As a member of the National Competitiveness and Productivity Council for many years, it always struck me that the quality of the work, analysis and thinking that went into their reports, from both the research secretariat that supported the council and the insights from its diverse membership, was excellent. It also struck me that successive governments could have responded more comprehensively and with more haste to their deliberations.
The council’s most recent report, Ireland’s Competitiveness Challenge, once again highlights the key issues facing the country from a competitiveness and productivity perspective. As always, the 130-page document includes much interesting data and well-thought-through recommendations, but several points stand out: the vulnerability of foreign direct investment (FDI) given global developments; the slow pace of progress on infrastructure development; the skills challenges facing Ireland; and the elevated cost of doing business in this country. These deficits are not just a challenge for international investors, they are also a challenge for Irish SMEs.
Ireland is competing in a challenging environment for investment. The industrial model of attracting foreign direct investment and capturing the spill-over effects that have propelled the economy for years is facing significant headwinds, some global and some domestic. Globally, the economy has been subdued due to inflation, high interest rates and geopolitical issues. The global flows of FDI, in terms of volume of projects, are still below pre-Covid 2019 levels, so Ireland and the Industrial Development Authority (IDA) are fishing for investment in a relatively smaller pool than they were previously.
Technology and pharmaceuticals ̶ two of the industry sectors where Ireland has excelled in attracting investment over recent years, and that grew very quickly during Covid ̶ have been significantly impacted globally post-Covid. The global competition for FDI continues to grow, evidenced by increased subsidies being offered by other countries.
Domestically, Ireland has several challenges that make attracting investment more difficult. Multinationals are frustrated with the slow response in addressing infrastructure shortfalls in areas like housing, energy, water and transport. These issues will continue to make it difficult to attract investment, if not addressed more quickly. Competitively priced utilities and infrastructure are entry-level requirements for investors. Ireland has to get the things within its control right, and domestic infrastructure is one of those.
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Those reliant on significant energy supplies are also disappointed with the slow pace of progress in relation to offshore wind, which offers a green, sustainable solution to Ireland’s and investors’ needs.
The council has also identified the conundrum that the Government faces of trying to make progress on infrastructure in an economy operating at capacity and with full employment, while not exacerbating the issues.
The report highlights Ireland’s cost of doing business as an issue. Government initiatives to improve working conditions have come with costs to employers. This affects all sectors, but particularly those employing large numbers of staff and operating on relatively slim margins. This includes, for example, firms operating in hospitality and retail. In addition, energy, transport and shipping costs remain elevated. This is echoed in Grant Thornton’s business optimism report in July, which shows that energy costs remain a key concern of Irish firms, with 43 per cent identifying utility bills as a growth constraint.
The council emphasises the need to do more to align the output of our education system with the fast-changing needs of enterprises. This is something Ireland has been relatively good at over the past two decades. The report places a particular focus on transversal, digital, green and construction-related skills and rightly references the changing nature of business due to artificial intelligence. Education will be a key driver of future economic success. The council does not address in its recommendations the issues around funding higher education, which undoubtedly is the elephant in the room.
While the IDA’s recent investment and jobs pipeline figures for the first half of 2024 show that investors continue to find Ireland attractive, the results have plateaued. The continued flow of investments cannot be taken for granted. Stability, political and economic, is Ireland’s strongest suit at the moment but given the global and domestic challenges that we face it is unlikely that FDI will grow at the same rate as we have seen over the past decade. Having said that, maintaining the base of FDI investment and employment at its current very high level would be a result for us.
Will there be a “ta-da” moment when Ireland is no longer viewed as an FDI location of choice? No. It is going to be much more subtle than that. Investors are keenly aware of the infrastructure and skills challenges that have emerged here, and Ireland is effectively excluding itself from consideration for certain investments. It is within Ireland’s gift to address much of this. One would expect that the reliance on the FDI sector for much of our annual corporate and income tax take would focus minds. The Competitiveness and Productivity Council should be heeded.
