Relating to International Business

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Table of Contents

Introduction
Taxation and fiscal policy
Privatisation
Labour
Government support
Internet Connectivity
Support for the Industry
Government regulation and laws
Conclusion
Reference List

Introduction

The political economy refers to the relationship that politics, the legal systems and the economy have and the effect of this relationship on the overall economy of a country. Political institutions can determine the stability of an economy by putting in place certain economic policies (Jensen, 2006).

Foreign direct investments into a country can be affected by the policies in the domestic market. The policies instituted by the government and other governing bodies have an effect on foreign firms and thus affect their operations (Ferguson & Rogers, 1984). The political economy of Ireland has been instrumental in attracting foreign direct investment. The policies instituted by the government have been a major contributor on making Ireland one of the most attractive destinations for foreign investors.

Taxation and fiscal policy

One the main ways that a country can attract foreign direct investment is through taxation. Reducing the corporate tax for the foreign investors will create a conducive environment for international business because the tax expenses of the firms will be reduced substantially.

Countries which subsidise corporate tax usually reduce government spending or shift the tax burden form capital to labour (Jensen, 2006; Caporaso & Levine, 1992). Ireland effectively used taxation to draw foreign investors. Corporate tax in Ireland was reduced and this attracted a number of foreign investors. This was facilitated by a reduction in government spending.

Appropriate management of a country’s fiscal policy attracts more foreign investment (Jensen, 2006). This is because a stable economy will assure investors of the right environment for business. A strong economy is attractive to investors as it ensures that their investment will produce good returns. During the 1980s, policy makers in Ireland attempted to improve the countries appeal by reducing the national debt and the annual budget deficit. This made the macroeconomic environment supportive of foreign direct investment.

Privatisation

Privatisation of government owned firms in Ireland played a major role in increasing foreign direct investment. This was primarily because privatisation boosted the economy as the GDP increased by 9.9 percent annually between 1996 and 2000. In addition, the government began to do away with protectionism which had created a hostile environment for foreign investors. Privatization is a key driver of economic growth and this creates a conducive environment for foreign direct investment. (Jensen, 2006)

Labour

The presence of a skilled and knowledgeable work force is very attractive for foreign investors. This is because they will not have to incur high training costs. In addition, good employees will ensure that an organization meets its objectives in terms of sales and profits (Lee, 1999; Ferguson & Rogers, 1984).

Ireland has a relatively well skilled work force. Ireland tried to build its work force in the technology intensive sectors by establishing an Education in science and technology fund. These sectors are very important in international trade as business operations become more and more digitised.

Government regulation of the workforce is important in ensuring that the wage and salaries rate are reasonable so as to attract foreign investors (Devas, 2009; Caporaso & Levine, 1992). A regulated workforce may be more productive and therefore is more useful for foreign organisations.

Unlike many other countries the Irish government was highly involved with the labour market. Partnerships between the government, employees and employers ensured that the labour costs in the country remained low. These low labour costs are attractive to investors.

Government support

In order to increase foreign direct investment, the government has to be willing to listen to the concerns of multinational organisations in the country and take appropriate action. This ensures that the government is aware of the issues affecting foreign companies in the country.

This is advantageous as it will be easy to provide relevant services to them. Government support includes providing the necessary resources and infrastructure that is required to carry out business. (Devas, 2009; Jensen, 2006). The Irish government was in tandem with foreign companies and this ensured that the firm continues being an attractive investment centre. Potential investors were impressed by the treatment that the current investors enjoy and this increased the number of foreign investors in the country.

Internet Connectivity

Telecommunications is vital for the advancement of any economy. Adequate infrastructure in this sector is likely to lure more international investors. With many business activities being reliant on the internet, it is necessary to put in place adequate infrastructure.

The availability of the internet induces foreign direct investment by increasing the productivity of the foreign firms. In addition, internet connectivity is essential for fast and reliable corporate communication. (Devas, 2009). Internet connectivity is very important as it enables companies with branches in different countries to coordinate their activities easily and quickly.

There had been the problem of unreliable and expensive internet services in most parts of Ireland. Ireland was quick to respond to this problem in its market. The Irish government began an €140 million initiative which was aimed at increasing broadband use for people in underdeveloped areas such as villages and towns. Improved internet access was beneficial for the Irish economy as it is attractive to the foreign investors.

Support for the Industry

It is important for governments to support the foreign investors by establishing government organisations which attend to the specific problems that are faced by foreign firms. This can be an avenue to enhance development in the underdeveloped areas by providing subsides for companies set up in this areas.

This will benefit the local community by creating jobs and developing the infrastructure in the area. Encouraging foreign companies in this way had a positive effect on the economy of Ireland. If foreign companies get adequate support from the host country, they are likely to prosper and remain in business (Devas, 2009)

Ireland was committed to increasing foreign direct investment in the country. To this end, four government organizations were given the mandate to promote foreign direct investment.

These organizations include The Industrial Development Agency of Ireland (IDA), Enterprise Ireland, SFADCO and Udaras. IDA was responsible for attracting foreign direct investment all over the country except in the Shannon free zone while attracting international firms to the International Financial Services Centre in Dublin. Enterprise Ireland was in charge of the promotion of strategic alliances and joint ventures between local and foreign firms.

Government regulation and laws

Government regulations and laws that are implemented by a country have major effects on the foreign companies and thus foreign direct investment (Gyu, 2004). Laws concerning employment, taxation, social security affect the foreign firms in the country. This should be taken into consideration when laws are being enacted so as to ensure that the laws are not hostile to the foreign firms. A number of laws affecting the foreign companies were enacted in Ireland.

The merges, takeovers and monopolies control act of 1978 regulates mergers and acquisitions by domestic and foreign firms. The Competition act of 1991 would also affect the activities of foreign firms as it regulates how they compete with other firms. The Companies act of 1963 stipulated the requirements for incorporation in Ireland. The laws pertaining to business should be carefully drafted as this will determine whether or not a country is attractive to investors.

Conclusion

Ireland’s competitive advantages such as a favourable business environment, low operating costs and reliable workforce made the country attractive to foreign investors. The favourable environment in Ireland attracted other multinational firms such as IBM, Oracle, Hitachi, Siemens, Modus Media, SAP among others. Ireland was able to maintain its competitive advantage by continually improving the conditions in the market. Where certain services were lacking, the government started initiatives for improvement.

It is clear that the political institutions in a country have a high impact on its economic conditions, especially on foreign direct investment. If used appropriately, the political economy can be profitable to a country’s economy as is the case in Ireland.

Reference List

Caporaso, J. & Levine, D., 1992. Theories of political economy, London: Cambridge University Press.

Devas, C., 2009. Political Economy. London: BiblioBazaar.

Ferguson, T., & Rogers J., 1984. The Political economy: readings in the politics and economics of American public policy. New York: M.E. Sharpe.

Gyu, H., 2004. Political Economy of FDI and Economic Growth in China: A longitudinal test at provincial level. Journal of Chinese political Science, 9 (1), pp. 44-62.

Jensen, M., 2006. Nation-states and the multinational corporation: a political economy of foreign direct investment. New Jersey: Princeton University Press.

Lee, Y., 1999. Political economy of Korean and Japanese foreign direct investment, Journal of Contemporary Asia, 29 (4), pp. 462-494.

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