Cause and Effect of Macro Environmental Forces on Foreign Direct Investment in Ireland

Topics: Economics, Economy, Economic system Pages: 6 (1780 words) Published: March 18, 2013
Once regarded as amongst the poorest member of the European Union, Ireland’s political economic development from the 1960s to 1990s saw an incremental growth of the nation’s economy based on foreign direct investments (FDI). Capitalising on a change of their political economy and their cultural ties to the United States, Ireland was capable of attracting large amounts of FDI, driving gross domestic product (GDP) level to a peak of almost 10% between 1995 and 2000 (Alfaro, Dev & McIntyre, 2010:1), along with a decline in unemployment to 5% of the labor demography. Ireland’s utilization of FDI is a prime example in modern history of how political decisions can affect legal policies which in turn help drive economic growth to become globally competitive. The purpose of this essay is to investigate the macro-economic forces that acted as a catalyst for the exponential growth in Ireland in a globalization context and its effect on FDI. This investigation is based on the case study on Ireland with reference made to the importance of FDI host nations to establish stable fiscal policies to sustain economic growth. Furthermore the essay will critically assess the impact of the Global Financial Crisis (GFC) on Ireland, in particular to its banking system, property sector and domestic consumptions. Finally a judgment will be made on whether Ireland will continue to remain as an attractive FDI host nation in light of their economic slowdown

One of the most significant contributing factors to Ireland’s exponential economic growth can be attributed to its change in its political economy system. It also provides a case for analysis of how political decisions can directly affect a nation’s economic outcome. Prior to the 1960s Ireland’s economic activities were managed under a collective, protectionism political atmosphere where the focus was to prevent external forces from influencing the native industries.

protectionism of indigenous assets as its political ideology. In the face of Wall Street crash and the Great Depression this near totalitarian control led to the result that tariffs were double that of the United States and 50% higher than the United Kingdom (Alfaro et al. 2010: 2), which posed a significant barrier of entry into Ireland for foreign entities.

By the 1950s Ireland was in a stage of economic stagnation and a pro-market political ideology was becoming more favorable. This shift in political atmosphere meant that Ireland was moving towards a more liberal economic system, along with the announcement from the finance minister in 1958 to advocate a shift from protectionism to free trade, combined with encouragement of tax concessions and incentive grants, (Alfaro et al. 2010: 3) Ireland quickly benefitted from an increased scale of FDI injection in the 1960s as a result of its more fiscal and financially appealing environment than other European countries. The legal aspect of Ireland as a result of the political decision to divert away from protectionism also played an important part in being able to attract FDI. The Finance Act of 1956 introduced exports profits tax relief which allowed a 50% tax exemption on profits earned from manufacturing goods, along with a low 10% corporate tax rate allowed foreign companies to significantly reduce their cost of operation and increased their power. Ireland’s decision to enter the European Union (EU) in the 1970s further assisted Ireland in quickly becoming a prime destination for foreign entities such as the United States to use as a stepping stone into the European market. (Buckley & Ruane, 2006: 5) However, the influx of FDI and foreign entities posed an implication for the host’s economic management.

One of the biggest management problems for a FDI host nation is to be able to balance those foreign entities with the competitiveness of the native industry. (Wei & Balasubramanyam, 2004: 184) Prior to Ireland’s opening to free...
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