the European Central Bank.

57

The monetary gap

Aggressive monetary easing from the U.S. Federal Reserve, including unorthodox policies like quantitative easing, have been critical and successful in right-sizing a U.S. economy that was on the verge of capsizing six years ago. By proactively expanding its balance sheet and pumping billions of additional dollars into the U.S. economy, the Federal Reserve helped stoke demand for more houses, autos, appliances and a host of other economic activities, boosting real demand/growth in the process.

After pushing interest rates to effectively zero in 2008, and confronting a sluggish economy, the

Federal Reserve opted for quantitative easing (QE)—or the buying of long-term Treasury and mortgage-backed securities. In the first phase, or QE1, extending from November 25, 2008 to March 2010, the Fed bought $1.7 trillion in securities. The second round commenced on August 2010 and ended June 2011, with the Fed purchasing another $600 billion in assets. With the U.S. economy still exhibiting signs of weakness, QE3 was launched in September 13 2012, with the Fed buying another $1.6 trillion in securities. By the time the third round of quantitative easing ended in October 2014, the Fed had bought and pumped nearly $4 trillion since the 2008 financial crisis.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ireland

U.S.

Eurozone

Italy

Germany

Greece

DEVELOPED ECONOMIES BACK ABOVE PRE-RECESSION OUTPUT LEVELS. (Real GDP level, Q1 2004 = 100)

Source: Haver Analytics. Data through Q3 2014.

Portugal

Spain

125

120

115

110

105

100

95

90

85

80

FIGURE 4.1 DEVELOPED ECONOMIES BACK ABOVE PRE-RECESSION OUTPUT LEVELS

58 The monetary injection pushed interest rates lower, helping U.S. households to either buy or refinance homes, and spend more on other goods and services. It also pushed up stock prices, and other financial assets, boosting the net worth of many Americans, which in turn supported consumer confidence.

In addition to QE, aggressive measures to recapitalize U.S. banks have made the U.S. banking system one of the strongest in the world, which is in contrast to Europe, where only in late 2014 was a serious stress test undertaken to gauge the soundness of Europe’s primary banks. Meanwhile, due to institutional constraints and the make-up of the European Central Bank (ECB), Europe’s central bank has moved far

more cautiously over the past few years than the Federal Reserve, with the Eurozone monetary base actually shrinking the past year, even in the face of slowing growth and rising risks of outright deflation. Even though the ECB changed tack in early 2015 by announcing a massive bond-buying program or its own version of quantitative easing, the central bank has been far too timid in the face of protracted stagnation, contributing to Europe’s lacklustre growth backdrop.

On balance, the transatlantic monetary gap—with the U.S. going for broke in terms of looser monetary policy versus Europe’s more conservative approach—is one key reason behind the growth gap that differentiates the U.S. from Europe.

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

CENTRAL BANK BALANCE SHEETS

Data as of December 3, 2014 Source: FRB, ECB, BoJ/Haver

Euro Area

U.S.

Japan

($ Billions)

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

FIGURE 4.2 CENTRAL BANK BALANCE SHEETS

59The energy gap

Another key differentiator between the U.S. and Europe lies with energy—or more precisely the surge in U.S. oil and gas production over the past few years versus falling energy output in Europe. In both cases, the divergent levels of activity in the sector have been reflective of very different sets of policy priorities. To this point, U.S. crude oil production rose 37.1% between 2008 and 2013, while output of OECD Europe, according to statistics from the International Energy Agency, plunged 31% over the same period. Both Norway and the United Kingdom with their North Sea oil and gas platforms reported sharp declines in production, in contrast to the U.S., where oil production has more than doubled since 2008.

Three critical variables have driven U.S. oil production to climb from a cyclical low of 4 million barrels per day (bpd) in October 2005 to over 9 million in December 2014; (1) pro-exploration and production policies at the state and local level, combined with (2) the application of revolutionary drilling and hydraulic technologies, and (3) eager entrepreneurship/risk-taking by the private sector. Natural gas production has also soared, with production in the Marcellus region (a large and prolific area of shale gas extraction that stretches across Pennsylvania and West Virginia, and into southeast Ohio and upstate New York) growing exponentially to around 13 billion cubic feet per day (Bcf/d) in 2014 from 2 billion Bcf/d in 2010. As the world’s largest natural gas producer —accounting for roughly 20% of global production—the U.S. now produces more natural gas each year than the entire Middle East.

America’s energy bonanza has bolstered the nation’s energy security in the face of geopolitical

risks in Russia and the Middle East—a stance that is in sharp contrast with Europe, which remains significantly tied to an unpredictable energy source, namely Russia. While the U.S. will never be totally energy independent from foreign oil, U.S. dependence on foreign oil has declined sharply over the past few years, with net oil imports accounting for 29% of U.S. consumption in late 2014, down from a peak of 60% roughly a decade ago. According to the latest figures from the U.S. government, America’s ratio of domestic energy production to consumption rose to nearly 84% in 2013, way ahead of comparable figures for Japan (7.2%) and Germany (35.2).

The U.S. energy revolution has not only lessened America’s geopolitical risks, the surge in production has also been a catalyst for economic growth, creating new jobs across multiple sectors (transportation, industrials, materials, etc.) and rising incomes for U.S. households. Lower energy costs have been a boon to U.S. competitiveness feeding directly into boosting incomes, improved corporate earnings and a draw for foreign direct investment inflows given that the U.S. is now among the most competitive locations in the world to manufacture, most especially in energy intensive industries such as steel, chemicals, construction and large scale automated production line industries like the auto sector.

Energy costs in Europe, notwithstanding the late 2014 downturn in world oil prices, remain relatively high. One reason lies with the fact that the energy market in the European Union remains fragmented, dubbed by incoming EU Council president Donald Tusk, as a patchwork of inefficient “energy islands.”i The lack of coordination and coherency in the energy sector

60 encourages waste and higher prices, and a mismatch in energy supply and demand. For instance, while Spain has an abundance of wind power, the excess energy cannot be exported to the rest of Europe since the continent’s power grid remains underdeveloped and more national in scope than regional. Moreover, European policy interventions to subsidize renewables to meet well-intentioned political and environmental priorities needs a more practical and effective response to sustain competitiveness and employment growth.

In addition to the above, cross border efforts to create more energy connectivity in Europe has run afoul of national policies. According to the Financial Times, “governments have tended

to resist integration because they do not want to expose their energy incumbents to outside competition or cannot generate commercial enthusiasm to fund and build the necessary infrastructure.” ii Meanwhile, differing national tax laws means the cost of energy in Europe varies by location, making it even harder to harmonize energy costs and policies on a regional basis.

All of the above leaves Europe paying more for energy relative to the U.S. and remaining overly dependent on unpredictable energy suppliers like Russia; the latter providing the EU with around 30% of its total gas needs. Higher costs and unpredictable supply is hurting European competitiveness for investment.

49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

U.S. RATIO OF DOMESTIC ENERGY PRODUCTION TO CONSUMPTION (%)

Source: U.S. Energy Information Administration. Data as of January 8, 2014.

U.S.

Germany

Japan

110

100

90

80

70

60

50

40

30

20

10

0

FIGURE 4.3 U.S. RATIO OF DOMESTIC ENERGY PRODUCTION TO CONSUMPTION

61The trade gap

Weak growth, divergent monetary policies, the U.S. energy revolution—all of these dynamics have manifested themselves in America’s widening trade gap (in goods) with the European Union, which hit a record high of $141 billion in 2014. Rising consumer demand and renewed levels of business investment in the US has helped raise the dollar and increase the appetite for imports into the US. The opposite has occurred in Europe leading to lopsided trade performance over the past few years.

America’s trade deficit with the EU has increased five years in a row, and more than doubled between 2009 ($60 billion) and 2014 ($141 billion). In 2014, U.S. imports from the EU rose 7.8% from the prior year, while U.S. exports rose 5.5% over the same period, causing America’s trade deficit with the EU to expand by 12.5%.

The good news is that U.S. exports—totalling $277 billion in 2014—have finally climbed back to the pre-crisis peak of $277 billion recorded in 2008.

However, U.S. exports to five European nations—Finland, Germany, Greece, Portugal, and the United Kingdom—remain below pre-crisis levels. More than half of America’s EU trade deficit in 2014 emanated from Germany—Europe’s largest and alleged healthiest economy. For the year, the U.S. merchandise trade deficit with Germany rose 10.1%, and represented 52% of the total U.S. merchandise trade deficit with the European Union. Topping $73 billion last year, America’s trade deficit with Germany was even larger than its trade deficit with Japan--$67 billion over the same period. Meanwhile, the U.S.’ trade gap with Ireland, $26.2 billion last year, accounted for 18.5% of the total.

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

(Billions of $)

*Estimate based on data through October 2014. Source: Bureau of Economic Analysis.

0

-20

-40

-60

-80

-100

-120

-140

-160

-180

FIGURE 4.4 U.S. TRADE BALANCE WITH EUROPE

62 Employment gap

Yet another gap that characterizes US-European partnership pivots on employment or job creation. One half of the transatlantic economy is generating jobs, the other is not. Given that America’s unemployment was 5.8% towards the tail end of last year versus an unemployment rate in excess of 11% in the eurozone for the same period, it’s not hard to guess which side of the Atlantic is producing jobs.

In the United States, the unemployment rate, after hitting a cyclical high of 10% in October 2009, has trended lower over the past few years, dipping below 6% in early 2015. Through 2014, the US economy has added on average over

200,000 jobs per month, with employment gains across a wide swath of industries. While the U.S. labour force participation rate remains relatively low and real wage gains have been nominal, the employment picture in the United States continues to improve as 2015 opens. In Europe, the jobs backdrop also improved in 2014 but not anywhere near the extent and pace of the United States economy. According to Eurostat the unemployment rate in the Euro area was 11.4% at year-end 2014, well above the similar rate for the U.S. Double digit levels of unemployment remain the norm in France (10.3% in December2014), Greece (25.8%), Spain (23.7%), Italy (12.9%), and Portugal (13.4%).

00 01 02 03 04 05 06 07 08 09 10 11 12 13

U.S. VS. EU UNEMPLOYMENT RATE

Data as of December 2014 Source: OECD

EU

U.S.

(%)

12

11

10

9

8

7

6

5

4

3

2

FIGURE 4.5 U.S. VS. EU UNEMPLOYMENT RATE

63Digital gap A final gulf that is emerging between the United States and Europe lies with technology and its myriad uses, with Europe’s more precautionary-based approach to digital regulations, greater legislative–based protection of personal data, and the potential breaking up of U.S. tech giants that hold dominant positions in Europe. In general, the U.S.-led development of software, social media and innovative business models of the Internet age—while hugely popular in the United States—face stiff policy resistance and constraints across Europe. At risk are the business practices of leading global information technology firms – impacted by restrictions and uncertainty in such areas as distribution channels, data privacy and content regulations.

In the US, there is view that a consumer and political backlash to digital innovation in Europe is gaining traction, which could not only undermine Europe’s future technological capabilities but also hamper the efforts of U.S. tech leaders to expand and grow in one of the largest economies in the world. Also at risk: growth in US-EU trade in digitally deliverable services that include a host of business services like advertising, legal services, finance, software, architectural design, and consulting, as well as activities like the management of intellectual property and their royalties and license fees. In that U.S.-EU trade and investment in services holds significant growth potential for both parties, policies that overly impede innovation on the Internet or the free flow of data across borders could risk curbing transatlantic trade/investment in services and weaken transatlantic supply chains – the very linkages that should be binding the two parties together in the digital age.

In terms of total spending on information technology, U.S. outlays on information technology (IT) were roughly 35% larger in 2013 than in Europe. IT spending in the U.S. rose 4.2% in 2013 and jumped 34% between 2006 and 2013, according to data from the International Data Corporation. The explosion in mobile device usage in the United State has been a key driver in rising IT outlays. In contrast, IT spending in Europe rose just 1.7% in 2013 and has increased just 11.6% since 2006.

According to Peter Thiel, one of America’s leading technology investors, “There is a sense in Silicon Valley that it is on the right side of history, and Europe is on the wrong side of history.”iii The general lack of a start-up culture and an aversion to risk taking is also stoking a brain drain across Europe, with many of the continent’s best and brightest in the field of technology heading for the west-coast tech-clusters in the US.

In time, both the U.S. and Europe will adapt and embrace disruptive technologies—but at a different pace and different levels, creating friction and tension points between the two parties. Notwithstanding the common values and strategic bonds of the United States and Europe, the parties have significant differences over the rules of engagement regarding the Internet and cross border flows of massive amounts of data. Managing the transatlantic digital divide is hugely important to the future of the transatlantic partnership.

64

In the end, six years after the global economic meltdown of 2008-09, the transatlantic economy remains largely out of sync, with real growth accelerating in the United States over the past year while decelerating or stagnating in much of Europe. This divergence comes with costs and consequences. The gap in growth, for instance, between the United States and Europe threatens to undermine Corporate America’s profitability in Europe and widened America’s already outsized trade deficit with Europe. The latter could trigger trade protectionist measures on Capitol Hill from a Congress under pressure to raise living standards and sustain US job growth, while the

former threatens to diminish the appeal of Europe in the eyes of U.S. corporations. Meanwhile, transatlantic energy costs continue to diverge, as does the pace of technological innovation and adaptation.

Against this backdrop, the transatlantic economy needs a catalyst—or a Big Bang, so to speak, to refocus the minds and energy of US-European policy makers. Enter the Transatlantic Trade and Investment Partnership—or TTIP, a critical trade/investment deal that is presently being negotiated between the US and Europe.

2006 2007 2008 2009 2010 2011 2012 2013

U.S. Western Europe

(IT spending: % of global total)

Source: International Data Corporation. Data as of January 2014

40

35

30

25

20

15

10

5

0

FIGURE 4.6 THE DIGITAL DIVIDE: U.S. VS WESTERN EUROPE

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A US-EU Free Trade Agreement would Strengthen Irish-US Ties

While a high degree of market integration already exists between the U.S. and Europe thanks to past and existing trade and investment agreements, much more can be done to fuse the world’s two largest economies together. Hence the on-going talks since July 2013 to craft a transatlantic free trade pact that would not only reduce tariffs but more importantly, reduce non-tariff barriers and harmonize the web of regulatory standards that 1) inhibits transatlantic trade and investment flows and 2) adds to the cost of doing business on both sides of the ocean.

We are not talking about headline-grabbing topics here but about micro issues like agreeing mutually acceptable high food safety standards, e-commerce protocols to expand opportunities for small and medium sized business, shared data privacy principals and protections, and standardizing a myriad of service-related activities in such sectors as aviation, retail trade, maritime, telecommunications and procurement

rules and regulations, especially at US State and EU regional level. The move towards a more barrier-free transatlantic market would also include product standardization so that a car tested for the highest safety levels in Bonn can be sold without further tests in Boston. Or a drug or food product approved under agreed high standards by the Food and Drug Administration (FDA) in Washington is deemed safe and market-ready in Brussels and vice versa.

Technical regulations and safety standards are not exciting topics but when these hurdles to doing business are stripped away, the end results are lower costs for companies, lower prices to consumers and more demand for goods and services. As one example, take packaging of pharmaceutical products in both the U.S. and Europe. As noted in a dispatch from Reuters, one German pharmaceutical executive was quoted as saying that when selling asthma inhalers in both the U.S. and Europe, the company had to spend $10 million alone just to prepare the product for the two markets because of the two different standards of dosage counters.iv

66 As for tariffs, average transatlantic tariffs are relatively low, in the 5%-7% range, although tariffs remain quite high in such categories as agriculture, textiles and apparel, and footwear. So there is room for barriers to fall. More importantly, in that a large percentage of transatlantic trade is intra-firm, or trade in parts and components within the firm, even small tariffs can add to the cost of production and result in higher prices for consumers on both sides of the pond. The more intense the intra-industry trade component of trade between two parties, like the one that characterizes Irish-U.S. trade, the greater the effects and benefits of lower tariffs.

For Europe right now, it amounts to a low cost economic stimulus. A report for the European Commissionv suggests that the EU’s economy would be boosted by as much as €119bn leading to tangible benefits to jobs and incomes as EU exports to the US rise by +25%, Interestingly the same report indicates that EU and US trade with the rest of the world would also rise – by €33 billion and that overall a comprehensive agreement would see a rise in total European exports of 6% and of 8% in US exports.

For Ireland, it is estimated that the completion of a successful agreement could add 1.1% to Irish GDP with particular benefits to its medical technologies, pharmaceutical, information technology and broad-based manufacturing sectors.vi In fact, that estimate is twice the average gain across the EU which reflects the importance of US-EU commercial relations to the success of Ireland’s own economic development.

Ireland’s position as a transatlantic trade and investment gateway suggests it’s in a very good place to benefit from an agreement as Ireland exports over 80% of its output, hundreds of thousands of jobs depend on the ability to trade overseas. The US is a vital market, consuming over 20% of Irish exports including some €500m from the fast growing food and drink sector.In the end, think of this EU-US Transatlantic Trade and Investment Partnership as yet another significant step towards the deeper integration of the United States and Europe, and by extension, the US and Ireland.

The benefits to both parties would be substantial, with any moves to strengthen and deepen the transatlantic economy quite beneficial to America’s primary bridge to the EU market: Ireland.

i See “Europe needs the will to build an energy union,” Financial Times, October 22, 2014ii See “Pyrenees dispute highlights EU energy woes.” Financial Times, October 22, 2014iii See “Europe Strikes Back,” Financial Times, September 16, 2014iv See “U.S. trade deal could be a lot for Europe to swallow,” Reuters, December 11, 2012v See ‘Reducing Transatlantic Barriers to Trade and Investment - An Economic Assessment’ Centre for Economic Policy ii vi Research, London, www.cepr.orgvii See ‘Economic impacts of TTIP in Ireland, Copenhagen Economics, June 2014

67

Chapter 5:

The Road Ahead for Irish-US Commercial Relations


• The post-crisis global economy is still being reshaped, with the ultimate configuration still unknown. But in a world in perpetual change, one strand of continuity remains the sturdy economic bond between Ireland and the United States. In the post-crisis era, Irish-US linkages have become stronger, not weaker.

• Out of the ashes of the recent crisis, the United States and Ireland now stand as two of the strongest growing economies of the transatlantic partnership, drawing strength and stability from each other. The mutual dependence of Ireland and the United States has only grown thicker in the post-crisis era.

• For Ireland to remain attractive for investment, Europe must find a sustainable path away from economic stagnation. As a bridge or gateway to Europe for US firms seeking growth opportunities, Ireland’s stands to gain from Europe’s success in achieving this turnaround.

• The nation must always remain diligent about sustaining and nurturing its competitive strengths, while pro-actively addressing its shortcomings.

• A credible skills and talent strategy must remain a top priority for Ireland, since that factor is centrally important in foreign direct investment decision making for the types of high-value activities that Ireland has established such a track record in winning and retaining.

• With more US manufacturing projects migrating back to a more competitive and growing America, and with China’s innovative capabilities on the rise, Ireland will have to redouble its efforts in sustaining a strong foundation of human capital, favourable cost basis and business-friendly work environment. The nation needs to remain vigilant about maintaining its place in the global value chains of U.S. multinationals.

• The critical task in front of Ireland is ensuring its place in the high-end, value-added chain of multinationals, notably in services and evolving technologies that will change the nature of work and production.

• In the end, the race to remain globally competitive never ends. Unlike many nations in Europe, Ireland understands this dynamic all too well. Rising to the challenge is something Ireland excels at, with the nation’s economic rebound in the past year just one more piece of evidence of Ireland’s dynamic economic character.

• The Irish-US economic relationship is expected to remain robust and mutually beneficial. To quote from our last three reports: “as history will ultimately prove, the commercial bonds between Ireland and the United States are built to last.”

68

There are few constants in a global economy that is incessantly churning and adjusting to new and emerging crosscurrents, with the pendulum of global growth always swinging between leaders and laggards. Disruptive technologies, the emerging middle classes of the developing markets, the redrawing of the Middle East, Europe’s protracted economic slump, the rise of China, America’s economic renaissance—these tectonic shifts suggest a world economy in constant flux, and a global economy where bi-lateral relations among nation-states are always vacillating. The post-crisis global economy is still being reshaped, with the ultimate configuration still unknown.

But in a world in perpetual change, one strand of continuity remains the sturdy economic bond

between Ireland and the United States. In the post-crisis era, Irish-US linkages have become stronger, not weaker; if we have learned anything in the past few years it is that the commercial ties between Ireland and the United States are built to last. Out of the ashes of the recent crisis, the United States and Ireland now stand as two of the strongest growing economies of the transatlantic partnership, drawing strength and stability from each other. The mutual dependence of Ireland and the United States has grown thicker since 2008.

However, for Ireland to remain attractive for investment, Europe must find a sustainable path away from economic stagnation. As a bridge or gateway to Europe for US firms seeking growth opportunities, Ireland’s stands to gain

69from success in achieving this turnaround. The strength and purpose of this ‘bridge’ will be determined by the health of the European economy and Ireland stands to lose or gain disproportionally on the outcome.

While the U.S. has recovered and rebounded from the 2008 financial meltdown, Europe— Ireland’s accessible marketplace—is still struggling with one of its worse economic downturns of the post-war era. A long-time commercial virtue—a large integrated, dynamic, pan-European market still remains the prize. But the response to the recent economic crisis has weakened its attractiveness. Its momentum held back by a lack of national co-ordination and political decisiveness and thus undermining real economic growth in the near-term. Within and outside Europe there is uncertainty – one that demands greater coherence to ensure the ‘European Project’ continues and the Euro survives. Yet again in 2015, there is talk of political strife – a UK election that could bring a promise on a referendum to remain in the EU, the risk that Greece may yet depart from the euro zone of currencies, regional independence pressures in Spain, the emergence of reactionary political movements with pop-economic policy appeal - scenarios that only serves to damage confidence in Europe and its economy on both sides of the Atlantic.

Simply put, Europe’s economic future is very much in play.

If the future of Europe is akin to Japan’s, which has suffered over two decades of sluggish growth, how much future incremental US investment will be allocated to Europe versus other vibrant parts of the global economy? As we highlighted earlier in this report, Europe’s share of US foreign direct

investment has dropped sharply over the past few years. Is this the path of the future?Future Irish-US commercial ties are conditioned on Europe staying together, not drifting apart. It is also conditioned on Ireland building on from the success of the past few years; Ireland is a small open economy highly exposed to global shocks and cycles, substantially dependent on US FDI-led growth economically and attached to a continent presently confronting a political malaise and potential economic stagnation. That means the nation can never rest, and must always remain diligent about sustaining and nurturing its competitive strengths, while pro-actively addressing its competitive shortcomings.

And key will be Ireland’s recognized competitiveness for the availability of talent. A credible skills and talent strategy must remain a top priority to maintain an edge, where that factor alone is becoming increasingly important in foreign direct investment decision making for the types of high-value activities that Ireland has established such a track record in winning and retaining.

Linked to this high-value skills base is the evolution of Ireland’s research, development and innovation (RD&I) performance as a new opportunity for economic growth. Having established its reputation as a global centre of operational excellence for its FDI base and built new credentials in fundamental researchand process innovation (Ireland has ascended the international ranking of scientific research capability – from 36th in 2003 to 20th in 2010; Ireland has scored a world ranking of 6th in materials science, 3rd for nanoscience; 4th for computer science and 1st in immunologyi), Ireland should seek to build out an eco-system

70 to more applied and commercial ventures with stronger local, academic and business collaborations to become a recognized source of innovation for global corporations seeking growth and shareholder value.

As Irish RD&I spending as a percentage of GDP (1.58%) lags the EU average (2.02%), Ireland should be innovative in seeking to boost the level of investment to ensure opportunities are not lost as it prioritizes research programs to achieve critical mass, international excellence and leadership, and maximum impact in addressing social and economic challenges that are often global in nature. Examples include, but not limited to, the convergence of medical science and communications technologies, advances in nutrition, the applications and integration of the ‘internet of things’ and the management of natural resources.

With more US manufacturing projects migrating back to a more competitive and growing America, and with China’s innovative capabilities on the rise, these trends, coupled with an uncertain Europe and a changing corporate tax landscape, means that Ireland will have to redouble its efforts in sustaining a strong foundation of human capital, a favourable cost base and a business-friendly work environment. The nation needs to remain vigilant about maintaining its place in the global value chains of U.S. multinationals. This is critical since the number of “technology and manufacturing-capable” nations is steadily rising, giving multinationals more opportunities to spread and leverage their global operations.

That said, many firms are not interested in one location but many, preferring to spread tasks around—whether research and development, production, marketing, design, etc.

The critical task in front of Ireland is ensuring its place in the high-end, value-added chain of multinationals, notably in services and evolving technologies that will change the nature of work and production. In the end, the race to remain globally competitive never ends. Unlike many nations in Europe, Ireland understands this dynamic all too well. Rising to the challenge is something Ireland excels at, with the nation’s economic rebound in the past year just one more piece of evidence of Ireland’s dynamic economic character.

The Irish-US economic relationship is expected to remain robust and mutually beneficial.

To quote from our last three reports: “as history will ultimately prove, the commercial bonds between Ireland and the United States are built to last.” Indeed, they are.

i See Science Foundation Ireland Annual Report, www.sfi.ie

71Key terms and definitions Affiliate Assets: Something of value that is owned such as: a current asset which is of temporary nature and will be changed into cash within a short period; a fixed asset which is durable and can be used repeatedly; a floating asset which can be quickly converted into cash at or near its book value; an intangible asset which has no material substance like goodwill; a liquid asset which can very easily be converted into cash without appreciable loss in value as opposed to a frozen asset which may be difficult to sell quickly without loss in value. Cross-border trade in goods and services: Transactions in merchandise goods and services between the residents of one country and the residents of another country. From the U.S. viewpoint, it consists of exports and imports of goods and services between U.S. residents and foreign residents. It includes both trade within multinational companies (intra-firm trade) and trade between unaffiliated parties. It is one of two channels of delivery of services in international markets; the other is sales of goods and services through foreign affiliates of multinational companies. Direct investment: Investment in which a resident of one country obtains a lasting interest in, and a degree of influence over, the management of a business enterprise in another country. In the United States, the criterion used to distinguish direct investment from other types of investment is ownership of at least 10 percent of the voting securities of an incorporated business enterprise or an equivalent ownership interest of an unincorporated business enterprise. Direct investment (capital) flows: Funds that parent companies provide to their affiliates net of funds that affiliates provide to their parents. For U.S. direct investment abroad (outflows), capital flows also include funds that U.S. direct investors pay to unaffiliated foreign residents when foreign affiliates are acquired and funds that U.S. investors receive from them when foreign affiliates are sold. There are three components of foreign direct investment: equity capital flows, intercompany debt, and reinvested earnings. Similarly, for foreign direct investment in the United States (inflows), capital flows include funds that foreign direct investors pay to unaffiliated U.S. residents when U.S. affiliates are acquired and funds that foreign direct investors receive from them when U.S.

affiliates are sold. Foreign direct investment in the United States also include debt and equity transactions between U.S. affiliates and members of their foreign parent groups other than their foreign parents. Direct investment income: Return that direct investors receive on their investment in affiliates abroad. It consists of the direct investors’ share in the earnings of the affiliates, plus net interest on intercompany debt. Direct investment position (stock) at historical cost: Stock means/denotes cumulative investment, showing the total outstanding level of U.S. direct investment abroad at yearend. It largely reflects prices at the time of the investment rather than prices of the current period and is not ordinarily adjusted to reflect the changes in the current costs or the replacement costs of tangible assets or in stock market valuations of firms. Holding Company: Within the data sets of the US Bureau of Economic Analysis the term refers to a company whose primary activity is holding the securities or financial assets of other companies and captures all activity of such holding firms regardless of location. Majority-owned foreign affiliate (MOFA): A foreign affiliate in which the combined ownership of all U.S. parents exceeds 50 percent. U.S. foreign affiliate sales: Goods and services sold in international markets through the channel of direct investment, specifically through foreign affiliates. From the U.S. viewpoint, it consists of sales of goods and services to foreigners by foreign affiliates of U.S. companies and U.S. purchases of goods and services from other countries’ U.S. affiliates. Value added (applicable to Affiliate Gross Product): The gross output of an industry or a sector less its intermediate inputs; the contribution of an industry or sector to gross domestic product (GDP). Value added by industry can also be measured as the sum of compensation of employees, taxes on production and imports less subsidies, and gross operating surplus. It represents the firm’s contribution to gross domestic product in its country of residence, which is the value of goods and services produced by labour and property located in that country.

American Chamber of Commerce Ireland

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T +353 1 661 6201

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