Investing in the Republic of Ireland
John Yuva is a writer for Inside Supply Management®.
March 2006, Inside Supply Management® Vol. 17, No. 3, page 26
Companies Searching for a European Base May Find Ireland's Favorable Incentives and Access to EU Markets a Profitable Choice
Establishing an overseas operation is a challenging endeavor. Such things as locating foreign investment assistance, adapting to a new culture, finding highly skilled labor and accessing new markets are just some of the difficulties. The good news is that there are regions where many of those challenges are minimal. One unique example among these regions is the Republic of Ireland. With a landmass slightly larger than West Virginia, Ireland is providing a home in Western Europe to multinational companies from a variety of industries. What makes the country stand out, however, is not just its highly skilled labor force or its English-speaking population, but Ireland's commitment to foreign investment and the incentives provided to companies that establish there.
Ireland's Investment Initiative
Traditionally an agricultural economy, Ireland has seen rapid industrial and service sector expansion. The impetus for the country's economic growth occurred during the early 1970s when Ireland experienced high levels of unemployment. In response to this economic crisis, a foreign investment strategy was formulated.
Joan Callaghan, director of PriceWaterhouseCooper's Pathfinder Service™ in Dublin, says that a government agency, IDA Ireland, was established with responsibility for attracting foreign direct investment into Ireland. One of the key reasons for IDA Ireland's success was its ability to identify the country's strengths and match those with growth industries. "Because Ireland is a small country, it was able to synchronize all the pieces, including training people for the required skills in targeted industry sectors," she says. "In addition, Ireland also ensured that the appropriate infrastructure was built up around those sectors including the support of and integration with Ireland's academic community."
More than 1,500 overseas companies have chosen Ireland as their European base (with nearly one-third from the United States) in such diverse sectors as:
- Informational communication technology (electronics and engineering)
- Pharmaceutical and medical technology
- Internationally traded services (non-manufacturing)
- Financial services
The success in Ireland is not without its challenges. However, Jimmy Murphy, a partner at Grant Thornton in Dublin, says the benefits of doing business in Ireland far outweigh some of the potential drawbacks such as pressures from emerging regions in Eastern Europe, Africa and Asia that offer low-cost, skilled labor; increasing property prices in Ireland that threaten inflation rates and economic stability; and rising energy prices that adversely affect the manufacturing sector. "The tax incentives present under the current regime together with the political, social and economic foundations set up over the past 20 years leave the country well suited to embrace these challenges," he says. "Recent reports suggest that economic growth and stability is set to continue well above other member states in the European Union."
Callaghan agrees, and adds that because of Ireland's highly educated workforce, the country is focused on encouraging companies to develop high value-added services and products in Ireland. "Because of the economic pressures that exist, the country is encouraging foreign investors to raise the bar in the value chain and go deeper into activities such as higher level R&D functions," she says. To reinforce its commitment to this area, Ireland provides a tax credit of 20 percent for R&D expenditures by Irish companies engaged in qualifying R&D undertaken within the European Economic Area. Along with the tax credit and an additional tax deduction of 12.5 percent (see the sidebar at the end of this article), IDA Ireland offers foreign investors R&D grants to cover a percentage of costs and related activities to product and service development.
Ireland's Coordinated Investment Efforts
Whether a U.S. company is pursuing an investment in Ireland or is approached about an investment opportunity, both will be guided to the country's foreign-direct investment agency IDA Ireland. This government agency's purpose is to identify appropriate companies, engage their interest in doing business in the region and coordinate their investment efforts. Myles O'Reilly, senior vice president at IDA Ireland in Chicago, says the global agency most often approaches large, multinational companies that it believes are in a growth pattern and can provide sustainable employment in Ireland.
Requesting a meeting. Once approached, O'Reilly says the agency will request a meeting with a company's executives to discuss the economic and business climate in the region. Most certainly, a supply management executive will be involved in the discussions and play a critical role in the initiative. Following the meeting, IDA Ireland will invite executives on a site visit to the country and discuss a business plan with colleagues at IDA Ireland's headquarters in Dublin.
Arranging a site visit. The site visit, which lasts two to three days, provides supply management executives not only with the opportunity to view the area, but also to make contact with the following entities:
- Service providers such as banks, law practices and accountancies to get familiar with Irish rules and regulations.
- Educational institutions to gauge the quality of academic programs and graduates entering the Irish workforce.
- Companies in their industry that have established operations in Ireland to learn about the challenges and advantages of doing business in the region.
During this time, executives can visit potential sites for establishing an operation. Ireland is divided into several regions, each with areas designated for business development. An operation's location, among other things, will factor into the type and amount of grant incentives available to a company.
Applying for grants. When a company concludes its site visit and decides to establish an operation in Ireland, the company may apply for grant incentives to help cover expenditures related to building, hiring and operating the business. O'Reilly explains that three types of grants are available:
- Capital grants — For investment in building facilities and purchasing new equipment.
- Employment grants — Based on the number of staff hired for the Irish operation. Also the most common grant awarded to companies.
- Training grants — Covers expenses related to onsite/offsite training for staff.
The grant approval process is an opportunity for supply management executives to display their negotiation talents because negotiating plays heavily into the final decision of the type and amount of grant that is allocated. While it is unlikely that a company would be approved for every grant it applies for, the ability to negotiate and support the company's position is advantageous to the proceedings.
Multinational companies establishing operations in Ireland are finding a rich market with highly skilled workers, a progressive outlook on foreign investment and access to new partners throughout Western Europe. Supply management executives who are talented negotiators and are focused on globalization are likely to thrive in Ireland's unique foreign direct investment practices. With an opportunity to meet local suppliers and glean information from industry colleagues in the region before making the decision to invest abroad, executives can feel confident about their decision to do business in Ireland.
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Ireland's Corporate Tax Rate Incentive
Throughout most of the western world, the corporate tax rate for trading income is more than 25 percent. However, in the Republic of Ireland, by agreement with the European Commission, the corporation tax rate on trading income is 12.5 percent. Jimmy Murphy, a partner at Grant Thornton in Dublin, Ireland, says to qualify for this rate, a company must be involved in substantial activity in Ireland and not be merely a "brass plate." He says the following factors are taken into account in determining whether a particular transaction or operation amounts to a trade and thus qualifies for the 12.5 percent rate:
By combining the favorable tax rate and grant incentives available to U.S. companies doing business in Ireland, many of the investment costs associated with establishing an overseas operation can be recouped in a much shorter timeframe.
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