By Ben Simmons

Global foreign direct investors view Ireland as an investment opportunity and plan to maintain or expand operations there over the next three years. However, they worry that the country's newfound competitiveness could be undermined by financial regulations. These are among the major findings of a new Economist Intelligence Unit report based on a survey of 315 investors into the country. The report, Investing in Ireland: A survey of foreign direct investors, sponsored by Matheson Ormsby Prentice, finds that Ireland's investment proposition is based on four cornerstones: European market access; a competitive corporate tax infrastructure, a talented workforce and a still-attractive regulatory framework.

Disadvantages in the eyes of investors include the small domestic market, its peripheral location, instability in the euro zone and uncertainty about government finances. Survey respondents also cite relatively high costs in relation to other investment locations. In spite of these disadvantages, however, just 10 of 315 investors surveyed expect to reduce their level of investment over the next three years, with most set to maintain or expand outlays in the country during the same time frame.

"Investors believe Ireland is becoming competitive again," says Jason Sumner, senior editor at the Economist Intelligence Unit and one of the report’s editors. "The investors we surveyed also think Ireland will have only a slow to moderate growth path for some time, but the vast majority still views the country as an FDI opportunity."

Following are the other main report and survey findings:

Access to European markets is Ireland’s FDI foundation. In general, global investors say their prime motivation for entering foreign markets is access — for 58%, this is the most important consideration, far outweighing the second and third most popular factors, namely availability of key skills (34%) and government incentives (32%). When it comes to Ireland specifically, access comes out on top, with “access to EU market” named by 46% of respondents, compared with 30% citing legal and fiscal stability and 29% citing the competitive corporate tax rate.

The headline corporate tax rate should be thought of as one ingredient in the overall tax infrastructure. Almost one-half of respondents (46%) say a low corporate tax rate is the most important government fiscal incentive they consider when investing abroad. However, evidence from the survey as well in-depth interviews conducted for the report suggests that excessive focus on the headline rate threatens to overshadow important aspects of the total corporate tax infrastructure, including double-taxation treaties, tax credits, transfer pricing or other sector-specific incentives.

Investors praise Ireland’s pool of domestic and foreign workers, but high income taxes could be discouraging senior talent. Survey respondents and interviewees say the quality of the local labour force is a strong point, especially the presence of formal qualifications and more innate abilities such as a practical approach to problem solving. Nonetheless, interviewees are concerned about what they see as imbalances in Ireland’s personal tax system, and that high marginal tax rates will make it less attractive for senior executives to settle in Ireland.

The biggest disadvantages for investors are largely outside the Irish government’s direct control. The biggest downside of doing business in Ireland, cited by 51% of those surveyed, is the size of the domestic market, but this is a factor policymakers can do very little to influence. Three other factors which received more than 30% of responses included instability in the euro zone (33%), uncertainty in relation to government finances (32%), and Ireland’s peripheral location (31%).

Ireland is generally perceived as a more costly place to do business than other investment locations. According to investors, Ireland compares unfavourably with other countries across a range of cost criteria, with wages and salaries the biggest concern: 51% say Ireland is more expensive than other locations where they are invested, compared with 16% who say it is cheaper. The cost of raw materials, the cost of living and the price of utilities and infrastructure also compare unfavourably.

Respondents believe the Irish government’s post-crisis response is on the right track. Overall, investors have more faith in the current Irish government than the previous one, although views are far more favourable among investors currently located in the country than among those based outside. The government’s priorities are also in line with investor expectations — stabilising the financial system, attracting inward investment and addressing the budget deficit.

Some post-crisis policies will not require trade-offs between stabilising the financial system and boosting Ireland’s investment competitiveness, but in other areas policymakers will have difficult choices. Tackling the deficit and the high cost of doing business in Ireland are both domestic vote-winners and competitiveness-boosters. Other aspects of Ireland’s recovery, however, have very real trade-offs, including policy decisions about taxes and regulations.

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