The IDA Ireland annual report for 2002, published earlier this month, confirmed that it was a tough year for foreign companies in the Republic.

The 11,700 jobs created in IDA-supported companies were overshadowed by the 14,700 that were lost. That translates into a 2.2 per cent drop in employment in IDA-backed operations during the year.

Despite the uncertainty, it has been acknowledged that foreign direct investment (FDI) has been, and remains, a hugely important element of the Irish economy. IDA-backed companies contribute about €16 billion every year to the economy. Sales from these companies total more than €65 billion, with exports valued at €60 billion.

But the experts all agree that the type of work being done in the Republic will have to change to attract the next generation of Intels and Microsofts.

In the past, many foreign companies set up manufacturing facilities in the Republic, attracted by generous grants, tax breaks and a cheap, educated workforce. Products were manufactured or assembled here and shipped abroad for sale.

That was fine while labour costs were relatively low. However, economic success led to cost increases in many areas, from labour to energy. But Ireland has become a victim of its own success. The low-cost manufacturing industry that had once thrived here is moving to developing economies in parts of Asia or eastern Europe.

The solution, according to the IDA and others, is to move to higher-value activities such as research and development and product innovation. This is the "third step" for many US companies in Ireland, says Ms Joanne Richardson, chief executive of the American Chamber of Commerce in Ireland, an organisation that represents the interests of US companies with operations in Ireland.

Investment by such companies represents 70 per cent of all inward investment in the Republic and covers a wide range of activities, including information technology, biotechnology, e-commerce and financial services.

Ms Richardson believes that US companies have the confidence to move this higher-value work offshore, particularly to Ireland, where many have built up strong links.

"The majority of US companies here are run by Irish people and they have been very forward-looking and very innovative over the years," she says.

Recent high-profile investments by multinationals, such as Wyeth in Clondalkin and Medtronic in Galway, are a sign that US companies are prepared to commit higher-value work to the Republic. "Investments like these make huge statements for Ireland," says Ms Richardson.

However, costs are high on the agenda for many US companies, irrespective of the type of work in which they are engaged, and the rising costs of wages, insurance and utilities mean that it is becoming increasingly expensive to do business in Ireland. Ms Richardson believes these costs must be kept in check if the Republic is to remain competitive.

A major incentive for companies locating here was, and still is, the low rate of corporation tax. This is tax paid by companies on any profits they earn within the State.

Traditionally, the Republic had a lower rate of corporation tax than its European counterparts. In the last Budget, the standard rate was reduced from 16 per cent to 12.5 per cent, although companies that established manufacturing operations here prior to July 1998 will continue to benefit from a special rate of 10 per cent until 2010 (2005 for companies involved in internationally traded services). This compares with a top rate of nearly 40 per cent in Germany.

However, the Government has come under pressure to bring the rate of corporation tax into line with the rest of the European Union. Many member-states feel the lower rate gives the Republic an unfair advantage in attracting foreign investment. Were the Government to contemplate such a move, it would be "strongly resisted" by US companies based here, says Ms Richardson.

Infrastructure is another issue for many foreign companies, particularly for those with facilities outside Dublin. The Republic is still "very far behind" in terms of infrastructure, she says. An underdeveloped transport system and poor roads can add considerably to journey times, both for people and goods.

However, she welcomed the recently published national spatial strategy, which sets out the Government's plans to spread development throughout the State via a series of hubs and gateways.

This strategy is also receiving close attention from the Western Development Commission, the body charged with promoting economic and social development in counties Donegal, Sligo, Leitrim, Roscommon, Mayo, Galway and Clare.

Ms Lisa McAllister, chief executive of the commission, believes the infrastructure in the Border, Midlands and West region needs to be improved urgently if it is to receive an equal share in investment.

"Infrastructure needs to be tackled - access in and out of the area is a critical issue," she says. "The access has got to be sorted and telecommunications have got to be sorted."

She is also concerned that the absence of a university in the northwest could mean that the region would lose out on knowledge-based investment due to a shortage of suitably qualified workers.

The outlook for FDI over the next few years is positive, according to the IDA. This optimism is based on the fact that the total number of new investments secured in 2002 was up by two-thirds on 2001. More importantly, 30 companies undertook to invest almost €120 million in research and development in their operations in the Republic last year.

This is the type of higher-value work that the IDA sees as being essential in securing foreign investment in the future.

"This indicates a very strong commitment to adding higher-value activity to existing operations in Ireland and raises the calibre and status of these companies significantly," according to Mr Seán Dorgan, chief executive of IDA Ireland.

"There is a brighter future ahead in 2003 for inward investment than there has been for the past two years. Despite the turbulent global conditions in 2002, the year shaped up better than expected, with a last-quarter boost in new projects secured by IDA and a strengthening pipeline of investments in negotiation for the first quarter 2003," Mr Dorgan concludes.