Enlargement of the EU to include Central and Eastern European countries could lead to foreign direct investment (FDI) being diverted from Ireland to some of the more advanced states in this region, the Dublin Economic Workshop in Kenmare was told.
Mr Frank Barry of UCD said previous analyses of the distribution of the costs and benefits of eastern enlargement to EU incumbents had ignored the possibility that FDI flows might be diverted away from Ireland. It was a threat which had inadequately been taken into account, he added.
At present, most central and eastern European bound FDI comes from Europe rather than the US and most of it is directed towards supplying the market in that region and appears to be diverted away from Portugal and Spain rather than from Ireland, according to Mr Barry.
Uncertainty over public policy and public administration in central and eastern European countries and even accession of these countries to the EU could explain why high-tech US multinationals have not yet begun to invest heavily in Central and Eastern Europe, he said.
"Accession will release many of these blockages and Ireland will find itself in direct competition with the most advanced of these countries for investments in the sectors in which Ireland has been relatively successful so far," said Mr Barry.
Ireland did not differ substantially from a number of central and eastern European countries in terms of corporation tax and the skill levels of the population, while the labour costs in these countries were very much lower, he said.
While Ireland is ahead of many of the central and eastern European countries in terms of productivity and R&D rankings, it has been Ireland's success in attracting FDI that has led to the improvement in the R&D and productivity climate rather than vice versa.
Many central and eastern European countries on accession to the EU might enjoy similar rapid success in this area, offering competition to Ireland, Mr Barry said.
But FDI flows in the expanded EU are likely to rise substantially upon enlargement, so that the more competitive environment will not necessarily represent a zero sum game.
However, Mr Barry said the foreign direct investment strategy might not be sustainable in the long term and the State might have to rely on indigenous industry.
Earlier, delegates were told that, while a strong case still existed for the State to provide financial assistance to the indigenous sector, it had to be extremely careful when it reallocated finance away from the Exchequer and into the hands of a small number of private citizens.
"Considerable care and diligence needs to be applied to ensure that the reallocation is genuinely in the long-term interests of the State," said Mr Greg Moloney, an investment consultant to Enterprise Ireland.
While market failure to provide equity and working capital to small and fast-growth firms was not a reason in itself for State intervention, it was essential that the State satisfied itself that market failure actually existed before it reached for its cheque book, he said.
"If there are private sector lenders and investors willing to put money in, then Enterprise Ireland should not be writing cheques," said Mr Moloney.
The State must break the grant mentality and try to develop a greater equity culture, he said.
"Enterprise Ireland has been attempting to move away from being regarded as an administrator of grant schemes for SMEs, and towards adopting a holistic approach of client needs analysis, leveraging private sector funding, and improving the international scalability of the indigenous manufacturing and internationally traded services sectors," Mr Moloney said.
