What does Ireland need to do now to win foreign direct investment?

When it comes to regional development, particularly the development of smaller towns, there are frequent calls for IDA Ireland to bring jobs to a town or region. Unfortunately, those calls misunderstand how modern multinationals choose locations and the IDA's role in this.

In the 1970s the IDA pursued a policy of spreading jobs to small towns around Ireland. That was supported by investment in so-called advance factories – factory buildings that the IDA constructed to be available to potential employers at some point in the future. Substantial grants were also available to investors. The policy attracted manufacturing employment to many towns but also left the State owning unused factory buildings.

Since those days the nature of the firms investing in Ireland has changed substantially. Until the late 1990s most multinationals here were involved in manufacturing, but now more than half of their investment is in services. The type of manufacturing that comes to Ireland has also changed significantly. Low-cost, labour-intensive activities now go to China or even to developing countries such as Ethiopia, as Ireland has become too expensive a location for these activities – and Irish workers would not want the low wages paid in those countries.

The most important driver of location is the share of the population with a third-level qualification

The wages Irish workers demand require a lot of added value, which is available only in high-tech industries or those where a high degree of skill and knowledge is necessary. These types of activities have very different requirements from those of the traditional manufacturing firms that invested in Ireland in the 1970s and 1980s. Where in the past low wages and a potential workforce with a basic secondary education were all that was needed, modern firms are looking for highly skilled graduates and a range of suppliers that are available only in bigger cities.

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Recent research shows that the most important driver of location, for both foreign direct investment and indigenous start-ups in Ireland, is the share of the population with a third-level qualification, followed by the scale of local employment and diversity of industries. Broadband infrastructure is also important but makes a difference only if educational attainment in an area is sufficiently high. Traditional infrastructures, such as road and rail, have been found to be much less important.

This means that although lots of locations would have suited multinational in the past, far fewer are profitable for them now – and for some firms the only suitable Irish location is Dublin. Governments’ ability to influence where companies locate is also more limited than it was in the 1970s and 1980s, as grants have been significantly curtailed by state-aid rules.

As mobile, highly skilled workers are a scarce resource in developed economies, smaller towns should try to attract them by offering a better quality of life

The conundrum for regional policy is that, without highly paid jobs, smaller towns outside big cities’ commuter belts tend to lose their most educated people, while new firms won’t locate in areas without enough highly skilled potential employees.

The National Planning Framework aims to scale up places outside Dublin. But for this to work only a few can be chosen. Scaled up significantly, cities like Cork, Limerick and Galway will have a positive effect on their hinterlands, just as Dublin has helped large parts of Louth, Meath, Kildare and Wicklow to develop. As mobile, highly skilled workers who seek out places with a high quality of life are a scarce resource in developed economies, smaller towns should try to attract them by offering that better quality of life. This will attract businesses to smaller places, as has been shown, for example, by Westport, which is small and relatively remote.

Edgar Morgenroth is professor of economics at Dublin City University business school