Foreign Direct Investment in Ireland 2019

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As seen in Figure 4.2, SPEs operating in Ireland contribute a relatively small amount of FDI when compared to the rest of the international businesses established here. Overall SPE presence in FDI figures increased significantly in 2015 coinciding with the onshoring of many intellectual assets which were funded with FDI liabilities. The figure maintains a relative consistency following this with the exception of the €30 billion decrease in 2018 which corresponds, largely, to a reduction in FDI equity liabilities for several firms which have been classified as SPE.

The consistency of SPE figures over the period 2015 to 2017 relates to minimal changes in several large FDI positions held by a select group of firms. This is consistent with the idea that many of these types of firms are established with a view to holding specific financial assets over a length of time.

These figures have increased markedly from the reporting on SPEs from previous editions of this publication. The reason for this has been further clarification and guidance from the IMF, and international statistical agencies more broadly, on the compilation of these firms. It is however, in the pass through and intellectual property figures where the main components of Ireland’s FDI liabilities can currently be distributed as seen in Figure 4.9.

Figure 4.3 shows FDI attributed to SPEs as a percentage of total Irish inward FDI. Following the dissolution of various debt liabilities in 2013 and 2014, the effects of these firms in the overall FDI inward data increased significantly. Following aforementioned declines in 2018, the figures have levelled off at approximately 6% of total Irish inward FDI.

As illustrated in Figure 4.4, the 25 firms that receive the most amount of FDI in Ireland are responsible for the majority (70%) of Ireland’s FDI inward positions. In relation to the other stratified compilations of firms, the SPEs have a relatively low amount of FDI that is attributed to them.

Pass-Through Method

The second method used to mitigate globalisation effects in FDI statistics involves estimating Pass-Through which can be defined as foreign multinational investment in Irish affiliates which is then subsequently invested into another economy. It has been shown globally that there exists a strong correlation between inward and outward FDI flows (Blanchard & Acalin, 2016). This suggests that FDI statistics are being inflated as investments flow through their economies instead of entering them. The result of this is that a highly globalised economy’s inward and outward FDI figures may be inflated.

Currently, there is no benchmark definition of pass-through FDI since it can come in different forms and largely depends on the level of operational activity within MNEs in an economy. For instance, although the SPE method is able to explain the large majority of FDI for Luxembourg and the Netherlands, it fails to explain a similar portion of Ireland’s FDI figures. This is because MNE activity in Ireland is quite different to that of Luxembourg’s or the Netherland’s. Many multinationals here are non-financial enterprises, often with large employment i.e. firms that fall outside the definition of an SPE. Therefore, pass-through activity in these regular operational enterprises may not be captured using the SPE method.

The method used in this report to estimate pass-through FDI occurring in Ireland involves comparing a firm’s FDI assets and liabilities. The lower of these is then chosen and used as the estimate of pass-through FDI for that particular enterprise. The results are then aggregated to give an overall estimate of pass-through FDI in Ireland. The premise for this method is that it captures non-conventional FDI activity among all firms, not just SPEs. The method is formally shown at the end of this chapter and is based on pass-through analysis first introduced by Leino and Ali-Yrkko (2014).

Figure 4.5 shows this method applied to Irish FDI data. In 2019, pass-through FDI was estimated to be €786.9 billion. For a better conceptual understanding of this figure, it can be viewed in terms of a % of FDI liabilities. In 2019, 51% of FDI liabilities are estimated to be pass-through.

The estimate for pass-through rises to 54% of FDI liabilities when firm-level data is aggregated to group-level where possible to capture pass-through that may occur in chains of subsidiaries. FDI is presented on an asset and liability basis in Figure 4.5 whereas in the SPE part of this publication it was done on a directional basis. For a breakdown of the difference between these two presentations see this information note. The difference between FDI inward (directional) and FDI Liabilities (asset and liabilities) essentially comes down to the removal of reverse investment i.e. investment from the subsidiary or child firm back to the parent of the organisation.

Figure 4.6 shows Pass Through relative to FDI Inward. When we analyse Pass Though with respect to the directional presentation of FDI or FDI Inward, it’s percentage of the total drops to 31% in 2019. The reason for this, is that there exists overlap between the funds excluded though the filter of removing reverse investment and those removed from filtering out pass through.

Figure 4.8 shows that firms with an ultimate controlling parent in the US have engaged in the most pass-through activity, totalling €504.8 billion in 2019. The estimated pass-through occurring in firms with an Irish ultimate controlling parent is mostly coming from redomiciled PLCs. These PLCs can have FDI liabilities coming from debt instruments such as loans and trade credits. Given that these firms have large outward FDI positions, the applied method will label their FDI liabilities as pass-through.

FDI Liabilities Breakdown

One procedure that can be applied to Ireland's FDI liabilities figure is to remove reverse investment (directional presentation) as well as pass-through investment. The on shoring of intangible assets, intellectual property and tangible fixed assets in the aircraft leasing sector has additionally led to increased difficulty in the interpretation of headline FDI figures in Ireland. Therefore, we will strip the FDI Liabilities figure of these too.

These estimates for pass-through activity are derived using FDI asset/liability data. Since some reverse investment is already captured in the pass-through estimate, applying the two methods separately is necessary so as to eliminate the possibility of double-counting.

Figure 4.9 displays Inward FDI with the removal of these aforementioned inflationary features. The pass-through component here represents the amount over and above reverse investment to avoid double counting. Positions of intangible assets, IP, and aircraft were used as a proxy for the associated FDI financing of these assets. In 2019, after removing these elements from our FDI liabilities figure, inward FDI was €261.4bn. This figure can be interpreted as an estimate for inward FDI removed of globalisation effects and helps explain the investment in Ireland's capital stock (see: Estimates of the Capital Stock of Fixed Assets)

By removing these elements from our FDI figures it implies that they provide zero contribution to real economic activities in Ireland. However, it’s conceivable that pass-through funding could in some way create economic spill-overs that result in positive effects on the economy. This applies to the on-shoring of intangible and tangible fixed assets in the aircraft leasing sector where employment and earnings have increased substantially along with the increases in those assets. This is noteworthy if seeking to use the remaining inward FDI figure derived above to estimate the effect FDI has on the Irish economy.

Further Notes

Due to how the CSO classifies firms in the aircraft leasing sector, not all their financing investments are defined as FDI. Therefore, only tangible fixed assets financed by reported FDI in this sector are included in the 'Aircraft, Intangible Assets, & IP' component in Figure 10.9. This meant excluding a considerable amount of this sector’s fixed assets from the analysis. The excluded fixed assets in these firms are financed by other investments in the context of CSO internal classifications and therefore are not relevant to this experimental FDI analysis.

Pass-Through Estimation Method

where I_i,t denotes inward FDI position of an enterprise and 0_i,t is the outward FDI position.