Foreign Direct Investment in Ireland 2024

Financial Globalisation and FDI Statistics

In the modern global economy, substantial flows of cash are transferred daily between many different countries, a lot of which have different taxation systems and accounting practices. This reality necessitates a separation of funds going into economies, from funds that are intended as actual investment, and those which are simply passing through. For a globalised economy, like Ireland, these complex capital flows can sometimes lead to difficultly in the interpretation of macroeconomic statistics.

Therefore, it is becoming increasingly important to adopt new methods in FDI statistics to reduce globalisation effects. In line with operational guidance from the IMF and Eurostat, as well as through the implementation of international best practices (the Finnish pass-through methodology), the following three statistical procedures aim to establish FDI figures that are more in tune with real economic phenomena.

SPE Method

A Special Purpose Entity (SPE) is a company set up for reasons that are beyond the production of goods and services. Often SPEs are established for financing purposes or to hold certain assets or liabilities. The present IMF guidance defines them as businesses which: have no more than five employees, have very little production within their resident economy, have a foreign ultimate controlling parent, and have a high ratio of foreign assets relative to domestic assets. A question for many countries such as Ireland, the Netherlands and Luxembourg (countries which exhibit a large disparity in FDI figures with their European counterparts), is to what extent these types of firms may influence investment figures, making them more difficult to interpret.

“The use of SPE structures has rocketed in a context of multifaceted and flexible multinational enterprise (MNE) structures, which have become increasingly global and seek to obtain benefits from different legal and tax regimes” (IMF SPE Task Force, 2018). Considering these factors, the EU and the OECD is encouraging member states to report more information on SPEs.

Figure 3.1 shows that SPEs account for the majority of FDI for some countries such as Luxembourg and Hungary. For most EU countries however, the percentage of SPE-based FDI is far lower. Some countries such as France and Germany report that none of their FDI can be attributed to SPEs. 8% of Ireland’s FDI in 2024 can be attributed to SPEs based on the IMF definition.

Pass-Through Method

The second method used to mitigate globalisation effects from FDI statistics involves estimating pass-through, which can be defined as foreign multinationals investing in their Irish affiliates which then subsequently invest in another economy. It has been shown globally that there exists a strong correlation between inward and outward FDI flows (Blanchard & Acalin, 2016). This suggests that FDI statistics are being inflated as investments flow through their economies instead of entering them. The result of this is that a highly globalised economy’s inward and outward FDI figures may be inflated.

Currently, there is no benchmark definition of pass-through FDI since it can come in different forms and largely depends on the level of operational activity within MNEs in an economy. For instance, although the SPE method can explain the large majority of FDI for Luxembourg and the Netherlands, it fails to explain a similar portion of Ireland’s FDI figures. This is because MNE activity in Ireland is different to that of Luxembourg or the Netherlands. Many multinationals here are non-financial enterprises, often with large employment i.e., firms that fall outside the definition of an SPE. Therefore, pass-through activity in these regular operational enterprises may not be captured using the SPE method.

The method used in this report to estimate pass-through FDI occurring in Ireland involves comparing a firm’s FDI assets and liabilities. The lower of these is then chosen and used as the estimate of pass-through FDI for that enterprise. The results are then aggregated to give an overall estimate of pass-through FDI in Ireland. The premise for this method is that it captures non-conventional FDI activity among all firms, not just SPEs. The method is formally shown at the end of this chapter and is based on pass-through analysis first introduced by Leino and Ali-Yrkko (2014).

Figure 3.5 shows this method applied to Irish FDI data. In 2024, pass-through FDI was estimated to be €610 billion. For a better conceptual understanding of this figure, it can be viewed in terms of a % of FDI liabilities where 38% of FDI liabilities in 2024 are estimated to be pass-through.

New Pass-Through Method

This new method for estimating pass-through is proposed in the IMF Direct Investment Task Team guidance note ‘D.6 Ultimate Investing Economy/Ultimate Host Economy and Pass-through Funds’. This method involves calculating pass-through on a directional basis and at the level of the residency of the ultimate investor.

The above estimates for pass-through activity are derived using FDI asset/liability data. However, when seeking to analyse the effect that FDI has on the economy, it is more precise to look at FDI figures presented using the directional principle which involves a netting process to remove reverse investment.

Pass-through funds in an economy are carried out by foreign-owned parent firms; that is, by entities that are in the middle of the chain that are both direct investment enterprises and direct investors. A breakdown of the outward FDI positions based on the residency of the ultimate investor gives an indication of the amount of funds passing through the economy back to the investing countries.

Figure 3.9 shows that in 2024, pass-through FDI was estimated to be €206 billion. As a percent of inward FDI, 19% is estimated to be pass-through. This compares to the 38% of FDI liabilities that are estimated to be pass-through in Figure 3.5, where the asset/liability principle does not capture the effects of reverse investment.

Round-Tripping Method

The above two statistical procedures aim to mitigate the effects that the complex financing and ownership structures of multinational enterprises have on the interpretation of FDI statistics. This third procedure seeks to do the same by of estimating the levels of round-tripping that exist within FDI in the Irish economy.

Round-tripping refers to domestic funds which leave an economy and return back as FDI. It is unlikely that round-tripping brings the additional benefits associated with truly foreign investment.

Statistics on round-tripping are useful for identifying if there is a problem with an economy’s investment policy regime. Round-tripping could also have other negative consequences on the investing economy, such as reducing tax revenues for or regulatory oversight by the investing economy (Borga, 2016). The below provides two estimates for round-tripping.

Figure 3.11 shows that firms with an ultimate controlling parent in Ireland totalled €4 billion in inward FDI in 2024. This gives an estimate of the levels of round-tripping engaged in by Irish ultimately controlled firms. The decreases in round-tripping in recent years were due to corporate restructuring.