Abstract
Selected Issues
Ireland: The Role of Foreign-Owned Multinational Enterprises1
Foreign-owned multinational enterprises (hereafter “multinationals”) have played a central role in supporting Irish growth over the past two-and-a-half decades.2 They have concentrated in higher productivity activities, providing high-skilled employment opportunities and contributing fiscal revenue that has supported growth-enhancing investment and social spending. Notwithstanding their manifold benefits, their complex operations and large scale relative to the overall economy require special consideration, particularly in terms of concentration risks to public finances, employment, and output, and the impact on the external balance. They also have sizable effects on Irish statistics, as most prominently highlighted by 26.3 percent growth rate in 2015.
A. Overview
1. Multinationals have played a key role in the economic success of Ireland. Ireland has actively promoted inward foreign investments, including through support by the Industrial Development Authority (IDA) Ireland.3 During the 1990s, companies, mainly from the US and to a lesser extent the EU, invested in high-productivity industries, such as chemicals (mainly pharmaceuticals), as well as information and technology. By providing high-skilled jobs and investing into R&D, they contributed significantly to growth of the economy, including through productivity spillovers, although economic multipliers are smaller than in the rest of the economy.
2. Who are they? Multinationals operating in Ireland may be subsidiaries or Ireland-headquartered (domiciled) foreign-owned companies. Close to a half (measured by FDI stock, by immediate investor) are from the United States, followed by Luxembourg, Netherlands, the UK and other EU countries (Figure 1). Measured by ultimate investor, U.S. investors dominate with 73 percent of FDI stock. Indeed, as of 2012 (latest available data), three quarters of multinationals-related gross value added (GVA) is produced by multinationals from outside of the EU.4 At the same time, more than half of portfolio investment originates in the EU, with an additional one third from the US.
Foreign Investors in Ireland
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Coordinated Portfolio Investment Survey (CPIS), and CSO.Foreign Investors in Ireland
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Coordinated Portfolio Investment Survey (CPIS), and CSO.Foreign Investors in Ireland
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Coordinated Portfolio Investment Survey (CPIS), and CSO.3. What brought multinationals to Ireland? There are several elements that make Ireland an attractive destination for foreign investments. Key factors include Ireland’s strong, flexible, English-speaking workforce, proximity to Europe and membership in the European Union, a competitive business environment (as reflected in a variety of international comparisons highlighted in Figure 2), and low statutory and effective corporate tax (CIT) rates relative to comparators. Indeed, these elements align with characteristics found to be significant in recent cross-country studies explaining FDI location decisions.5
Irish Competitiveness
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, World Bank, and Global Competitiveness Report 2016-17.Irish Competitiveness
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, World Bank, and Global Competitiveness Report 2016-17.Irish Competitiveness
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, World Bank, and Global Competitiveness Report 2016-17.Output and Employment
4. Multinationals are an important part of the Irish economy (Figure 3). In total, they produced more than a third of GVA in 2014, rising to an estimated 50 percent in 2015, equivalent to approximately 60 percent of the non-financial business economy, much higher than the EU average of about 25 percent.6 Certain aspects of multinational operations (e.g., IP-related investment, contract manufacturing, and aircraft leasing) inflate these headline figures (Appendix). Still, multinationals have a sizable impact on underlying Irish economy. Multinationals tend to cluster in, and dominate, chemicals and chemical products, software and communications, and a mixed group of related sub-sectors.7 These multinational-dominated sectors jointly represented 40 percent of GVA in 2015. Activities of multinationals account for a significant share of employment and payroll in the non-financial business economy, while making up just 1.5 percent of total companies.
Foreign-Owned Multinational Enterprises
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.Foreign-Owned Multinational Enterprises
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.Foreign-Owned Multinational Enterprises
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.5. Multinational-dominated sectors exhibit higher labor productivity and wages than indigenous firms (Figure 4). The high presence of IP-related activities in Ireland and related contract manufacturing pushes up labor productivity in manufacturing.8 Although still significant, differences in productivity between multinational and indigenous firms in construction and distribution appear to be many times smaller than in manufacturing. Correspondingly, the differences in wages paid by multinationals compared to domestic firms are the highest in manufacturing and ITC. Nevertheless, when compared to the overall economy, pay in the multinational-dominated sectors is close to the average (Figure 3).
Multinational Productivity and Wages Compared
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.Multinational Productivity and Wages Compared
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.Multinational Productivity and Wages Compared
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: CSO and IMF staff.6. Production by multinationals tends to be part of global value chains (GVC). Especially for chemicals and electronics, the stages of GVC production in Ireland involve manufacturing, assembling, logistics, and design, that are characterized by low value added consistent with the middle of GVC production stages (Figure 5). Indeed, chemicals and electronics have a short production span in Ireland relative to the overall length of the GVC (Figure 6). These stages are longer for medical equipment, where there are also more spillovers to the broader economy.
Global Value Chain Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: World Economic Forum (2012).Global Value Chain Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: World Economic Forum (2012).Global Value Chain Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: World Economic Forum (2012).
Length of Global Value Chains
(Index of production stages, 2008)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD ICIO model, December 2012 release.Length of Global Value Chains
(Index of production stages, 2008)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD ICIO model, December 2012 release.Length of Global Value Chains
(Index of production stages, 2008)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD ICIO model, December 2012 release.7. Employing non-Irish workers is common in Ireland, and their share in employment in multinational-dominated sectors is somewhat higher than in the broader economy (Figure 7). This testifies for the truly open character of the Irish economy, including the labor market. However, it also likely signals skills mismatches at the domestic labor market—shortages of local high-skilled professionals for high-value added jobs of multinationals (IMF, 2016). A high rate of vacancies (job vacancies per 100 jobs taken up) in multinational-dominated sectors, such as the financial sector and ICT, may also suggest untapped employment potential (Figure 8). Between 2012 and 2015, over 115 thousand jobs were created in the indigenous sector versus 8 thousand by MNEs, although MNE job creation jumped substantially in 2015 to 82 thousand, just above half of total new jobs created that year.
Share of Non-Irish Employment
(2011, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff.Share of Non-Irish Employment
(2011, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff.Share of Non-Irish Employment
(2011, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff.
Job Vacancies Rate, by activity
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: Eurostat.Note: Business economy includes sectors B to J, L to N, and S95 of NACE Rev. 2.Job Vacancies Rate, by activity
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: Eurostat.Note: Business economy includes sectors B to J, L to N, and S95 of NACE Rev. 2.Job Vacancies Rate, by activity
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: Eurostat.Note: Business economy includes sectors B to J, L to N, and S95 of NACE Rev. 2.8. Despite relatively low multipliers, multinational-dominated sectors provide a buffer during downturns in the domestic business cycle. Foreign-dominated sectors have lower output multipliers and much lower employment effects (DOF, 2014). The output multiplier, measuring the marginal full-economy direct and indirect effects on output from an increase in final demand for output in a given sector, is 1.2 for the multinational-dominated sector and 1.4 for the indigenous sector. The impact on employment in the economy resulting from a €1m increase in final demand for output in a given sector (the employment effect) is 3 additional jobs for the multinational-dominated sector, compared to 10 jobs for the indigenous sector. This finding is consistent with the specialized, export-oriented activities of multinationals. However, this paired with strong access to external finance has a positive macroeconomic stabilization impact during downturns, that is periods of domestic demand adjustments and impaired financial intermediation.
External sector
9. Multinationals had a sizable impact on the Net International Investment Position (NIIP), especially in 2015. Foreign investment in Ireland has grown significantly and become the key driver of NIIP. The large size of assets and liabilities reflects the scale of multinational operations (Figure 9, FDI and portfolio investments). The recent deterioration of NIIP has been mostly driven by multinational’s intangible operations related to balance-sheet restructuring and thus has not affected the external sustainability of core domestic sectors (see Appendix III, IMF, 2017a).
Export and Net International Investment Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver, CSO, and IMF staff.Export and Net International Investment Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver, CSO, and IMF staff.Export and Net International Investment Position
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver, CSO, and IMF staff.10. Multinationals dominate Irish exports, albeit concentrating in few export categories. According to IDA (2011), exports of multinationals accounted for 75 percent of total in 2011. Using trade data (excluding contract manufacturing), multinational-dominated activities in exports of goods and services accounted for close to 70 percent of total in 2015 and concentrate in handful of product categories, namely chemicals, selected manufacturing products, and computer and financial services. Nevertheless, contract manufacturing plays an increasingly important role in overall exports. Approximately 25 percent of GDP in 2016 (up from 5 percent of GDP in 2013) relates to contract manufacturing (Box 1), with important implications for the trade balance. While the trade balance for goods and services is 23.2 percent of GDP, without contract manufacturing, it would be close to zero.9
Overseas Activities of Multinationals
The most important part of offshore production is contract manufacturing. That is manufacturing of goods abroad, based on a contract with an Irish-domiciled firm (see Appendix, footnote 1). While information on the approximate scale of such operations in manufacturing is available, a quantification of offshoring in other sectors is not. In the financial sector for instance, it is difficult to break down the export-related value-added into traditional export of services and offshoring.
Contract manufacturing accounted for an estimated quarter of GDP in 2016. Products under contract manufacturing in Ireland are not registered by customs but are booked in the national accounts as net export (revenues less costs). Therefore, the difference between goods export in balance-of-payments accounts and customs accounts serves as a proxy for the size of contract manufacturing.1/ Contract manufacturing goods exports accounted for a third of 2015 GDP and for about a quarter of 2016 GDP. For 2015, the figure is similar to the preliminary estimate of the difference between GDP and GNI* (see Appendix), suggesting that the biggest difference between GDP and a proxy measure of the size of the domestic economy is contract manufacturing (CBI, 2017).
11. The large scale and low value added per unit of multinational exports has reduced the ratio of domestic GVA in gross exports. While the overall domestic export-oriented GVA rose substantially between 1995 and 2011, the share of domestic GVA in gross exports fell from 62 percent to 56 percent during this period, currently among the lowest for OECD countries. The share of domestic GVA in indigenous sector exports is relatively high, but the short production cycle of multinationals in Ireland and their increased importance in exports weights down the overall share (Figure 10).
Share of domestic GVA embedded in gross exports
(Percent, 2011)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD TiVA.Share of domestic GVA embedded in gross exports
(Percent, 2011)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD TiVA.Share of domestic GVA embedded in gross exports
(Percent, 2011)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: OECD TiVA.B. Policy Implications
12. Multinationals present important opportunities and challenges. Given their networks, they can channel products efficiently to various markets—an important opportunity for Irish-owned businesses in related sectors to partner with multinationals. In addition, multinationals invest in R&D, increasing labor productivity. At the same time, the high concentration of multinational operations implies risks. In this context, potential tax changes in key partners, including the US, and broader discussions on international tax cooperation may affect multinational operations in Ireland (Box 2).
Impact of Potential US Tax Changes on Multinationals in Ireland
The complex nature of the international tax system makes it difficult to assess the impact of potential changes in international taxation. There are several factors – beyond Ireland’s low tax rate – that make it an attractive destination for foreign investment. Ireland ranks well in various indicators of global competitiveness, based on a sound legal and regulatory system, a strong workforce, and a flexible labor market. EU membership and the native English environment are also relevant to the mainly US-based multinationals in Ireland. Nonetheless, in a globalized world with mobile capital, it is important to consider possible implications of ongoing discussions of international tax reforms for Ireland, including the ongoing discussions of possible tax reform in the US. Tax-related issues are likely to be particularly relevant for multinationals with substantial profits deriving from IP and those with limited physical operations in Ireland. In such cases, the impact may be less severe on domestic underlying activity and employment, notwithstanding potential effects on corporate taxes.
Destination-based tax systems and those with less favorable treatment of imports, such as the recently floated border tax in the US, would likely have the largest impact on exporters in general, including those in Ireland. Such reforms in the US, which imply fundamental changes from the existing system, appear less likely at present. At the same time, direct exports to the US are concentrated in the chemical/pharmaceutical sector, with many multinationals in Ireland serving mainly as a hub for European operations. Possible US measures to support repatriation of profits or to reduce tax rates (as has been occurring for some time in other jurisdictions) are less likely to have a major effect in the short-term.
13. What are the policy options to further increase the benefits from multinationals while mitigating associated risks? Among key priorities are to continue building fiscal buffers and to broaden the tax base, while fortifying the business environment to maintain competitiveness. The latter includes improving infrastructure, strengthening human capital (including through higher female labor force participation and investment in tertiary and technical education), and promoting innovation and diversification in the SME sector, including through higher local sourcing in Ireland by multinationals.
Importance for Public Finances
14. The activities of multinationals have important implications for government revenues. The impact on revenues is both direct (through CIT) and indirect (through taxes paid on compensation of employees and consumption):
CIT receipts are a relatively large and concentrated source of government revenues, suggesting elevated risks to revenue collection (Figure 11). The CIT share of total tax revenues is about double the EU average, pointing to a higher reliance on CIT as a form of state financing that is also concentrated among few companies (see IMF 2017a).
Estimates suggest large indirect effects on tax revenues. Multinationals pay about 15 percent of total compensation of employees, hence social contributions and income taxes. In addition, through wage-linked consumption, they affect VAT receipts. Here also, there is a significant concentration of the indirect impact. IMF staff estimates that the top 50 companies account for about 10 percent of non-CIT tax receipts.10
Revenues from CIT
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Office of the Revenue Commissioners, and IMF staff.Revenues from CIT
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Office of the Revenue Commissioners, and IMF staff.Revenues from CIT
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Eurostat, Office of the Revenue Commissioners, and IMF staff.15. Changes in the offshore activities of multinationals may significantly and quickly affect public debt sustainability. Offshore activities of multinationals are large and portable, with potential implications for both tax revenues and measured GDP, hence the public debt-to-GDP ratio. Staff estimates suggest offshore activities accounted for about 25 percent of GDP in 2016 (see Box 1). For an assessment of the risks to debt dynamics in the event of a sudden decline in multinational activities, see the public-sector debt sustainability analysis (DSA) in IMF (2017a). Fiscal policies should focus on:
Building fiscal buffers. The concentration risk associated with multinational-driven CIT further reinforces the importance of strong fiscal buffers. At the same time, some portion of these revenues may prove temporary, highlighting the importance of saving revenue windfalls and not using them to fund permanent increases in expenditures.
Utilizing alternative metrics to assess the appropriate fiscal stance: As detailed in the appendix, headline, or measured, GDP overstates underlying economic activity, complicating policymaking. The planned publication of additional metrics beginning in July, which seek to strip out the effect of global activities by multinationals, will provide a stronger basis to assess public spending and debt levels than GDP-based metrics.
Structural Reforms
16. An effective strategy to reinforce sustainable and inclusive growth in Ireland will need to reflect Ireland’s growth model—taking advantage of the strong presence of multilaterals while insulating against associated risks, preparing the workforce to compete effectively for the more skilled, high-paid jobs multinationals offer, and supporting the dynamism of the domestic economy:
Enhancing labor skills. Continued efforts to align education path with business needs can help address the skills shortages in fast-growing sectors, including those dominated by multinationals that were identified in the 2016 National Skill Bulletin.
Further improving the business environment. International survey data suggest some gaps in the generally strong business environment, including improving contract enforcement, strengthening procedures for registering property, further developing the financial market, and dealing with construction permits (see Figure 2).11
Addressing infrastructure needs. Inadequate infrastructure has been identified in these surveys as an important obstacle in doing business in Ireland.
Promoting innovation among SMEs in the indigenous sector. While Ireland is considered a top innovator, a large part of R&D activities are carried out by large enterprises, mostly foreign-owned. The share of R&D expenditures by small firms in business R&D expenditures remains just above 13 percent, and spillovers from multinationals are relatively limited. Furthermore, public-sector support for business innovation is mainly in the form of tax credits, which may be less effective in helping start-up firms. Promoting innovation through expansion of government support for SME-driven R&D, including direct funding measures, will help increase dynamism in the domestic economy. Consistent with the government’s Action Plan for Jobs 2017, innovation support, especially through monitoring IP activity at a firm level, increasing collaboration with research centers and multinationals through Knowledge Transfer Ireland, and assuring broader non-bank financing options, is important. These efforts would improve the share of domestic value added in exports, increase employment of skilled labor force, and thereby increase economic multiplier of multinational operations in Ireland.
Appendix I. Statistical Challenges
This appendix reviews the challenges of measuring domestic economic activity in Ireland and discusses ongoing efforts by the authorities to address this issue with additional statistics.
A. Measurement Challenge
1. The large scale of multinational activities in Ireland relative to the domestic economy, as well as their complex, varied and changing nature, contribute to statistical challenges. Multinationals invest in substantial physical production, provide significant employment, and are an important part of the tax base in Ireland, with a direct bearing on the underlying economy. However, significant investment in (or relocation of) intangible and internationally mobile capital assets (including aircraft leasing), as well as often related “offshore” contract manufacturing, have a large statistical impact not in line with their relevance to underlying domestic activity (See Box A1 and Figure A1).1 2 They also substantially complicate understanding of the external accounts (Box A3), While such operations are in no way unique to Ireland, their large scale relative to the overall Irish economy presents special challenges. The often-complex nature of these operations adds to the challenge. This impact was particularly striking in 2015, with multinational intangible operations related to balance sheet restructuring (and related contract manufacturing) accounting for a large portion of the 26.3 percent headline GDP growth.3
Growth and Trade
GDP Growth (Constant prices, y-o-y, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver Analytics and IMF staff.Note: Contract manufacturing is recorded on a net basis as net export and added to the series of exports of goods.Growth and Trade
GDP Growth (Constant prices, y-o-y, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver Analytics and IMF staff.Note: Contract manufacturing is recorded on a net basis as net export and added to the series of exports of goods.Growth and Trade
GDP Growth (Constant prices, y-o-y, percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Sources: Haver Analytics and IMF staff.Note: Contract manufacturing is recorded on a net basis as net export and added to the series of exports of goods.Impact of Multinationals on GDP
Multinationals strongly affect national account measures under ESA2010 and BPM6, complicating an analysis of underlying conditions:
Expenditure approach. Offshore production and other proceeds for invested capital (such as license fees) by Irish multinationals are part of net exports of goods and services. Investment in intellectual property (IP) affects capital formation, capital stock, and imports. Because current national accounts statistics do not provide a breakdown for contract manufacturing and partial information for investment into IP by multinationals, underlying components of domestic demand and exports cannot be distinguished from the often volatile effects of multinational activities, especially on investment and exports. This also complicates the assessment of external sustainability.
Production approach. Gross Value Added (GVA) includes both domestic and offshore value added created by multinationals in Ireland. Current national accounts statistics do not provide a breakdown for domestic and offshore production of multinationals. Thus, the offshore component is difficult to separate to derive certain domestic measures, such as labor productivity. Given the volatile nature of offshore activities, they often mask underlying domestic economic trends.
Income approach. Investment profits by Irish-domiciled companies, including from offshore activities, are part of GNP/GNI. Although income data for redomiciled companies are available, current statistics do not report separately profits of multinationals from offshore activities with weak links to employment, which would be ideally excluded when analyzing underlying economic conditions. Consequently, the labor share for domestic production cannot be derived, limiting analysis of potential output and the cyclical position. A GNI* metric and related data will be produced starting this summer to begin addressing some of these issues (discussed in Section B).
Schematic National Accounts Statistics with Multinationals
(Percent of GDP)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: IMF staff.1/ Items are currently not reported separately.2/ Includes net export of royalties, not reported separately.Schematic National Accounts Statistics with Multinationals
(Percent of GDP)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: IMF staff.1/ Items are currently not reported separately.2/ Includes net export of royalties, not reported separately.Schematic National Accounts Statistics with Multinationals
(Percent of GDP)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: IMF staff.1/ Items are currently not reported separately.2/ Includes net export of royalties, not reported separately.Impact of Multinationals on External Accounts
Operations of multinationals affect NIIP and nearly all flows on the Balance of Payments. Multinationals perform contract manufacturing, provide financial services, invest in IP, and trade in goods and services. In terms of financing, multinationals borrow abroad, pay out dividends, and reinvest. These flows affect virtually all parts of the BOP accounts (see table) and NIIP since multinationals are often financed from external sources (including related-party lending). Recent relocation of large balance sheets by multinationals also has had a major impact on asset and liability stocks and flows of profits and royalties. A better understanding of the underlying BOP and IIP would require stripping out multinational activities related to their global operations (e.g., those driven by IP and contract manufacturing).
Balance of Payments with Multinationals
Contract manufacturing is recorded as export on a net basis and thus does not affect imports.
Balance of Payments with Multinationals
| Balance of payments item | Affected by multinationals | Type of multinational flow | ||
|---|---|---|---|---|
| Current account | Yes | |||
| Trade balance | Yes | |||
| Export of goods | Yes | Contract manufacturing1/, other multinational export | ||
| Export of services | Yes | Financial services of IFSC, royalties of re-domiciled multination | ||
| Import of goods | Yes | Non-contract manufacturing import of multinationals | ||
| Import of services | Yes | Import of IP-related investment, royalties paid | ||
| Income balance | Yes | |||
| Credit | Yes | Profits of Irish re-domiciled multinationals | ||
| Debit | Yes | Profits, remittances | ||
| Capital account | No | |||
| Financial account | Yes | |||
| Direct investment | Yes | FDI by multinationals, including reinvested profits | ||
| Portfolio investment | Yes | Foreign investments in multinationals (not classified as FDI) | ||
| Other investment | Yes | External borrowing by multinationals, including related party | ||
| Change in reserves | No | |||
| Errors and omissions | Possibly | |||
Contract manufacturing is recorded as export on a net basis and thus does not affect imports.
Balance of Payments with Multinationals
| Balance of payments item | Affected by multinationals | Type of multinational flow | ||
|---|---|---|---|---|
| Current account | Yes | |||
| Trade balance | Yes | |||
| Export of goods | Yes | Contract manufacturing1/, other multinational export | ||
| Export of services | Yes | Financial services of IFSC, royalties of re-domiciled multination | ||
| Import of goods | Yes | Non-contract manufacturing import of multinationals | ||
| Import of services | Yes | Import of IP-related investment, royalties paid | ||
| Income balance | Yes | |||
| Credit | Yes | Profits of Irish re-domiciled multinationals | ||
| Debit | Yes | Profits, remittances | ||
| Capital account | No | |||
| Financial account | Yes | |||
| Direct investment | Yes | FDI by multinationals, including reinvested profits | ||
| Portfolio investment | Yes | Foreign investments in multinationals (not classified as FDI) | ||
| Other investment | Yes | External borrowing by multinationals, including related party | ||
| Change in reserves | No | |||
| Errors and omissions | Possibly | |||
Contract manufacturing is recorded as export on a net basis and thus does not affect imports.
Statistical Impact of IP-Related Operations by Multinationals
The complex impact of multinational operations on Irish national accounts can be demonstrated by the differential impact of IP-related operations carrying different structures:
Investment into the IP. A multinational company purchases IP (acquires it) and imports it to Ireland. This will be registered as an increase in investment and imports by the same amount with no immediate impact on GDP but with a negative immediate effect on the current account. The acquisition of the asset may affect import and export flows in the future – through the payments of royalties and the direct effect on the trade of goods or services (see Box 1, 2016 Article IV).
Transferring IP assets. When a multinational relocates an entire balance sheets to an Irish subsidiary there is no asset acquisition and the transaction affects neither capital formation nor imports (and thus has no immediate effect on the BOP. However, IP relocation increases the capital stock and affects the IIP since it implies relocation of liabilities related to non-resident owners/creditors. Over time, it increases net exports through the inflow of royalties and the direct effect on the trade of goods and services (see Annex I, PPM6).
2. Why are alternative metrics important? While Ireland’s national accounts statistics are fully consistent with international norms, the headline aggregates no longer provide an accurate picture of underlying performance within Ireland. Multinational activities can mask trends in underlying growth rates, as well as trade and investment developments, making it more difficult to gauge the cyclical position of the economy and the appropriate setting for economic policies. Volatility and lumpiness in multinational investment or income flows further complicate assessment. Standard metrics, often based on GDP or headline balance of payments figures, can distort analysis of, for example, labor productivity and economic well-being, fiscal sustainability, and external competitiveness, masking important risks or misrepresenting performance. Headline data also limits meaningful cross-country comparisons, as standard metrics can lead to misrepresentation of Ireland’s relative position.
3. Historically, GNP was used as an alternative to GDP to address the effect of multinationals in Ireland. GNP measures activity attributable to Irish residents and is defined as GDP less net factor income to non-residents from Ireland.4 The gap between Ireland’s GDP and GNP is among the highest in the world and has grown, driven by multinational operations. GNP grew on average about a percentage point a year slower than GDP over nearly two decades (Figure A2). Nonetheless, GNP has never been a perfect substitute and over time has become increasingly problematic given the increased relevance of issues related ownership of intellectual property, including under new international statistical norms adopted in 2010 and with significant re-domiciling of activities to Ireland. In addition, the scale of contract manufacturing and aircraft leasing has also ballooned, especially in 2015, having a large effect on all standard measures of economic activity – GDP, GNP, and domestic demand (Figure A1).
GDP and GNP
(Billion euros, constant prices; right axis in percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff calculations.GDP and GNP
(Billion euros, constant prices; right axis in percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff calculations.GDP and GNP
(Billion euros, constant prices; right axis in percent)
Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A003
Source: CSO and IMF staff calculations.4. The Irish authorities have long recognized the need for better measures of underlying activity. Additional metrics for output beyond GNP have been utilized in key analytical and policy documents for some time. For example, the Ministry of Finance has included interest-to-revenue and debt-to-revenue benchmarks in budget documents in addition to traditional debt-to-GDP measures. Central Bank analysis utilizes measures of underlying activity (e.g., domestic demand, investment), which exclude volatile components of investment in intangibles and aircraft leasing.5 Alternatives to GDP in analytical work by public and private researchers, such as GNP and employment, has also been common. The CSO periodically publishes useful information on multinational-dominated sectors, albeit not with sufficient detail to fully separate out overseas operations.6 Notwithstanding these earlier efforts, the 2015 national accounts revision was rightly seen as a game changer.
How Statistical Issues Affect the IMF’s Work
Applying standardized IMF approaches to economic and sustainability analyses requires caution and adjustments in the Irish case:
Producing a measure of underlying domestic economic conditions – core domestic demand. This measure adjusts domestic demand for intangible and aircrafts investments.
Relying more on complementary statistics in DSA analysis, such as public debt to revenues and per capita debt, rather than the ratio of debt to headline GDP that is distorted by the large size of offshore activities by multinationals (Annex VI. IMF 2017a).
Recognizing external analysis under EBA methodology is complicated by contract manufacturing and IP-related operations on the current account and its determinants. (Annex III, IMF 2017a).
More generally, special attention is required when applying economic models, and there is also need to caveat cross-country work to recognize the special circumstances of the Irish case.
B. Addressing the Issue
5. Following the revision to 2015 data last year, the CSO convened an Economic Statistics Review Group (ESRG), led by the governor of the Central Bank of Ireland, Philip Lane, and including members from the CSO, government, academia, business, and unions, with observers from the IMF (STA) and Eurostat and contributions from the OECD, UN, Central Bank of Ireland, and KPMG. This group was tasked with identification of indicators that would support better understanding of Ireland’s highly globalized economy.
6. A staged approach was chosen (Box A3). The CSO, based on the ESRG recommendations, will publish a range of additional information over time beginning this summer, and further consider the possibility of additional steps. The ESRG and CSO took into consideration factors including implementation costs, stability, and repeatability of proposed changes in the context of a changing globalization landscape, and potential confidentiality issues – which might arise when one or a small number of firms have a macro-significant impact.
7. Key follow-up steps include:
CSO publication, beginning in mid-2017, of a GNI* series, that reduces GNI for undistributed profits of foreign-owned Irish firms (on portfolio investments) and depreciation pertaining to the gross earnings of foreign-owned domestic capital.7 A complementary presentation of the balance of payments, adjusted for these components, will also be provided. A preliminary estimate by the Central Bank of Ireland suggest GNI* was equivalent to approximately two-thirds of GDP in 2015 (CBI, 2017).
Publication of additional statistics on multinationals over-time, albeit without a split between on- and offshore operations, namely:
A set of structural macroeconomic indicators that describe economic activity by multinational-dominated and domestic sectors, through the publication of a breakdown of the NFC sector in the institutional sector accounts into broadly defined foreign and domestic subsectors.
Additional details on the cross-border economic activity in terms of gross fixed capital formation, domestic demand, and exports and imports.
ESRG Recommendations and Planned CSO Follow-up1/
| ESRG Recommendation | CSO Response |
|---|---|
| Level Indicator: Publication of GNI* and adjusted presentations of BOP/IIP data. | Annual time series for GNI* and corresponding BOP measures to be published beginning July 2017. Develop quarterly GNI* series during 2017; further work to highlight impact of IP relocations on IIP in 2018. Continue annual update on impact of re-domiciled firms on existing measures. |
| Structural Indicators: Large Cases/Remainder presentation; further explore data clarifications proposed by FitzGerald and Honohan; publication of Table 1 of the QNA in current as well as constant prices. | Include breakdown of foreign and domestic subsectors of non-financial corporate sector in annual sector accounts publication (beginning October 2017 with large cases only), with consideration of quarterly publication and a fuller breakdown and broader steps in 2018. |
| Cyclical Indicators: Publication: quarterly of underlying investment and domestic demand measures that take account of IP relocation, contract manufacturing, aircraft leasing, and re-domiciled firms; of similarly adjusted trade data at current and constant prices; quarterly of GVA data for multinational-dominated sectors (and other); quarterly of NNP data; of monthly production and turnover data adjusted for multinational activity, along with alternatively weighted indices, using sectoral wages rather than GVA. | Information consistent with first recommendation to be published in mid-2017; publish “walk-through” analysis of existing “cross-the-border” based external account data to calc. exports/imports on a “ownership” based national accounts basis; quarterly GVA data planned to begin in 2018; annual and quarterly NNP data by end-2018. Indices to be provided by early 2018. |
| Cooperation: Focused on inter-institutional collaboration, in particular with the central bank, while continuing substantial engagement on globalization-related issues by the international statistics community. | Continued collaboration with various domestic partners and participation in numerous international statistical forums. |
| Communication: Improve strategy in relation to release of national accounts data, reflecting the importance of transparency to a wide range of domestic and international counterparties. | Appointed a head of communications, in the process of establishing a press office function and restructuring existing information unit in line with the CSO’s new communications policy. |
| ESRG Recommendation | CSO Response |
|---|---|
| Level Indicator: Publication of GNI* and adjusted presentations of BOP/IIP data. | Annual time series for GNI* and corresponding BOP measures to be published beginning July 2017. Develop quarterly GNI* series during 2017; further work to highlight impact of IP relocations on IIP in 2018. Continue annual update on impact of re-domiciled firms on existing measures. |
| Structural Indicators: Large Cases/Remainder presentation; further explore data clarifications proposed by FitzGerald and Honohan; publication of Table 1 of the QNA in current as well as constant prices. | Include breakdown of foreign and domestic subsectors of non-financial corporate sector in annual sector accounts publication (beginning October 2017 with large cases only), with consideration of quarterly publication and a fuller breakdown and broader steps in 2018. |
| Cyclical Indicators: Publication: quarterly of underlying investment and domestic demand measures that take account of IP relocation, contract manufacturing, aircraft leasing, and re-domiciled firms; of similarly adjusted trade data at current and constant prices; quarterly of GVA data for multinational-dominated sectors (and other); quarterly of NNP data; of monthly production and turnover data adjusted for multinational activity, along with alternatively weighted indices, using sectoral wages rather than GVA. | Information consistent with first recommendation to be published in mid-2017; publish “walk-through” analysis of existing “cross-the-border” based external account data to calc. exports/imports on a “ownership” based national accounts basis; quarterly GVA data planned to begin in 2018; annual and quarterly NNP data by end-2018. Indices to be provided by early 2018. |
| Cooperation: Focused on inter-institutional collaboration, in particular with the central bank, while continuing substantial engagement on globalization-related issues by the international statistics community. | Continued collaboration with various domestic partners and participation in numerous international statistical forums. |
| Communication: Improve strategy in relation to release of national accounts data, reflecting the importance of transparency to a wide range of domestic and international counterparties. | Appointed a head of communications, in the process of establishing a press office function and restructuring existing information unit in line with the CSO’s new communications policy. |
8. The announced publication of supplementary data is an important step.
The planned GNI* series should provide a reliable measure of changes in overall domestic activities, filling a critical gap. It will represent a lower bound for the size of the domestic economy, since it will remove depreciation and undistributed profits for all multinationals and not just those pertaining to offshore and IP-related activities.8 At the same time, applying concepts, such as potential output and output gap, that need consistent series for components of overall activity (e.g., labor share, capital stock, or wage-productivity developments), will continue to be complicated.
While an additional breakdown of multinational-driven external flows will become available with the new statistics the CSO will publish, some elements will not be available. IP-related imports and FDI profits (including from re-domiciled firms) will become available. However, disaggregation of exports of financial services and additional details on royalty flows, dividends, and related party borrowing, which are more difficult to capture, will not, implying important continuing gaps for the external assessment and calculation of a proxy for underlying net exports of goods and services.
The CSO is also working to develop analytical tools to support calculation of productivity for the domestic economy, which may require capital stock adjustments for IP assets. More broadly, the CSO will continue to consider data classifications proposed by FitzGerald (2016) and Honohan (2016) that would allow for “trimmed” accounts that would separate out multinational-related distortions. This assessment will consider the costs (including in terms of collection) and additional analytical benefits these and other possible steps to taking the process further following initial experience.
References
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CBI, 2017, Central Bank of Ireland Quarterly Bulletin 02, April 2017, https://www.centralbank.ie/docs/default-source/publications/quarterly-bulletins/quarterly-bulletin-no-2-2017.pdf.
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Honohan, Patrick, 2016, “Towards a Trimmed-GDP Concept”, A manuscript.
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Quinlan, Joseph P., 2016 “The Irish-US Economic Relationship,” American Chamber of Commerce, Ireland.
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Prepared by Jiří Podpiera. The paper benefited from discussions with the authorities during Article IV seminar, in particular, Thomas Conefrey, and substantial input by members of the IMF Ireland team.
This paper focuses on the role of non-financial enterprises. Financial service operations by multinationals (IFSC) also have a sizable impact on Ireland.
IDA Ireland has provided support to one third of multinationals in Ireland.
Table 8.2 Structural business statistics by sector and nationality of ownership, 2012 http://www.cso.ie/en/releasesandpublications/ep/p-bii/businessinirelandabridged2012/multinationals/
See, for example, Davies and Killeen (2015) and Davies and others, (2016). These studies find that factors such as location, common language, market size, and EU market access play a key role for EU and non-EU investors, a low tax environment matters mainly for FDI in services for non-EU investors. Beusch and others (2013) also finds a correlation between a low tax environment and location of contract manufacturing.
Actual data for 2015 is not available. GVA shares for 2015 are therefore estimated using the share of multinational-dominated sectors in overall GVA in 2015 and adding (1) the 2014 difference between multinational-dominated sectors and all foreign-owned multinationals to estimate the share in GVA of all foreign-owned multinationals in 2015 and (2) the 2014 difference between the share of multinational-dominated sectors in GVA and the share in the business economy to obtain the multinationals share in business economy in 2015.
Reproduction of recorded media; basic pharmaceutical products and pharmaceutical preparations; computer, electronic and optical products; electrical equipment; medical and dental instruments and supplies.
Pharmaceutical products are recorded under Manufacturing and IT in Non-Financial Services.
A large part of the import of services (royalties and IP investment) may be linked to contract manufacturing and would be ideally subtracted from imports. Data on this breakdown, however, are not currently available.
The estimate assumes that non-CIT tax receipts are proportional to the compensation of employees. Therefore, the derived share of compensation by top 50 companies yields the estimate. The share of compensation by the top 50 companies have been derived using reported CIT tax payments, divided by the CIT rate (12.5 percent) and by the share of profits in GVA observed in the multinationals-dominated sector (77 percent). The result is multiplied by 0.9, since non-CIT tax revenues represent 90 percent of total tax revenues, yielding the estimate of the share of top 50 companies in non-CIT tax receipts.
Executive survey by the WEF, Global Competitiveness Report as well as ranking by the WB’s Doing Business.
“Contract manufacturing” refers to a special form of outsourcing, where a domestic company engages a company abroad to manufacture products on its behalf but retains the economic ownership of the inputs used in this production process. This process includes the import of intermediate inputs and manufacturing services by the domestic company. Subsequently, when the product is sold to a customer abroad, a change in economic ownership takes place and the export of this good is then recorded in the domestic national accounts and balance of payments, even though it was never physically present in the country.
See Lane (2016).
The revision was driven by a Euro 300 billion increase in the capital stock and associated activities, see Annex 1, Post Program Monitoring 6 for a fuller discussion of the July 2016 revision to 2015 GDP from 7.8 to 26.3 percent.
GNI (Gross National Income) is a similar concept to GNP, subtracting net property income to non-residents from Ireland.
Underlying domestic demand is close to the concept of “core domestic demand” utilized in recent Fund staff reports.
See Lane (2017) for a clear presentation of the underlying conceptual framework for this approach.
Undistributed profits have been standardly excluded from GNI in accounting standards.
