Fdi Research Final Report

FDI Research Project –
Final Report
Department of Enterprise,
Trade & Investment
February 2008
For and on behalf of Experian
Approved by: Clare Reid
Director of Economics, Strategy and

Position: Research
Date: 6th February 2008

FDI Research Project –
Final Report
6th February 2008
Contents
Introduction................................................................................................................................................ 1
Background .............................................................................................................................................. 1
Objectives................................................................................................................................................. 1
Format ...................................................................................................................................................... 2
1 Context................................................................................................................................................ 3
1.1 Defining FDI ................................................................................................................................ 3
1.2 Type of FDI Project...................................................................................................................... 3
1.2.1 Greenfield ............................................................................................................................... 3
1.2.2 Mergers & Acquisitions ........................................................................................................... 4
1.2.3 Invest Northern Ireland’s Policy on FDI................................................................................... 4
1.3 Defining Tradable Services ......................................................................................................... 4
2 Literature review ................................................................................................................................ 6
2.1 Benefits of FDI............................................................................................................................. 6
2.2 global and uk trends in FDI.......................................................................................................... 7
2.2.1 Global geographic pattern....................................................................................................... 7
2.2.2 Likely future trends.................................................................................................................. 8
2.2.3 Global sectoral pattern ............................................................................................................ 9
2.2.4 UK trends .............................................................................................................................. 10
2.3 Exportable service trends .......................................................................................................... 12
2.4 Labour market implications of an FDI strategy .......................................................................... 15
2.5 Benefits to Tier One companies ................................................................................................ 17
2.6 Impact of Corporation Tax ......................................................................................................... 17
2.7 Reasons given for not investing ................................................................................................ 19
3 Investment inflows into Northern Ireland....................................................................................... 20
3.1 Northern Ireland in a UK context ............................................................................................... 20
3.2 total inflows 2002-2006.............................................................................................................. 21
3.3 Key investors............................................................................................................................. 21
3.4 Performance by Northern Ireland sub-region ............................................................................ 23
3.5 Performance by industry............................................................................................................ 23
3.6 Nation of ownership................................................................................................................... 24
3.7 Quality of job ............................................................................................................................. 25
4 Comparator Research...................................................................................................................... 26
4.1 Republic of Ireland..................................................................................................................... 27
4.1.1 Role of government............................................................................................................... 28
4.1.2 Performance.......................................................................................................................... 29
4.1.3 Critical success factors - benefits.......................................................................................... 31
4.1.4 Applicable lessons ................................................................................................................ 35
4.2 Sweden ..................................................................................................................................... 37
4.2.1 Role of government............................................................................................................... 37
4.2.2 Performance.......................................................................................................................... 37
4.2.4 Threats.................................................................................................................................. 40
4.2.5 Applicable lessons ................................................................................................................ 41
4.3 Poland ....................................................................................................................................... 41
4.3.1 Role of Government .............................................................................................................. 41
4.3.2 Performance.......................................................................................................................... 42
4.3.4 Threats.................................................................................................................................. 45
4.3.5 Applicable Lessons ............................................................................................................... 46
5 Workshops and business consultations........................................................................................ 47
5.1 Workshop .................................................................................................................................. 47
5.1.1 SWOT analysis ..................................................................................................................... 47
5.1.2 Developing opportunities and mitigating threats.................................................................... 49
6 Survey Findings ............................................................................................................................... 50
6.1.1 FDI Survey ............................................................................................................................ 50
6.1.2 Tier 1 Indigenous Suppliers Survey ...................................................................................... 51
6.2 FDI Survey Results.................................................................................................................... 51
6.2.1 Supply chain linkage ............................................................................................................. 51
6.2.2 International competitiveness................................................................................................ 53
6.2.3 New products and services ................................................................................................... 54
6.2.4 Increased skills...................................................................................................................... 55
6.2.5 Networking ............................................................................................................................ 56
6.2.6 Knowledge and Technology transfer..................................................................................... 57
6.2.7 Perceptions of Northern Ireland ............................................................................................ 58
6.2.8 Impact of FDI......................................................................................................................... 58
6.2.9 Summary............................................................................................................................... 58
6.3 Tier one Survey ......................................................................................................................... 58
7 Quantitative Analysis....................................................................................................................... 60
7.1 Methodological approach .......................................................................................................... 60
7.1.1 Input data .............................................................................................................................. 60
7.1.2 GVA impact calculation ......................................................................................................... 60
7.1.3 Employment impact calculation............................................................................................. 61
7.1.4 Fiscal impact calculation ....................................................................................................... 61
7.2 GVA Impact ............................................................................................................................... 61
7.2.1 Benefits ................................................................................................................................. 61
7.2.2 Net Overall Impact ................................................................................................................ 62
7.3 Employment impact ................................................................................................................... 62
7.3.1 Benefits ................................................................................................................................. 62
7.3.2 Net Overall Impact ................................................................................................................ 62
7.4 Fiscal benefits ........................................................................................................................... 63
8 Future trends in inward investment................................................................................................ 64
8.1 Investment outlook: overview .................................................................................................... 64
8.1.1 UK prospects......................................................................................................................... 64
8.1.2 Prospects for Northern Ireland .............................................................................................. 65
8.1.3 FDI opportunities for Northern Ireland in selected sectors .................................................... 66
9 Key Findings & Recommendations ................................................................................................ 70
9.1 Range of Benefits Tradable Services FDI Can Generate .......................................................... 70
9.1.1 Output benefits...................................................................................................................... 70
9.1.2 Employment benefits............................................................................................................. 70
9.2 Benefits at the Sub Sectoral Level ............................................................................................ 70
9.3 Fiscal Benefits of Service Sector FDI ........................................................................................ 71
9.4 Locational Factors ..................................................................................................................... 72
9.5 Forecast Trends ........................................................................................................................ 72
9.6 Market Failures.......................................................................................................................... 73
9.6.1 Identifying competitors .......................................................................................................... 74
9.7 International Examples .............................................................................................................. 74
9.8 Recommendations..................................................................................................................... 77
9.8.1 Focus .................................................................................................................................... 77
9.8.2 Corporation Tax .................................................................................................................... 77
9.8.3 Skills in high-tech industries.................................................................................................. 78
9.8.4 Measuring the impact of the Tradable Services sector. ........................................................ 78
Appendix A: Crowding out effects of FDI investment on Northern Ireland businesses

Appendix B: Model to generate economic impact calculation
Appendix C: Methodological note on Experian’s regional forecast
FDI Research – Final Report
Introduction
BACKGROUND
In June 2006, the Department for Enterprise, Trade and Investment in Northern Ireland
(DETI) appointed Experian’s Business Strategies Division to provide a robust evidence base
of trends in and the value of Foreign Direct Investment (FDI) in Northern Ireland, to improve
its understanding of the benefits that FDI projects can bring to the local economy and by
examining likely trends in FDI, identify the key sectors and markets which Invest NI should
target.
As well as DETI, other organisations included in the Client Steering Group for the research
are Invest NI and DEL.
The definition that this report will use for the tradable service sector will be the same as that
used in DETI’s Exporting Northern Ireland Services study (see section 1.3). In order to
develop a broader view of service sector exports in the UK in Northern Ireland, the report will
use the term ‘exportable services’ to describe those services that export at least five per cent
of their produce.
OBJECTIVES
The objectives of this study were to:
• Explore the range of benefits over and above direct employment impacts that FDI in
the tradable service sector can generate;
• Explore these benefits at a sub-sectoral level, including wider supply chain benefits
accruing to indigenous companies and knock-on effects in terms of the skills base;
• Estimate the fiscal benefits of service sector FDI;
• Identify any regional/ locational factors causing sub-sectoral variation;
• Forecast key trends in service sector FDI;
• Highlight areas where a competitive advantage can be developed and market failures
where government can respond;
• Explore international examples of the development of successful tradable services sub-
sectors;
• Identify the policy implications of the evidence gathered.
• Propose a series of actions that need to be taken to improve Northern Ireland’s
competitive advantage and also ensure that benefits from inward locating projects are
maximised. This will provide the rationale for all agencies and organisations with a
stake in FDI; and
• Develop a series of recommendations that set out exactly what type of investment you
should or could attract and the most effective means of doing this.
1
FORMAT
The remainder of this document is structured as follows:
• Section one sets out the context for the later analysis, by defining what is meant by the
terms ‘FDI’, ‘type of investment’ and ‘tradable services’;
• Section two sets out the findings of the literature review, and includes an analysis of
trends in FDI and total investment in the UK and global economies, and an analysis of
the implications that FDI growth can have on economies and labour markets.
• Section three discusses trends in total FDI, and tradable services FDI in Northern
Ireland by year, by sector, by geographic area of investment and by nation of
ownership.
• Section four discusses the comparator research on Ireland, Sweden and Poland;
• Section five summarises the views of stakeholders in the Northern Ireland economy
during the consultation and workshop stages;
• Section six summarises the main results of the Survey elements of the research;
• Section seven provides an analysis of the impact of FDI in Northern Ireland;
• Section eight examines future trends in investment inflows into Northern Ireland
against a favourable global context; and
• Section nine provides a summary of the key findings from the research and
recommendations for the policy interventions that should follow from this work.
2
1 Context
International trade and investment flows provide a strong stimulus to global economic growth
and to expansion in individual countries. Regions within national economies share the
benefits, particularly if they have a strong exporting capacity or are direct recipients of FDI.
This section provides a context for the rest of the report, defining ‘FDI’, type of FDI project,
and ‘tradable services’ for the purposes of the research.
1.1 DEFINING FDI
According to international institutions such as the International Monetary Fund (IMF) and the
United Nations, FDI is defined as an investment made to acquire a lasting interest in an
enterprise operating outside of the economy of the investor1. Investment may be in
incorporated or unincorporated enterprises, branches or subsidiaries. The investor’s purpose is
to gain an effective voice in the management of the enterprise. Some degree of equity
ownership is almost always associated with acquiring an ‘effective voice’ and international
institutions’ guidelines suggest a threshold of 10 per cent. FDI is also more likely to result in
the importation of new technology and management skills, and is less likely to displace
existing operations.
The above definition involves cross-border flows. A broader concept of direct investment
can be considered, to include inflows from other parts of the same nation-state. Such flows
are much harder to identify, but if the data are available, they provide information that is of
great interest in analysing the economic impact of direct investment. Information on total
direct investment (‘cross border’ plus ‘investment from elsewhere in the UK’) is indeed
available for Northern Ireland at the broad tradable services level, but not for the narrower
definition used in this report.
1.2 TYPE OF FDI PROJECT
Although all FDI should generate economic benefits to some degree, the extent of the benefits
will, in reality, vary substantially depending upon whether the FDI is a greenfield investment
or a merger/acquisition.
1.2.1 Greenfield
A greenfield investment establishing a new operation or expanding existing facilities is likely

to be of greatest benefit, providing new capacity, additional jobs, possibly new technology
and management techniques, training for staff and potential linkages to the global
marketplace. The increase in employment will provide additional spill over benefits to the
local economy via increased effective demand. There may be an additional boost where the
new operation stimulates expansion in up/down stream businesses in the area. But this form
of FDI carries potential downsides. Existing industry in the area might be ‘crowded out’ as
the incoming producer draws on local resources of labour and intermediate goods. In addition
there is a risk that profits do not wholly feed back into the local economy but are repatriated
to the investor’s home economy.
1
Balance of Payments Manual Fifth Edition: (BPM5) Washington DC IMF 1993
3
1.2.2 Mergers & Acquisitions
Mergers and/or acquisitions (M & As) account for the bulk of FDI but their initial impact is
less powerful than a greenfield investment since they normally involve merely a change of
ownership of existing assets. New technology and management skills may be introduced and
linkages to the global market may be enhanced. But if the merger/acquisition leads to an
expansion of capacity, the outcome would be similar to that following a greenfield
investment. Because the benefits of greenfield investments are significantly greater than
those associated with mergers and acquisitions, this research is concerned with the former
type of investment.
1.2.3 Invest Northern Ireland’s Policy on FDI
Invest Northern Ireland’s policy towards FDI states that funding will only be provided to
support investments in export-oriented businesses. Invest NI therefore does not assist HQ
operations, sales and marketing operations and logistic and distribution sectors. Nor does
Invest NI assist mergers and acquisitions unless they lead to subsequent development
projects.
1.3 DEFINING TRADABLE SERVICES
The term ‘tradable services’ generally refers to any services that are capable of being
imported and exported, i.e. services that are not necessarily purchased at the point of
production, such as software design and consultancy. However, in some instances, the term
can be broadened to include services such as transportation and hospitality that are purchased
locally, but which generate foreign exchange revenues.
Although, for analysis purposes, it is necessary to form a view as to which industries should,
and should not be classified as ‘tradable services’, it is important to recognise that the
Standard Industrial Classification (SIC) makes no distinction between tradable and non-
tradable activities. This means that, in many cases, SIC codes will include a mixture of
tradable and non-tradable activities2.
DETI’s Exporting Northern Ireland Services Study3 (ENIS) recommended that a definition be
based upon those sectors that have the highest potential to trade services internationally. The
sectors chosen by this study were:
• Computer and Related Activities (SIC 72);

• Research and Development (SIC 73);
• Market Research (SIC 74.13);
• Business and Management Consultancy (SIC 74.14);
• Architectural and Engineering (SIC 74.2)
• Technical Testing and Analysis (SIC 74.3);
• Advertising (SIC 74.4); and
• Creative Entertainment (SIC 92.1-92.3).
This study will also adopt this ENIS definition for the tradable service sector, however, in
order to develop a broader view of service sector exports in the UK in Northern Ireland, the
2
For example, the SIC classification system does not make any distinction between high street banks
and telephone banking providers; between universities that provide distance learning qualification and
those that do not provide such qualifications or between manufacturing companies who only sell
processed outputs and those who also offer design services.
3
Exporting Northern Ireland Services Study, DETI, March 2007, http://www.detini.gov.uk/cgi-
bin/downdoc?id=2844
4
report will also use the term ‘exportable services’ to describe those services that export at
least five per cent of their produce.
5
2 Literature review
From a review of a range of literature sources, this section describes the benefits that FDI can
bring to an economy, assesses recent global and UK trends in FDI, and examines the impact
of increased FDI on economic growth and skills demand.
2.1 BENEFITS OF FDI
As well as the direct impact on employment and GVA4, the DETI Corporate Plan identifies
wider economic benefits of FDI as follows:
• The introduction of new products and processes;

• Improved management practices;
• New technology and skills development; and
• Improved job quality.
In acknowledging these benefits, the 2005 Economic Vision for Northern Ireland sets out a
policy to “adopt a targeted approach to FDI, which provides wider economic benefits to the
economy and puts structures in place to encourage investment across all of Northern Ireland
so that all areas benefit from sustainable economic growth and high value added
employment”.
Although an increase in the level of FDI investment does have potential to deliver clear
benefits to the Northern Ireland economy, there is a risk that the incoming businesses could
crowd out activity in, and displace labour from, the indigenous business base. As part of our
research we have carried out an examination of literature on the crowding out issue, and have
concluded that although 100 per cent crowding out is unlikely to occur, some allowance for
crowding out should nonetheless be made. A more detailed commentary on the crowding out
issue is provided in Appendix A.
In addition to the economic benefits of FDI, there are also societal benefits of improved job
quality. The evidence of whether these benefits have been experienced within Northern
Ireland is mixed. A recent study by Invest Northern Ireland5 found that 56 per cent of full
time jobs promoted by first time inward investments, had weekly salaries above the Northern
Ireland average for full time private sector employees. However, an analysis of more recent
figures provided by Invest Northern Ireland showed that 69 per cent of full time workers in
FDI companies earned more than the Northern Ireland average, and that 49 per cent of full
time workers in tradable services FDI companies did so. This job quality issue will be
explored in further detail in section 3.7.
A further job quality benefit arises as a result of the improvements that FDI companies can
bring to their host country’s skills base. In a recent study of the benefits of FDI to the
Australian economy6, Invest Australia argued that recipient economies can benefit from “a
cross-pollination and sharing of ideas”, and that the skills of the local workforce can be
enhanced through:
4
This will be examined in greater detail in the discussion on crowding out that follows.
5
Performance Report 2003/2004 – 2004-2005, Invest Northern Ireland,
http://www.investni.com/performance_report_02-05.pdf
6
Benefits of Foreign Direct Investment to Australia, Invest Australia, 2004
6
• Staff relocating to the country from other parts of the multi-national’s operation;
• Staff being provided with global exposure as a result of their interaction with the
investor’s overseas operations;
• The introduction of new and innovative working practices;
• Knowledge transfer between the investor and their local supplier and linked companies;
and
• Knowledge transfer as a result of employees moving from the investing organisation to
indigenous employers.
2.2 GLOBAL AND UK TRENDS IN FDI
Data on trends in total FDI (including non-tradable activities) are available in terms of annual
flows (from the perspective of both the originating countries and recipients) and stocks, which
reflect the accumulation of flows in a country over a period of time. We use both approaches
to illustrate trends in the evolution of FDI.
FDI flows reached a peak at the turn of the century (Table 2.1) as the global economy
expanded vigorously, investment in technology surged and mergers and acquisition activity
was especially strong. The economic slowdown of the early years of this decade and the
terrorist attacks on the US led to a marked deceleration in FDI, but the pace of flows has
picked up strongly in recent years in line with the buoyancy of the global economy.
2.2.1 Global geographic pattern
Developed economies have traditionally been the dominant source of FDI. In 1970, they
accounted for virtually all such flows, and even in 1980 the level of FDI from developing
countries was small. But the past quarter of century has seen important changes. While
developed economies still account for the bulk of FDI outflows, their share has decreased as
developing economies – notably in Asia – have expanded rapidly and in the cases of China
and India, participate more actively in the international economy through their steady
liberalisation of trade policies. The growing importance of developing economies as a source
of FDI is highlighted in Table 2.1. In 2004, such countries provided 12.7 per cent of global
FDI. The table also shows that while the overall developed country share of world FDI flows
is on a steadily declining path, the share of individual regions within the total flows can be
very volatile.
Table 2.1 - FDI outflows (% of total unless otherwise noted)

1970 1980 1990 2000 2004
Developed economies 99.7 93.8 94.6 88.1 87.3
North America 58 43.4 15.2 15.1 37.9
Europe 36 45 58.2 69.9 42.4
Developing economies 0.3 6.2 5.4 11.9 12.7
World ($ million) 14,157 53,743 238,681 1,239,149 730,257
Source: UNCTAD (http://stats.unctad.org/FDI)
The pattern among recipients of FDI is similar to that shown in Table 2.1. The rise of the
developing economies has been strong, although from a much higher base than in the case of
outflows, as the attractions of lower production costs have long been an incentive for
transnational companies to locate operations in such countries. In 1980 developing countries
received almost 16 per cent of total flows, and increased their share to 41 per cent by 2004.
The rise of Asia as an investment location has been dramatic, with FDI flows increasing from
$442 million in 1980 to $147.5 billion in 2004. In Latin America, the increase in flows over
the period was from $7.5 billion to $67.5 billion.
7
Table 2.2 - FDI inflows (% of total)

1980 2004
Developed economies 84.5 59
Developing economies 15.5 41
Asia 1 23
Latin America 14 10
S E Europe/CIS 0.5 5
Source: UNCTAD (http://stats.unctad.org/FDI)
A useful way of considering the importance of individual countries in the global picture of
FDI is to investigate their stock of inward investment. The United Nations Conference on
Trade and Development (UNCTAD) annual investment report7 contains a wealth of
information on this and allied topics. The following table highlights the importance of the UK
in this context, second only to the US in terms of the value of investments, and shows the
rapid emergence of China as a major recipient.
Table 2.3 - FDI stock and greenfield projects ($ billion unless otherwise noted)
1990 2004 % growth Number of
greenfield
projects 2002-04
Top developed countries*
US 395 1,474 273 1,580
UK 203 771 280 1,222
France 86 535 522 482
Top developing countries*
China (ex Hong Kong) 21 245 1,066 3,409
Mexico 22 182 727 451
Brazil 37 151 344 720
Source : UNCTAD World Investment Report
*In terms of FDI stock
Table 2.3 also indicates that as a destination for greenfield projects the UK does very well. At
1,222 projects in the period 2002-04, the figure is not far short of the US number and well
above that seen in France, although in overall percentage growth terms France has increased
its FDI more rapidly than the UK. China’s record in this context is extremely impressive, well
ahead of the US. India, with 1,392 projects is in third place and Russia has also attracted over
1,000 projects. But the stock of FDI in both these countries is still comparatively small.
It should be noted that since these figures were produced, the US share of FDI is likely to
have declined as a consequence of the country’s introduction of a one-off corporation tax
amnesty for repatriated profits in 20057. However, this is only likely to be a short-term trend.
2.2.2 Likely future trends
Over the long term, patterns in FDI flows are likely to be closely correlated with future trends
in output growth, with companies in the world’s emerging economies taking on a new global
presence in international markets. This means that Eastern European nations such as Bulgaria,
the Czech Republic and Poland may begin to emerge as new sources of FDI, while existing
sources such as China and India will take on even greater importance..
7
UNCTAD World Investment Report 2005, Statistical Annex, UN 2005
7
Economy loses €18bn after US tax repatriation, p1, The Irish Times, 17th October 2006
8
Figure 2.1 shows forecasts for average annual FDI per head of population (in US$) and FDI
as a percentage of GDP from 2006 to 2010 for a selection of countries. It shows that the
Republic of Ireland will have the third highest FDI per capita figure of the 82 countries
assessed, at $4,750 per year, while the UK ranks 11th on the same indicator, attracting $1,480.
Figure 2.1 - Forecast FDI as a proportion of population and GDP
$6,000 18%
16.5%
15.0% 16%
$5,000 $4,776 $4,750
14%
$5,037
$4,000 12%
$3,258
$3,053 10%
$3,000
$2,459 8%
7.9% 7.9%
$2,000 6%
6.7%
$1,480
5.1% $1,144 4%
$984
$1,000 2.2%
3.6%
2.9% $479 2%
$224
2.0%
1.2%
$0 0%
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FDI inflows per head ($US)

FDI inflows as % of GDP
Source: The Economist Intelligence Unit, 2006
2.2.3 Global sectoral pattern
The rapid expansion of the service sector has boosted the share of FDI in service industries.
This is true of developed and developing countries. In China for example, while
manufacturing (led by computers and other electronic equipment and textiles) dominates the
picture, sectors such as distribution and financial services have recently seen significant
inflows. The trend towards services is seen in the following table.
Table 2.4 - World FDI stock by sector

% shares of total inward FDI 1990 2003
Primary (agriculture and mining) 9.5 6.9
Manufacturing 41.6 33.3
Construction and electricity, gas water 1.7 3.2
Services 47.2 56.6

Trade 12 10.7
Hotels and restaurants 1.3 1
Finance 19.7 18
Business activities 6.8 14.9
Transport & communications 1.5 5.2
Source: UNCTAD World Investment Report 2005, Statistical Annex
9
2.2.4 UK trends
New FDI investment into the UK grew steadily from 1988 to 1997, before undergoing four
years of rapid growth between 1997 and 2000. Investment that fell rapidly in the wake of the
September 11th attacks of 2001 but is now showing signs of returning to its 2000 peak.
Figure 2.2 – Inward investment flows into the UK, 1988-2004
90
Billions of
Pounds
80
78.5
70
54.4
60
44.9
50
42.8
40
36.6
30 20.3
12.4
20 17.4 15.7
11.6 17.2 12.7 16.0
8.8 9.9 6.0
10 8.4
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations Conference on Trade and Development (UNCTAD),2007
This investment into the UK has had a positive impact on employment levels, and UK Trade
& Investment (UKTI) estimate that nearly 90,000 jobs were created or safeguarded in
2005/06 as the UK recorded its highest ever number of inward investment projects.8 Of the
1,220 projects, 508 were ‘new’, 337 ‘expansions’ and the remainder, 375 (30 per cent) M & A
transactions.
Investment in the tradable service sector represented over 55 per cent of the total number of
projects, with a strong representation in knowledge-intensive sectors. IT, software, internet
and e-commerce represented 284 projects.
Survey evidence supports the view that the UK remains a top attraction for investment. The
annual survey by Ernst & Young revealed that in 2005, of 3,066 FDI projects in Europe, 559
went to the UK, 538 to France and 181 to Germany in third place. An interesting feature of
the survey was that 29 per cent of FDI projects in France were in manufacturing against 19
per cent in the UK. The annual IBM survey also showed the UK in the lead, with France close
behind, in terms of the number of new projects.
Approximately half (51 per cent) of all FDI inflows into the UK originates from within
Europe, with Germany investing the most out of any European nation, followed by France
and the Netherlands. The US is the biggest single investor in the UK, accounting for 33 per
cent of all investment, while 8 per cent of investment comes from Asia, and the remaining 10
per cent is spread across the rest of the world (Table 2.5).
8
UK Inward Investment 2005/6, UK Trade & Investment,www.ukinvest.gov.uk
10
Table 2.5 - Gross foreign direct investment in the UK by nation of origin, 2003
Percentage of total
investments
Germany 13
France 11
Netherlands 13
Other Europe 14
USA 33
Other America 5
Asia 8
Rest of the World 5
Source: National Statistics (Pink Book), 2006
The financial services industry is the biggest net source of foreign direct investment,
contributing to approximately one third of all investment. Other major recipients of FDI in the
UK include the transport & communications, retail & wholesale, utilities, business service
and chemicals & plastics sectors (Table 2.6).
Most heavy industries, including the metals and mechanicals products and office equipment
sectors reported negative levels of net FDI, meaning that more money was invested in these
sectors by UK companies overseas, than by foreign companies in the UK.
Table 2.6 - Net foreign direct investment in the UK by industry, 2004

Industry Share of FDI
Financial services 32%
Transport and communications 23%
Retail / wholesale trade and repairs 14%
Electricity, gas and water 13%
Real estate and business services 9%
Chemical, plasic and fuel products 6%
Other services 2%
Textile and wood, printing and publishing 1%
Food products 1%
Agriculture, forestry and fishing 0.1%
Source: National Statistics Business Monitor, 2006
Figure 2.3 provides a ranking of factors influencing location decisions based on the 2006
Ernst & Young Global Attractiveness Monitor. It shows that transport & logistics
infrastructure and labour costs are considered to be the most important influencers, both being
described as ‘very important’ by a majority of respondents. Corporate tax rates, a key
differentiator between the Northern Ireland and Republic of Ireland offer, are also considered
important, being mentioned by 46 per cent of respondents. Membership of the Eurozone,
another key differentiator in the context of Ireland is, however, considered less important, and
is considered to be of little or no importance by 36 per cent of respondents.
11
Figure 2.3 - Ranking of the selection criteria for an investment location
Transport & logistics infrastructures 54 35 7 3
Labour costs 52 39 7 2
Potential productivity increase 48 38 8 4
Telecommunications infrastructures 48 40 9 2
Transparency & stability of polit., leg. & reg.

47 39 9 3
env.
Corporate taxation 46 40 9 3
Local labour skills levels 45 42 9 3
The country or region's domestic market 44 39 12 4
Flexability or labour legislation 41 42 13 3
Social climate and environment stability 40 48 8 3
The country or area's specific skills 33 42 19 4
Avail. of sites, cost of land & regulations 31 42 19 6
R&D availability and quality 29 36 24 11
Local language, culture and values 29 42 22 6
Specific treatment of expat. execs/corp HQs 27 42 23 7
Aid, subsidy & support from public authorities 24 41 24 8
Membership of the Euro zone 23 40 26 10
Quality of life 23 34 23 18
Access to local financial investors 22 30 31 16
0 20 40 60 80 100
Very important Of some importance Of little importance Not at all important
Source: Ernst & Young,

2006
2.3 EXPORTABLE SERVICE TRENDS
‘Exportable’ services can be identified as service sector industries within which a significant
proportion of total output is exported overseas. An analysis of the Office of National Statistics
(ONS) 2004 Input-Output tables identifies 16 industries within which over 5 per cent of
industrial output is exported. These are shown in Table 2.7.
12
Table 2.7 - Export share of UK service sector industries
Industry Percentage of
output exported
Exportable services
Water transport 60.8

Auxiliary financial services 53.9
Research & development 43.9
Other business services 22.5
Air transport 18.9
Computer services 12.1
Architectural activities & technical consultancy 11.7
Recreational services 9.9
Banking & finance 9.8
Advertising 8.9
Legal activities 8.4
Accountancy services 8.2
Insurance & pension funds 7.6
Hotels, catering, pubs etc. 7.2
Telecommunications 7.2
Market research & management consultancy 4.8
Other services
Other land transport 4.3

Ancillary transport services 3.8
Railway transport 3.7
Postal & courier services 2.6
Education 2.0
Other service activities 1.2
Renting of machinery etc. 1.2
Public administration & defence 1.0
Motor vehicle distribution & repair, automotive fuel retail 0.4
Retail distribution 0.3
Letting of dwellings 0.3
Private households with employed persons 0.2
Sewage & sanitary services 0.2
Owning & dealing in real estate 0.2
Health & veterinary services 0.2
Estate agent activities 0.0
Social work activities 0.0
Source: ONS Input-Output Statistics, 2004
Figure 2.4 shows the long-term trend in export sales in the 16 selected exportable service
industries, and across the economy as a whole. It shows that the proportion of UK exportable
services outputs that are exported has increased from under 15 per cent in 1992 to over 17 per
cent in 2004. In contrast, the proportion of output exported across UK industries as a whole
has remained fairly static at close to 11 per cent.
13
Figure 2.42
Proportion of UK output exported by industry grouping, 1992 - 2004
18
17
16
15
All Industries
14 Exportable services
13
12
11
10
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Experian 2006, based on ONS 2004 Input-Output data
Figure 2.5 shows the percentage change in export share in selected exportable service
industries between 1992 and 2004. The table shows that over this period, the UK has
managed to establish itself as a leading exporter of research and development, and has
enjoyed a substantial increase in banking and financial services exports. Although total output
in the air transport sector has increased substantially over this 12 year period, the majority of
this increase originated from sales to UK based customers, and as a consequence, the export
share in this sector has fallen sharply.
Figure 2.5
Percentage point change in export share 1992 - 2004 for selected industries
Research & development
Water transport
Auxiliary financial services
Insurance & pension funds
Accountancy services
Banking & finance
Computer services
Legal activities
Advertising
Telecommunications
Architectural & tech consult
Wholesale distribution
Motor vehicle distribution & repair
Market res & managem't cons
Hotels, catering, pubs etc.
Recreational services
Other business services
Air transport
-15 -10 -5 0 5 10 15 20 25 30 35
ONS 2004 Input-Output data
14
2.4 LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY
Northern Ireland currently has one of the smallest private services sectors of any developed
economy. However, a recent study by Regional Forecasts Ltd forecasts a large increase in
service sector jobs over the coming decade, as shown in Table 2.8. A successful strategy to
attract tradable services FDI into the Northern Ireland economy would boost the sector,
accompanied by an increase in the demand for skilled workers.
The table highlights the occupations in Northern Ireland that are likely to require the largest
numbers of new workers over the next ten years. It shows that, over the period, 43,950 new
jobs will be created, while 698,940 further vacancies will arise as a result of people moving
between occupations, people becoming unemployed or inactive, people retiring or people
migrating away from Northern Ireland. Most of the new jobs created will be in occupations
that are in heavy demand by the service sector, while predominantly manufacturing
occupations, such as skilled trades, and process, plant and machine operatives, look likely to
experience a continuing fall in new employment demand.
It should be noted that these figures represent a baseline forecast for the Northern Ireland
economy over the eleven year period, and that any future FDI strategy could, potentially, lead
to employment demand levels that are higher than the figures shown below.
Table 2.8 - Forecast new employment and replacement demand in Northern Ireland by
occupation, 2005-2015 inclusive*
Replacement Total
New employment employment employment
demand demand demand
Managers and Senior Officials 10,800 66,220 77,020
Professional occupations 15,500 58,300 73,800
Associate professional and technical occupations 6,100 66,880 72,980
Administrative and secretarial occupations 4,500 98,560 103,060
Skilled trades occupations -8,200 79,750 71,550
Personal service occupations 11,800 62,480 74,280
Sales and customer service occupations 4,900 92,840 97,740
Process, plant and machine operatives -4,200 58,850 54,650
Elementary occupations 2,800 115,060 117,860
Total 43,950 698,940 742,890
Source: Regional Forecasts Ltd, 2006
* The replacement demand figure was calculated by multiplying the reported annual average figure for the 2005-2015 period by
11
If present trends continue, future FDI investment will be disproportionately concentrated in

and around Belfast and Derry, with Belfast, Derry, Craigavon, Newtownabbey, Limavady,
Strabane, Larne and Carrickfergus all receiving a share of FDI that is above their share of
total employment (see Table 2.9).
15
Table 2.9 – Share of FDI and employment by district

Percentage of FDI Percentage of total
District Index
workforce employment
Belfast 33.4 32.4 103
Derry 13.8 6.9 200
Craigavon 6.7 6.2 109
Lisburn 6.3 6.5 97
Newtownabbey 6.3 5.1 123
Newry & Mourne 4.8 5.2 91
Limavady 3.9 1.5 253
Strabane 3.4 1.5 227
Ballymena 3.2 4.9 64
Antrim 3.1 4.0 77
Coleraine 2.7 3.8 70
Larne 2.1 1.4 151
Castlereagh 1.9 4.2 45
Fermanagh 1.9 3.4 55
Carrickfergus 1.7 1.4 127
Northdown 1.5 3.7 42
Dungannon 1.4 3.3 43
Cookstown 1.0 1.8 58
Ards 1.0 2.9 35
Ballymoney 0.8 1.2 68
Down 0.6 2.9 20
Omagh 0.4 3.0 12
Moyle 0.2 0.6 39
Banbridge 0.1 1.9 8
Armagh 0.04 3.0 1
Magherafelt 0.02 2.4 1
Source: Invest Northern Ireland, Northern Ireland Census of Employment
In addition to the benefit of increased labour demand described above, Driffield8 suggests that
FDI can potentially deliver further benefits to the Northern Ireland labour market by
increasing the allocative efficiency, and therefore the productivity of the workforce. In other
words, because more employment opportunities are made available to individuals working in
Northern Ireland, it will be easier for individuals to identify working opportunities that are
well suited to their skills and experience.
However, Driffield also suggests that, as a consequence of the increased demand for labour
brought about by FDI investment, and the resulting increase in industry wages, some
indigenous businesses may attempt to reduce costs by substituting labour for capital. The
extent of such substitution will vary according to the degree of FDI investment in the industry
in question, and the technical feasibility of substituting capital for labour in that industry.
However, overall this substitution effect is expected to lead to the loss of one indigenous job
for every five FDI jobs created.
The 2004 Northern Ireland Skills Strategy responds to this expected demand by focusing on
three different types of skills, namely:
• Essential skills of literacy and numeracy and, increasingly, information and

communications technology (ICT);
8
Indirect employment effects of foreign direct investment to the UK, Nigel Driffield, Bulletin of
Economic Research, 51:3, 1999
16
• Employability skills, including the key skills of team working, problem solving and
flexibility; and
• Work based skills, specific to a particular occupation or sector.
The 2006 Programme of Implementation for this strategy outlines how these types of skills
will be developed, citing, for example, work to increase the presence of UK wide Sector
Skills Councils in Northern Ireland as a method of developing the final skill type.
2.5 BENEFITS TO TIER ONE COMPANIES
In addition to the labour market and export benefits associated with FDI, an investment also
yields additional benefits for the indigenous companies who supply them (referred to in this
study as ‘tier one companies’) and other Northern Ireland businesses. These include, for
example, the profits made by local companies as a result of sales to FDI investors, profits
made as a result of spending by the employees of FDI investors, profits gained as a result of
knowledge shared with investors, and agglomeration benefits (benefits of being located in
close proximity to one another such as labour mobility, and reduced transportation cost).
The extent to which these benefits are likely to be experienced by the wider business base
varies according to the characteristics of the FDI investor. For example, Turok9 argues that
inward investors can be categorised into two broad types10:
• Investors with developmental linkages to indigenous businesses – Investors that

establish long-term collaborative partnerships with local businesses; have decentralised
management structures; procure bespoke good and services from knowledge-intensive
local industries; and employ a diverse range of local staff;
• Investors with dependent linkages to indigenous businesses – Investors that procure

basic goods and services at a minimal price from local companies, who employ low
skilled staff in elementary activities on temporary or casual contracts, with highly
centralised organisational structures.
Turok argues that while the former companies are likely to contribute to self-sustaining
growth in a local economy, the latter group are likely to leave the economy vulnerable to
market conditions elsewhere in the global economy, with a risk of large-scale low skills
employment loss should the company close its operations11.
An estimate of the output and employment benefits received by tier one companies in
Northern Ireland will be provided in Section seven of this report.
2.6 IMPACT OF CORPORATION TAX
In recent years, there has been a regular debate in both the British and Irish media on the role
that the corporation tax differential between the Republic of Ireland (which has a 12.5 per
cent rate on trading income in most areas, although a lower 10 per cent rate applies for
companies based in Shannon and for certain companies in the International Financial Services
9
See Inward investment and local linkages – how deeply embedded is “Silicon Glen”?, I Turok, 1993
10
These two types are used for illustrative purposes. In reality, most companies would lie within a
spectrum between these two extremes.
11
It should however be acknowledged that attracting companies with dependent linkages may prove
desirable from an equity perspective as these employers are more likely to offer employment
opportunities in areas of high economic inactivity.
17
Centre and in the manufacturing sector) and Northern Ireland (which, in line with other parts
of the UK, has a 30 per cent main rate)12.
The most obvious issue associated with such corporation tax differentials is that they may
cause firms to choose to locate in low tax countries such as the Republic of Ireland, rather
than in Northern Ireland, in order to reduce the amount of tax they are required to pay. A
second issue is that they may encourage the branches of multinational corporations in high tax
locations, such as Northern Ireland, to sell goods and services to branches in low tax
locations, (such as the Republic of Ireland) in order to reduce the company’s overall tax
burden. This practice, known as transfer pricing, would reduce the total tax yield generated in
the high tax country13.
In a recent report entitled Assessing the case for a differential rate of corporation tax in
Northern Ireland (, November 2006), the Economic Research Institute of Northern Ireland
estimate the impact that is likely to occur, should Northern Ireland reduce its corporation tax
rate to Republic of Ireland levels. The calculation accounts for:
• The additional corporation tax that will be paid by the newly attracted FDI investors;
• The reduction in the amount of corporation tax paid by existing companies in Northern
Ireland;
• The additional taxation paid as a result of induced domestic demand;
• The additional taxation paid as a consequence of ‘knock on’ jobs in the Northern
Ireland economy;
• The reduction in unemployment and incapacity benefit costs caused by these ‘knock
on’ jobs;
• Additional payments of other taxes, such as income tax and VAT;
• Additional public expenditure costs incurred in order to serve the new businesses.
The report finds that the immediate effect of any reduction in the rate of corporation tax
would be negative, as it would immediately reduce the tax payments of existing businesses.
However, over time, the change will lead to growth in the business base, and balances should
become positive from 2013 onwards, with the positive balance rising to almost £2.5 billion by
2030. However, as the report does not account for the likely benefits that will occur as a result
of UK companies relocating profits to capitalise on ‘transfer pricing’, it may understate the
true likely benefit of such a change (Figure 2.6).
12
Recent articles include DUP and Sinn Féin back corporate tax cut, Financial Times, 13th November
2006 and NI pledged €79bn to underpin St Andrews Agreement, Irish Times, 2nd November 2006
13
Likewise, if Northern Ireland’s corporation tax rate were to be reduced to below the UK average,
Northern Ireland could benefit as a result of UK based companies operating in Northern Ireland
reassigning profits to their Northern Ireland offices.
18
Figure 2.6 – Benefit to UK fiscal balances of a reduction of Northern Ireland

corporation tax rates to 12 per cent
2500
£ million
2000
1500
1000
500
-500
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Regional Forecast Ltd, Economic Research Institute of Northern Ireland (2016 to 2029 figures Experian based on ERINI)
2.7 REASONS GIVEN FOR NOT INVESTING
In 2000, the House of Commons Northern Ireland Affairs Committee14 provided a list of
reasons why unsuccessful FDI investment leads had taken the decision not to locate in
Northern Ireland. These included:
• An unfavourable tax regime;

• A small critical mass in comparison to other regions (in terms of the number of people
available);
• Distance from customer; and
• Concern regarding security and political stability.
This report was based on research carried out only a short time after the signing of the Good
Friday Agreement, at a time when political stability concerns were more pertinent than they
are currently. However, the three other concerns are all likely to remain of importance to
foreign direct investors.
Inappropriate skills, absence from the Eurozone and infrastructure issues were not cited as
barriers by any of the leads questioned, However, it is possible that these and other issues
may have impacted on the decisions made by other investors.
14
Northern Ireland Affairs Committee's Fifth Report 1999-2000, Public expenditure in Northern
Ireland: Inward Investment
19
3 Investment inflows into Northern

Ireland
This section discusses the performance of Northern Ireland in attracting inward investment,
and its performance by location and sector.
3.1 NORTHERN IRELAND IN A UK CONTEXT
In 2004/5, National Statistics reported that there were 36 ‘project successes’ in Northern
Ireland, equating to 21 successes per million people. In other words, on 36 occasions, an
overseas company specified an interest in, and successfully completed an investment in,
Northern Ireland. Of these companies, 14 were manufacturers (eight per million people) and
22 were non-manufacturers (13 per million people).
During this year, Northern Ireland had the UK’s joint third highest success rate in terms of
population share, behind only London and the North East (Figure 3.1).
Figure 3.1 – FDI project successes per million population, 2004/5
40
36.7 Manufacturing
1.3
35 Non-manufacturing
30
25
22.6
21.7
20.6
20 19.0
4.3
35.4 10.5 15.7
8.0
15 8.5 14.4 13.3 12.8
12.0
6.9 10.7
4.4 3.9 2.3
10 5.4 2.4
17.4 7.5
12.1 12.6 2.2

5 10.5 9.4 9.7
8.8 9.0 8.3
7.4
5.3
0
London North South Northern Wales East North Scotland West East Yorkshire South
East East Ireland Midlands West Midlands & West
Humber
Source: National Statistics 2006
Between 2000/1 and 2004/5, the number of project successes in Northern Ireland rose from
22 to 36, equivalent to a 64 per cent increase. This represents the fourth highest increase in
the UK over the period, behind only the East Midlands, North West and North East. As in
most other regions, non-manufacturing FDI grew more rapidly than manufacturing FDI
(Figure 3.2).
20
Figure 3.2 – Percentage change in number of FDI projects
233%
East Midlands 375%
300%
173%
North West 121%
136%
69%
North East 72%
71%
27%
Northern Ireland 100%
64%
-37%
Yorkshire & Humber 200%
64%
-4%
Wales 138%
44%
-29%
London 31%
27%
117%
East 8%
20%
-31%
South West 23%
0%
-38%
Scotland 20%
-6%
46% Manufacturing
South East -14%
-7% Non-manufacturing
-38%
West Midlands -29% Total
-33%
-100% -50% 0% 50% 100% 150% 200% 250% 300% 350% 400%
Source: National Statistics 2006
3.2 TOTAL INFLOWS 2002-2006
Table 3.1 shows the trend in FDI into Northern Ireland over the past five years. The figure
shows that the Northern Ireland economy has generally experienced a steady increase in FDI
investment, although it did experience two exceptionally strong years of investment in 2004
and again in 2006.
In both these years, the exceptional performance was mostly attributable to major investments
by Northbrook Technology and Citigroup, which together contributed 635 jobs in 2004 and
585 jobs in 2006.
Table 3.1 - Trends in Northern Ireland FDI

Tradable service All industries
Jobs Capital investment Jobs Capital investment
Projects created (US$m) Projects created (US$m)
2002 4 163 41 12 583 151
2003 5 185 102 16 880 385
2004 11 1,188 6.5 27 1,862 224.4
2005 11 255 39.97 39 1,407 492.84
2006 11 1,073 176.69 32 4,263 440.88
Source: Locomonitor, 2007
3.3 KEY INVESTORS
Since January 2002, FDI in Northern Ireland has been dominated by the IT and business and
financial services sectors, with six of the ten biggest investors in job creation terms operating
in these sectors. The most significant investor over this period was ICICI, the Indian contact
centre operator, which created 1,600 jobs in Belfast and Derry.
Northbrook Technology and Citigroup were the only two tradable service companies to
appear in the list of the ten most significant investors.
21
Table 3.2 - Northern Ireland’s largest foreign direct investors, January 2002 to March 2007
Investing company Country Destination city Jobs Capital invested Sector Key business function
of origin created (US$m)
ICICI OneSource India Belfast, Derry 1,600 0 Business Services Customer Support Centre
Northbrook Technology USA Belfast, Strabane, Derry 1,060 42 IT and Software Research and Development
HCL BPO India Belfast, Armagh 825 2 Business Services Customer Support Centre
Citigroup USA Belfast 560 0 Financial Services Research and Development
Asda USA Antrim, Enniskillen 475 86 Food and Drink Retail
Teleperformance France Newry 450 13 Business Services Customer Support Centre
IKEA Sweden Belfast 400 0 Consumer Products Retail
Quinn Direct Insurance Ireland Enniskillen 350 13 Financial Services Customer Support Centre
Image Communications Group Ireland Armagh 304 0 Telecom Services Customer Support Centre
Seagate Technology USA Derry 300 241 Business Equipment Manufacturing, R&D
Table 3.3 - Northern Ireland’s largest tradable services foreign direct investors, January 2002 to March 2007
Investing company Country Destination city Jobs Capital invested Sector Key business function
of origin created (US$m)
Northbrook Technology USA Belfast, Derry, Strabane 1,060 42 IT and Software Research and Development
Citigroup USA Belfast 560 0 Financial Services Research and Development
Allen Systems Group USA Belfast 168 6 IT and Software Research and Development
Polaris Software India Belfast 158 0 IT and Software Research and Development
FG Wilson USA Larne 155 87 Machinery & industrial goods Research and Development
Avalanche Technology USA Belfast 130 13 IT and Software Business Services
CEM Solutions USA Belfast 100 32 Machinery & industrial goods Research and Development
Gambro BCT Sweden Larne 86 13 Healthcare Research and Development
HCL BPO India Belfast 75 0 Business Services Customer Support Centre
Liberty Information Technology USA Belfast 51 8 IT and Software Research and Development
22
3.4 PERFORMANCE BY NORTHERN IRELAND SUB-REGION
Belfast is by far the most popular location for FDI investors into Northern Ireland, with 30
tradable service investors, and a further 29 non-tradable service investors choosing to locate
there since January 2002, creating an additional 4,239 jobs. Derry is also a popular location,
attracting three tradable, and eight non-tradable investments, and creating 1,766 additional
jobs. However, outside of these two cities, only Larne, Strabane, Bangor and Downpatrick
have succeeded in generating employment opportunities through tradable service
investments15.
Table 3.4 - Geographic breakdown of Northern Ireland FDI investments, January 2002
to March 2007
Jobs Capital invest Jobs Capital invest
Belfast 30 2,151 113 59 4,239 243
Derry 3 360 111 11 1,766 375
Larne 3 270 110 5 321 110
Strabane 1 100 0 1 100 0
Bangor 1 18 0 4 218 0.5
Downpatrick 1 15 1 2 85 5
Armagh 1 0 27 3 704 27
Newry 0 0 0 3 450 13
Antrim 0 0 0 2 425 45
Enniskillen 0 0 0 3 436 61
Kilkeel 0 0 0 2 264 25
Carrickfergus 0 0 0 4 176 216
3.5 PERFORMANCE BY INDUSTRY
Since January 2002, the Northern Ireland IT and software industry has attracted more FDI
investments than any other industry, and has helped to create 1,842 jobs. However, the largest
share of jobs created has occurred in the business services sector, where 3,118 jobs have been
created. Other sectors that attract significant levels of FDI in the region include the financial
services sector and food and drink.
The vast majority of tradable service sector investments have occurred within the IT and
software sector, though the business services sector has also received investments. All of the
tradable investments outside these two sectors relate to the establishment of research and
development facilities, and include Citigroup’s Technology Centre of Excellence and
Assystem’s Aerospace Design Innovation Centre (both in Belfast).
15
Tradable service investments did occur in Cookstown, Limavady and Newtownards, however these
investments did not lead to job creation
23
Table 3.5 - Industry breakdown of Northern Ireland FDI investments, January 2002 to
March 2007
Jobs Capital inv Jobs Capital inv
Business services 2 75 0 13 3,118 16
IT and software 30 1,842 128 30 1,842 128
Financial services 2 560 0 9 1,378 61
Food and drink 1 0 0 9 941 350
Machinery & industrial goods 3 284 129 7 415 130
Consumer products 0 0 0 2 415 0
Aerospace 0 50 2 5 314 88
Telecom services 0 0 0 3 309 1
Business equipment 2 0 96 3 300 241
Consumer electronics 0 0 0 2 220 44
Real estate 0 0 0 2 150 0
Pharmaceuticals 0 0 0 1 100 5
Healthcare 1 86 13 1 86 13
Aerospace 1 50 2 1 50 2
Electronic components 1 17 0 1 17 0
3.6 NATION OF OWNERSHIP
The USA are by a significant margin the largest FDI investor in the Northern Ireland
economy, making investments in 30 tradable services, and a further 62 non-tradable
investments since January 2002, and generating 4,057 additional jobs. India are also a major
investor, and their two tradable service sector investments (HCL and Polaris Software), have
together created 233 jobs in Belfast.
Although FDI investment from the Republic of Ireland has created a significant number of
jobs across the Northern Ireland economy as a whole, and in the finance, telecoms and food
and drinks sectors in particular, their involvement in the tradable services sector has been
more limited.
Table 3.6 - Northern Ireland FDI investments by nation of ownership, January 2002 to
March 2007
16
Jobs Capital invest Jobs Capital invest
USA 30 2,443 309 62 4,057 1,140
India 2 233 0 8 2,583 3
Sweden 1 86 13 6 561 57
France 2 80 13 11 906 100
Germany 3 55 6 6 295 8
Turkey 1 17 0 1 17 0
Ireland 2 0 27 20 1,004 147
Spain 0 0 0 1 180 0
Taiwan 0 0 0 1 150 40
Japan 0 0 0 3 116 28
South Korea 0 0 0 1 70 4
Belgium 0 0 0 2 6 0
16
Further investment were made from Bermuda and Austria based companies, however these did not
lead to the creation of any additional jobs
24
3.7 QUALITY OF JOB
Table 3.7 provides an illustration of the quality of job offer associated with recent FDI
investments both in Northern Ireland’s tradable service sector, the manufacturing sector and
across the business base as a whole. It shows that, although FDI has helped to safeguard a
number of high wage jobs, many of the newer jobs that have been created are lower value
added, with this being particularly true in the tradable services sector.17
Table 3.7 – Assessment of job quality of Invest NI FDI Investments

Percentage of jobs paying above
Northern Ireland Private Sector Median
salary
Tradable Manufacturing All industries
services
New jobs 47 72 54
Safeguarded jobs 100 84 84
All jobs 49 81 69
Source: Invest NI, NI Annual Survey of Hours and Earnings
Figure 3.3 provides a comparison of average wages in Northern Ireland’s tradable service FDI
businesses, against those across all FDI businesses in Northern Ireland, and against average
weekly wages in the UK and Northern Ireland labour force, and the Northern Ireland private
sector labour force.
The figures appears to present an opposing view to the table above, showing that the average
weekly wage offered by FDI firms is above that of the Northern Ireland economy as a whole.
This is likely to be because, although investors tend to employ a large number of low paid
staff, this is often offset by a minority of employees who are paid substantially more than the
national average.
Figure 3.3 – Comparison of average weekly wages by area and sector
£380
£374.52
£370 £367.70
£364.10 £363.90
£360
£350
£340
£330
£324.70
£320
£310
£300
£290
New and safeguarded New and safeguarded All Employment, All Employment, UK All Private Sector
FDI, NI Tradable FDI, All industries Northern Ireland Employment, Northern
Services Ireland
Source: Northern Ireland Annual Survey of Hours and Earnings, and Experian, based on Invest Northern Ireland, 2007
17
This analysis refers to the 2002/03 - 2005/06 period. At the point at which this report was
produced, figures for 2007 were nearing completion, but were yet to become available.
25
4 Comparator Research
This section provides comparator analysis for three countries, Ireland, Sweden and Poland.
The focus of the case studies is on the main tradable service sectors in which the three
countries have been successful in attracting FDI. The purpose of the case study analysis is to
consider lessons applicable to Northern Ireland or ideas that can be replicated. The three case
studies were selected working with the Client Steering Group:
• Ireland – Focusing on the International Finance Services Centre (IFSC) in Dublin;

• Sweden – Focusing on Electronics and ICT;
• Poland – Focusing on Telecoms and Financial Services.
The figure below shows FDI inflows for our three case study countries.
Figure 4.1
FDI Inflows per annum

70,000
Ireland FDI inflows
60,000
Sweden FDI inflows
Poland FDI inflows
50,000
Dollars Millions
40,000
30,000
20,000
10,000
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
Source: Eurostat
There is a general upward trend for Ireland and Poland in particular although each country has
seen volatility in FDI inflows. Sweden has seen the largest fluctuations with FDI increasing
steadily over most of the 1990s; recording an exceptional, one-off peak in 1999, following the
£22 billion takeover of Astra by Zenica, a UK firm18; and declining in recent years. FDI
inflow growth in Poland has been the most gradual but consistent.
The figure below shows FDI outflows for the three case study countries.
18
http://news.bbc.co.uk/1/hi/business/576197.stm
26
Figure 4.2
FDI outflows per annum

120,000
Ireland FDI outflows
100,000 Sweden FDI outflows

Poland FDI outflows
80,000
Dollars Millions
60,000
40,000
20,000
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
Source: Eurostat
The table shows that outflows from Sweden have generally been more volatile than those in
Poland and Ireland. Ireland has seen significant increases in FDI outflow in recent years,
while levels of FDI outflow from Poland has remained consistently insignificant.
UNCTAD gives rankings for FDI performance, the table below shows reported performance
for the three countries.
Table 4.1 - FDI Actual Performance by Rank

1990 2000 2003 2004
Ireland Inward FDI Rank 52 4 5 5
Poland Inward FDI Rank 100 47 72 75
Sweden Inward FDI Rank 53 8 54 93
Ireland Outward FDI Rank 12 13 10 26
Poland Outward FDI Rank 63 84 86 62
Sweden Outward FDI Rank 2 7 7 8
Source: UNCTAD
The table demonstrates the strong performance of Ireland in actually attracting FDI although
the UNCTAD rated Sweden above Ireland in its Inward FDI potential index ranking between
1990 (6th) and 2003 (8th).
The remainder of this section focuses on the three case studies.
4.1 REPUBLIC OF IRELAND
In 1986 gross domestic product (GDP) per capita in Ireland was 64 percent of the EU
average. There were also high levels of unemployment with unemployment rates 18 percent
higher than the EU average. Furthermore national debt levels were 120 percent of gross
national product. 19
19
U.S. Foreign Direct Investment in Ireland, Making the Most of Other People’s Money, Berry R
27
In 1987, Dublin's IFSC, was set up by the Irish Government as a location for internationally
traded financial services. The initial designated site of the IFSC was 11 hectares of land in the
Custom House Docks area of Dublin City Centre. The Customs House Docks Development
Authority was established to redevelop the area and construction started in late 1988, with the
first building completed and occupied by 1990.
In May 1997, the Custom House Docks Development Authority was dissolved. At this stage,
the IFSC had 114,000 sq m of office accommodation, as well as 333 apartments, a hotel,
multi-storey car park and retail space, including a pub, restaurants and the Dublin Exchange
Facility. The regeneration continued following this period and the Dublin Docklands
Development Authority was established in 1997 to develop and deliver IFSC phase II20.
Williams and Redmond21 report that Dublin’s economy has developed in three phases.
Phase 1 – Production of foods, textiles and beverages for local and export
consumption;
Phase 2 – Industry developed mainly through FDI from the US (manufacturing and
services);
Phase 3- Economy continues to develop as a “knowledge economy” building on
innovation and R&D.
They also note that a main reason for success has been focusing on growth sectors which
matched the labour force skills. Moving to the third phase of development meant developing
the educational base in line with the need to increase R&D. There was also a need to create an
environment where innovation was encouraged and suitable supply chains were developed.
4.1.1 Role of government
The Irish Government took a decision to set up the IFSC in 1987. The Government also
agreed a corporate tax rate of 10 per cent with the EU Commission. Furthermore, local
development incentives for Docks area were implemented, supported by an open and
responsive business environment and welcomed all types of inward investment22.
To supplement these incentives a marketing team was put in place to engage directly with
global institutions. There was also an important role in positively engaging local banks to
promote the centre. Part of this was the development of a social partnership between
Government, employers and unions.
The Industrial Development Agency of Ireland (IDA) and Enterprise Ireland were the main
public sector organisations involved with the development of the IFSC. The role of the IDA is
to attract FDI to Ireland focusing on high value-added investments using favorable
corporation tax rates as one marketing tool. Enterprise Ireland promotes joint ventures and
strategic alliances between indigenous and foreign companies, facilitating export activity of
indigenous firms, which may involve work with FDI projects.
All businesses seeking to be part of the IFSC have to gain a licence through contact with the
IDA. The Central Bank then undertakes regulation of member organisations activities. This
also ensured that ‘brass plate’ organisations would not be based in the IFSC and also meant
that any employment benefits were likely to be more enduring and significant. Due to the fact
20
IFSC Website
21
Ideopolis: Knowledge City Region, Dublin Case Study, Dr Brendan Williams and Dr Declan Redmond
22
ECB, FDI Task Force Report, 2004
28
that tax levels have now resumed to a more ‘standard’;level, and conditions for relocating are
less onerous the Central Bank now undertakes screening instead of the IDA23.
4.1.2 Performance
The IFSC makes up a significant amount of total FDI in Ireland and this is shown in the figure
below.
Figure 4.3 – FDI inflows
Source: Trade and Investment Report 2005, Forfas
The chart demonstrates the significance of IFSC FDI inflows as a percentage of total FDI
inflows in Ireland. The chart below shows the significant FDI outflows including outflows
from the IFSC.
Figure 4.4 - FDI outflows
Source: Trade and Investment Report 2005, Forfas
The chart shows that IFSC outflows have been small in recent years, with the exception of
2002, creating significant net inward FDI from the IFSC.
The benefits of the IFSC are not confined to inward investment and in 2002 the Irish
Exchequer collected more than €700 million in corporation tax from IFSC companies.
According to the Central Bank, the net asset value for collective investment schemes for
regulated funds was just under €424 billion at the end of August 2004. The chart below
highlights that the IFSC also has a significant role in the Irish services market.
23
The Role of Dublin’s International Financial Services Centre in Irish Regional Development, White
M, CISC, 2003
29
Figure 4.5 - Services Exports
20.0 40.0%
18.0
IFSC Imports/Exports in Euro Billions
35.0%
16.0
30.0%
14.0 IFSC services exports
12.0 25.0%
IFSC services imports
10.0 20.0%
8.0 15.0%
IFSC exports as % of total
service exports
6.0
10.0%
4.0
2.0 5.0%
0.0 0.0%
1999 2000 2001 2002 2003 2004 2005 2006
Q1
Source: International Trade and Investment Report 2005 - Forfas
The international financial services industry has a major economic contribution to make.
Approximately 11,000 people are directly employed by the sector in a range of institutions
providing products and services to a global customer base. The international financial services
industry made a net contribution of €2.5 billion to Ireland’s balance of payments from both
services and investment in 2000. The balance of payments statistics show that the sector
generated a surplus of €735 million on international trade in services and €1,763 million in
investment income.24
In addition to this direct contribution, the financial services industry also contributes
indirectly to the Irish economy by helping local businesses to secure funding. A recent study
by Patrick Honohan of Trinity College Dublin25 identified a clear relationship between the
depth (defined as the level of private credit available to businesses as a proportion of GDP) of
a country’s financial services sector, and the country’s economic growth rate. This is shown
in Figure 4.6.
24
FSIA Annual Report 2001
25
Honohan. P, To what extent has finance been a driver of Ireland’s economic success?, Quarterly
Economic Commentary, Winter 2006, pp59-72
30
Figure 4.6 – Relationship between financial sector depth and GDP growth
Source: Honohan, 2006
The continued success of the IFSC and its importance to the economy is emphasised by the
net trade surplus of €4.9 billion in IFSC activities in 2004. The growth in IFSC exports,
comprising mainly insurance, financial services and business services exports, has been 234
per cent since 1999.
4.1.3 Critical success factors - benefits
4.1.3.1 Taxation
The role of low tax levels as an incentive was significant to the success of the IFSC.
However, from the end of 2002, the 10 percent corporation tax rate ceased to apply to
financial services companies, except for those operations that set up before July 1998, which
could avail of this rate until the end of 2005. All other operations are now subject to the
standard corporation tax rate of 12.5 percent on trading income. Nevertheless, the average tax
rate in OECD countries reported in the most recent tax report (2005) is just over 30 per cent,
and Dublin retains this competitive advantage.
FDI Magazine26 reported that Dublin is highlighted as an exemplar of dockland regeneration

alongside London, Bilbao, Shenzhen and Shanghai. The report found the three most important
elements involved in the regeneration of Dublin’s docks have been a low tax environment, a
healthy labour market and clear political support during the 15 years of recent development.
In addition to this Corporation Tax benefit, businesses start ups in the area have benefited
from the Business Expansion Scheme, a government initiative to provide tax support to start
up businesses, which has helped to generate increased levels of exports and R&D investments
across the country’s base of start-up businesses.
26
FDI Magazine, Feb 2004, Urban Renaissance
31
4.1.3.2 Labour Market Conditions
An additional factor in the investment decision to locate in Dublin was the attractiveness of
the labour market which was well educated, young, relatively cost effective and English
speaking. The Dublin population remains younger than the population within many
competitor locations and in 2010 and 2015 will have an average age of 36.9 years and 37.9
years respectively. Ireland is also expected to have the largest under 25 year old population
share in Western Europe. (Ireland Vital Statistics, IDA).
4.1.3.3 US effect
Economic growth was underpinned by significant FDI from a number of countries but
particularly from the US. This continues to be the case and it is reported that US investment
flow into Ireland in 2004 was $10.4 billion, roughly one-tenth the US total for the EU27 while
over 40 per cent of all US foreign software investment is in Ireland28, one-third of all
manufacturing inward investment in Ireland comes from the US and 300 US entities have
been licensed to trade in the IFSC.
This level of investment can be explained by some of factors above but also are testimony to
the cultural links between the US and Ireland and the marketing efforts that the Irish
Government have made to target CEOs of leading US companies. Time zone comparability
and lack of language barriers for US businesses seeking to manage cash in Europe and within
the Eurozone are also important29.
4.1.3.4 Other factors
While the IFSC was considered to be an undoubted success Ireland did benefit in other areas
such as the EU Common Agricultural Policy. It is widely accepted that Ireland has received
more support through CAP than other countries, receiving subsidies twice as large as their
share of EU agricultural output in 200430. The effective use of this support assisted the
overall development of Ireland’s economy.
4.1.3.5 Other benefits
The main benefits of IFSC activity to date are:
• the regeneration impacts;

• employment benefits; and
• associated fiscal tax income benefits.
However, our research has also found anecdotal evidence of other benefits including indirect
employment and supply chain development benefits, particularly in the business services
sector - legal firms, auditors and tax experts; and the corresponding knowledge transfer within
the cluster.
4.1.3.6 Possible threats
In spite of the advantages previously identified, there is a risk that, if left unchecked, an
overheating of the Irish economy could limit the future growth potential of the IFSC.
27
American Chamber of Commerce Ireland
28
Address by Mr Brian Cowen, To the American Chamber of Commerce Ireland November 2005
29
Offshore Treasury Centers: Rethinking Outsourcing Based on Tax-Advantaged Structures, June 2005
By George Cassidy (International Finance & Treasury)
30
BBC News, 2 December 2005
32
An example of this is the strong house price growth that has occurred in Ireland, and in
Dublin in particular in recent years, with house prices growing by 42 per cent in Dublin and
by 36 per cent nationally in the three years to September 2006.
Figure 4.7 – Average house prices in Dublin and Republic of Ireland
€450,000
Dublin Rest of RoI €419,800
€400,000
€356,200
€350,000 €330,600
€296,500
€300,000
€266,300
€250,000 €231,400
€222,100
€195,400
€200,000
€150,000
€100,000
€50,000
€0
2003 2004 2005 2006
Source: Permanent TSB House Price Index, 2006q3
A second example of how the Republic of Ireland economy is overheating is the rapid
tightening of the labour market that has taken place, with unemployment falling from 4.7 per
cent to 4.3 per cent over the past three years, with the decline expected to continue over the
medium term (Figure 4.8).
Figure 4.8 – ILO unemployment rates for the Republic of Ireland, 2003-2010
4.8
4.7
4.6
4.5
4.4
4.3 4.3
4.2
4.0 4.0
3.8 3.7
3.6
3.6
3.5
3.4
3.2
3.0
2003 2004 2005 2006 2007 2008 2009 2010
Source: Experian, 2006
33
Finally, price levels are on a strongly upward trend in Ireland, with consumer prices
increasing by 23 per cent since 2000 and commercial property prices increasing by 3 per cent
in 2005 alone31. This has put cost pressures on investors seeking to procure locally (Figure
4.9)
Figure 4.9 – Harmonised Index of Consumer Prices for the Republic of Ireland, 2000-
2010 (2000=100)
140
137
135 133
130
130
126
125 123
118
120
116
113
115
109
110
104
105
100
100
95
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In addition to this economic tightening, the future of the Republic of Ireland FDI market may
also be at risk from the diminishing importance of the US, Ireland’s biggest supplier of FDI,
in the European market. This is illustrated below.
31
http://www.shelteroffshore.com/index.php/property/more/commercial_property_ireland/
34
Figure 4.10 – US FDI investment projects in Europe as a percentage of all FDI projects
50
45 41.7 43.8
39.0
40
35.5 36.8
35
32.5
30 29.6
27.0 26.45
25
20
15
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Ernst & Young European Investment Monitor, 2006
4.1.4 Applicable lessons
The development of the IFSC in Dublin has contributed to economic growth in the Republic
of Ireland, and raised the prominence of the sector in the national economy.
In 2006, the financial services sector accounted for 4.7 per cent of employment and 9.7 per
cent of output, substantially higher than the figures of 4.2 per cent and 6.7 per cent reported
six years previously. However, in spite of this upward trend, the sector’s employment and
output shares are expected to remain broadly unchanged over the next four years (Figure
4.11).
35
Figure 4.11 – Employment and output in Republic of Ireland financial services sector
as a percentage of the national total
12%
10.0% 10.1% 10.3%

9.7% 9.9%
10% 9.5%
8.8%
8.4%
7.3%
8%
7.1%
6.7%
6%
4.7% 4.8% 4.9% 4.9% 5.0%
4.6% 4.6%
4.2% 4.3%
4.2% 4.1%
4%
2%
FTE employment
Output
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
However, due to the large movements of capital involved in financial services FDI, there is a
risk that assessing the impact of the sector purely in gross investment terms may cause the
sector’s impact on the economy to be overstated. Indeed Forfas reports that the financial
services sector creates fewer jobs per unit of investment than many other industries. This is
partly due to the fact that businesses operating in the financial services sector in Dublin are
engaged in large movements of capital by parent companies to their fund management and
other IFSC financial subsidiaries, which are then reinvested in overseas assets. In this sense,
flows of direct investment into IFSC companies are roughly matched by outward flows of
portfolio investment. The sector also has issues with the low levels of internal supply chain
activities which it attracts.
The main factors contributing to the success of the IFSC in Dublin can be summarised as:
• the international business culture in Dublin;

• modern IT infrastructure;
• regulatory environment;
• strong domestic political support;
• competitive cost base, assisted through low tax and ‘urban renewal incentives’;
• air access to the rest of the world;
• availability of well trained employees;
• youthful labour market;
• cultural relationship with US; and
• proximity to other financial centres.
The Central Bank of Ireland32 report that the risk to Ireland from the strongly growing central
and eastern European countries is relatively limited as Ireland has focused on different
sectors. This is underpinned by the fact that Ireland has a head start on these countries. In
effect it has a first mover advantage which it is sustaining by continually improving its offer.
32
Quarterly Bulletin 1 2006, Central Bank and Financial Services Authority of Ireland
36
While limitations may exist due to the labour market and inflationary pressures that growth
causes, the IFSC is a relatively sustainable model due to:
• first mover advantage;

• a culture of knowledge and innovation;
• continuous improvement ahead of competitors;
• network creation amongst firms; and
• employees who are willing to remain in the area.
4.2 SWEDEN
Until the mid-1980s FDI in Sweden was restrictive and governed by a complex system of
laws and regulations. Since entry into the EU in 1995, Sweden has improved the investment
climate to attract FDI through a number of interventions including reductions in income and
corporation tax, deregulation of foreign ownership and loans to foreign investors.
Although FDI has increased in Sweden in recent times, there are obvious year on year
fluctuations.
4.2.1 Role of government
The following bodies govern and influence FDI in Sweden:
• Swedish Institute for Growth Policy (ITPS); analyses policies, growth studies and
various areas of government statistics;
• Swedish Business Development Agency (known as Swedish National Board for
Industrial and Technological Development (NUTEK) prior to 2001);
• Invest in Sweden Agency (ISA);
• Position Skane – the agency for investment and tourism in Southern Sweden.
ISA offers assistance in key sectors including IT, electronics and biological sciences:
• comprehensive information on business opportunities in Sweden;

• tailor-made information and practical advice;
• introductions to relevant contacts;
• assistance in finding and arranging visiting programs; and
• supporting the development of the Fibre Optic Valley cluster.33
4.2.2 Performance
FDI in Sweden has increased significantly since 1989 helping GDP to grow by 73 per cent
between 1991 and 2005.34
FDI inflows in Sweden peaked at over £3.8 million in 1999, and increased by 73 per cent in
the ten year period 1990 to 1999. Since 1999 FDI inflows in Sweden have decreased each
year, reaching -£202 million in 200435. Figure 5.9 demonstrates the volatility of FDI in
Sweden.
33
Invest in Sweden Agency http://www.isa.se/templates/Normal____2040.aspx
34
OECD.stat http://stats.oecd.org/wbos/default.aspx
35
A negative outflow could indicate a disinvestment (e.g. where capital or earnings are repatriated to
the country of origin)
37
Although foreign ownership increased, this was mainly due to acquisitions of domestic firms
rather than greenfield operations36. The value of mergers and acquisitions between 1990 and
2000 increased in Sweden by 192 per cent.37
Looking across sectors (Table 4.2), we see that FDI in Sweden has traditionally been
dominated by the manufacturing sector, which has seen higher levels of inward investment
than tradable services in nine out of the past eleven years.
Figure 4.12
FDI in Sweden - Manufacturing, Services and Tradable

£ Million
Services, 1991 to 2002
35,000
30,000 SECONDARY SECTOR
TERTIARY SECTOR
25,000 Tradable Services*
20,000
15,000
10,000
5,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-5,000
Source: Central Bank of Sweden
* Note: Tradable Services includes transport and storage
In recent years, tradable service FDI has been largely dominated by the transport, storage and
communications sector, and the ICT cluster in particular, although there has also been
significant investment in finance and business services.
36
The determinants of FDI Flows: Evidence from Swedish manufacturing and service sector, Karpaty
and Paldah, 2006
37
UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx
38
Table 4.2 - FDI Inflows in Sweden by sector 1991-2002

£ millions
Sector 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
TOTAL 3,601 -23 2,559 4,150 9,150 3,482 6,695 11,965 37,642 15,355 8,264 7,841
PRIMARY SECTOR 0 1 6 0 306 8 -9 -41 301 95 -252 39
Agriculture, hunting forestry and fishing - - - - 0 - -1 2 120 3 1 1
Mining, quarrying and petroleum 0 1 6 0 306 8 -8 -43 181 92 -253 38
SECONDARY SECTOR 2,498 -295 1,188 2,180 6,572 802 2,559 3,841 30,715 6,151 4,294 414
Food, beverages and tobacco 42 0 245 23 807 33 289 38 57 -8 813 -128
Textiles, leather and clothing 38 7 2 14 8 -1 -2 -8 -2 27 25 28
Wood and wood products 12 -6 149 591 -55 179 102 2,200 198 266 1,523 -154
Manufacture of wood products - - - - - - - - - - 3 131
Paper and paper products 11 -9 146 305 -86 178 96 2,279 123 225 1,520 -284
Coke, petroleum and nuclear fuel 69 194 313 1,486 5,197 263 414 217 24,805 1,066 -759 506
Chemicals and chemical products - - - - - - - - - - - -
Rubber and plastic products - - - - - - - - - - - -
Non-metallic mineral products 12 11 96 74 3 105 -42 178 1,477 -524 29 6
Metal and Metal products - - - - - - - - - - - -
Basic metal and metal products 144 458 50 127 57 -78 134 147 274 36 818 892
Fabricated metal products - - - - - - - - - - - -
Machinery and equipment 2,181 -961 333 -136 503 301 1,661 1,030 3,900 4,971 1,867 -882
Other manufacturing 0 2 0 0 53 0 4 39 6 316 -21 145
TERTIARY SECTOR 969 706 639 996 743 2,268 2,887 5,966 3,050 4,952 2,879 6,797
Electricity, gas and water 182 146 58 1 133 1,538 841 -50 181 1,238 1,045 966
Construction 22 7 80 16 48 5 9 -31 -6 28 43 2
Trade 151 187 244 629 304 182 858 70 504 1,128 -399 1,043
Hotels and restaurants - - - - - - - - - - - -
Transport, storage and communications 39 44 105 141 140 306 368 614 878 765 700 2,003
Finance 338 117 6 102 -40 25 244 5,280 349 989 895 1,281
Financial intermediation 8 -76 170 100 -41 13 243 5,200 229 542 894 178
Insurance and pension funding 330 193 -165 2 1 12 1 80 120 447 2 1,103
Business activities 239 155 126 103 148 192 506 37 1,132 870 547 1,528
Community, social and personal service -2 50 21 4 10 19 62 46 11 -67 48 -24
Unspecified 114 110 63 10 7 405 384 696 1,123 2,084 1,716 720
Reinvested earnings 20 -546 664 964 1,522 364 873 1,502 2,452 2,074 -373 -129
Source: Central Bank of Sweden, Balance of Payments
39
The growth in FDI in Sweden is due to a number of institutional changes that took place
during the late 1980s, including liberalisation of cross-border capital transactions and the de-
regulation on foreign ownership. The tax reform launched in the early 1990s resulted in a
decrease in corporation tax, attracting further foreign investment
Sweden has a number of competitive advantages that attract foreign investors:
• It has an exceptional telecommunications network, a stable political environment,

advanced technology and a well-educated labour force (highly skilled in modern
technology) owing to the expansion of higher education in Sweden;
• Deregulation of industries; in particular the electricity, postal service, air transportation,
railroads and telecommunication markets, has resulted in more efficient sectors and
lower prices.
Sweden has implemented a range of incentives to encourage FDI inflows, these include:
• Dividends paid by foreign subsidiaries in Sweden to their parent company are no longer
subject to Swedish taxation;
• Loans are available to foreign investors from the Swedish Business Development
Agency and the regional development funds;
• Support programmes include location and employment grants; low-rent industrial
parks; economic free zones;
• A range of incentives exists for research and development programs by the Swedish
government;
• Deduction on key foreign personnel’s income tax.
• The development of the ‘Fibre-Optic Valley’ ICT cluster, centred around the
Hudiksvall municipal area, on the Gulf of Bothnia, 300km north of Stockholm.
For example, as part of Sweden’s reform to its higher-than-average income tax system, and to
encourage foreign key personnel to Sweden, there was a reduction in income tax charges for
key foreign personnel. This change meant that from January 2001 onwards, individuals
classified as ‘key expert personnel’ within foreign direct investment firms were only required
to pay tax on 75 per cent of their income. While foreign companies have complained about
bureaucratic difficulties and the sometimes arbitrary nature of obtaining expert status38, we
found no evidence that this has impacted upon decisions to invest in Sweden.
4.2.4 Threats
Although Sweden has recently enjoyed great success in attracting FDI, there are a number of
factors which, if left unchecked, are likely to deter investors in the future. One such deterrent
is likely to be the high cost of labour in the country, which can cause investors profit margins
to be squeezed. This is illustrated overleaf.
38
2006 Investment Climate Statement – Sweden, US department of State
40
Figure 4.13 – Average monthly labour costs in selected European economies, 2003
€5,000
€4,500 € 4,313
€ 4,101
€ 3,997 € 3,895
€4,000 € 3,726 € 3,716 € 3,643
€ 3,487
€3,500 € 3,355
€ 3,017
€3,000
€2,500
€2,000
€1,500
€1,000
€500
€0
y
m
UK
en
ce
nd
nd
k
nd
an
ar
nd
iu
an
ed
la
la
la
m
m
lg
la
Po
I re
Fr
Sw
en
Be
r
er
Fi
he
G
D
of
et
ic
N
l
ub
ep
R
Source: Eurostat, 2006, CSO Census of Industrial Production, Polish Central Statistical Office, Experian
In addition to these high labour costs, high price levels in general in the country may diminish
investors’ purchasing power, and act as a deterrent to future investment39. Furthermore, the
country’s high tax, and especially income tax levels, may reduce the country’s attractiveness
to investors.
4.2.5 Applicable lessons
The Swedish example has shown that, through a combination of heavy investment in
infrastructure, capital and skills; outward looking trade policy; cluster development; and a
discriminatory taxation system, it is possible for a country that was once largely overlooked
as a location for overseas investment to position itself as a desirable location of knowledge
intensive business. However, such success comes at a price, contributing to high housing and
labour costs, and high levels of personal taxation; factors which, in the long term, could act as
a deterrent to future investors if policies aren’t implemented to address them.
4.3 POLAND
Poland has undergone significant political and economic transitions in the past 20 years. In
1989 it became the first country out of the former Soviet block to re-establish democracy and
launch an economic and social move to a market economy.
Following financial liberalisation and reforms including a new currency in 1995, FDI
increased in Poland. The country joined the EU in 2004, and after the announcement in 2003,
FDI in Poland was boosted appreciably.
4.3.1 Role of Government
FDI is monitored by three institutions in Poland:
39
A recent study by The Economist suggested that prices in Sweden were 53 per cent overvalued in
relation to the US$, see http://www.oanda.com/products/bigmac/bigmac.shtml
41
• National Bank of Poland (NBP);

• Polish Agency for Foreign Investment (PAIZ);
• Central Statistical Office (GUS).
The Polish Agency for Foreign Investment (PAIZ) was established in 1992 with the objective
of promoting Poland’s investment opportunities. PAIZ offers foreign companies its know-
how and helps them establish contacts with governmental bodies and the business
community.40
The National Bank of Poland and the Ministry of Finance are responsible of licensing and
regulating banking activities. They record and publish data on FDI activity in Poland.
Foreign exchange permits are issued by the NBP.
4.3.2 Performance
Figure 4.14 shows FDI inflows and outflows between 1991 and 2004.
Figure 4.14
Foreign Direct Investment in Poland 1990-2004

10,000
8,000 inflows
outflows
6,000
Millions of dollars
4,000
2,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-2,000
Source: UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx
Over the period 1990 to 2000, FDI inflows in Poland increased every year. Flows decreased
by 56 per cent between 2000 and 2003; however following the announcement that Poland
would join the EU,they recovered. Growth in FDI outflows has been less volatile.
Table 5.3 below gives a breakdown of FDI inflows in Poland by industry sector.
40
UNCTAD WID Country Profile: POLAND
42
Table 4.3 - FDI inflows into Poland by industry

Millions of Dollars
Sector 1996 1997 1998 1999 2000
TOTAL 4,498 4,908 6,365 7,270 9,342
PRIMARY SECTOR 12 23 26 60 37
Agriculture, hunting forestry and fishing 4 5 8 57 11
Mining, quarrying and petroleum 8 18 18 3 26
SECONDARY SECTOR 1,559 1,197 1,882 1,412 1,770
Food, beverages and tobacco 597 361 720 176 407
Textiles, leather and clothing 31 22 16 30 4
Wood, publishing and printing 10 222 155 254 283
Chemicals and Chemical products 130 245 185 166 176
Rubber and plastic products 131 48 110 172 127
Non-metallic mineral products -4 -1 0 0 13
Basic metal and metal products 54 103 7 193 93
Machinery and equipment 81 23 79 80 64
Office machinery and computers 0 -1 -2 4 28
Radio, television and communication apparatus 47 55 55 25 85
Motor vehicles 342 193 466 280 280
Other transport equipment 8 1 -18 29 20
Other manufacturing 389 217 406 341 506
TERTIARY SECTOR 1,573 1,631 2,139 5,453 7,220
Electricity, gas and water 5 -2 28 44 350
Construction 48 20 89 1 157
Trade and repairs 612 433 782 834 749
Hotels and restaurants 3 -14 6 27 84
Transport 17 25 -3 44 237
Telecommunications 133 25 7 1,789 3,185
Finance 608 896 1,019 2,342 1,972
Monetary intermediation 502 721 728 2,194 1,130
Financial intermediation 66 120 145 24 522
Insurance and other activities 40 55 146 124 321
Real estate 50 45 27 144 284
Business activities 107 200 179 142 160
Other services -11 3 6 86 44
Unspecified 1,355 2,059 2,318 345 316
Source: National Bank of Poland, Statistics Department
Between 1996 and 2000, FDI in Poland increased by 108 per cent, with the tertiary sector’s
(services) share increasing from 35 per cent to 77 per cent. This was mostly due to the
increase of FDI in the telecommunications industry. FDI in telecommunications decreased
between 1996 and 1998 due to lack of regulation in the sector. As more regulation came into
force in 1999, FDI in the sector increased 247 fold between 1998 and 1999, then by a further
78 per cent in 2000.
Another important sector for FDI in Poland is finance, which includes Monetary
intermediation, financial intermediation and insurance and other activities. In 2000 the
financial sector accounted for 21 per cent of total FDI in Poland, following privatisation of
state-owned banks from 1993 to 2000.
The secondary sector (manufacturing), although showing an upward trend in FDI, has
suffered from some volatility. In 1996 the secondary sector accounted for 35 per cent of total
FDI inflows in 1996 compared to 19 per cent in 2000.
43
In 2001, Germany, France and Netherlands accounted for almost 60 per cent of Poland’s total
FDI stock. The role of developing countries as a source of FDI inflows in Poland is quite
small, declining largely due to the disinvestment by the Republic of Korea. Major foreign
investors in Poland include:
• Fiat Auto Poland SA (Italy) in the motor vehicles industry, the largest TNC affiliate;
• Makro Cash and Carry SA (Germany) in distributive trade, is the second biggest;
• KGHM Polska Miedz S.A. is the largest home-based TNC in Poland41
FDI in service industries has been heavily influenced by significant one-off investments in
privatised government owned organisations.
Increases in FDI in Poland may be driven by the various mechanisms that are in place to
encourage FDI in Poland. Foreign entrepreneurs have equal rights to Polish entrepreneurs in
establishing and conducting business activity in Poland. In addition restrictions to FDI
investment have become relaxed in Poland, with the following provisions being made:
• guarantee of unrestricted transfer of profits and investment capital;

• generally no restrictions of foreign ownership, although some restrictions exist in
certain activities;
• screening mechanism for entry abolished;
• terms attached to the privatisation of some large state-owned entries, such as
production or performance targeting may be negotiated.
Both foreign and domestic investors must obtain government concessions, licenses or permits
to engage in certain activities. Prior to 2001 the number of sectors that required concessions
was 27, but this was reduced to nine in 2001 and again to six in 2004 (broadcasting, aviation,
energy, weapons, mining, and private security services).
Another factor influencing foreign investment in Poland is that the country’s population is
larger and younger than in any other European country bar Turkey, creating the largest
consumer market in Central Europe and a significant pool of young active labour. This is
illustrated in the following chart.
41
UNCTAD, FDI in Brief: Poland
44
Figure 4.15 – Proportion of the population aged between 15 and 24, 2006
20
18
16.5
16 15.5
14
12.9
12.2
12
10
he ay
R aria
Po e y
La s
F r ry
Le Por K
en al
Sl n d
C ia
Ire ia
R land
th a
Ic i a
d
ze Bu lta
C ia
Hu atia
ce
Au i n
Sw tria
N Nor n
Lu rm d
en g
Sl blic
m y
k
Fi in
itz nds
ru
xe an
ar
e
G lan
D our
Li ani
an
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ak
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ic tug
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a
et w
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ua
Sp
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u
M
ro
Sw rla
ch lg
el
nl
ov
Tu
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ov
om
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ht
Source: Eurostat, 2006
C
Furthermore, although Poland’s transport system and infrastructure are weak by Western
European standards42, labour costs are low. In 2002, the typical cost of a day’s skilled labour
in Poland was 13 per cent of the equivalent figure for France, and 11 per cent of the
equivalent figure for Germany.
Poland has been regarded as an attractive location for FDI, and has ranked consistently highly
in the annual AT Kearney index of competitive destinations for FDI, raking 5th in the most
recent 2005 index43. This was due to many factors including:
• geographical location;
• political change and acquisition opportunities;
• a young qualified population of working age;
• attractiveness of working in foreign companies due to the higher rates of pay;
• a relatively cheap workforce.
Poland has undergone major privatisation over recent years which included the opportunity
for FDI through acquisitions such as the largest privatisation to date when France Telecom
invested in Telekomunikacja Poland in 2000. Another, and one of the most recent is an issue
of 30 per cent of shares in the largest Polish bank, PKO BP on the Polish stock market in
2004.
4.3.4 Threats
As in the Swedish example, there is a risk that the country’s growing popularity as a foreign
direct investment location will lead to cost push inflation, thus reducing the country’s
competitive advantage as a low cost location. Indeed, evidence of this has already been seen,
with the cost of labour in Poland outgrowing the EU average (Figure 4.16). Furthermore, the
42
FDI Impact on Polish Labour Market, Agnieszka Ziomek
43
http://www.atkearney.com/main.taf?p=5,3,1,140,1
45
recent expansion of the EU to include Romania and Bulgaria may cause Poland to lose out
from low skilled FDI to cheaper competitors in future.
For these reasons, Poland will be required to move further up the value chain if it wishes to
retain its competitive position, which is likely to require significant investment in
infrastructure.
Figure 4.16
Labour Cost Index 2004 (2000 Base)

300
250
200
150
100
50
Malta
Slovakia
Germany
Italy
Hungary
Austria
Greece
Ireland
Slovenia
Latvia
EU (25)
Denmark
Cyprus
Netherlands
Lithuania
France
Sweden
Finland
Spain
Poland
Estonia
Bulgaria
Romania
United Kingdom
Portugal
Czech Republic
Belgium
Luxembourg
Source: Eurostat
4.3.5 Applicable Lessons
In recent years, the emergence of Poland, and the other accession nations, has meant that
Northern Ireland is no longer in a position to compete on low-value added assembly and
business process outsourcing opportunities, and must to seek opportunities further up the
value chain. This trend is likely to continue as the Polish economy increases in sophistication,
and this is likely to put further pressures on the Northern Ireland business base.
However, in spite of this threat, Poland also presents Northern Ireland with an opportunity for
the development of highly competitive joint FDI propositions with Polish organisations in the
business and financial services sector. Such propositions would involve companies
establishing operations in Northern Ireland with responsibility for management and customer
service tasks, and operations in Poland to handle the processing side of the business.
46
5 Workshops and business

consultations
5.1 WORKSHOP
As part of our research, a workshop was held involving representatives from Invest Northern
Ireland, Intertrade Ireland, DETI, and a range of recruitment companies and employers in
order to:
• Form a view on the strengths, weaknesses, opportunities and threats in the Northern
Ireland economy; and
• Gather opinions on the best ways to exploit the strengths and opportunities and to
mitigate the weaknesses and threats.
A summary of the views of those who attended the workshop is provided in this section.
5.1.1 SWOT analysis
5.1.1.1 Strengths
The attendees felt that the province’s key strengths included:
• An untapped graduate market – although attendees felt that this has been a strong
strength of the region in the past, it is less so now, as an increase in high-skilled jobs
has absorbed much of this excess capacity;
• Cultural compatibility – particularly with the US market;
• Infrastructure, particularly in telecoms infrastructure;
• Room for expansion – in comparison to more constrained competitor areas such as
Dublin;
• A ‘Can do attitude’ – although this was disputed by some attendees;
• Status as an English speaking nation – seen as a comfort factor for some investors;
• An accent that is easily intelligible to overseas customers – this gives Northern Ireland
a particular advantage over Scotland for example;
• A tight legislative environment particularly in the areas of security and intellectual
property – giving Northern Ireland a particular advantage over India for example;
• Access to the profitable Republic of Ireland market;
• Status as a member of the European Union – helping to overcome customs issues;
• A strong research base –there appears to be little appetite to commercialise this
although development of the NI Higher Education Innovation Fund is a move in that
direction;
• Ease of hire and fire – especially in relation to France;
• Low churn levels – which encourages companies to invest more in training without fear
of ‘poaching’.
5.1.1.2 Weaknesses
The attendees felt that the province’s key weaknesses were:
• A large pool of workers with only basic or intermediate skills – although this was once
a strength, it is now seen as preventing movement up value chain;
• Lack of foreign language capability;
47
• Mismatch between the nature of research and development work undertaken by

universities and that required by business44;
• A ‘brain drain’ of graduates to mainland Britain;
• Higher corporation tax rates than the Republic of Ireland;
• Low levels of entrepreneurship - preventing supply chain opportunities of FDI from
being maximised;
• An ‘over-sized, over-paid and over-secure’ public sector, that absorbs much of the
province’s skilled people;
• Lack of scalability outside Belfast due to property shortage, labour shortage,
demographic factors and absence of universities.
5.1.1.3 Opportunities
Opportunities in the province were noted as:
• The ability to provide a near-shore solution for Indian businesses (e.g. HCL);
• An emerging brand, and a more recognised international status as a place to invest;
• Opportunity to market province as a cost minimisation location, as opposed to a profit
maximisation one;
• Growing global demand for IT security;
• Potential to lure contact centre and back office processing businesses out of Eastern
European countries, due to high levels of inflation in these countries;
• Initiatives to make education provision more business relevant, e.g. ECIT;
• Exploiting research organisations such as CUBIS;
• Attraction of workers returning to Northern Ireland from overseas following the peace
dividend;
• Use of low cost labour from accession countries as a solution to demographic problem;
• Focus on niche opportunities – for example, rather than targeting entire sectors,
focusing closely on the parts of the sectors that add value, that are expected to grow in
the years ahead, and for which Northern Ireland offers distinct locational advantages.
However, there was a debate about level of granularity that should be used to do this.
• Generating environment in which ‘winners pick us’ through, for example, lower
corporation taxes;
• Ability to absorb back office functions for IFSC following strong economic growth and
cost-push inflation in Dublin;
5.1.1.4 Threats
Threats to the province were thought to include:
• Saturation of the graduate market – The ‘strengths’ section identified Northern

Ireland’s untapped graduate market as a recent source of strength. However, it also
raised the issue of the recent absorption of much of this surplus by existing businesses.
Should this trend continue, a shortage of skilled labour may emerge as an issue in the
Northern Ireland labour market;
• Recruitment - Increasing difficulty finding people with sales skills;
• The emergence of India and Eastern Europe as competitive threats;
• Current low take up of maths and science at school level translating into a future skills
shortage in the labour market;
• A reduction in people learning ICT skills following the ‘bursting’ of the ‘dot-com
bubble’;
• A lack of public sector understanding of the commercial pressures businesses are under
leading to the withdrawal of businesses from Northern Ireland;
44
The HEIF or DEL’s HE and FE Collaboration Fund could help to address this
48
• A reduction in wealth creation and investment following the ending of the property
boom;
• Increased competition from outside of Europe;
• A lack of vision.
5.1.2 Developing opportunities and mitigating threats
During the workshop exercise, attendees argued that45:
• The advantages of cultural compatibility can be maximised by not only targeting US

companies, but also Indian companies that serve US markets. In particular, Northern
Ireland should focus on offering them a near shore solution for their EU and US
markets, and help in ‘leverage the virtual day’46;
• Northern Ireland could benefit from making more reference to security, IP and
legislative advantages in their sales proposition;
• Government marketing should be better targeted towards niche markets;
• Better use should be made of opportunities for joint ventures, with places like India and
Poland. A joint proposition could be made with such low-cost countries whereby they
provide the scale, and Northern Ireland provides the comfort to investors in terms of
legislative environment and cultural compatibility;
• Attempts should be made to attract outbound sales contact centres47 to areas outside
Belfast and Derry as they offer a spectrum of occupations, allowing inactive people and
women returners to join company in less skilled roles, and to move themselves up the
value chain;
• Invest Northern Ireland could better exploit the opportunities presented by the Indian
market by having a permanent member of staff based there – something currently under
consideration;
• Government support for skills and education provision should be better targeted to the
needs of businesses (e.g. science and maths). DETI and Invest NI have a role to play in
influencing DEL’s priority skills areas. DEL have responded to this criticism by
pointing out that their Skills Strategy and FE Means Business initiative are both
targeted towards business needs. It has also been pointed out that DETI and Invest
Northern Ireland are both involved in influencing DEL’s priority skills areas and the
Skills Expert Group is currently engaged in considering the NI priority skills areas as it
develops a NI Employment and Skills Action Plan.
• Resources should be allocated towards marketing IT as a career opportunity for
women;
• The public sector’s wage and pension offer could be reformed to make it less of a
magnet to Northern Ireland’s best talent; and
• Government could allocate a higher share of Northern Ireland’s public resources
towards economic development.
45
It should be stressed that all of these points represent opinions made by attendees at the workshop,
and do not necessarily reflect the findings of this research.
46
This refers to the opportunity to ensure that Indian and US businesses can continue to operate
productively and respond to changing conditions outside of the hours of their working day, by having
operations in other time zones.
47
A contact centre can be defined as ‘a centralised office used for the purposes of receiving and
transmitting a large volume of requests by telephone, letter, fax or e-mail’
(http://en.wikipedia.org/wiki/Call_centre). Although all outsourcing call centre service providers fall
under SIC code 74.86, most call centres operations fall under the SIC code of the company they
support. For example, the Customer Contact Association represents companies in the manufacturing,
utilities, public service and private service sectors.
49
6 Survey Findings
In addition to the quantitative employment, output and fiscal benefits, which will be discussed
in the next section, tradable services FDI is also likely to generate wider benefits to the
Northern Ireland economy. For example, we would anticipate that indigenous companies will
have an opportunity to sell their products to the FDI investor (upstream linkages) or they
could procure more cost effectively, as a result of having a new supplier operating in close
proximity (downstream linkages). It is also more likely that the Northern Ireland business
base will become more internationally competitive as they gain access to a broader range of
products and services. Furthermore, training and job opportunities provided by the FDI
investors have the potential to help raise the skills base of the Northern Ireland labour market
and the proximity of FDI investors is likely to facilitate networking, and allow the transfer of
ideas between Northern Ireland companies. However, in addition to these positive factors,
there is a risk that increased FDI investment may displace local activity, increase labour costs
for Northern Ireland businesses and increase the problem of skills shortage.
In this section we assess these wider benefits and threats through an analysis of the finding of
our surveys of brownfield FDI investors, and tier one beneficiaries in order to gain an
understanding of the extent to which these benefits have been experienced by companies in
Northern Ireland. The analysis is based on:
• Survey of FDI Projects;

• Tier 1 Survey.
6.1.1 FDI Survey
During October and November 2006 we undertook a telephone survey with tradable services
FDI companies. In this description we included not only foreign owned companies that had
chosen to locate a site within Northern Ireland but also companies headquartered elsewhere in
the UK but who had chosen to make a significant investment to develop a site in Northern
Ireland. The list of companies was provided to us by Invest Northern Ireland and included
not just companies they had assisted but also other FDI start ups they were aware of.
To carry out this survey, we were provided with contact details for 68 tradable service
companies. Of these companies, 31 had ceased trading, while four numbers were invalid.
Eighteen of the remaining 33 companies agreed to participate in the survey, equivalent to a
response rate of 58 per cent, Although this is a good response rate, unfortunately the sample
size of 18 is still too low for us to report on quantitatively48. However, the wealth of data
available comes from a broad spread of different types of tradable services FDI companies so
we are able to provide a useful summary of the main findings. Any figures reported relate to
the number of companies choosing each particular response and therefore should be treated as
indicative.
48
Looking at the confidence intervals of this dataset we see that, for example, if 50 per cent of
companies state that they agree with “xyz” we are 95 per cent confident that the true proportion of
companies that agree with “xyz”, had all 57 companies been interviewed, would lie between 34 and 66
per cent.
50
6.1.2 Tier 1 Indigenous Suppliers Survey
During the same period we also undertook interviews with Tier 1 indigenous suppliers of FDI
companies. In total we conducted interviews with 18 companies - the majority of whom were
mentioned by the FDI companies as being major suppliers for their Northern Irish site(s).
Once again, the sample size is still too low for us to report on quantitatively. However, the
interviews were undertaken with a broad range of suppliers including accounts, utility
companies, graphic designers, IT services, legal services, recruitment services and stationary
suppliers and we provide a summary of the main findings below.
6.2 FDI SURVEY RESULTS
6.2.1 Supply chain linkage
6.2.1.1 Upstream linkages
Table 6.1 provides details of the locations from which investors purchase their factors of
production. It shows that investors have a strong preference for local procurement, with 9
respondents out of 18 reporting that they procured at least 75 per cent of their materials in
Northern Ireland, and a further three procuring at least 50 per cent of materials there.
Table 6.1 - Proportion of purchases made from different geographic markets (number
of respondents)
Geographic market 0 to 24 % 25 to 49 % 50 to 74 % 75 – 100 %
Northern Ireland 3 1 3 9
England, Scotland and Wales 11 2 2 1
Republic of Ireland 15 1 0 0
Rest of EU 15 1 0 0
Outside of EU 14 1 0 1
Table 6.2 shows the extent to which FDI investors source their goods locally has changed
over time. It shows that despite the fact that the companies operate in an increasingly global
market, the proportion of products procured locally has increased in the past 12 months. There
are several possible explanations for this trend. For example, it may have occurred because, as
the companies are now more established in the Northern Ireland economy, they have had
more opportunities in the past year to establish links with local suppliers. Conversely, it may
be because tier one firms would have had longer to establish a presence in Northern Ireland,
in order to cater for the demands of the investor.
Table 6.2 - Change in proportion of goods sourced locally in past 12 months

Response Number of mentions
Significant increase 0
Increase 7
No change 11
Decrease 0
Significant decrease 0
Figure 6.1 shows the kinds of products and services that our responding FDI investors in
Northern Ireland tend to procure locally. It shows that IT and office supplies were the most
commonly procured product, being mentioned by 17 of the 18 respondents to this question.
Recruitment and HR services were another commonly procured service, as were electricity
and utilities, legal services and cleaning.
51
Figure 6.1 - Main products and services bought locally
Products and services bought locally by FDI investors in the

Northern Ireland tradable services sector
Number of mentions
18 17
16
14
12
10
8
8 7 7
6 6
6
4 3 3
2 2
2 1 1 1
0
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6.2.1.2 Downstream linkages
Although upstream linkages present important benefits to Northern Ireland’s indigenous

business base, attention must also be given to further linkages, which assist downstream
companies to procure more cost effectively.
Table 6.3 provides a summary of the types of markets that tradable service FDI investors in
Northern Ireland tend to sell to. It shows that all of the companies responding to the survey
sold primarily to other businesses, with large and medium sized businesses tending to be the
most significant customers.
Table 6.3 - Characteristics of main customers

Type of customer Number of
responses
Small private companies (<50 employees) 0
Medium private companies (50-250 employees) 3
Large private companies (>250 employees/multinationals) 15
Public sector 0
Individuals / Consumers 0
Small voluntary sector 0
Large voluntary sector 0
Table 6.4 shows the locations of the markets to which responding FDI investors in Northern
Ireland typically sell. It shows that the companies tend to be very internationally oriented,
with half of the question’s 16 respondents reporting that they sell the majority of their
produce to areas outside of the EU, and with only two of the 16 companies selling the
majority of their produce to the Northern Ireland market. This means that, unlike upstream
linkages, downstream linkages and benefits are likely to be minimal.
52
Table 6.4 - Proportion of sales made to different geographic markets

Geographic market 0 to 24 % 25 to 49 % 50 to 74 % 75 – 100 %
England, Scotland and Wales 12 2 2 0
Republic of Ireland 15 0 1 0
Rest of EU 11 4 1 0
Outside of EU 3 3 3 7
6.2.2 International competitiveness
Table 6.5 shows the anticipated growth markets for Northern Ireland’s tradable services FDI
companies over the next 12 months. These figures support the argument that the companies
tend to be outward looking, with only a small number of respondents anticipating growth
opportunities in Northern Ireland, and with companies seeing potential opportunities in a wide
range of global markets. This means that the companies are likely to make a contribution to
the international presence of the Northern Ireland economy for as long as they continue to
have their operations their. It also means that the displacement of local activity is likely to be
low.
Table 6.5 - Anticipated growth markets in next 12 months

Anticipated growth area Number of responses
Sales to UK and RoI
Northern Ireland market 2
Markets in the rest of the UK 2
Markets in the Republic of Ireland 0
International Sales
Other EU markets 6
USA 3
Asia 2
Eastern Europe 1
Global growth 2
Figure 6.2 shows the trends in turnover, selling price, exports, employment, profitability and
investment over the past year, and how these are expected to change over the year ahead. It
shows that:
• In spite of a reduction in selling prices, caused by intense low cost competition from
overseas, most respondents are reporting an increase in turnover, much of which has
come from increased exports;
• As a consequence of this turnover and export growth, employment and profitability
have both increased;
• Companies have responded to this growth by investing more heavily in new buildings
and in plant and machinery; and
• All of these trends are forecast to continue into the next year.
53
Figure 6.249
Net balance of Current and forecast trends in tradable services FDI activity
respondents
20 This year
18 Next Year
16
15 15
15 14
12 12
11
10 10
10
6 6
-2 -2
-5
Turnover/Revenue Selling prices Exports Employment Profitability Investment in new Investment in plant
buildings and machinery
6.2.3 New products and services
When FDI companies increase the range of products and services that they offer, the economy
benefits in two ways. Firstly, the investor’s local consumer and business customers gain
access to a broader range of products and services, and secondly, the company’s employees
and suppliers benefit from the resulting expansion.
Table 6.6 shows the responses made by survey respondents when asked whether the range of
services that they provide had changed since they moved to Northern Ireland. It shows that 10
of the 18 respondents reported an increased diversification, and that eight respondents
reported no overall change. No decreases were reported.
Table 6.6 - Change in range of services since moving to Northern Ireland

Response Number of
respondents
Increase 10
Decease 0
Remain unchanged 8
Of the 10 respondents who reported an increase, most reported that this was due to a
corporate decision to move into new areas, while other factors reported included:
• Improved technical capacity;

• Developing markets - new clients, with new demands;
• The increased access to an increasingly global market; and
• A corporate takeover by a larger firm.
49
The net balance of respondents is equal to the number of respondent reporting an increase minus the
number of respondents reporting a decrease.
54
This increase in product and service offering has been of notable benefit to the Northern
Ireland economy, with eight of the 14 respondents increasing their investment in the Northern
Ireland economy as a result of the expansion.
Although only a small number of these investors were prepared to provide details of the sums
they invested, the evidence appears to indicate that the impacts can vary widely, with
investments ranging from six figure sums to eight figure sums. The median investment was
£5.4 million.
6.2.4 Increased skills
FDI can be of particular benefit to the Northern Ireland economy if they generate an
investment in skills that can be utilised by other companies in the business base. However, a
shortage of skills can have an impact on an investor’s long term willingness to remain in
Northern Ireland.
Table 6.7 shows that, at present, skills gaps50 only pose a limited threat to FDI investors in
Northern Ireland, affecting only six of the 18 firms surveyed. Assuming no sampling error,
this would equate to a figure of 33 per cent, a significantly higher figure than the 9 per cent
reported for the Northern Ireland business base in The Northern Ireland Skills Monitoring
Survey 2005. The most commonly reported skills gap in the Northern Ireland labour force
were technical and business specific skills, and these were mentioned by three respondents.
Problems were also reported with numeracy, IT, sales and customer service skills, as was a
lack of entrepreneurial spirit and a poor consulting culture.
Table 6.7 - Companies experiencing skills gaps

Response Number of
respondents
Have skills gaps 6
Do not have skills gaps 12
As part of the survey, the six FDI investors who reported skills gaps were each asked to report
the impact that skills gaps is having on their businesses, with 1 representing ‘no effect’ and
100 representing ‘company closure’. Although most respondents did report some impact on
their businesses performance, only one respondent gave a response in excess of 60, indicating
that the effects of the gaps are limited.
Table 6.8 - Effect of skills gaps on company performance

Response Number of
respondents
Little or no effect (responses of 0-20) 1
Small impact on performance (responses of 21-40) 2
Quite high impact on performance (responses of 41-60) 2
Very high impact on performance (responses of 61-80) 1
Risk of company closure (responses of 81-100) 0
An alternative means of assessing the impact of labour supply difficulties on FDI investors in
Northern Ireland is to assess the extent to which companies have experienced ‘hard to fill’
50
A skills gap can be defined as “a gap between the types of skills that their current employees had,
and those that the organisation needed to meet their business objectives” (Source: Northern Ireland
Skills Monitoring Survey 2005),
55
(htf) vacancies51. Nine of the 18 respondents to the survey reported that they had experienced
hard to fill vacancies in their organisations during the preceding 12 months. These included
seven IT/software business, an electronics company and a financial services company.
Comparisons cannot be drawn between these finding and the findings of the Northern Ireland
Skills Monitoring Survey, as the survey contains questions relating to hard-to-fill vacancies at
a particular point in time, rather than over the course of a year.
Table 6.9 - Presence of hard to fill (htf) vacancies

Response Number of
respondents
Experienced htf vacancies 9
Have not experienced htf vacancies 6
Don’t know / Did not recruit 3
6.2.5 Networking
Economists such as Michael Porter have argued that, by working in close proximity to and by
networking and sharing ideas with successful large scale multinational companies52,
indigenous companies will be able to benefit from the exchange of ideas and best practice.
Table 6.10 provides details of the involvement of FDI companies in business networks and
support organisations in the Northern Ireland economy. It shows that approximately half of all
respondents are members of such organisations.
Table 6.10 - Membership of industrial networks or business support organisations

Response Number of
respondents
Am a member 9
Am not a member 8
Don’t know 1
Momentum, Northern Ireland’s ICT trade association, was the most cited example of an
organisation through which networking takes place, gaining four mentions. Invest NI,
Northern Ireland’s economic development agency also gained two mentions as an
organisation that supported business networking links.
Other organisation mentioned by survey respondents included:
• Centre for Competitiveness;

• Call Centre Forum;
• IT Industry Chief Executive Forum;
• Prince;
• ITIL;
• ECIT;
• CSPT; and
• Centre for Software Process Technology.
51
An htf vacancy is a position in a company which employers struggle to fill, either as a result of too
few potential employees having the necessary skills to undertake the post, or as a result of too few
qualified employees being willing to undertake the post, given the wage or salary on offer.
52
See Porter, M. (1980) Competitive Strategy, Free Press, New York, 1980 for a discussion of this
theory.
56
As well as being of significant benefit to indigenous firms, evidence from the survey appears
to indicate that these links are also beneficial to the investors themselves, with seven of the
nine respondents reporting they generated opportunities for their business.
Table 6.11 - Knowledge sharing opportunities generated through networks

Response Number of
respondents
Networks have generated opportunities 7
Networks have not generated opportunities 2
6.2.6 Knowledge and Technology transfer
In addition to these links with other businesses, links between FDI investors and universities
can also be mutually beneficial, allowing the two organisations to share in knowledge and
research findings. Furthermore, these shared finding will be disseminated to other Northern
Ireland businesses, both through the use of business networks, and through links between
universities and indigenous companies. Our survey showed that the majority of FDI
companies in Northern Ireland had links with local universities (Table 6.12).
Table 6.12 - Linkages between companies and universities

Response Number of
respondents
Linkages exist 14
Linkages do not exist 4
However, although most respondents had links with the University sector, the majority only
used these links for graduate recruitment purposes, with only three respondents using their
links principally for either research and development or knowledge transfer purposes (Table
6.13)53.
Table 6.13 - Purposes of links with universities

Response Number of
respondents
Graduate recruitment 8
Training 1
Research & Development 2
Knowledge Transfer 1
Other 2
Although knowledge transfer does not appear to be the principal purpose of investor-
academic links in Northern Ireland, the links do nonetheless appear to have an impact in this
area, with six respondents reporting t knowledge-sharing opportunities generated as a result of
the links (Table 6.14).
Table 6.14 - Knowledge sharing opportunities generated through university links

Response Number of
respondents
Links have generated opportunities 6
Links have not generated opportunities 8
53
Again this is being responded to by way of interventions such as the HEIF and/ or HE-FE
Collaboration Fund.
57
Furthermore, FDI projects can also benefit from links to the FE sector, and particularly in
response to companies’ training needs for planned workforce. Invest NI has engaged in
brokering such links in the IT and Financial Services Sector.
6.2.7 Perceptions of Northern Ireland
The FDI investors who participated in the survey had positive perceptions of Northern Ireland
as an investment location, with the majority of respondents either ‘agreeing’ or ‘strongly
agreeing’ with the statement that ‘Northern Ireland is a good place for businesses to invest in
the future’, and with a majority of respondents reporting that the province had either met or
exceeded their expectations. These supportive conditions led businesses to make further
expansions following their initial investment, and to broaden the range of products and
services that they offer from their Northern Ireland site.
6.2.8 Impact of FDI
All 18 of the surveyed foreign direct investors in Northern Ireland’s tradable services sector
either ‘agree’ or ‘strongly agree’ with the statement that ‘FDI is good for the economy of
Northern Ireland’, citing supply chain purchases, training provision, and knowledge transfer
benefits as evidence of a positive impact.
However, it was noted that investors do not do as much as they could to help Northern Ireland
companies make sales in other countries, and there is a view that there could be more done by
the public sector to help indigenous suppliers work with FDI companies, particularly in
developing the skills base.
6.2.9 Summary
In summary, the main findings of this analysis are that:
• Tradable service FDI investors have a tendency to procure a significant share of their
factors of production in Northern Ireland, with suppliers of recruitment services and IT
/ office equipment enjoying particular benefits;
• There is little evidence of any significant downstream benefits resulting from FDI
investment;
• Tradable service FDI companies in Northern Ireland are highly export-oriented, and
make a significant contribution to the presence of Northern Ireland in international
markets;
• Tradable service FDI investors are continuing to contribute to Northern Ireland’s
economic expansion in spite of low cost competition from overseas;
• Following on from their initial investment, there is evidence to suggest that companies
continue to invest in and develop their business;
• Although investors in Northern Ireland undoubtedly face skills issues, these do not
appear to be sufficient to threaten their operations; and
• Most tradable service FDI investors have established mutually beneficial links with
local businesses and universities, although there is scope to further develop these.
6.3 TIER ONE SURVEY
Although the tier one survey involved interviews with the same number of individuals as the
FDI investors survey, it accounted for a much smaller proportion of the total pool of
companies operating in the Northern Ireland economy. For this reason, it is difficult to draw
58
any firm, quantifiable conclusions from this work. However, respondents to the survey did
express some interesting views on the impacts of FDI on their businesses, and these are
summarised below.
• The FDI suppliers we consulted spoke favourably of Northern Ireland as a business

location, with all of the respondents agreeing that it was a good place to invest, and
with most expressing the view that Northern Ireland will become more competitive as a
business location in the years ahead;
• The strength of Northern Ireland as a business location was partly attributed to high
levels of workforce skills and a plentiful supply of business premises, and partly to
their proximity to other companies, whom they could sell their products and services to,
and collaborate with. In particular, the presence of FDI companies in Northern Ireland
was considered important, with these companies accounting for approximately one in
ten sales made by supplier companies;
• When asked about the impact that an increase in FDI would have on their business, the
majority of respondents felt that it would lead to an increase in company sales and that
it would encourage new businesses to set up in Northern Ireland. However, there was
also a view that an increase in FDI could lead to an increase in pay demands on their
business. Respondents also felt that an increase in FDI would have little impact on the
size of the labour pool, workforce skills or staff retention;
• Although all of the companies that we contacted had had some success in selling to
larger FDI investors, none have secured any major contracts as a result of their
relationship during the past five years;
• The majority of FDI suppliers do not have links with universities, and those that do
tend only to use them for graduate recruitment or training. They are therefore unlikely
to receive any of the knowledge transfer benefits resulting from relations between FDI
investors and the academic sector.
• However, a third of the FDI suppliers interviewed belong to specialist industrial

networks or business support networking organisations that assist their businesses to
innovate. Of these suppliers, two-thirds of them stated links with these networks
offered them opportunities to share knowledge or network with tradable services FDI
investors in Northern Ireland. As a result, the majority of suppliers agree that FDI
companies will improve technology transfer between Northern Ireland companies.
• Most FDI suppliers we talked to believe that in the past five years the volume of
foreign direct investment in their local geographic area has increased.
• FDI suppliers feel quite positive about Foreign Direct Investment and ‘strongly agree’
or ‘agree’ that it is good for the economy of Northern Ireland. Almost all suppliers
agree that FDI in Northern Ireland is good for their businesses. However, most felt that
there could be more done by the public sector to help indigenous suppliers work with
FDI companies, for example, by helping local suppliers to identify suitable contacts in
investing companies, and by raising awareness of what indigenous businesses had to
offer investing firms.
• There is little evidence from our limited survey at least to suggest that FDI has helped
indigenous companies to access new export markets, or that indigenous companies
have made changes to the quality of their product/service offer in order to meet the
demands of the FDI investors.
59
7 Quantitative Analysis
7.1 METHODOLOGICAL APPROACH
7.1.1 Input data
In addition to the analysis of survey data, we designed an employment, output and fiscal
impact model to estimate both the direct employment and output benefits of tradable services
FDI in Northern Ireland, and the wider indirect and induced benefits.
Wherever possible, the model inputs were based on the responses given by survey
respondents regarding their direct employment, turnover, and product destinations. However,
due to the limited number of survey respondents, we supplemented these figures with detailed
company data provided to us by DETI’s statistics research division, whose assistance in this
analysis was of significant benefit to our study.
7.1.2 GVA impact calculation
In order to arrive at a gross GVA impact estimate for each company, we multiplied the
reported direct employment impact for each company by £24,286, a figure which represents
average total value added per employed person in the Northern Ireland IT and Business
Services Sector based on data from Experian’s Autumn 2006 Regional Planning Service.
In order to convert this figure into a net impact, the following adjustments were made:
• We applied a 22 per cent displacement adjustment to account for the amount of output
and employment that the FDI investors displace from other companies within Northern
Ireland.
• We then applied an indirect impact multiplier of 1.075 in Northern Ireland, and 1.35 in
the UK, to the proportion of sales made locally, in order to account for the additional
benefits generated through the business spending of FDI investors and their local
suppliers. As little additionality guidance is available at a Northern Ireland level, we
used English Partnerships Additionality Guidance to generate these figures54.
• Finally, we applied an induced impact multiplier of 1.05 in Northern Ireland, and 1.25
in the UK, to total sales, in order to account for additional benefits generated by
company employee spend, and by spend by employees of those firms serving the
employees of the FDI investor. These figures were also based on English Partnership
guidance55.
54
As the figure is only being applied to the proportion of purchases made locally, we have adopted the
recommended multipliers for companies with strong local linkages here.
55
Recommended multipliers for areas with ‘average’ local linkages.
60
7.1.3 Employment impact calculation
As all of the companies in this study are foreign-owned, brownfield investors, we have
assumed that the gross employment impact of the intervention is equivalent to the company’s
total employment on site. We then applied the same assumptions on displacement and on
indirect and induced multipliers as in the GVA calculation, in order to reach a net
employment figure.
7.1.4 Fiscal impact calculation
We used the 2004 Annual Business Inquiry to calculate for twenty industry divisions:
• The ratio of employment cost to GVA contribution;

• The ratio of goods, materials and services expenditure to GVA contribution; and
• The ratio of capital spend to GVA contribution.
For each company, we then applied their reported turnover figure to the relevant three ratios,
in order to derive an estimate of gross expenditure on employment; goods, materials and
services; and capital. These gross figures were converted into net figures by applying the
same displacement and indirect and induced multiplier assumptions as in the GVA and
employment calculations.
Once these net impacts were generated, we calculated this fiscal impact by applying effective
tax rates of 3.8 per cent on goods and capital spend, 23.4 per cent on employment cost, and 11
per cent on company profit56. These figures represent typical effective tax rates for UK
businesses, based on an analysis of 2004 UK Input-Output tables.
Effective tax rates in Northern Ireland may be very marginally lower than this. This is
because businesses, on average, tend to be slightly smaller in scale, meaning that a higher
proportion of income will be taxed at a lower rate. However, due to the risk of sampling error
when calculating rates based on Northern Ireland ABI returns, a view was taken that UK data
would, nonetheless, be more reliable.
The figures do not account for the impact of transfer pricing. This is because, given the
difficulties surrounding the access of transparent data on company reallocation of profits, we
do not believe that this can be accounted for accurately. For this reason, the fiscal impacts
quoted within this analysis should be regarded as ‘high estimates’.
All of the calculations underlying the calculation are shown in Appendix B.
7.2 GVA IMPACT
7.2.1 Benefits
• Northern Ireland’s tradable service FDI firms directly contribute £751 million per
annum worth of output to the Northern Ireland economy equivalent to 2.9 per cent of
GVA. However, once a displacement factor has been accounted for, this figure is
reduced by £165 million57, to £586 million.
56
Operating Surplus/Mixed Income (equivalent to GVA contribution less employment costs) was used
as a proxi for profit.
57
The study has assumed that all displacement takes place at the Northern Ireland level.
61
• In addition, purchases made by the firms, and related purchases further up the supply
chain (indirect benefits) are worth £132 million to the Northern Ireland economy and
£309 million to the UK economy.
• A further benefit of £29 million in Northern Ireland and of £146 million in the UK
occurs as a result of purchases made by the employees of FDI firms, and by the
employees of the companies who serve these customers (induced benefits).
7.2.2 Net Overall Impact
When all of these factors are accounted for, the overall impact of FDI in tradable services on
GVA equates to £747 million per annum in Northern Ireland. This equates to 2.9 per cent of
total GVA and £1,041 million across the UK (0.01 per cent of total GVA) (Table 7.1).58
Table 7.1 - Impact of tradable services FDI on output in the Northern Ireland and UK
economies (£ million per annum)
Northern Ireland UK
Direct impact 751 751
Displacement - 165 - 165
Indirect benefits 132 309
Induced benefits 29 146
Net overall impact 747 1,041
Source: Experian, based on data from Experian, English Partnerships, ONS and DETI
7.3 EMPLOYMENT IMPACT
7.3.1 Benefits
• Using survey response data, and data provided to us by DETI’s Statistics Research
team, we have generated an estimate of total employment in the Northern Ireland
tradable services sector. We have found that the sector employs 30,905 staff, equivalent
to 3.8 per cent of the total workforce. These include:
o 17,360 in computer and related activities; and

o 13,545 in other business services (including R&D);
• Once displacement is accounted for, this figure falls by 6,799 to 24,106.
• In addition, the companies that produce the goods and services used by FDI firms
employ 5,441 people in Northern Ireland and 12,713 in the UK.
• A further benefit of 1,205 in Northern Ireland and of 6,026 jobs in the UK were also
associated with the purchases made by the employees of the FDI firms and their
supplier companies.
7.3.2 Net Overall Impact
When all of these factors are accounted for, the overall impact of FDI on employment equates
to 30,752 jobs at the Northern Ireland level. This equates to 3.8 per cent of all jobs. It also
accounts for 42,845 jobs at the UK level 0.2 per cent of the total. The fact that FDI accounts
for a higher proportion of employment than output reflects the tendency for employment
58
Model workings provided in Appendix C
62
productivity within the tradable service sector to be below that in more capital intensive
manufacturing industries.
Table 7.2 - Impact of tradable services FDI on employment in the Northern Ireland and
UK economies (total jobs)
Northern Ireland UK
Direct impact 30,905 30,905
Displacement 6,799 6,799
Indirect benefits 5,441 12,713
Induced benefits 1,205 6,026
Net overall impact 30,752 42,845
7.4 FISCAL BENEFITS
Once issues relating to displacement and the multiplier effect have been accounted for,
Northern Ireland’s tradable service FDI companies are responsible for an estimated £174
million in Government tax receipts in Northern Ireland, including £33 million per annum in
taxes on goods and capital spend, £105 million in taxes on employment, and £36 million in
taxes on company profits.
Across the UK, the companies are responsible for an estimated £311 million in Government
tax receipts. These include £50 million in taxes on goods and capital spend, £147 million in
taxes on employment, and £114 million in taxes on company profits.
Table 7.3 - Fiscal benefits associated with tradable services FDI in Northern Ireland and
the UK (£ million per annum)
Company profit Employment Good and capital Total fiscal
spend revenue
UK 114 147 50 311
63
8 Future trends in inward investment
The research on future investment trends will focus on the industries identified by DETI as
having outstanding potential for exports.
8.1 INVESTMENT OUTLOOK: OVERVIEW
International investment will remain a key driving force in the global economy. Cross border
flows are stimulated by the following factors:
• an increasingly integrated world market;

• a favourable outlook for the business environment;
• growing inter-nationalisation of services;
• the continuing expansion of foreign markets as an export base;
• technological developments that enable international businesses to be run in an
integrated manner;
• strong competitive pressures forcing multinationals to seek new locations for
production;
Against these stimuli to FDI, a number of potential constraints must be considered.

Geopolitical uncertainties are a permanent feature of international operations and their impact
on international investment has been heightened by concerns connected with terrorist attacks
in recent years. Other factors that dampen FDI include sharp exchange rate fluctuations driven
partly by volatile commodity prices, a reaction in some countries against foreign participation
in key sectors, and ‘outsourcing fatigue’ among Western companies.
While these factors will constrain growth to below its potential, the expansion of FDI is
expected to remain robust. A recent forecast by the Economist Intelligence Unit59 has FDI
growth averaging almost 5 per cent a year in the period 2007-10 on the central scenario. We
consider this to be a realistic forecast. Growth in international trade and investment has
exceeded global GDP growth in recent decades, and this pattern should continue.
The report also concludes that the bulk of the increase in FDI flows in the period 2007-10 will
be to developed countries. Boosted by strong EU/US investment links, annual growth in FDI
flows to these countries is forecast to average 7 per cent. The volume of FDI inflows into the
US, attracted by the wealth of opportunities, an entrepreneurial culture and a strong
infrastructure, is a major contributor to the strong growth projected for investment into this
group of countries. Despite buoyancy in the overall level of flows to developing countries and
further strong inflows into China, growth averaging only 1 per cent a year is forecast. The
diminishing effect of privatisations in many leading emerging markets is likely to constrain
the increase in inflows to rates below those seen in recent years.
8.1.1 UK prospects
As noted in Section 3, the UK remains the top attraction in Europe for inward investment,
despite the success of France and Eastern Europe in attracting investment in recent years.
France benefits from its geographical proximity to Germany and arguably has an edge over
the UK in terms of attracting European investment given its membership of the Eurozone.
Eastern Europe has become Europe’s main destination of manufacturing investment,
including some relocation of FDI projects from the UK.
59
World Investment Prospects to 2010, Economist Intelligence Unit
64
These trends are expected to continue. Intra-Eurozone investment and good, relatively
inexpensive labour supply in Eastern Europe will continue to provide a competitive
environment. Nevertheless, close transatlantic links are expected to benefit FDI growth in the
UK. The Economist Intelligence Unit report forecasts that the UK will be in second place
behind the US in terms of the value of inflows arriving in the period 2007-10. But since the
main driver of these flows is Mergers & Acquisitions rather than greenfield investment, the
potential boost to the UK’s output capacity and employment is limited.
8.1.2 Prospects for Northern Ireland
A striking feature of investment into Northern Ireland is that the bulk of FDI over the past
decade has been in manufacturing, which accounted for over 80 per cent of the total. The
share of manufacturing in terms of the number of projects (around two-thirds) and new jobs
created (around half) was much smaller than its share of financial flows. But this does not
seriously weaken the argument that in the face of intense global competition and a generally
bleak time for UK industry, Northern Ireland was remarkably successful in attracting
investment into its manufacturing sector in the ten years to 2005.
It is likely that in future it will be difficult to repeat this success, and that attention will need
to focus increasingly on exportable services if Northern Ireland is to continue to benefit from
new investment. A number of factors support this view:
• International trends – the share of manufacturing in FDI is steadily declining, see

table 2.4 which shows the composition of the global stock in 2003 compared with the
early 1990s. Flows are still buoyant, but are directed chiefly to Eastern Europe, the
Commonwealth of Independent States and developing Asia. The re-location of labour-
intensive manufacturing to emerging markets will continue.
• UK trends – the fate of high profile investments such as Motorola in Scotland and LG
in Wales highlights the problems inherent even in the high-tech sector of
manufacturing. In traditional industries, textiles, footwear & clothing, transport
equipment, paper, printing & publishing and rubber & plastics, opportunities for FDI
into the UK are modest. These are areas of UK manufacturing where we forecast
continued output decline or meagre growth over the long term.
• The exportable service sector has seen an upturn in project numbers and
investment flows since the mid-1990s and job creation in most years has been
significant. This trend reflects the comparative advantage that Northern Ireland
possesses in some areas of exportable services, exemplified by its success in attracting
investment in software development in the face of strong competition from other
locations.
8.1.2.1 Moving up the value chain
The Annual Survey of Hours & Earnings (ASHE) enables high-value-added services to be
identified through the wage rates paid in various sectors. The rates for the key exportable
services sectors in the UK are shown in the following table. The results underpin the view that
jobs created or safeguarded in computer & related activities and R&D, make a strong
contribution to moving the economy up the value chain. Investments in these sectors are high
quality, featuring profitable, high-tech companies paying wages above the national average.
65
Table 8.1 - Hourly earnings in UK exportable services

Number of jobs Median hourly gross pay (£)
(000)
Post & telecommunications 519 10.2
Banking 679 11.7
Insurance & pensions 208 13.2
Auxiliary to financial intermediation 252 16.7
Computer and related services 433 16.7
Research and development 142 15.7
Other business activities 2083 9.8
Recreational, cultural and sporting 517 7.9
All employees 23,606 9.6
Source: Annual Survey of Hours & Earnings
8.1.2.2 Geographical dimension-where will the investment come from?
Northern Ireland will benefit from the UK’s overall attractiveness as a destination for foreign
investment - openness to FDI, a flexible labour market with good labour relations, centres of
scientific excellence with a strong skills base in science-based research, membership of the
EU and use of English. Some of these are particularly relevant to investment in the sectors
under consideration. These strengths will continue to attract companies world-wide.
It has been argued that non-participation in the euro project has led to a decline in the UK’s
share of total FDI from the EU since the start of the EMU. In the absence of counterfactual
data, it is difficult to confirm this or to gauge the impact of the UK’s non-participation in the
euro. But it remains the case that that the large Eurozone countries are prominent sources of
FDI at the UK level. However section 3 showed that this was not the case in Northern Ireland.
North America has dominated the picture of FDI into the sectors under review over the past
decade.
Looking ahead, investment flows from outside UK will continue to be dominated by North
America, mainly the US, many of whose companies perceive the UK as the best base for their
European operations. Ireland’s proximity makes it a natural investor into the province,
however the scale will inevitably be smaller than from the huge US market, and their presence
in exportable sectors is currently limited. India has become a prominent recipient of FDI in
information and communication technology, and has demonstrated a growing propensity to
invest abroad.
8.1.3 FDI opportunities for Northern Ireland in selected sectors
Within the exportable services sector, Table 8.2 indicates sub-sectors with growth prospects
and high value added opportunities, to 2016 are shown in table. 60:
60
These are based on forecasts from Experian’s regional forecasts. A methodological explanation of
how they are derived is provided in Appendix C
66
Table 8.2 - Growth in output in Northern Ireland key sub-sectors selected by DETI
Real growth per annum (%) 2000-05 2006-16

Computer & related activities (SIC 72) 13.5 8.0
Research & development (SIC 73) * -3.7 3.5
Market research (SIC 74.13) 6.4 5.5
Business management & consultancy (SIC 74.14) 6.4 7.0
Architectural & engineering (SIC 74.2) 6.4 6.5
Technical testing & analysis (SIC 74.3) 6.4 6.4
Advertising (SIC 74.4) 6.4 6.0
Creative entertainment (SIC 92.1-92.3) 8.7 7.0
Source: Experian estimates and forecasts
*this is a small and volatile sector – latest data show a large fall in output compared with the early 2000s
This group of industries has demonstrated strong expansion over the past decade. Table 8.2
shows that robust growth in output is expected to continue in the medium term, albeit at a less
hectic pace in the case of the star performer – computer & related services. This sector posted
exceptional growth in the first half of this decade as it expanded from a relatively small base,
but progress at this pace is unsustainable as the industry matures. We expect growth over the
next decade to moderate to a still impressive 8 per cent per annum.
8.1.3.1 Computer & related activities
The computer & related activities sector was investigated in detail in a report by OCO
Consultants (Northern Ireland ICT sector review) completed in December 2006. The study
emphasised the importance of the sector in the FDI pattern of Northern Ireland and
highlighted the fact that Northern Ireland has been the leading region in Europe in terms of
the number of software development centres attracted from foreign investors. The data
presented in Section 3 confirms the impressive number of FDI projects in this sub-sector and
highlights the fact that it dominates the picture among the eight areas selected by DETI.
The OCO report also noted that Belfast is a highly competitive location, with operating costs
at 74 per cent of the average of all locations. This means the investor can save one-quarter of
their costs by locating in Belfast compared to other leading software locations. Belfast also
performs reasonably in terms of skills and labour force and well in terms of R&D capabilities.
The most promising FDI growth areas identified by the report within the computer & related
sector were:
• financial services software applications;

• R & D in information software;
• information technology outsourcing (ITO);
• IT technical support centres (TSC);
• wireless and mobile, driven by increasing demand and a continuous stream of innovation
Solid expansion prospects in software development internationally should provide a sound

platform for further significant investment inflows into Northern Ireland in this area. Growth
prospects to 2016 for the industry are the strongest among the sectors featuring in this sector.
Taking account of size (see table 8.3), past trends in attracting FDI and growth prospects,
computer & related services emerges as the clear leader among the eight sectors under
consideration for future FDI into Northern Ireland.
67
Table 8.3: Numbers employed in selected tradable service sectors (2005)
Number employed % of total employed

Computer & related activities (SIC 72) 6,371 0.9
Research & development (SIC 73) 1,652 0.2
Market research (SIC 74.13) 456 0.07
Business management & consultancy (SIC 74.14) 1,795 0.3
Architectural & engineering (SIC 74.2) 5,247 0.8
Technical testing & analysis (SIC 74.3) 150 0.02
Advertising (SIC 74.4) 674 0.1
Creative entertainment (SIC 92.1-92.3) 3,120 0.5
Source: Northern Ireland Census of Employment
8.1.3.2 The other seven sectors
The amount of FDI the other seven areas of activity can reasonably attract is relatively
modest. Although they display excellent output and growth prospects both domestically and
internationally, the volume of foreign investment they have attracted to Northern Ireland in
the past is small as shown in Section 3, and their potential is constrained by:
• limited incentive for overseas companies to establish significant overseas presence to

provide services where there are few barriers to international operations conducted from
the home location; and
• highly specialised labour requirements in key roles which might pose recruitment
problems.
The above highlights the fact that strong potential in international trade for a sector does not
necessarily indicate similar potential for FDI. For example, market research or architectural
firms in Northern Ireland might be well-placed to sell their services in the fast-growing
international market and boost invisible exports. But the scope for Northern Ireland to attract
overseas firms to establish operations in the province is limited as the work can be carried out
without significant barriers from existing locations. The absence of any identified FDI
projects in the sub-sectors in the past five years, as shown in Section 3, confirms this. It is not
automatically appropriate for service sectors that show strong potential for trade to be
prioritised for FDI. The relationship between export growth and FDI inflows is not as close as
in manufacturing.
The, research & development (R & D) sector seems to offer good potential for expansion.
Northern Ireland can offer research bases to support new products, linked if required to
manufacturing facilities. While it is possible that some of the FDI inflows classified in table
3.5 as computer & related activities should more properly be considered as R & D, the data
suggest that FDI in R & D was not substantial in the first half of this decade. Moreover,
analysis of the sector’s performance in Northern Ireland is hampered by uncertain data.
Recent output trends (see table 8.1) are hard to explain. In contrast to the exceptional growth
posted at the UK level (15 per cent per annum between 2000 and 2005) the sector actually
contracted in Northern Ireland according to both Annual Business Inquiry 2 data and DETI
Census of Employment statistics. The latter show that in 2001, the industry employed 1,829
people, but this number had fallen to 1,652 by 2005. This is reflected in the output contraction
shown in table 8.1. These employment and output data confirm that Northern Ireland has not
received substantial job-creating FDI inflows in the recent past. Looking ahead, we expect the
decline in output/employment to be reversed over the decade ahead, stimulated by steady
demand growth. FDI should be boosted as Northern Ireland capitalises on its ability to
provide research bases linked to manufacturing facilities in the way that the rest of the UK has
done over the past few years, and we expect some improvement on the modest experience of
the first half of the decade.
68
The architectural & engineering sector, dominated by architecture and engineering

consulting and design, has not attracted significant amounts of FDI in recent years. While
output growth prospects are positive and the sector is quite sizeable, we do not expect strong
FDI flows over the next decade.
Demand for business management & consultancy services should continue to grow at near
7 per cent a year, and exports will flourish against a buoyant global backdrop. But we expect
FDI flows to be small, given the nature of the industry. With consultants generally sent from
the company’s home base to clients’ premises, there is no real need to establish overseas
operations except in the largest markets.
Increasing leisure, ageing populations and technological advances underpin further expansion
in creative entertainment. Particularly strong growth in the music, games and screen-based
industries is expected. Scope for export of films and other productions is considerable, but
foreign investment in radio and TV activities, dance halls, arts facilities and other such
activities is likely to be minimal. Motion picture production might attract FDI, but not in large
volumes.
The remaining sectors, market research, technical testing & analysis and advertising are
very small and even if foreign investment is attracted, it will be small scale.
69
9 Key Findings & Recommendations
The first part of this section provides the key findings from the research and are reported
according to the original research specification.
9.1 RANGE OF BENEFITS TRADABLE SERVICES FDI CAN GENERATE
9.1.1 Output benefits
• Foreign direct investors in Northern Ireland’s tradable services sector directly

contribute £751 million to output in the Northern Ireland and UK economies,
equivalent to 2.9 per cent of Northern Ireland GVA. However, once displacement is
accounted for, this figure falls by £165 million to £586 million;
• In addition, supply chain linkages between investors and indigenous firms contribute a
further £132 million to output at a Northern Ireland level, and a further £309 million at
a UK level;
• Expenditure by employees of FDI investors, and by employees of the companies who

serve them contributes a further £29 million to output at a Northern Ireland level, and
to a further £146 million at a UK level;
• As a consequence, the overall impact of tradable service FDI is equal to £747 million
at a Northern Ireland level (equivalent to 2.9 per cent of total GVA), and to £1,041
million at a UK level (equivalent to 0.01 per cent of total GVA).
9.1.2 Employment benefits
• Foreign direct investors in Northern Ireland’s tradable services sector contribute

towards 30,905 jobs in the Northern Ireland and UK economies. However, once
displacement is accounted for, this figure falls by 6,799;
• In addition, supply chain linkages between investors and indigenous firms contribute to
a further 5,441 jobs in Northern Ireland, and to a further 12,713 jobs nationally;
• Expenditure by employees of FDI investors, and by employees of the companies who

serve them contributes a further 1,205 jobs at a Northern Ireland level, and to a further
6,026 jobs nationally;
• As a consequence, the overall impact of tradable service FDI is equal to 30,752 jobs at
a Northern Ireland level (equivalent to 3.8 per cent of total employment), and to 42,845
jobs at a UK level (equivalent to 0.2 per cent of total employment).
9.2 BENEFITS AT THE SUB SECTORAL LEVEL
Our literature review found evidence of a clear link between levels of FDI investment and the
quality of jobs on offer at the UK level, with the development of the FDI base leading to
improvements in earning potential. However analysis of Invest Northern Ireland data shows
that the evidence is inconclusive at the Northern Ireland level.
70
The research has also found evidence linking increases in FDI levels in Northern Ireland, to
an expansion in the less-developed private services sector. Our survey, albeit on a limited
sample, indicated the highest levels of purchases being made by tradable services investors in
Northern Ireland are in business services in particular recruitment, IT, legal, accounting,
training, and cleaning services.
As well as giving indigenous companies the opportunity to sell their products to FDI investors
(‘upstream benefits’, accounted for in the ‘indirect benefit’ calculation), the research found
some evidence of indigenous companies experiencing efficiency gains as a consequence of
being able to procure certain services more cost effectively, although the generally export-
oriented nature of FDI investors mean that this benefit has been somewhat limited.
Given the export-oriented nature of the FDI investors, it is likely that the investment has had a
positive impact on the international profile of Northern Ireland, increasing export share, and
improving the balance of payments although the link between tradable services FDI and
exports is not consistent across all tradable services sectors.
The research found evidence that FDI investors are very willing to train and invest in the
skills of their staff, and this has helped to improve the quality of the Northern Ireland labour
force. However, the extent to which this investment ‘crowds out’ training that would have
been otherwise provided elsewhere is unclear from the available evidence.
In many countries, there is evidence to suggest that FDI can increase the range of services on
offer to both consumers and businesses and, as in the case of the Republic of Ireland, there is
evidence to suggest that it can help bring about an increase in the sophistication of an
economy’s financial services and technological offer.
There is also evidence in academic literature to suggest that the presence of FDI investors in
business networks can boost the level of knowledge transfer between businesses, and that
these links can increase innovation and improve product quality. The literature also suggests
that FDI companies in Northern Ireland participate enthusiastically in such networks.
However, the extent to which it is possible to capitalise on these benefits depends on whether
FDI investors have positive ‘developmental’ linkages with their local economy, or
neutral/negative ‘dependent’ links. From the evidence gathered in this research, it would
appear that both types of linkages exist within the Northern Ireland FDI business base,
although businesses in Belfast, and those in the ICT and business services sectors tend to be
more developmental.
The extent to which these spillover benefits will be experienced is likely to depend upon the
quality of the jobs generated by the FDI investor. One useful methodology for assessing this
is to define a ‘quality job’ as one which pays more than Northern Ireland’s average earnings
level61. However, although Invest Northern Ireland do hold statistics on the total number of
jobs created above and below mean average earnings, figures on the number of jobs earning
in excess of an agreed threshold above average earnings are not available.
9.3 FISCAL BENEFITS OF SERVICE SECTOR FDI
There is strong anecdotal evidence to suggest that many multinational corporations use
sophisticated accounting practices to repatriate profits for tax evasive purposes (a process
known as transfer pricing). Such practices are likely to impact adversely on the UK exchequer
61
See also one measurement by Scottish Development International (SDI) of its performance, being the
number of fte jobs created paying 20 percent above average Scottish salaries. IDA Ireland assesses
performance against the value of job. For example, a benchmark of €40,000 is used, 20 percent above
average Irish salaries. Also proportion of graduate jobs created is important for all sectors.
71
due to the lower rates of corporation tax charged in the neighbouring Republic of Ireland.
However, the practice may at some point become beneficial to the Northern Ireland economy,
should a corporation tax differential emerge between the province and the British mainland.
Because the techniques used by companies to repatriate profits are deliberately non-
transparent, it is not possible to quantify the effect of transfer pricing on tax revenue from
tradable services in Northern Ireland.
However our research found that, in the absence of transfer pricing, the UK exchequer
benefits from an estimated £311 million in combined VAT, income, national insurance and
corporation tax receipts as a result of Northern Ireland tradable service FDI, though in reality
transfer pricing means that the actual benefit may be lower than this.
9.4 LOCATIONAL FACTORS
There is a view among stakeholders that, because Northern Ireland is an English speaking
location, with a close cultural compatibility to the US, it is likely to be viewed as an attractive
investment location for US businesses wishing to expand into Europe. There is also a view
that the province’s close proximity to the Eurozone, its strong legislative environment, its
physical capacity, its comparatively low labour costs in relation to other Western European
locations and the large number of graduates it produces are all likely to prove attractive to
investors.
A significant cost for any operation is labour and with the relative labour cost advantages
Northern Ireland continues, at present, to have a comparative advantage here. The quality and
supply of labour is also a strong selling point, and a key means of retaining young people in
the Northern Ireland economy.
Docklands-style developments and modern open plan office space, combined with good
accessibility by road and air to other European or global locations are strong selling points for
Northern Ireland. Although there is potential for other large labour markets e.g. Lisburn/Derry
to attract investment, Belfast clearly is the strongest selling point in this proposition. The
continued potential for development, relative accessibility and lack of congestion make this
an attractive location for investors.
There is no doubt that the relative stability of the UK economic, legal and technical climate
remains a strong selling point, particularly for those US investors seeking to minimise risk in
choice of location. Furthermore and given the steps to date in forming a devolved
administration in Northern Ireland and the political will that exists, there is evidence from the
ROI and other UK locations of the impact that political support at the most senior level can
have in enabling FDI investment.
However, there are concerns that the large number of workers with only basic or intermediate
skills is preventing Northern Ireland from moving up the value chain, a problem exacerbated
by the large number of graduates leaving Northern Ireland to take up jobs either in the
Republic of Ireland or on the British mainland. The over-reliance on the public sector is also
perceived to be an issue for the Northern Ireland economy, as is the corporation tax
differential between Northern Ireland and RoI, although this margin has been narrowed very
marginally in the most recent budget.
9.5 FORECAST TRENDS
The UK is a top location in Europe for inward investment and FDI into the country is again
showing signs of strong growth following a post September 11th decline. Of the 1,220
projects, 508 were ‘new’, 337 ‘expansions’ and the remainder, 375 (30 per cent) M & A
72
transactions. Over the last five years, FDI in the Northern Ireland economy has grown
steadily, although there were two exceptionally strong performances in 2004 and 2006.
The largest recent investments made into the Northern Ireland economy have tended to be in
the business services and IT and software industries. ICICI and HCL have been the dominant
non-tradable investors, while Northbrook Technology and Citigroup have been the dominant
tradable investors.
The biggest providers of tradable service FDI have been the USA and India. Republic of
Ireland businesses have also provided significant levels of investment into Northern Ireland,
though little of this has been in the tradable services sector. Belfast has been by far the largest
recipient of tradable service investment in Northern Ireland, although Derry, Larne and
Strabane have also received significant investments.
Northern Ireland’s record in attracting and supporting significant tradable services investment
to date provides evidence of the sustainability of the location and of the likely proximity to
appropriate labour and suppliers.
Looking forward, the increasing integration of the world market, a favourable business
outlook, and the desire for technology and efficiency gains mean that international investment
will remain a key driving force in the global economy, with a 7 per cent increase in FDI
forecast in developed countries by 201062.
In spite of its absence from the Eurozone, and its location on the periphery of Europe, the UK
is expected to remain a popular destination for FDI investment, and is forecast to receive a
greater inflow of investment than any other European economy63. This is partly due to the
country’s strong transatlantic links.
In recent years, Northern Ireland has been more successful in attracting manufacturing FDI
than other parts of the UK. However, the continuation of strong and increasing global
competition in manufacturing and the UK’s emphasis on a service economy mean that
tradable services will become a more important source of investment in the years ahead.
Output in the computer and related activities sector is forecast to grow by 8 per cent per
annum between 2006 and 2016. Strong 7 per cent per annum output growth is also expected
in the business management and consultancy sectors, while output in the rest of the
tradable services industry is expected to grow by between 3.5 and 6.5 per cent per annum.
These growth trends are likely to prove beneficial to the Northern Ireland economy, by
helping to raise average wages, and to move the economy further up the value chain.
9.6 MARKET FAILURES
The report has identified clear benefits that can be gained by the Northern Ireland economy as
a result of further tradable service FDI. In a recent study on the economic benefits of public
sector support for FDI,64 UKTI identifies five market failures which together provide a
justification for public intervention. These are:
• Under-provision of public goods – The provision of information on issues pertinent to

foreign direct investors, such as information on local labour markets, site availability,
the legislative environment et al is non-rivalrous in nature. In other words, a decision
62
Economic Intelligence Unit
63
Op. cit.
64
2004 – 2005 study of the relative economic benefits of UK Trade & Investment support for trade and
inward investment: Final Synthesis Report, UKTI, March 2006
73
by one prospective investor to view the information does not prevent other prospective
investors from doing so. As a result, such information tends to be purchased in sub-
optimal quantities in the absence of public agencies;
• Network and intermediation failures – The public sector has a unique role to play as
a trusted intermediary, in order to promote links between businesses both domestically
and internationally;
• Informal barriers to market access – Agencies can provide advice and support to
companies on informal barriers which prevent companies from expanding their
operations into other countries. These include, for example, technical standards;
• Weaknesses in internationalisation skills – Private sector companies are often unable

to carry out research into international markets as a result of issues such as language
barriers, and an unfamiliarity with local data sources;
• Beneficial knowledge spill-overs – The presence of overseas companies in the market

gives indigenous firms ‘greater exposure to new ideas, technologies and better ways of
doing business. Private sector companies do not always take account of these benefits
when making their investment decisions, and as a result, a sub-optimal allocation of
investment may occur in the absence of public sector intervention.
9.6.1 Identifying competitors
In order to successfully attract companies from their target markets, it is important that
Invest NI competes effectively against other locations with a similar marketing proposition
to theirs. Such competitors may include:
• Scotland, Wales and Northern England – English speaking areas, with strong
locational infrastructure, high skills, affordable labour costs, a stable economic
climate and a desire to target high value added tradable services;
• London and the South East - Areas with all of the above characteristics, albeit with
slightly higher labour costs;
• Northern France, Western and Southern Germany, Northern Italy and the
Benelux Countries – Areas of strong economic performance and with good
connectivity links to the rest of Europe.
• Southern Italy, Spain and Eastern Europe – Areas with low labour costs and with
access to the European market.
9.7 INTERNATIONAL EXAMPLES
The case study of Ireland has shown how the development of an international financial
services cluster can help an area to increase levels of knowledge based employment, support
an increase in export activity and provide improved access to financial services for local
businesses. It has also shown how the provision of a low rate of Corporation Tax is important
in encouraging overseas companies to invest in a country, and how differentiations in tax
rates can ensure that the investments secured occur in the regions and sectors which stand to
gain the most from them.
The study of Sweden has shown how deregulation and investment in world class
telecommunications infrastructure and educations systems can help a country to become an
attractive location for inward investment. The study has also shown how the use of grants for
investors, together with an income tax system that offers preferential treatment to inward
investors can allow a fairly high-tax country to attract investment without significantly
74
altering the overall fiscal intake. Finally, the study has shown how the development of a
successful IT cluster can help a country to become a leading provider of a knowledge-based
service.
The study of Poland has shown that with a deregulated market, a young, low cost labour
force, and unrestricted access to the European market, a previous impoverished area can
become a world leader in low cost manufacturing, and how they can use this status to move
further up the value chain. However, in all three cases, the studies have shown that this
success can come at a price, and that a successful FDI strategy may lead to increased price
levels, higher labour costs, and a reduction in land availability.
Table 9.1 provides a summary of five key factors in each of the three case study areas to
develop and maintain a successful tradable services sector and sub-sectors.
75
Table 9.1: Maximising spillover benefits once projects locate

Ireland Sweden Poland
Marketing IDA Operations split between development work to attract Less emphasis on general promotion of Over 90 billion Euro available for development,
the company; and then operational teams to develop the Sweden as a place to do business infrastructure and human capital
project
Specific investment opportunities (by sector 14 Special Economic Zones (SEZ) and Technology
Competition intense – 200 competing organisations in and/ or location) Parks with incentives
Manhattan, (NY) alone. More recently agencies from
Singapore and China approaching existing FDI projects in In terms of attractiveness of domestic markets Poland
Ireland leads among the new EU member states and is fourth
in Europe, after Germany, UK and France
Location ‘Cool Hibernia’ contributing to attracting young qualified Geographic location amid other Nordic/ Baltic Geographic location in the hearth of Europe
people to live work across Ireland markets
Excellent location for transferring non-production
Attracts talented workers functions of a company, such as accounting
departments, call centres or warehouses.
Skills Ireland 2003 promotion to attract 200,000 workers from Qualified labour Availability of a highly qualified labour force, the
overseas up to 2008. Availability of Baltic/ Nordic language presence of many universities and the support of the
authorities.
Sectoral networks developed by IDA with Project, HE and HE/ FE courses in contact centre research and
FE Institutions. Eg Dublin City University & Financial CRM 20 million young, highly educated, multilingual people
Services,
Education system adapted to needs of industry Grants for employee training programmes
Business-Education relationship enhanced by Project
sponsorship of graduates, courses, and/ or faculties.
Outwith Dublin, Cork, and the established HE sector,
65
emphasis on working with FECs, Project and FAS in
developing ‘project compatible courses, qualifications
Taxation Crucial element of Ireland’s success. Also easier Tax breaks for ex-pat workers – 25 percent of Investors operating in the SEZ can benefit from
immigration regimes make Ireland a more attractive ex-pat earnings are tax free subject to skills/ income tax exemption – a form of regional aid
‘English speaking’ destination than UK. qualifications criteria being met
Other Operations staff given targets to develop the project (eg Seven ICT Research Units 50% of the population under 35 years old
expansions R&D projects per annum, HE/ FE links made),
65
Foras Áiseanna Saothair (FAS) Ireland, national training and employment authority
76
9.8 RECOMMENDATIONS
Following submission of the amended final report in July 2007 (that reflected the revision to the
original terms of reference), the Steering Group met to discuss the amendments and revised
policy implications and actions. Based on these the Steering Group developed a considered
response as follows:
9.8.1 Focus
The original Terms of Reference required the research to “set out exactly the types of
investment that Northern Ireland could or should attract and the most effective means of doing
this.” FDI policy clearly has an important role in Northern Ireland’s economic development
policy toolkit as it has the potential to improve average productivity by attracting innovative and
skilled companies, helping to close the productivity gap with the rest of the UK.
There are a number of high value added tradable services sectors that could realistically be
attracted to Northern Ireland and it is recommended that future tradable services FDI policies
specifically target new investments which are capable of adding value and fostering
developmental links to indigenous businesses.
The Experian research distinguished between different levels of opportunity and therefore
potential across the tradable service sectors, The Steering Group does not make any distinction
and suggests that opportunity sectors could include:
• Computer and related activities (SIC 72)

• Research and development (SIC 73)
• Architectural and engineering services (SIC 74.2)
• Business management and consultancy (SIC 74.14)
• Creative entertainment (SIC 92.1, SIC 92.3)
• Financial Intermediation (SIC 65)
• Legal Activities (SIC 74.11)
• Accountancy (SIC 74.12)
• Market Research (SIC 74.13)
To address these opportunities, Invest NI currently produces an annual International Sales and
Marketing Plan which is the strategy for attracting FDI into Northern Ireland. The strategy
analyses market trends, assesses the competition and identifies Northern Ireland’s strengths and
weaknesses. It highlights NI’s competitive advantages and sets our specific target
sectors/locations upon which activity and resources to attract FDI to NI will focus. The strategy
is approved by the Invest NI Board but for commercial reasons the plan is not published. It is
recommended that the findings of this research are incorporated into the next International Sales
and Marketing Plan.
It is the Steering Group’s view that whilst Northern Ireland has enjoyed considerable success in
attracting FDI, a number of these projects have been contact centres which are involved in lower
value added activities. These projects are likely to be at variance with the new Executives’
overarching objectives of increasing private sector productivity and supporting high value added
employment and therefore the researchers and the Steering Group recommend that DETI/ Invest
NI undertake a review of current strategy towards contact centres.
9.8.2 Corporation Tax
The literature review detailed the findings of recent ERINI research, the Ernst & Young Global
attractiveness monitor and some respondents to Experian’s stakeholder surveys found that the
77
prevailing rate of Corporation Tax is seen as a key competitiveness issue and policy tool for
attracting high value added FDI into Northern Ireland.
The Steering Group recommends that the NI Executive and all interested stakeholders should
continue efforts to secure a reduction in the rate of Corporation Tax that prevails in NI as it is
their view that such a change would deliver significant boost to the levels of inward investment
secured by NI.
9.8.3 Skills in high-tech industries
The primary research undertaken as part of this study has not revealed any conclusive evidence
of skills gaps or shortages that are impacting on FDI companies located in Northern Ireland.
Workforce skills are an important driver of productivity growth for the economy as a whole and
also for attracting and retaining FDI companies in Northern Ireland.
However, whilst the research did not reveal conclusive evidence of skills gaps, the findings of
the 2005 Skills Monitoring Survey (SMS) found that skills gaps were most prevalent in the
financial services and health & social care sectors, and that overall 9% of employers in the
survey reported skills gaps.
The researchers and the Steering Group therefore recommend that DEL and InvestNI continue
to work closely together to monitor the skills requirements of both existing and prospective FDI
companies and work with education and training providers to ensure that the workforce has the
necessary skills.
9.8.4 Measuring the impact of the Tradable Services sector.
The definition of tradable services currently employed by DETI only includes the high export
potential group, this limits the ability to measure FDI and also underestimates the value of
tradable services exports, weakening the evidence base from which to form policy Whilst there
is general agreement that these tradable services sectors are those with the highest propensity to
export, it is clear that a significant number of other tradable services sectors are involved in
export activity and are therefore important in economic development terms, but are outside the
current definition.
It is essential that economic policy decisions are informed by robust and reliable statistical
surveys. This piece of research would have benefited from a wider definition which would have
allowed the impact of the tradable services sector as a whole to be surveyed, analysed and
reported on.
At a minimum the researchers and the Steering Group recommend that the DETI definition of
tradable services be widened from;
• Computer & Related Activities (SIC 72);

• Research & Development (SIC 73);
• Market Research (SIC 74.13);
• Business Management & Consultancy (SIC 74.14);
• Architectural & Engineering (SIC 74.2);
• Technical Testing & Analysis (SIC 74.3);
• Advertising (SIC 74.4);
• Creative Entertainment (SIC 92.1-92.3).
To include;
• Financial Intermediation (SIC 65)
78
• Legal Activities (SIC 74.11)
• Accountancy (SIC 74.12)
• Wholesale (SIC 51)
• Transport, Storage and Communication (SIC 60-64)
79
Appendix A
Crowding out effects of

FDI investment on
Northern Ireland businesses
Public sector intervention and crowding out
Crowding out can be said to take place when Transnational Corporations (TNCs) and their
foreign investment displace domestic producers or pre-empt their investment opportunities.
Where public sector financial support is involved, a more refined definition focusing on
capital market effects is generally used. For example; HM Treasury’s 1997 guidance on
appraisal and evaluation in central government, The Green Book, advised that any public
sector investment in regional policy would cause 100 per cent ‘crowding out’ of economic
benefits at a national level, as a result of public sector investment putting upward pressure on
interest rates, leading to an offsetting decrease in private sector investment.
However, this assumption is not contained in the latest version of the Green Book.
Furthermore, this narrowly-based concept of crowding out should not be assumed to also hold
for tradable service FDI investment at a Northern Ireland level for three reasons. These are:
- Although the total decrease in activity may occur at a national level, some of this will
leak to other areas of the UK, and therefore there will not be complete crowding out
at the Northern Ireland level;
- In the case of FDI, the amount of private sector investment levered in through public
expenditure on areas such as marketing and provision of business infrastructure to
investing companies is significantly greater than the public investment itself.
- Invest Northern Ireland’s policy of only supporting export-oriented businesses, and of

carrying out a displacement assessment during the appraisal process, mean that the
extent to which investors displace indigenous activity will be limited.
However, although 100 per cent crowding out appears unlikely, some degree of crowding out
will occur if public sector intervention encourages or allows FDI which creates a position
where local firms cannot learn, innovate or expand as they would have done otherwise. In the
long term this can cause an economy to grow more slowly because domestic innovation and
growth is frustrated.
A presentation for the International Centre for Trade and Sustainable Development*, by
Nagesh Kumar presented evidence of FDI in 81 countries between 1980 and 1999. This
suggested that 29 of 81 countries experienced FDI crowding out of domestic investment.
However, 23 countries experienced ‘crowding in’ i.e the presence of the foreign direct
investment by a Transnational corporation (TNC) stimulates new downstream and upstream
investments that would not have taken place in their absence
A study by Koen De Backer and Leo Sleuwaegen** also found that crowding out through
FDI is prominent. However, it was also found that long-term FDI can impart significant
structural benefits and ‘crowding in’ through improved learning, networking and linkages
between a country’s firms. An economic briefing for the Earth Summit, 2002 suggested that
crowding in occurred only where restrictive regimes were used and FDI was subject to
screening and incentives were provided only for certain firms.
* http://www.icst.org/ministerial/cancun/tds/Documents/31/kumar.ppt
** Does Foreign Direct Investment Crown Out Domestic Entrepreneurship? K De Backer and L
Sleuwaegen, 2003
Based on the above research we consider there are two main areas which justify support for
FDI. First, we consider it critical that FDI support is targeted in sectors where market failure
exists. This market failure must be restricting domestic growth and innovation. The market
failure may be locational (e.g. area of deprivation) or economic (e.g. businesses are not viable
without support). Intervention which creates inward investment in these sectors will create
additional economic and social benefits.
For industries in Northern Ireland which already hold a competitive advantage there is a need
to be more careful in terms of public sector intervention. However, encouraging FDI through
non-fiscal policies can also assist domestic business if the intervention is targeted. This can
occur by attracting organisations which are complementary to existing growth sectors. These
non-domestic organisations may benefit supply chains or provide new technology to a sector.
There is a European context to the issue of crowding out as the UK continues to use Sterling
(£). A study by HM Treasury of EMU and business sectors noted that there has been a fall in
the UK’s share of EU FDI since the start of EMU. It is also suggested that becoming a
member of the Euro would increase levels of inward investment. This suggests that Northern
Ireland may be at a disadvantage vis-a-vis Eurozone locations in competing for FDI.
Therefore a small amount of public intervention may not be subject to EU state aid rules.
Appendix B
Model to generate economic impact

calculation
GVA impact
% of sales outwith Indirect impact Induced impact Displacement Net GVA Impact (£m)
Industry Gross GVA

NI UK NI UK NI UK NI UK NI UK
Code Impact (£m)
12 1 100% 100% 0.0 0.0 0.1 0.3 0.3 0.3 1 1

12 2 100% 50% 0.0 1.3 0.1 0.5 0.5 0.5 2 4
12 0.4 100% 100% 0.0 0.0 0.0 0.1 0.1 0.1 0 0
12 1 94% 72% 0.1 0.4 0.1 0.3 0.3 0.3 1 2
12 4 95% 65% 0.2 1.4 0.2 0.8 0.9 0.9 3 5
12 366 100% 100% 0.0 0.0 14.3 71.3 80.4 80.4 299 356
12 0 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0 0
14 2 50% 0% 0.7 1.7 0.1 0.3 0.3 0.3 2 3
12 5 100% 100% 0.0 0.0 0.2 1.0 1.2 1.2 4 5
12 1 100% 100% 0.0 0.0 0.0 0.2 0.3 0.3 1 1
14 52 99% 90% 0.4 5.5 2.0 10.1 11.4 11.4 43 56
14 55 0% 0% 46.1 57.8 2.1 10.7 12.1 12.1 91 111
12 0 100% 95% 0.0 0.0 0.0 0.1 0.1 0.1 0 0
14 1 25% 0% 0.5 0.8 0.0 0.2 0.2 0.2 1 2
14 50 0% 0% 41.7 52.4 1.9 9.7 10.9 10.9 82 101
12 3 100% 100% 0.0 0.0 0.1 0.6 0.7 0.7 2 3
12 15 100% 70% 0.0 4.7 0.6 2.9 3.3 3.3 12 19
14 13 98% 0% 0.2 14.1 0.5 2.6 2.9 2.9 11 27
14 0 99% 73% 0.0 0.1 0.0 0.0 0.1 0.1 0 0
12 0 100% 100% 0.0 0.0 0.0 0.1 0.1 0.1 0 0
12 0 61% 0% 0.2 0.5 0.0 0.1 0.1 0.1 1 1
12 5 53% 6% 1.8 4.5 0.2 0.9 1.0 1.0 6 9
12 2 95% 50% 0.1 1.1 0.1 0.4 0.5 0.5 2 3
12 0 100% 75% 0.0 0.1 0.0 0.0 0.0 0.0 0 0
12 0 100% 100% 0.0 0.0 0.0 0.1 0.1 0.1 0 0
14 43 100% 0% 0.0 44.9 1.7 8.3 9.4 9.4 35 86
12 0 100% 56% 0.0 0.1 0.0 0.0 0.1 0.1 0 0
12 1 100% 15% 0.0 0.6 0.0 0.1 0.2 0.2 1 1
14 5 100% 100% 0.0 0.0 0.2 1.0 1.2 1.2 4 5
12 1 100% 100% 0.0 0.0 0.0 0.2 0.2 0.2 1 1
14 34 0% 0% 28.9 36.3 1.3 6.7 7.6 7.6 57 70
14 14 100% 15% 0.0 12.1 0.5 2.6 3.0 3.0 11 25
12 10 0% 0% 8.2 10.3 0.4 1.9 2.2 2.2 16 20
14 6 70% 65% 1.6 2.3 0.2 1.2 1.4 1.4 7 8
14 1 98% 0% 0.0 1.2 0.0 0.2 0.2 0.2 1 2
12 1 100% 91% 0.0 0.1 0.0 0.2 0.2 0.2 1 1
14 4 95% 58% 0.2 2.0 0.2 0.9 1.0 1.0 4 6
14 5 100% 0% 0.0 5.2 0.2 1.0 1.1 1.1 4 10
12 0 0% 0% 0.3 0.4 0.0 0.1 0.1 0.1 1 1
14 44 97% 0% 1.1 45.9 1.7 8.5 9.6 9.6 37 88
12 1 100% 0% 0.0 1.0 0.0 0.2 0.2 0.2 1 2
751 38 22 132 309 29 146 165 165 747 1,041
Unshaded impacts based on Survey findings Turquoise shaded impact based on Invest NI data
Fiscal impact
Gross taxable expenditure/income % of sales outwith Indirect impact NI Induced impact NI Indirect impact UK Induced impact UK
Purchases Purchases Purchases Purchases
Purchases of GVA GVA
Turnover Industry GVA Employment Capital GVA Employme of goods, Capital GVA Employme of goods, Capital Employme of goods, Capital Employme of goods, Capital
goods, materials NI UK Contributi Contributi
(£m) Code Contribution Cost Spend Contribution nt Cost materials Spend Contribution nt Cost materials Spend nt Cost materials Spend nt Cost materials Spend
and services on on
and and and and
1.2 12 1.34 0.81 0.81 0.86 100% 100% 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.2
11.0 12 2.43 1.48 1.48 1.57 100% 50% 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 1.6 1.0 1.0 1.1 0.6 0.4 0.4 0.4
1 12 0.36 0.22 0.22 0.24 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1
23 12 1.34 0.81 0.81 0.86 94% 72% 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.5 0.3 0.3 0.3 0.3 0.2 0.2 0.2
11.0 12 3.93 2.39 2.39 2.54 95% 65% 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.1 1.9 1.1 1.1 1.2 1.0 0.6 0.6 0.6
30 12 365.50 222.03 222.26 236.29 100% 100% 0.0 0.0 0.0 0.0 18.3 11.1 11.1 11.8 0.0 0.0 0.0 0.0 91.4 55.5 55.6 59.1
0.1 12 0.10 0.06 0.06 0.06 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
7.5 14 1.58 0.95 0.93 1.04 50% 0% 0.8 0.5 0.5 0.6 0.1 0.0 0.0 0.1 2.1 1.3 1.3 1.4 0.4 0.2 0.2 0.3
10 12 5.34 3.25 3.25 3.45 100% 100% 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 1.3 0.8 0.8 0.9
157.1 12 1.21 0.74 0.74 0.79 100% 100% 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.2
454 14 52.00 31.17 30.64 34.26 99% 90% 0.6 0.3 0.3 0.4 2.6 1.6 1.5 1.7 7.0 4.2 4.1 4.6 13.0 7.8 7.7 8.6
196 14 54.93 32.93 32.37 36.20 0% 0% 59.1 35.4 34.8 38.9 2.7 1.6 1.6 1.8 74.2 44.5 43.7 48.9 13.7 8.2 8.1 9.0
0.9 12 0.32 0.19 0.19 0.20 100% 95% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.1
2.9 14 0.78 0.47 0.46 0.51 25% 0% 0.6 0.4 0.4 0.4 0.0 0.0 0.0 0.0 1.0 0.6 0.6 0.7 0.2 0.1 0.1 0.1
1091 14 49.76 30 29 33 0% 0% 53.5 32.1 31.5 35.3 2.5 1.5 1.5 1.6 67.2 40.3 39.6 44.3 12.4 7.5 7.3 8.2
7.5 12 3.04 1.84 1.85 1.96 100% 100% 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.8 0.5 0.5 0.5
11.5 12 14.84 9.01 9.02 9.59 100% 70% 0.0 0.0 0.0 0.0 0.7 0.5 0.5 0.5 6.0 3.7 3.7 3.9 3.7 2.3 2.3 2.4
9.9 14 13.36 8.01 7.87 8.80 98% 0% 0.3 0.2 0.2 0.2 0.7 0.4 0.4 0.4 18.0 10.8 10.6 11.9 3.3 2.0 2.0 2.2
0.5 14 0.24 0.15 0.14 0.16 99% 73% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0
1.9 12 0.34 0.21 0.21 0.22 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1
2.9 12 0.49 0.30 0.30 0.31 61% 0% 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.7 0.4 0.4 0.4 0.1 0.1 0.1 0.1
9.4 12 4.57 2.77 2.78 2.95 53% 6% 2.3 1.4 1.4 1.5 0.2 0.1 0.1 0.1 5.8 3.5 3.5 3.7 1.1 0.7 0.7 0.7
4.3 12 2.06 1.25 1.26 1.33 95% 50% 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.4 0.8 0.8 0.9 0.5 0.3 0.3 0.3
0.5 12 0.22 0.13 0.13 0.14 100% 75% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0
0.8 12 0.34 0.21 0.21 0.22 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1
18.4 14 42.65 25.56 25.13 28.10 100% 0% 0.0 0.0 0.0 0.0 2.1 1.3 1.3 1.4 57.6 34.5 33.9 37.9 10.7 6.4 6.3 7.0
0.5 12 0.24 0.15 0.15 0.16 100% 56% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0
0.06 12 0.70 0.43 0.43 0.46 100% 15% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.5 0.5 0.5 0.2 0.1 0.1 0.1
2.8 14 5.37 3.22 3.16 3.54 100% 100% 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 1.3 0.8 0.8 0.9
0.4 12 0.83 0.50 0.50 0.53 100% 100% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.1
148.4 14 34.46 20.66 20.31 22.71 0% 0% 37.0 22.2 21.8 24.4 1.7 1.0 1.0 1.1 46.5 27.9 27.4 30.7 8.6 5.2 5.1 5.7
6377 14 13.53 8.11 7.97 8.91 100% 15% 0.0 0.0 0.0 0.0 0.7 0.4 0.4 0.4 15.5 9.3 9.1 10.2 3.4 2.0 2.0 2.2
33.4 12 9.81 5.96 5.97 6.34 0% 0% 10.5 6.4 6.4 6.8 0.5 0.3 0.3 0.3 13.2 8.0 8.1 8.6 2.5 1.5 1.5 1.6
59.8 14 6.17 3.70 3.64 4.06 70% 65% 2.0 1.2 1.2 1.3 0.3 0.2 0.2 0.2 2.9 1.7 1.7 1.9 1.5 0.9 0.9 1.0
33.4 14 1.12 0.67 0.66 0.74 98% 0% 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 1.5 0.9 0.9 1.0 0.3 0.2 0.2 0.2
0.8 12 0.92 0.56 0.56 0.60 100% 91% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1
4.2 14 4.49 2.69 2.65 2.96 95% 58% 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.1 2.5 1.5 1.5 1.7 1.1 0.7 0.7 0.7
3.9 14 4.93 2.96 2.91 3.25 100% 0% 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.2 6.7 4.0 3.9 4.4 1.2 0.7 0.7 0.8
2 12 0.34 0.21 0.21 0.22 0% 0% 0.4 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.5 0.3 0.3 0.3 0.1 0.1 0.1 0.1
17 14 43.59 26.13 25.69 28.73 97% 0% 1.4 0.8 0.8 0.9 2.2 1.3 1.3 1.4 58.9 35.3 34.7 38.8 10.9 6.5 6.4 7.2
1.8 12 1.00 0.60 0.61 0.64 100% 0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 0.8 0.8 0.9 0.2 0.2 0.2 0.2
750.56 453.29 450.23 489.33 38 22 169 102 100 111 38 23 23 24 396 238 234 260 188 113 113 122
Fiscal impact (cont)

Displacement NI Displacement UK Net impact NI Net impact UK Fiscal benefits NI Fiscal benefits UK
Purchases Purchases Purchases Purchases Purchases Purchases
GVA GVA GVA GVA GVA GVA
Turnover Industry Employme of goods, Capital Employme of goods, Capital Employme of goods, Capital Employme of goods, Capital Employme of goods, Capital Employme of goods, Capital
Contributi Contributi Contributi Contributi Contributi Total Contributi Total
(£m) Code nt Cost materials Spend nt Cost materials Spend nt Cost materials Spend nt Cost materials Spend nt Cost materials Spend nt Cost materials Spend
on on on on on on
and and and and and and
1.2 12 0.3 0.2 0.2 0.2 0.4 0.2 0.2 0.2 1.1 0.7 0.7 0.7 1.3 0.8 0.8 0.8 0.0 0.2 0.0 0.0 0.3 0.1 0.2 0.0 0.0 0.4
11.0 12 0.6 0.3 0.3 0.4 1.0 0.6 0.6 0.7 2.0 1.2 1.2 1.3 3.6 2.2 2.2 2.4 0.1 0.3 0.0 0.0 0.5 0.4 0.5 0.1 0.1 1.1
1 12 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.4 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.1
23 12 0.3 0.2 0.2 0.2 0.5 0.3 0.3 0.3 1.2 0.7 0.7 0.8 1.7 1.0 1.0 1.1 0.1 0.2 0.0 0.0 0.3 0.2 0.2 0.0 0.0 0.5
11.0 12 1.0 0.6 0.6 0.6 1.5 0.9 0.9 1.0 3.4 2.1 2.1 2.2 5.3 3.2 3.2 3.4 0.1 0.5 0.1 0.1 0.8 0.6 0.8 0.1 0.1 1.6
30 12 84.4 51.3 51.3 54.6 100.5 61.1 61.1 65.0 299.3 181.8 182.0 193.5 356.4 216.5 216.7 230.4 12.9 42.6 6.9 7.4 69.7 39.2 50.7 8.2 8.8 106.8
0.1 12 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
7.5 14 0.6 0.3 0.3 0.4 0.9 0.5 0.5 0.6 2.0 1.2 1.2 1.3 3.2 1.9 1.9 2.1 0.1 0.3 0.0 0.0 0.5 0.4 0.4 0.1 0.1 1.0
10 12 1.2 0.7 0.8 0.8 1.5 0.9 0.9 0.9 4.4 2.7 2.7 2.8 5.2 3.2 3.2 3.4 0.2 0.6 0.1 0.1 1.0 0.6 0.7 0.1 0.1 1.6
157.1 12 0.3 0.2 0.2 0.2 0.3 0.2 0.2 0.2 1.0 0.6 0.6 0.6 1.2 0.7 0.7 0.8 0.0 0.1 0.0 0.0 0.2 0.1 0.2 0.0 0.0 0.4
454 14 12.1 7.3 7.2 8.0 15.8 9.5 9.3 10.4 43.0 25.8 25.4 28.3 56.2 33.7 33.1 37.0 1.9 6.0 1.0 1.1 10.0 6.2 7.9 1.3 1.4 16.7
196 14 25.7 15.4 15.1 16.9 31.4 18.8 18.5 20.7 91.1 54.6 53.7 60.0 111.4 66.8 65.7 73.4 4.0 12.8 2.0 2.3 21.1 12.3 15.6 2.5 2.8 33.2
0.9 12 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1
2.9 14 0.3 0.2 0.2 0.2 0.4 0.3 0.3 0.3 1.1 0.7 0.7 0.7 1.6 0.9 0.9 1.0 0.0 0.2 0.0 0.0 0.3 0.2 0.2 0.0 0.0 0.5
1091 14 23.3 13.9 13.7 15.3 28.5 17.1 16.8 18.8 82.5 49.4 48.6 54.4 100.9 60.5 59.5 66.5 3.6 11.6 1.8 2.1 19.1 11.1 14.2 2.3 2.5 30.0
7.5 12 0.7 0.4 0.4 0.5 0.8 0.5 0.5 0.5 2.5 1.5 1.5 1.6 3.0 1.8 1.8 1.9 0.1 0.4 0.1 0.1 0.6 0.3 0.4 0.1 0.1 0.9
11.5 12 3.4 2.1 2.1 2.2 5.4 3.3 3.3 3.5 12.2 7.4 7.4 7.9 19.2 11.6 11.6 12.4 0.5 1.7 0.3 0.3 2.8 2.1 2.7 0.4 0.5 5.7
9.9 14 3.1 1.9 1.9 2.1 7.6 4.6 4.5 5.0 11.2 6.7 6.6 7.4 27.1 16.2 16.0 17.9 0.5 1.6 0.2 0.3 2.6 3.0 3.8 0.6 0.7 8.1
0.5 14 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1
1.9 12 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1
2.9 12 0.2 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.6 0.3 0.3 0.4 1.0 0.6 0.6 0.6 0.0 0.1 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.3
9.4 12 1.6 0.9 0.9 1.0 2.5 1.5 1.5 1.6 5.5 3.4 3.4 3.6 9.0 5.4 5.5 5.8 0.2 0.8 0.1 0.1 1.3 1.0 1.3 0.2 0.2 2.7
4.3 12 0.5 0.3 0.3 0.3 0.9 0.5 0.5 0.6 1.8 1.1 1.1 1.1 3.1 1.9 1.9 2.0 0.1 0.3 0.0 0.0 0.4 0.3 0.4 0.1 0.1 0.9
0.5 12 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.2 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1
0.8 12 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1
18.4 14 9.9 5.9 5.8 6.5 24.4 14.6 14.4 16.1 34.9 20.9 20.6 23.0 86.5 51.8 51.0 57.0 1.5 4.9 0.8 0.9 8.1 9.5 12.1 1.9 2.2 25.7
0.5 12 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1
0.06 12 0.2 0.1 0.1 0.1 0.4 0.2 0.2 0.2 0.6 0.4 0.4 0.4 1.3 0.8 0.8 0.9 0.0 0.1 0.0 0.0 0.1 0.1 0.2 0.0 0.0 0.4
2.8 14 1.2 0.7 0.7 0.8 1.5 0.9 0.9 1.0 4.4 2.6 2.6 2.9 5.2 3.1 3.1 3.4 0.2 0.6 0.1 0.1 1.0 0.6 0.7 0.1 0.1 1.6
0.4 12 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.7 0.4 0.4 0.4 0.8 0.5 0.5 0.5 0.0 0.1 0.0 0.0 0.2 0.1 0.1 0.0 0.0 0.2
148.4 14 16.1 9.7 9.5 10.6 19.7 11.8 11.6 13.0 57.1 34.2 33.7 37.6 69.9 41.9 41.2 46.1 2.5 8.0 1.3 1.4 13.2 7.7 9.8 1.6 1.8 20.8
6377 14 3.1 1.9 1.8 2.1 7.1 4.3 4.2 4.7 11.1 6.6 6.5 7.3 25.3 15.2 14.9 16.7 0.5 1.6 0.2 0.3 2.6 2.8 3.5 0.6 0.6 7.5
33.4 12 4.6 2.8 2.8 3.0 5.6 3.4 3.4 3.6 16.3 9.9 9.9 10.5 19.9 12.1 12.1 12.9 0.7 2.3 0.4 0.4 3.8 2.2 2.8 0.5 0.5 6.0
59.8 14 1.9 1.1 1.1 1.2 2.3 1.4 1.4 1.5 6.6 4.0 3.9 4.4 8.3 5.0 4.9 5.5 0.3 0.9 0.1 0.2 1.5 0.9 1.2 0.2 0.2 2.5
33.4 14 0.3 0.2 0.2 0.2 0.6 0.4 0.4 0.4 0.9 0.6 0.6 0.6 2.3 1.4 1.3 1.5 0.0 0.1 0.0 0.0 0.2 0.2 0.3 0.1 0.1 0.7
0.8 12 0.2 0.1 0.1 0.1 0.3 0.2 0.2 0.2 0.8 0.5 0.5 0.5 1.0 0.6 0.6 0.6 0.0 0.1 0.0 0.0 0.2 0.1 0.1 0.0 0.0 0.3
4.2 14 1.1 0.7 0.6 0.7 1.8 1.1 1.1 1.2 3.9 2.3 2.3 2.5 6.4 3.8 3.8 4.2 0.2 0.5 0.1 0.1 0.9 0.7 0.9 0.1 0.2 1.9
3.9 14 1.1 0.7 0.7 0.8 2.8 1.7 1.7 1.9 4.0 2.4 2.4 2.7 10.0 6.0 5.9 6.6 0.2 0.6 0.1 0.1 0.9 1.1 1.4 0.2 0.3 3.0
2 12 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.6 0.3 0.3 0.4 0.7 0.4 0.4 0.4 0.0 0.1 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.2
17 14 10.4 6.2 6.1 6.8 24.9 14.9 14.7 16.4 36.8 22.1 21.7 24.2 88.4 53.0 52.1 58.3 1.6 5.2 0.8 0.9 8.5 9.7 12.4 2.0 2.2 26.3
1.8 12 0.2 0.1 0.1 0.1 0.6 0.3 0.3 0.4 0.8 0.5 0.5 0.5 2.0 1.2 1.2 1.3 0.0 0.1 0.0 0.0 0.2 0.2 0.3 0.0 0.0 0.6
211 127 126 138 293 177 175 192 747 451 447 488 1,041 627 621 680 33 105 17 19 174 114 147 24 26 311
Employment impact
% of sales outwith Indirect impact Induced impact Displacement Net Employment Impact
Gross
Industry
Employment NI UK NI UK NI UK NI UK NI UK
Code
Impact
12 55 100% 100% 0.0 0.0 2.1 10.7 12.1 12.1 45 54
12 100 100% 50% 0.0 52.7 3.9 19.5 22.0 22.0 82 150
12 15 100% 100% 0.0 0.0 0.6 2.9 3.3 3.3 12 15
12 55 94% 72% 2.8 16.5 2.1 10.7 12.1 12.1 48 70
12 162 95% 65% 6.8 59.7 6.3 31.6 35.6 35.6 139 218
12 15,050 100% 100% 0.0 0.0 587.0 2,934.8 3,311.0 3,311.0 12,326 14,674
12 4 100% 100% 0.0 0.0 0.2 0.8 0.9 0.9 3 4
14 65 50% 0% 27.3 68.4 2.5 12.7 14.3 14.3 80 132
12 220 100% 100% 0.0 0.0 8.6 42.9 48.4 48.4 180 215
12 50 100% 100% 0.0 0.0 2.0 9.8 11.0 11.0 41 49
14 2,141 99% 90% 18.0 225.4 83.5 417.5 471.0 471.0 1,771 2,313
14 2,262 0% 0% 1,896.7 2,381.9 88.2 441.1 497.6 497.6 3,749 4,587
12 13 100% 95% 0.0 0.7 0.5 2.5 2.9 2.9 11 13
14 32 25% 0% 20.1 33.7 1.2 6.2 7.0 7.0 46 65
14 2,049 0% 0% 1,718.1 2,157.6 79.9 399.6 450.8 450.8 3,396 4,155
12 125 100% 100% 0.0 0.0 4.9 24.4 27.5 27.5 102 122
12 611 100% 70% 0.0 193.0 23.8 119.1 134.4 134.4 500 789
14 550 98% 0% 9.2 579.2 21.5 107.3 121.0 121.0 460 1,115
14 10 99% 73% 0.1 2.8 0.4 2.0 2.2 2.2 8 13
12 14 100% 100% 0.0 0.0 0.5 2.7 3.1 3.1 11 14
12 20 61% 0% 6.5 21.1 0.8 3.9 4.4 4.4 23 41
12 188 53% 6% 74.1 186.1 7.3 36.7 41.4 41.4 228 369
12 85 95% 50% 3.6 44.8 3.3 16.6 18.7 18.7 73 128
12 9 100% 75% 0.0 2.4 0.4 1.8 2.0 2.0 7 11
12 14 100% 100% 0.0 0.0 0.5 2.7 3.1 3.1 11 14
14 1,756 100% 0% 0.0 1,849.1 68.5 342.4 386.3 386.3 1,438 3,561
12 10 100% 56% 0.0 4.6 0.4 2.0 2.2 2.2 8 14
12 29 100% 15% 0.0 26.0 1.1 5.7 6.4 6.4 24 54
14 221 100% 100% 0.0 0.0 8.6 43.1 48.6 48.6 181 215
12 34 100% 100% 0.0 0.0 1.3 6.6 7.5 7.5 28 33
14 1,419 0% 0% 1,189.8 1,494.2 55.3 276.7 312.2 312.2 2,352 2,878
14 557 100% 15% 0.0 498.5 21.7 108.6 122.5 122.5 456 1,042
12 404 0% 0% 338.8 425.4 15.8 78.8 88.9 88.9 670 819
14 254 70% 65% 63.9 93.6 9.9 49.5 55.9 55.9 272 341
14 46 98% 0% 0.8 48.4 1.8 9.0 10.1 10.1 38 93
12 38 100% 91% 0.0 3.6 1.5 7.4 8.4 8.4 31 41
14 185 95% 58% 7.8 81.8 7.2 36.1 40.7 40.7 159 262
14 203 100% 0% 0.0 213.8 7.9 39.6 44.7 44.7 166 412
12 14 0% 0% 11.7 14.7 0.5 2.7 3.1 3.1 23 28
14 1,795 97% 0% 45.2 1,890.1 70.0 350.0 394.9 394.9 1,515 3,640
12 41 100% 0% 0.0 43.2 1.6 8.0 9.0 9.0 34 83
30,905 38 22 5,441 12,713 1,205 6,026 6,799 6,799 30,752 42,845
Appendix C
Methodological note on Experian’s

forecast
National and Regional Forecasts

The starting point for our forecasts is historical data collected at a highly disaggregated level in the UK.
The majority of these series come from the Office of National Statistics (ONS) or other official sources
such as the Labour Force Survey. This core of information is supplemented by international data,
qualitative surveys (heavily used in our regional estimates) and other market information (such as
Nationwide house prices) where appropriate.
These data series describe the historical performance of the UK economy and its regions. Two areas of
effort are then required. The first is to ensure that all data are consistent. Figures from different sources,
for instance, are usually of different vintages, or variables may be defined in a different way. Official
data are frequently revised over time and forecasters want to ensure that they incorporate the latest
possible information.
The second effort is the estimation of systems of equations (or models) to represent the economic
relationships. Each equation explains the performance of a particular indicator in terms of a number of
other factors. The historical relationships that underpin these linkages are subject to rigorous statistical
testing. All the major variables at the national and regional level are represented in this way.
The model is used to produce an initial forecast. Our internal experts inspect this and then adjust the
view in the light of their detailed knowledge. Alterations are made for influences such as inward
investment, infrastructure developments or changes to European funding in the form of “add factors”.
A new forecast is then produced and subjected to rigorous inspection by clients. This process continues
until those responsible are satisfied with the results.
Sub-regional Forecasts
County and LAD forecasts are prepared once national and regional forecasts are finalised. At this level
far fewer reliable economic data are available. For UK sub-regions, Experian makes extensive use of
the NUTS2 output figures, Annual Business Inquiry employment measures (and its predecessors), and
the Census population data.
In broad terms, the historical performance of a county is interpreted in terms of its share of the regional
economy. In turn, the performance of the LAD areas is based on share of the county. For each sector of
the economy, equations are produced for output and employment to explain the relationship between
these variables at the local and regional level.
Equations for forecasting output in the production industries generally model changes at the county and
regional levels without further refinements. Service industries are driven by a greater range of variables
and incorporate both population and intermediate (business-to-business) demand. The construction
sector is treated slightly differently, using data on investment spending by both service and production
industries.
In broad terms, if a county/local authority X has accounted for a steadily rising share of a sector P in
region/county Y, then its share will continue to increase into the future and vice versa. This applies
whether the sector is increasing or decreasing in size at the regional level. Shift-share calculations are
executed for every sector and every county in a region. All variable totals must sum to regional value
and, in turn, calculated LAD totals must sum to the county.
Nonetheless, the forecasts derived by this approach are the stage one figures. These are largely demand
driven and capture the short-to-medium term outlook particularly well. Over the longer-term (about a
decade out), supply-side factors become increasingly important to performance.
Experian’s long-term county modeling framework incorporates supply-side factors. These variables
include labour supply, work force quality, infrastructure, population density and ethnic mix. In the long
run, they determine potential participation (the potential for people to be economically active at a given
employment rate), productivity and employment rates.
The longer-term supply-side and short-to-medium demand-side models are drawn together and the
process culminates with a set of county and local authority forecasts that are entirely consistent with the
national and regional view.

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FDI Research Project –

Approved by: Clare Reid

Director of Economics, Strategy and

Date: 6th February 2008

6th February 2008

Appendix A: Crowding out effects of FDI investment on Northern Ireland businesses

The objectives of this study were to:

The remainder of this document is structured as follows:

1.1 DEFINING FDI

1.2 TYPE OF FDI PROJECT

A greenfield investment establishing a new operation or expanding existing facilities is likely

1.2.2 Mergers & Acquisitions

1.2.3 Invest Northern Ireland’s Policy on FDI

1.3 DEFINING TRADABLE SERVICES

• Computer and Related Activities (SIC 72);

2.1 BENEFITS OF FDI

• The introduction of new products and processes;

2.2 GLOBAL AND UK TRENDS IN FDI

2.2.1 Global geographic pattern

Table 2.1 - FDI outflows (% of total unless otherwise noted)

Table 2.2 - FDI inflows (% of total)

2.2.2 Likely future trends

Figure 2.1 - Forecast FDI as a proportion of population and GDP

FDI inflows per head ($US)

2.2.3 Global sectoral pattern

Table 2.4 - World FDI stock by sector

Services 47.2 56.6

Figure 2.2 – Inward investment flows into the UK, 1988-2004

Source: United Nations Conference on Trade and Development (UNCTAD),2007

Table 2.6 - Net foreign direct investment in the UK by industry, 2004

Figure 2.3 - Ranking of the selection criteria for an investment location

Transport & logistics infrastructures 54 35 7 3

Potential productivity increase 48 38 8 4

Transparency & stability of polit., leg. & reg.

Local labour skills levels 45 42 9 3

The country or region's domestic market 44 39 12 4

Flexability or labour legislation 41 42 13 3

Social climate and environment stability 40 48 8 3

The country or area's specific skills 33 42 19 4

Avail. of sites, cost of land & regulations 31 42 19 6

R&D availability and quality 29 36 24 11

Local language, culture and values 29 42 22 6

Specific treatment of expat. execs/corp HQs 27 42 23 7

Aid, subsidy & support from public authorities 24 41 24 8

Membership of the Euro zone 23 40 26 10

Access to local financial investors 22 30 31 16

Very important Of some importance Of little importance Not at all important

Source: Ernst & Young,

2.3 EXPORTABLE SERVICE TRENDS

Table 2.7 - Export share of UK service sector industries

Water transport 60.8

Other land transport 4.3

Proportion of UK output exported by industry grouping, 1992 - 2004

Research & development

Auxiliary financial services

Insurance & pension funds

Banking & finance

Architectural & tech consult

Motor vehicle distribution & repair

Market res & managem't cons

Hotels, catering, pubs etc.

Other business services

2.4 LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY

If present trends continue, future FDI investment will be disproportionately concentrated in