Home Country
Determinants of
Outward Foreign
Direct Investment:
From which countries does the
Republic of Ireland attract
Foreign Direct Investment?
BACHELOR THESIS
THESIS WITHIN: Economics NUMBER OF CREDITS: 15 ECTS
PROGRAMME OF STUDY: International Economics AUTHOR: Mark Stribling & Ville Viinikainen
Bachelor Thesis in Economics
Title: Home Country Determinants of Outward Foreign Direct Investment: From which countries does the Republic of Ireland attract Foreign Direct Investment?
Authors: Mark Stribling and Ville Viinikainen Tutor: Andrea Schneider, PhD
Date: 2021-05-24
Key terms: Foreign Direct Investment, Home Country Determinants, Macroeconomic Factors, Market Size, Corporate Tax
Abstract
The flow of foreign direct investment (FDI) into a country can benefit both the investing entity (the home country) and the host country. The determinants of FDI are a highly discussed topic, with various determinants being analysed and discussed over time. Multiple research papers focus on the determinants of the host country, which try to identify the most important factors that make countries attractive to investment from abroad. This paper aims to shed light on the home country determinants and their relationship with investments into the Republic of Ireland. Using panel data analysis for 28 different countries around the world from the years 2012 to 2019, this paper aims to find relationships between different home country related variables and FDI flows into the Republic of Ireland. We find evidence that FDI is positively associated with the market size of the home country, the corporate tax rate difference between the home and the host country and sharing an official language. On the other hand, population and distance were found to be negatively associated with FDI. Based on the results of our analysis, a discussion of the home country determinants and their impact on FDI into Ireland is presented.
Table of Contents
1.
INTRODUCTION ... 1
2.
LITERATURE REVIEW ... 5
2.1 Previous empirical studies regarding FDI ... 5
2.2 The specific case of Ireland regarding FDI from previous studies ... 6
3.
THEORETICAL FRAMEWORK ... 9
3.1 Foreign Direct Investment ... 9
3.2 Market Size ... 10 3.3 Population ... 11 3.4 Corporate tax ... 12 3.5 Distance ... 14 3.6 Language ... 15 3.7 Other factors ... 17
4.
DATA ... 19
4.1 Dependent and Independent Variables... 19
4.2 Descriptive Statistics ... 20
4.3 Expected Results ... 22
5.
EMPIRICAL ANALYSIS ... 23
5.1 Specification of the empirical model ... 23
5.2 Results ... 24
6.
DISCUSSION ... 28
7.
CONCLUSION ... 30
7.1 Suggestions for Future Research ... 31
Reference list ... 34
Appendix ... xl
GLOSSARY
Abbreviation Meaning
Asian Tiger Economies Hong Kong, Singapore, South Korea, and Taiwan
EEC European Economic Community
EU European Union
FDI Foreign Direct Investment
FEM Fixed Effects Model
GDP Gross Domestic Product
GVC Global Value Chain
IDA International Development Agency
MNC Multinational Corporation
OECD The Organisation for Economic Co-operation and Development
OLS Ordinary Least Squares
ROI The Republic of Ireland
UNCTAD United Nations Conference and Development
UK United Kingdom
1. INTRODUCTION
Ireland’s economic history has long been one of stagnation and hardship, with its economy performing poorly throughout much of the 19th and 20th centuries. In the 20th century, this had peaked, with Ireland being considered as one of the poorest nations in Western Europe at the time (Dorgan, 2006). However, this evolved with the remarkable boom of the Irish economy in the 1990’s, as shown in Figure 1, which came to see the country referred to as the “Celtic Tiger,” a term coined to show the similarities between the Irish economy and the Asian Tiger economies at the time, which were also experiencing substantial economic growth. Fuelled by an ever-growing flow of inward foreign direct investment (FDI), mainly from the United States from 1994 - 2007, this boom saw the Irish economy grow precipitously. Since then, although badly affected by the Financial Crash of 2008, the economy of the Republic of Ireland (ROI) has continued to grow rapidly, utilising a low rate of corporate tax, which has led to an increase in the trade competitiveness of Ireland as it was able to attract more inward FDI flows from abroad. This is evident in Figure 2, where the FDI inflow per capita from 2009 to 2018 is considerably higher in Ireland than the OECD (The Organisation for Economic Co-operation and Development) average. Today Ireland is one of the most FDI-reliant countries in the European Union (EU), attracting $75 billion of inward FDI flows in the first six months of 2020 alone (Central Statistics Office, 2020). Moreover, Ireland experienced the fastest GDP in the developed world in the year 2020, fuelled by the contributions of FDI into the country, mainly to the pharmaceutical and technological sectors (McHugh, 2021). Furthermore, due to Ireland’s impressive execution in attracting foreign investment into the country, it has been named the best country in the world for attracting high-value foreign direct investments for six consecutive years from 2011 to 2016 (Taylor, 2017). The above-stated reasons are why Ireland is selected as the sole host country for analysis in this thesis.
Figure 1 GDP (current US$) of The Republic of Ireland
Source: World Bank (2021a)
This paper will examine the determinants of numerous countries worldwide that affect FDI flows into Ireland, based on previous literature related to FDI, literature based on Ireland’s attractiveness as a destination for FDI, and literature associated with FDI outflows. Moreover, this paper will empirically show the significance and impact that the determinants: market size (related to GDP), population, corporate tax, distance, and language have on FDI flows from the chosen home countries to Ireland. The purpose of this thesis is to answer the following research using panel data for the period 2012-2019: From which countries does Ireland attract FDI? This paper aims to show which countries Ireland attracts FDI from and the most significant determinants of FDI flows into Ireland from the chosen home countries. Previous research has concentrated on determinants of the host country for FDI flows into Ireland, showing what makes Ireland an attractive location for investment. Therefore, this paper aims to fill the literature gap currently present, with little research focussing on the determinants of the home countries regarding FDI flows into Ireland, showing from which countries Ireland attracts FDI. Previous literature has concentrated on individual determinants of the host country, with a significant focus on corporate tax rates, indicating that the low rate of corporate tax has had a positive impact on inward FDI flows into Ireland (Gunnigle and McGuire, 2001; Barry, 2003; Sweeney, 2010; Brazys and Regan, 2017).
Due to Ireland’s low rate of corporate tax, numerous multinational corporations (MNC) have used this to their advantage, with the notable inclusion of Apple using Ireland as a route to avoid paying large tax bills from their European and international operations. By using Ireland as a tax haven to avoid the US and Irish tax regulations, Apple, from the years 2003-2014, was found by the European Commission to have an unpaid tax bill to the Irish government amounting to $14.5 billion (Barrera and Bustamante, 2017).
Figure 2 FDI inflow per capita (current US$) comparison between OECD countries and Ireland
Source: World Bank (2021b) and World Bank (2021c)
Section 2 gives an overview of the previous literature available regarding FDI and shows its relevance for this thesis. Moreover, background information will explain the importance of FDI and a detailed case of Ireland and determinants that are significant as the host country. Following this, Section 3 will provide the theoretical framework, which will define FDI and the specific determinants of market size, population, corporate tax, distance, and language that are to be used in the empirical analysis. In Section 4, the data and variables used in the empirical analysis will be presented and explained in depth. Section 4 is also where the descriptive statistics are. Section 5 is where the empirical analysis can be found with a synopsis of the models used and the regression outputs, the empirical findings, and the results. Moreover, we also have included the expected relationships between the variables used in this section. Section 6 includes a detailed
discussion of the results. Finally, in Section 7, conclusions of the thesis are made, with a summary of the results found, the limitations from performing the analysis, and several suggestions for future research that could be conducted.
2. LITERATURE REVIEW
The purpose of this literature review is to show the relevance of previous studies on empirical evidence regarding FDI with a specific focus on Ireland. Firstly, earlier findings of the host country determinants that impact FDI will be briefly presented to give an overview of this topic of literature available. The emphasis on Ireland will be in the second part of the literature review. Numerous previous studies have focused on the inward FDI determinants of the host country. This paper seeks to examine the characteristics of the home countries, which has a limited amount of previous literature available as a topic of research. Therefore, this paper, with the aid of this literature review, aims to bridge the present gap of literature and findings related to home country determinants that impact outward FDI.
2.1 Previous empirical studies regarding FDI
Several empirical studies have explored the determinants of inward FDI for the host country in numerous countries. Studies focused on a single country have often used time-series analysis (A. Boateng et al., 2015; Cookey and Eniekezimene, 2020; Mugableh, 2021). On the other hand, studies that focused on multiple countries often employed panel data analysis (Kok and Acikgoz Ersoy, 2009; Vijayakumar, 2010; Jadhav and Katti, 2012; E. Boateng et al., 2017; Kumari and Sharma, 2017; Asongu et al., 2018). The choice of the dependent variable for the stated literature was constant, with all papers using FDI inflows to the host country as the dependent variable. The choice of independent and explanatory variables differed depending on the countries being examined, although some variables have been used consistently. For example, the market size of the host country (often represented by gross domestic product) was employed by many empirical studies (Kok and Acikgoz Ersoy, 2009; Vijayakumar, 2010; A. Boateng et al., 2015; E. Boateng et al., 2017; Kumari and Sharma, 2017; Asongu et al., 2018; Mugableh, 2021). Other independent and explanatory variables that are often used include the level of trade openness, inflation, and an indicator for infrastructure availability (Kok and Acikgoz Ersoy, 2009; Vijayakumar, 2010; Jadhav and Katti, 2012; A. Boateng et al., 2015; E. Boateng et al., 2017; Kumari and Sharma, 2017; Asongu et al., 2018; Cookey and Eniekezimene, 2020; Mugableh, 2021).
On the other hand, when examining the academic literature available for outward FDI flows from different countries globally, the literature remains relatively thin compared to the literature for inward FDI. Moreover, most literature has focused on host country determinants. Thus, the determinants for home country characteristics are not clear from the existing empirical literature. However, from the available literature where outward FDI flow is the dependent variable, panel data analysis was used most frequently (Das, 2013; Lee et al., 2016; Liu et al., 2017; Cieślik and Hien Tran, 2019).
From previous literature, the market size of the home country was found to be a significant determinant for outward FDI (Lee et al., 2016; Cieślik and Hien Tran, 2019). Moreover, the trade openness of the host country was also found to contribute positively to outward FDI (Tolentino, 2010; Das, 2013; Liu et al., 2017). Furthermore, Cieślik and Hien Tran (2019) employed panel data from 2001 to 2012 examining outward FDI flows from 38 emerging home economies into 134 host countries. They found that the market size of the home country, the similarity of the market size between the home and host country, skilled labour in the host country, and sharing a common language contributed positively to outward FDI. However, the distance between the countries, the cost of investment in the host country, and the trade cost of exporting had a negative impact on outward FDI from the home country.
2.2 The specific case of Ireland regarding FDI from previous studies
Ireland has been the study of numerous papers and past research regarding inward FDI flows, focussing primarily on the country’s rapid growth accelerated by investments from abroad. Numerous studies have found a strong link between corporate tax rates and FDI inflows into Ireland (Gunnigle and McGuire, 2001; Barry, 2003; Sweeney, 2010; Brazys and Regan, 2017). This section will examine previous literature regarding host country determinants of FDI for Ireland and their impact on FDI flows into Ireland.
The economic boom of the Celtic Tiger in the 1990’s in Ireland is considered by many to be the result of a change in the Irish government’s taxation policy regarding corporate tax. Before this change, one of the most significant host country determinants for FDI into Ireland was the work of the Industrial Development Agency, now known as the International Development Agency (IDA). The IDA reduces the precariousness and
uncertainty of Ireland as an investment location by promoting Ireland as an attractive destination for investors and through the services it provides to the firms in Ireland. The IDA helps assist small and medium-size multinationals who consider coming to Ireland by helping them in researching possible investment opportunities in Ireland. Furthermore, much larger MNC’s are predominantly driven by the financial incentives offered in locating to Ireland and have employees that already have the appropriate skills when deciding on overseas investment locations. However, the smaller firms are not always able to have such expertise at their disposal, so the IDA assists them with the resources required and knowledge needed in searching for investment locations in Ireland. This is vital for Ireland to gain more FDI inflows, as it promotes Ireland as an attractive location for investment (Teeling, 1975, as cited in O’Farrell and O’Loughlin., 1980).
Host country determinants regarding FDI that focus on Ireland have been previously studied, with a strong focus on the Irish government’s use of corporate tax as the main incentive for firms to relocate there. Gunnigle and McGuire (2001) found that many firms located in Ireland from the US ultimately chose to locate to Ireland due to its low corporate tax rate, stating this as the main attractive determinant of investing into the country. While the low corporate tax rate was indeed critically significant in attracting US multinationals, their research also points to the supply of labour, the quality and cost of both the raw materials and labour available and the recognition of trade unions and the flexibility of the labour available. Ultimately a combination of many or all of the factors led to the decision by numerous US firms to locate to Ireland.
Similarly, to Gunnigle and McGuire (2001), Barry (2003) also found that a low tax policy has remained a dominant ingredient of the Irish government’s strategy to attract companies worldwide and remains a core part of the Irish approach to foreign investments. As well as corporate tax, the use and dominance of the English language were also important for Ireland to thrive economically in the way it has. Moreover, Slaughter (2003; as cited in Navaretti et al., 2014) based its focus on US FDI inflows into Europe and found that the reason Ireland is so successful in attracting FDI is that US MNC’s tend to concentrate a region’s production in countries with a lower corporate tax. This key finding can help to understand why Ireland has achieved success as a core manufacturing platform for US multinationals, with a small economy, a low rate of
corporate tax, as well as its physical location as an EU member state with a western seaboard (Slaughter, 2003; as cited in Navaretti et al., 2004). On the other hand, Sweeney (2010) explores the notion that since the enlargement of the EU in 2004, the advantage of a low corporate tax rate as a fundamental driver of FDI into Ireland has decreased. This in turn means that Ireland must find other ways to sustainably grow that do not only focus on the use of a low corporate tax as a driver of growth. However, there is a consensus that empirically, the Irish economy has benefitted from the use of lower corporate tax rates, which have had a key impact on the GDP growth of the country.
Brazys and Regan (2017) argue that FDI inflows from US firms drove Ireland’s post-crisis economic revival, the majority being from Silicon Valley, and while it was predominantly due to the MNC’s in the US being attracted to Ireland’s low corporate tax, it was also fuelled by the access that Ireland granted these firms to the EU market and the labour markets of Europe. This corresponds with the findings of Gunnigle and McGuire (2001), as both papers have concluded that the Irish government’s corporate taxation policy has been the predominant determinant of FDI and a driver of FDI growth in Ireland (Brazys and Regan, 2017).
Another approach regarding the determinants of FDI inflows into Ireland is the use of the gravity model. This has been used in research by Kristjánsdóttir and Óskarsdóttir (2021), where the gravity model accounted for the variables market size, distance, culture, skilled labour, EU membership, the political risk of the country, country credit rating, and government efficiency. Their findings with their modern version of the gravity model showed that having EU membership before the 2008 economic crisis did not indicate that Ireland was more attractive as a destination for FDI for other EU members. However, they found that after the 2008 financial crash, being a member of the European Union did indeed make Ireland more attractive to European FDI flows. This shows the value of the EU trading bloc to Ireland and potential investors from other EU nations who have considered Ireland as a location for their investments. This is due to numerous reasons, such as the market size available to Ireland as an EU member. The advantage of this is access to trade with other EU countries without any customs or barriers to entry.
3. THEORETICAL FRAMEWORK
This section starts by defining foreign direct investment (FDI), with a description of both inward and outward FDI, as well as a definition of the home and the host country. The theoretical framework then provides a discussion on how the home country determinants of market size, population, corporate tax, distance, and language affect the FDI flows into Ireland. These five determinants have been the focus of the empirical analysis of the thesis, which is discussed in more detail in sections 4 and 5. Finally, determinants of the host country that are also important for inward FDI flows into Ireland but will not be measured with empirical data will be mentioned in the last part of the theoretical framework.
3.1 Foreign Direct Investment
When defining foreign direct investment (FDI), we first need to discuss and assess both inward and outward FDI. From the work of the economist Imad Moosa (2002), outward FDI is the action in which citizens or companies from a country, often referred to as the home country, purchase the ownership of assets of a firm in another country, referred to as the host country, to control the operations of said firm. The advantages of outward FDI are that it allows a firm to enter new markets, import goods used in the production process at lower costs and enable domestic firms from the home country to access new technology in the host country (Herzer, 2010). On the other hand, inward FDI is defined as the investments coming into the host country from foreign economies. While inward FDI is likely to increase economic growth for the host country, it can also have negative employment effects. This could lead to the issue that a significant increase in foreign ownership of domestic assets from the home country can lead to the possible concern of a loss of sovereignty and the fear of loss of national security in the host country (Moosa, 2002).
The United Nations Conference and Development’s (UNCTAD) report from 2013 regarding global investment defines many determinants of FDI and how they individually impact the global value chain (GVC). For example, when referring to locational factors, where an MNC would choose to relocate its production operations and its headquarters, UNCTAD (2013) gives several determinants in numerous categories. In addition, the
report discusses the potential policy plan by the government of the host country, which is deemed to have a positive impact in determining a greater amount of investment in the form of FDI entering the country. These could, for example, be regulations involving investment behaviour into the country, trade agreements, and intellectual property rights. This links to corporate tax, a value set by the government of the host country, which is highly influential for MNC’s when deciding on where to invest, especially if there are few differences between a group of countries, regarding their economic characteristics such as the market size, and other government policies. Moreover, the lowering of corporate taxes over time has been an approach used by many governments globally to attract FDI, with notable examples of Ireland, the Netherlands, and the Bahamas.
3.2 Market Size
Market size is one of the factors into why a firm would choose to invest in another country. When discussing inward FDI, market size theory (Chakrabarti, 2001) refers to the size of the host country’s market that a foreign firm enters. GDP is often used as a proxy for market size to show the economic significance of the size of the market. When considering Ireland as a destination for FDI, many firms have considered the size of the Irish economy and the size of the EU market, which Ireland has direct access to as a member. This is important as it makes the Republic of Ireland attractive when looking at the GDP value of its economy, which as of 2019 stood at $388 billion (World Bank, 2021).
Market size has been closely examined in the work of Cieślik & Hien Tran (2019), with their research focusing on the role of the market size of the home country. Their study found that market size has a significant positive impact on FDI, with market size positively influencing the amount of FDI outflows from the home country, meaning that the greater the market size of the home country, the greater the outflows of FDI will be. Furthermore, hypothesis testing has shown that market size, as well as the similarity in market size between the home and the host countries, an abundance of skilled labour, investment cost, trade costs and also the geographical distance between the home and the host countries, can explain most outward FDI flows from emerging economies (Cieślik and Hien Tran, 2019).
According to the market size theory by Chakrabarti (2001), the market size of the host country is one of the most significant variables regarding the influx of FDI into the host country. A large market size of the host country is essential to both attract firms to their country and for new firms from the home country to be invested in the idea of moving their operations to the host country. This shows the importance of market size as a determinant for both the home and the host country. Therefore, we expect in the empirical analysis in Section 5 that the market size of the home country will be positively associated with inward FDI flows into Ireland.
3.3 Population
As a determinant of outward FDI from the home country, the population of the home country has been scarcely used in previous literature, but this paper aims to bridge the gap in the literature that is currently present.
A strong overseas population from the home country has shown to be a strong indicator and a determinant of outward FDI (Buckley et al., 2007). This research has shown a strong link between outward Chinese FDI flows and the population size of the Chinese diaspora in other countries. The greater the number of Chinese people living in other countries, the greater the flow of FDI from China into these economies is. This appeared to be a beneficial strategy for Chinese MNC’s, taking advantage of large overseas Chinese populations.
In the empirical analysis in Section 5, it is unclear what the expected impact that the home country’s population will have on FDI flows into Ireland. A positive relationship between population and FDI into Ireland would reflect that the greater the home country's population, the greater the FDI flows from the home country into Ireland, which would be related to more populated countries having a greater market size. On the other hand, a negative relationship between population and FDI into Ireland could reflect that firms in less populated countries outside of the EU would seek to invest in Ireland to access the European markets (Esselink, 2003).
3.4 Corporate tax
The difference in the corporate tax rate between the home and host country (corporate tax rate of the home country minus the corporate tax rate of Ireland) is an important determinant regarding FDI flows, focusing on the relationship that the difference in corporate tax has on FDI flows from the home country into the host country. Lower rates of corporate tax have been an economic policy used by the Irish government to attract FDI into the country. This was most notable in recent decades. Ireland employed a low rate of corporate tax that accompanied its incredible growth during the 1990’s, earning it the nickname “The Celtic Tiger” (Blue, 2000). Ireland has been an innovator in the way that it uses taxation for its industrial strategy, attracting FDI based on the low amount of tax corporations would have to pay on profits. Furthermore, Ireland has been able to achieve added corporate tax revenue from MNC’s by providing even lower corporate tax rates via the method of transfer pricing. Transfer pricing involves setting prices in a transaction for a large MNC that are not set close to the actual value. This is used to maximise tax profits by setting the transfer prices that diminish the total amount of tax paid by the firm (Sweeney, 2010). Therefore, we expect in the empirical analysis in Section 5 that the corporate tax of the home country will be positively associated with FDI flows into Ireland.
Ireland began its accession to free trade when it signed the Anglo-Irish Free Trade agreement, starting in 1966, which eventually led Ireland, along with Denmark, and the United Kingdom (UK) to join what was known at the time as the European Economic Community (EEC) in 1973, eventually changing to the European Union (EU) in 1993. However, even before joining the EU, the Irish government had implemented zero corporate tax profits on manufacturing exports leaving Ireland, which began in the latter half of the 1950’s. This had a significant impact on the economy of Ireland, with the total share of manufactured exports in terms of total exports of merchandise rising from 19 percent in 1959 to 35 percent in 1971. This substantial change also reflected heavily on Ireland’s comparative advantages, which changed from the manufacturing of food and live animals to the manufacturing of chemicals and textiles (Navaretti et al., 2004). Due to the success of this policy, by the mid 1980’s Ireland had become a key European production facility and base for US MNC’s. Furthermore, Ireland then found itself
well-positioned to take advantage of FDI flows from the US, which had changed its strategy to invest more into the EU and profit from the Single Market in the 1980’s and 1990’s. As a result, this timeframe saw huge US investments into the European continent, with Ireland capturing a significant share of these investments (Navaretti et al., 2004).
Corporate tax rates are an important determinant for a country regarding its capability in attracting inward FDI flows. From Ireland’s assent to the EU in 1973, it experienced a foreign direct investment boom. This was mostly due to its corporate tax policy but also linked to its government strategy in attracting investment as well as its English-language business environment, which was also perceived to be of crucial importance. EU accession resulted in another boost in inward investment to the country, with the number of people employed in a foreign industry growing by an additional 40 percent from 1973 to 1980. Moreover, the development of the Single European Market raised these levels of people employed in a foreign industry further, as more US firms looked to benefit from access to the Single Market via production in Ireland. Before Ireland became a member of the EU, most FDI into the country had been of the tariff-jumping or market-seeking variety (Barry, 2003).
Kummer (2014) argues that it cannot be questioned that Ireland benefited greatly from FDI inflows at the peak of its economic success due to its substantially low rate of corporate tax, which made Ireland extremely attractive to firms around the world. According to Paul Duffy (2014), Vice President of Pfizer in Ireland, “The corporate tax rate is one of the pillars of the Irish economy, driving the number of jobs and exports, and creating tax revenues for the government.” The corporate tax, along with other significant factors such as the policies of the Irish government and the International Development Agency, has been the leading factor in attracting such strong levels of FDI into the country. Ireland had adopted its flat rate of 12.5 percent corporate tax in 1999 due to strong pressure from the other EU member states, which compelled the government to change its 10 percent rate to a higher rate of taxation for corporations. The rate of 12.5 percent taxation for firms represents one of the lowest taxation rates on the entire European continent, giving Ireland an unprecedented advantage when attracting firms from both Europe and further abroad (Kummer, 2014). Therefore, the higher the rate of corporate tax in the home country, the greater the difference in corporate tax, meaning
that firms investing from the home country have the most to gain from outward FDI into Ireland.
Considering the dependency the Irish government has had with its level of corporate tax when considering its FDI based policies, it is important to mention the effects that profit shifting has had. Profit shifting is the outcome of lower government revenues due to multinational enterprises avoiding paying corporate tax by shifting their profits to countries with a lower rate of corporate tax (Janský and Palanský, 2019). Profit shifting has had an overall significant effect on Ireland, with many cases affecting the country. Its government revenues have changed based on numerous firms shifting their profits to Ireland to pay a lower rate of corporate tax in Ireland and avoiding paying tax elsewhere. An example of this is Google Inc. using Ireland as a base for its holding company, regarding non-US income, meaning that the corporation would pay the Irish rate of corporate tax instead of the US rate of corporate tax for the revenues of the holding firms; making it a prime example of profit shifting (Fuest et al., 2013). Moreover, another example is that of Apple Inc. which, due to Ireland’s “business-friendly” tax laws, was found by the European Commission in 2016 to have underpaid around $14.5 billion to the Irish government from 2003 to 2014 (Barrera and Bustamante, 2017). Apple Inc. was then ordered to repay the Irish government after the investigation by the European Commission had ruled that the deal between Apple Inc. and the Irish government amounted to illegal state aid. The Commission also found that the agreement allowed Apple Inc. to pay a minimum rate of 1 percent, with further findings showing that Apple Inc. in 2014 paid its corporate tax in Ireland at just 0.005 percent (Farrell and McDonald, 2017). In addition, the Commission's findings show that certain transfer pricing rulings given by member states of the EU to specific firms had violated the restrictions of the EU regarding State-funded aid (Moreno González, 2016).
3.5 Distance
When considering the distance from the home to the host country as a determinant of FDI, it is important to note that the distance is not only related to just the home country or just the host country but their relationship to one another. Cieślik and Hien Tran (2019) found that geographical distance from the home country to the host country is significant for outward FDI. This is connected to theory that outward FDI is likely to be lower when the
home country is further away from the host country. Moreover, when considered as a determinant of outward FDI, geographical distance is closely linked to the role that a common language and a cultural affinity between the home and the host country have. Therefore, if the home country is further away from the host country but shares a common language and cultural affinity, it is likely that outward FDI from the host country will still be high.
The remoteness and geographical distance between two locations can affect trade costs, such as the costs of transporting goods and the cost of communication between the two countries. This relates to the costs that increase regarding FDI as geographical distance increases. Geographical distance is also connected to “cultural distance”, which is used to show how closely the languages, cultures, and customs of the two countries are related (Miroudot and Ragoussis, 2009).
Empirically the effects that distance has on trade and investment flows are tested and captured using the gravity model. The gravity model is an economic model used to measure the great variations in economic interactions across space and time in both the movement of trades and factors of production and investments regarding the flows of FDI. Dutch economist Jan Tinbergen (1963) was the first to utilise the gravity model regarding trade flows and trade patterns. He proposed that the size of the bilateral flows between countries can be estimated using the gravity model. Regarding Ireland and the flow of FDI, the gravity model shows how countries that are geographically closer to Ireland invest more into the Irish economy than those that are not. Therefore, in the empirical analysis in Section 5, we expect that the relationship that distance has on inward FDI flows into Ireland will be negative, meaning that the further away a country is from Ireland, the less it is likely to invest into Ireland.
3.6 Language
Language is another determinant in this thesis that is neither distinctly related to the home country nor the host country but is important when considering its relationship that it has for both countries. Having a common language between the home and the host country makes trade and investment easier. For example, specifically for Ireland, it can make trade agreements and negotiations regarding FDI inflows easier with countries such as the US
and Australia due to a shared language. Although this does not have such significance in a modern setting, in the past, a common language was an essential part of negotiations and investments, as well as having a great influence over agreements between the home and host countries. Ireland is the only nation in the Eurozone with English as its official language. English is the dominant global language of the business world and is used for communication between different native languages globally. Shared language facilitates communication, which is important for economic transactions between countries. Language is also related to institutional and legal systems, which are important for economic development. Moreover, language inherently reflects a country’s national culture and identity. As such, countries that share a common language may have stronger cultural ties, and therefore are more willing to trade, invest, and provide aid to each other (Esselink, 2003). In the dataset, five countries; Australia, Canada, New Zealand, United Kingdom, and the United States, have English as their official language.
Bryntesen and Holtan (2019) did not find evidence that countries that share a global language with an FDI recipient country will contribute more FDI outflows than those that do not share a global language with an FDI recipient. They found that overall, shared languages do not seem to impact FDI significantly and have determined that language is not a significant determinant for FDI in Southeast Asia.
On the other hand, Feng et al. (2018) found that although language can aid in promoting bilateral FDI flows, their findings indicate that some aspects of language and linguistics are more important for FDI between two countries. They found that FDI flows between countries tend to be higher if they share a common official language, have a shared native language, or have highly linguistically similar languages. However, they observed that simply sharing a common official language is not the strongest predictor and determinant of FDI between two countries. They also showed that sharing a common native language implies that the two countries would have strong cultural and ethnic relations, which is a stronger predictor of FDI (Feng et al., 2018).
Oh and Selmier (2013) concluded that speaking a major trade language, which they define as being spoken by more than 100 million people and an official language in 10 or more countries, has a substantial impact on bilateral trade flows, and attracting and achieving
FDI. They found that English constantly provides positive additions for both types of economic interactions, meaning that it is significant for trade and FDI flows. In addition, they found that many countries around the world with speakers of non-major trading languages spend a lot of time improving their skills in English and practising English, which in turn leads to greater rates of return with their levels of English, trade, and FDI with English-speaking countries. This is linked to the theory from Ginsburgh et al. (2007) that a reluctance to learn another language arises when the potential language learner’s language is already widely spoken. Therefore, English continues to dominate the business world regarding trade and foreign direct investment, and is why it provides the most additional positive contributions for trade and FDI flows (Oh and Selmier, 2013). Therefore, we expect in the empirical analysis in Section 5 that sharing a common language with Ireland will be positively associated with FDI flows into Ireland.
3.7 Other factors
Several factors are important for inward FDI flows to Ireland but cannot be empirically tested in this paper because of data restrictions. Therefore, we plan to explain these factors briefly and show their importance to Ireland as a destination for foreign direct investment. Comparative Advantage
Comparative advantage is when a country can produce a good or have a service with the lowest opportunity cost. Countries with a comparative advantage should produce the good or service they have a comparative advantage in; to reap the highest benefits of international trade. Therefore, it is important which comparative advantages Ireland has, which are mostly goods or services that are capital intensive such as pharmaceuticals and the production of computers. However, this has changed over time when Ireland used to have comparative advantages in dairy and wheat production (Addison-Smyth, 2005). Barriers to Entry
For Ireland specifically, one of the biggest barriers to entry that the country has overcome which makes it an attractive location for FDI, is becoming a member of the European Union (at the time known as the European Economic Community) in 1973. This in turn made Ireland more attractive as MNC’s investing into the country now had access to the
entire market of the EEC without having to pay tariffs or having other barriers to trade (O’Driscoll, 2013).
Irish Government Policy
Over the last 60 years (from 1960 onwards) the Irish government has implemented an active promotion of the country in government policy to attract FDI inflows. Their policies, which began in 1960, were spearheaded a consorted effort to develop the Irish economy based on the export and external sectors of the economy. By implementing policies and decision making that took advantage of the long-term development goals of Ireland, the government aimed to attract quality investment, seeking more sustainable growth through a series of macroeconomic and social policies. Thus, the Irish government began to aggressively adopt a strategy for development that combined both an economic and industrial approach, which has increased Ireland’s attractiveness as an investment location for multinational firms (O’Donovan and Rios-Morales, 2006).
4. DATA
4.1 Dependent and Independent Variables
Following the practice of previous studies (Kok and Acikgoz Ersoy, 2009; Vijayakumar, 2010; Jadhav and Katti, 2012; Das, 2013; Lee et al., 2016; E. Boateng et al., 2017; Kumari and Sharma, 2017; Liu et al., 2017; Asongu et al., 2018; Cieślik and Hien Tran, 2019), this paper adopted a panel analysis procedure to examine data for eight years from 2012 to 2019. The sample was limited to 28 countries, mostly a selection of OECD countries, excluding those that did not have sufficient data to conduct the analysis properly, and additional countries to gather as much data as possible. A list with all included countries is available in the Appendix. The periodicity also was from 2012 to 2019 because of data availability constraints at the time of the study.
The total inward FDI financial flows expressed in million US$ was used for the dependent variable, as denoted by FDI. The data used is provided by OECD (2021). This value was log-normalised to improve linearity with the other variables. The total inward FDI financial flows are the sum of the net values of equity, reinvestment of earnings, and debt instruments. In some cases, the values can be negative, which might indicate disinvestment in assets or discharges of liabilities. In the case of equity, the direct investor might sell all or part of the equity held in the direct investment enterprise to a third party, or the direct investment enterprise might buy back its shares from the direct investor, thereby reducing or eliminating its associated liability. Suppose the financial movement is in debt instruments between the direct investor and the direct investment enterprise. In that case, it might be due to the advance and redemption of inter-company loans or movements in short term trade credit. Negative reinvested earnings indicated that, for the reference period under review, the dividends paid out by the direct investment enterprise are higher than current income recorded (if that is the decision of the board of managers) or that the direct investment enterprise is operating at a loss (OECD, 2008). Furthermore, log-normalisation of negative values disregards those observations, and they will not be used in the empirical models. This is not an issue in this thesis, since we are more interested in the gross flow of FDI from the home country into Ireland.
In summary, the explanatory variables are shown below.
(1) Market size: The gross domestic product of the home country given in terms of current US dollar (in millions). Data source: World Bank (2021a).
(2) Population: Population of the home country expressed in millions. Data source: World Development Indicators (2021c).
(3) Corporate Tax: The difference in the corporate tax rates between the home country and Ireland expressed in percentages (Corporate Tax Rate of the home country – Corporate Tax Rate of Ireland). Data source: Trading Economics (2021).
(4) Distance: The distance between the home country’s capital and Dublin (Capital of Ireland) measured in kilometres. OpenStreetMap (2021).
(5) Language: Dummy variable for language, which is given a value of 1 if the home country has English as its official language and 0 otherwise. Data source: CIA’s World Factbook (2021).
4.2 Descriptive Statistics
Table 1 Descriptive statistics of the variables used in the analysis
Mean SD. Min Max
Log FDI 2.737 0.984 0.674 4.958
Log Market Size 13.697 1.279 10.945 16.880
Log Population 3.248 1.557 -0.633 7.243
Corporate Tax 13.560 4.889 5.270 25.510
Distance 4159.019 4819.123 461.940 18673.420
Language 0.158 0.366 0.000 1.000
The descriptive statistics of the variables used in the analysis are presented in Table 1. We can see that of all variables, the variable distance has the highest standard deviation (4819.123). For the logarithm of FDI, the lowest value is from Portugal in 2018 (0.674), and the highest value is from the Netherlands in 2019 (4.958). For the logarithm of market
size, the lowest value was from Luxembourg in 2012 (10.945), and the highest value of the logarithm of market size was from the US in 2019 (16.880). For the logarithm of population, the lowest value is from Luxembourg in 2012 (-0.633), and the highest value is from China in 2019 (7.243). For the variable corporate tax, the lowest value is from Switzerland in 2017 (5.270), and the highest value is from Japan in 2012 and 2013 (25.510). For the variable distance, the lowest value is from the United Kingdom with 461.940 kilometres from London to Dublin, and the highest value for distance is from New Zealand with 18,673.420 kilometres from Wellington to Dublin. Finally, for the variable language, the countries that have English as an official language were given a value of 1.000 (Australia, Canada, New Zealand, UK, and the US), and all other nations that do not have English as an official language were given a value of 0.000 (see Appendix).
Table 2 Correlation Matrix
Log FDI Log Market Size Log Population Corporate
Tax Distance Language
Log FDI 1 Log Market Size 0.3829 1 Log Population 0.0971 0.8697 1 Corporate Tax 0.3112 0.3655 0.2867 1 Distance -0.2702 0.0871 0.1968 0.2631 1 Language 0.0998 0.2576 0.1042 0.1755 0.5411 1
Table 2 presents the correlation matrix. In the table, the only relatively strong correlations (≥ |0.5|) are between log population and log market size, and between language and distance. A relatively strong relationship between population and market size is expected, but the strong relationship between language and distance could be seen as merely
coincidental. The relation between log population and log market size reflects that if the population of a country is bigger, the market size will be bigger and the other way around. 4.3 Expected Results
The expected results from the model and data we have used are that the coefficients market size, corporate tax, and language are positive, but distance is negative, and the coefficient of the population is uncertain, as can be seen in Table 3. The coefficient of market size is expected to be positive since the market size of the home country is anticipated to have a positive influence on inward FDI flow into the host country. The population coefficient is challenging to assess, since a larger population of the home country does not explicitly confirm a larger GDP. There are numerous developing countries that have a lower GDP but a much greater population than many developed countries, showing in turn that a large population does not equal a large market size. A positive coefficient of corporate tax would reflect that the higher the corporate tax rate is in the home country, the more the companies investing into Ireland gain from their lower tax rates, meaning that the coefficient of corporate tax is expected to be positive. Distance is connected to the transportation costs between the home and the host country, meaning that the greater the distance between the two countries, the higher the transportation costs. This, in turn, suggests that distance is expected to have a negative relationship with inward FDI flows into Ireland. Language is expected to have a positive sign since it would reflect that the FDI into Ireland would be greater if the countries share the same official language.
Table 3 Expected Signs of coefficients
Variable Expected Sign
Market Size +
Population +/-
Corporate Tax +
Distance -
5. EMPIRICAL ANALYSIS
5.1 Specification of the empirical model
Panel data techniques have been used to estimate the inward FDI equations because of their advantages over cross-section and time-series using all the information available, which are not detectable in pure cross-sections or in pure time series. In this study, the pooled data (cross-section time series) has been created for 28 countries from 2012 to 2019. In addition, for making the evidence more reliable, three models were set up for analysis.
(1) Ordinary Least Squares (OLS) pooled time-series cross-sectional technique (2) Country Fixed Effects Model (FEM)
(3) Country and Time Fixed Effects Model (FEM)
We are using France as the reference country and 2012 as the reference year in both fixed effects models. As a result, the intercept α0 is the intercept value for France, and the other α coefficients represent how much the intercept values of the other countries differ from the intercept value of France. The sum (α0 + αAustralia) gives the actual value of the intercept for Australia. The intercept values of the other countries can be computed similarly. The same method can describe the intercept's actual values for years using 2012 as a reference (Gujarati and Porter, 2008).
When using panel data connected to individual countries over time, it is highly likely that there is to be heterogeneity between the data. This means that there will be substantial differences between the data as it varies from country to country. The advantage that panel data gives is that by allowing for subject-specific variables, the issues that arise with heterogeneity can be considered. Moreover, panel data has the advantage that it makes it easier to study the subtleties of changes in the data (Gujarati and Porter, 2008).
We specify our models as shown below: 𝐿𝑂𝐺(𝐹𝐷𝐼 ) = 𝛼 + 𝛼 + 𝛽 𝐿𝑂𝐺(𝐺𝐷𝑃 ) + 𝛽 𝐿𝑂𝐺(𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 ) + 𝛽 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 + 𝑢 (2) 𝐿𝑂𝐺(𝐹𝐷𝐼 ) = 𝛼 + 𝛼 + + 𝛽 𝐿𝑂𝐺(𝑀𝑎𝑟𝑘𝑒𝑡 𝑆𝑖𝑧𝑒 ) + 𝛽 𝐿𝑂𝐺(𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 ) + 𝛽 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑇𝑎𝑥 + 𝑢 𝑊ℎ𝑒𝑟𝑒 𝑖 = 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎, 𝐴𝑢𝑠𝑡𝑟𝑖𝑎, … , 𝑈𝑛𝑖𝑡𝑒𝑑 𝑆𝑡𝑎𝑡𝑒𝑠 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑖𝑛𝑔 𝑡ℎ𝑒 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑡 = 2012, 2013, … , 2019 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝛼 = 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠 𝜇 = 𝑡𝑖𝑚𝑒 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠 (3) 5.2 Results
The following are the three panel analytic models used: (1) Pooled Ordinary Least Squares regression model, (2) Country Fixed Effect model, and (3) Country and Time Fixed Effect model. Pooled Ordinal Least Squares regression model has constant coefficients for both the intercept and slope. The fixed effect model is the differences
𝐿𝑂𝐺(𝐹𝐷𝐼 ) = 𝛽 + 𝛽 𝐿𝑂𝐺(𝑀𝑎𝑟𝑘𝑒𝑡 𝑆𝑖𝑧𝑒 ) + 𝛽 𝐿𝑂𝐺(𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 ) + 𝛽 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑇𝑎𝑥 + 𝛽 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 + 𝛽 𝐿𝑎𝑛𝑔𝑢𝑎𝑔𝑒 + 𝑢
across cross-sectional units that can be captured in differences in the constant term, and the intercept term of the regression model, which varies across the cross-sectional units. The results of the regressions can be found in Table 4. When comparing the models, the pooled OLS is the only one where most of the coefficients are significant. The problem with the pooled OLS model is that the model does not distinguish between the various countries. Rather, it does not distinguish between countries at different times and conceals heterogeneity that may exist among the countries. The individuality of each subject is subsumed in the disturbance term uit. Consequently, it is quite possible that the error term may be correlated with some of the regressors included in the model. If that is the case, the estimated coefficients in the equation may be biased and inconsistent. According to the pooled OLS, market size, corporate tax, and language are positively associated with FDI into Ireland. On the other hand, population and distance are negatively associated with FDI into Ireland. The coefficient of the variable language was not found to be significant. The coefficient of the variable market size was consistent in both fixed effects models compared to the pooled OLS. In the country and time fixed effects model, the sign of the coefficient population changed to be negative, whilst in country fixed effects, the sign is in line with the pooled OLS model. In both fixed effect models, the sign of the variable corporate tax is negative, which is not the result in the pooled OLS model. When controlling for country fixed effects and country and time fixed effects, none of the variables were found to be significant for either of the models.
According to Torres-Reyna (2007), if the number of years is less than 20, one should use a pooled OLS method since the cross-sectional dependence in short time series is not an issue like in longer time series. Other issues that arise with fixed effects models include the introduction of too many dummy variables, which will lead to a degrees of freedom problem. That is, the lack of enough observations to do meaningful statistical analysis. Another issue is that the fixed effects models cannot identify the impact of time-invariant variables, which do not significantly change over time (distance and language). Since these variables do not change over time for an individual country, the fixed effects models may not be able to identify the impact of such time-invariant variables on inward FDI. In other words, the country-specific intercepts absorb all heterogeneity that may exist in the dependent and explanatory variables (Gujarati and Porter, 2008).
Table 4 Regression results: (1) Pooled OLS, (2) Country FE, and (3) Country and Time FE
Dependent Variable: Log FDI
(1) (2) (3)
Log Market Size 0.753596*** 0.079082 0.947772
(0.124774) (0.584789) (0.71937) Log Population -0.487741*** 1.494106 -1.2257 (0.097175) (2.106794) (3.062356) Corporate Tax 0.049018*** -0.031834 -0.018749 (0.014522) (0.023588) (0.029276) Distance -0.0000594*** (0.0000184) Language 0.114221 (0.24088) Constant -6.436738*** -3.312831 -5.179042 (-1.394962) (10.89624) (15.56812)
Country Dummies NO YES YES
Year Dummies NO NO YES
Countries 28 28 28
Observations 139 139 139
Adjusted R2 0.438324 0.742006 0.752438
F-Statistic 22.53869*** 14.22986*** 12.33613***
Note: 1) *, **, and *** refer to 10%, 5%, and 1% level of significance, respectively. 2) Standard errors are reported in parentheses.
Given the issues with fixed effects models related to our data combined with the significance levels, proceeding with the pooled OLS model is the most rational selection for this thesis. Thus, the pooled OLS model gives the most significant coefficients for individual variables yet keeping the R-Squared at a sufficient level (0.4383).
During the time period of 2012 to 2019, investors from different countries investing in Ireland are more willing to invest, if their country of origin has a larger market size and corporate tax rate. Investors are less likely to invest in Ireland if their country of origin has a greater population. The distance between the capitals has a negative relationship with FDI. Therefore, countries further away are less likely to invest into Ireland. A shared official language has a positive relationship with FDI but is insignificant.
Keeping all other values constant, a one percent increase in the market size of the home country increases the inward FDI flow into Ireland by 0.7536 percent. For the variable population, a one percent increase leads to a 0.4877 percent decrease in inward FDI into Ireland. One unit increase (percentage) in the corporate tax rate difference results in a 5.0239 percent increase in inward FDI to Ireland. One unit (kilometre) increase in distance between the capitals leads to a decrease of 0.00059 percent decrease in inward FDI into Ireland. If the countries share a common official language, the inward FDI to Ireland will be on average 12.1000 percent higher than without sharing a common language. However, the variable language is not statistically significant.
6. DISCUSSION
The pooled OLS model derived to analyse data shows significant results that help to define the home country determinants of outward FDI into Ireland. However, not all of the variables were significant. For example, language did not show evidence to contribute to the amount of FDI flowing into Ireland significantly. Bryntesen and Holtan (2019) found similar results in the study of FDI in Southeast Asia. However, all other variables were significant and, therefore, are relevant to determine the amountof FDI inflows into Ireland.
The empirical analysis constructed for this study found that the market size of the home country has a significant positive influence on inward FDI into Ireland. This is supported by the market size theory (Chakrabarti, 2001). The significant positive relationship between the variables reflects that the size of the economy of the home country will affect the amount of money that said the economy would invest abroad, meaning that countries with a higher GDP will invest more into Ireland than countries with a lower GDP. The population of the home country has a negative yet significant effect on the inward FDI into Ireland. The reasoning behind a negative relationship could be related to firms from less populated countries seeking larger markets for their products and services. The Irish population alone would not be big enough to justify investment but could work as a gateway to access the European markets. This relates to the idea that larger economies are less interested in expanding to smaller and less significant markets (Esselink, 2003). The corporate tax rate difference was significant and positively related, meaning that countries with higher corporate tax rates are more willing to invest in Ireland. This can be connected to the idea that MNC’s often look to invest into countries with lower rates of corporate tax to retain the highest level of profits and to shift their profits. Profit shifting, as explained earlier, is the outcome of lower government revenues in the home country due to MNC’s avoiding paying corporate tax in the home country by shifting their profits to the host country, which has a lower rate of corporate tax (Janský et al., 2019). The difference in corporate tax rate between the home country and Ireland was found to be a significant determinant of outward FDI and has influenced the level of FDI flows
into Ireland, with studies showing that many companies are using Ireland as a base for their holdings to shift their profits from countries that have a higher rate of corporate tax (Fuest et al., 2013). This, in turn, shows the significance of a lower rate of corporate tax to Ireland and its economy. This connects to the work of Ekholm and Slaughter (2003), which shows the success that Ireland has reached, especially regarding US multinationals and inward FDI flows from the US. Moreover, due to US affiliates being more orientated towards export-platform activity than local sales in smaller markets (which is defined as locations with a lower GDP), this has helped to explain why Ireland specifically has been so effective in being an export platform, explicitly in manufacturing exports, for US MNC’s.
Distance between the home country was found to be negatively related to FDI flows into Ireland. The further away the investing country is, the less likely it is to invest into Ireland. This is connected to the gravity model, which focuses on both trade and flows of investments, which was first developed to explain bilateral trade flows by Tinbergen (1963). The remoteness and geographical distance between two locations can affect trade costs, such as the costs of transporting goods and the cost of communication between the two countries. This is also strongly related to the costs that increase regarding FDI as distance increases.
Regarding Ireland and the flow of FDI, the gravity model shows how countries that are geographically closer to Ireland invest more into the Irish economy than those that are not. This is due to less trade barriers and costs associated with trading and investing from countries closer to Ireland. The UK, for example, invested $5254 million into Ireland in 2017, whereas New Zealand in the same year invested only $64 million into Ireland (values obtained from the dataset). This shows that the closer the country is to Ireland, the greater the FDI into Ireland will be, as our empirical results show.
7. CONCLUSION
This thesis aimed to explore the home country determinants of outward FDI into Ireland, and to examine our research question: from which countries does Ireland attract FDI? The purpose of this paper was to quantitatively assess specific home country determinants of outward FDI into Ireland. More explicitly, we investigated the determinants for multiple different home countries that were significant for investment into Ireland. Ireland was selected as the sole host country due to its high levels of FDI over multiple decades and the country being one of the most FDI reliant countries in the EU (Central Statistics Office, 2020). This thesis has also briefly discussed the host country determinants of Ireland that help to explain why Ireland has been able to attract such high levels of FDI to boost its economic growth.
This study has used in-depth analysis to examine the effects of different home country variables and their impact on FDI into Ireland. We have conducted a panel data analysis based on three different econometric models for eight years from 2012 to 2019 using 28 countries worldwide to quantify these relationships. The results across the models varied significantly. The pooled OLS model was able to show empirically the effects that market size of the home country, the population of the home country, the difference in corporate tax rate between the home country and Ireland, the distance from the home country’s capital city and Dublin (the capital of ROI), and a shared official language have on the flows of FDI into Ireland.
Our findings show that the greater the market size of the home country, the greater the FDI flows into Ireland, which shows that the market size of the home country is positively related to FDI. On the other hand, our data shows that the population of the home country was found to be negatively associated with FDI, meaning more populated countries are likely to invest less into Ireland. The greater the difference in the corporate tax rate between the home country and Ireland, the greater the investment from the home country into Ireland, showing its significance as a determinant of FDI. This suggests that countries with a higher rate of corporate tax gain the most from investments into Ireland. The determinant of distance, described as the distance between the capital cities of the home country and the host country, was shown to have a negative relationship with FDI flows
into Ireland. This implies that home countries located geographically closer to Ireland invest more into the country compared to those further away. From our empirical analysis, language was shown to be positively associated with FDI into Ireland but was found to be an insignificant variable. Our study has shown that Ireland predominantly attracts FDI from countries that have a large market size, and have a relatively small population, a higher rate or corporate tax than Ireland, and are located geographically closer to Ireland. Examples of countries that fit some or all of these criteria are Luxembourg, the UK, the US, the Netherlands, Belgium, and Germany.
We are aware that our research does not come without limitations. The main limitation is the data availability. OECD established a new way of reporting FDI data in 2008. The data reporting was changed in 2011, meaning that data before the year 2012 is not comparable with data after 2012 (OECD, 2008). Therefore, the time period of our data is just eight years. Another limitation is also related to the inward FDI data. Inward FDI data to Ireland based on the country of origin is a sum of multiple factors, such as the reinvestment of earnings and debt. Therefore, some of the observations are less than zero. Ideal data for this thesis would be the gross value of investment from the home country to Ireland. We would have wanted to include as many countries as possible in the dataset, but the lack of data was a vast constraint, and therefore, we were only able to include 28 countries in the dataset.
7.1 Suggestions for Future Research
For future research, it could be beneficial to explore the impacts of different policies, such as Brexit (the withdrawal of the United Kingdom from the European Union) and the OECD’s plans for a minimum corporate tax rate. In addition, global crises such as the impacts that COVID-19 has had on the outward flow of FDI can also be studied when data is more freely available.
Brexit could, in turn, damage the flow of investment and trade from the UK into Ireland due to the potential barriers to entry that leaving the EU could have for the UK. Therefore, this could impact the trading and investment relationship that the UK and Ireland have, as the UK looks to invest further abroad, more specifically into Southeast Asia and distance itself from the EU (Storey, 2019).
The COVID-19 pandemic, which has seen global investment expenditure drop significantly due to overall uncertainty and a challenging current economic climate, could impact outward FDI from home countries globally. Interestingly, it is likely that outward investment patterns will change with many home countries such as China looking for investment opportunities closer to home in the Asian continent (Duan et al., 2020). For example, this could be significant regarding investment flows into Ireland if China, as one of the world’s biggest economies, were to invest less into Europe in terms of outward FDI (Blomkvist and Drogendijk, 2016). Moreover, a long-term impact of COVID-19 could be studied regarding its effect on global investment strategies, which cannot currently be explored empirically with econometric analysis.
A possible policy implication regarding the outward FDI of the home countries chosen could arise from a recent proposal by the OECD. The OECD has explored instigating a global minimum corporate tax rate (currently proposed to be a rate of 15 percent), aimed at increasing tax revenues collected from large MNC’s, and reducing the likelihood of tax avoidance via transfer pricing strategies, which are currently used by numerous large MNC’s (Politi, 2021). The impacts of this policy on the investment flows into Ireland could be interesting to research, considering Ireland’s history of using a lower rate of corporate tax to attract MNC’s. Furthermore, the greater the difference in corporate tax between the home country and Ireland was found to be one of the main determinants of FDI into Ireland in this thesis. Therefore, future research could shed light on the impact of the policy, specifically regarding the unique case of Ireland.
Reference list
Addison-Smyth, D. (2005). Ireland’s Revealed Comparative Advantage. Central Bank of Ireland Quarterly Bulletin 1, 101–114.
Asongu, S., Akpan, U. S., & Isihak, S. R. (2018). Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries. Financial Innovation, 1–17.
Barrera, R., & Bustamante, J. (2017). The Rotten Apple: Tax Avoidance in Ireland. The International Trade Journal, 150–161.
Barry, F. (2003). Tax Policy, FDI and the Irish Economic Boom of the 1990s. Economic Analysis and Policy, 221–236.
Blomkvist, K., & Drogendijk, R. (2016). Chinese outward foreign direct investments in Europe. European J. of International Management, 343.
Blue, J. R. (2000). The Celtic Tiger Roars Defiantly: Corporation Tax in Ireland and Competition within the European Union. Duke Journal of Comparative & International Law, 443–467.
Boateng, A., Hua, X., Nisar, S., & Wu, J. (2015). Examining the determinants of inward FDI: Evidence from Norway. Economic Modelling, 118–127.
Boateng, E., Amponsah, M., & Annor Baah, C. (2017). Complementarity Effect of Financial Development and FDI on Investment in Sub-Saharan Africa: A Panel Data Analysis. African Development Review, 305–318.
Brazys, S., & Regan, A. (2017). Celtic Phoenix or Leprechaun Economics? The Politics of an FDI-led Growth Model in Europe. New Political Economy, 223–238. Bryntesen, T. B., & Holtan, M. B. (2019). AURA: A study of language effects on inward
