1.  SUMMARY

1.1  Between 1947-67, over 90 per cent of all new industrial jobs in Northern Ireland were created by Foreign Direct Investment (FDI). In 1990, there were over 200 externally owned plants in Northern Ireland employing 41,000 people and accounting for 39 per cent of total manufacturing employment.

  1.2  Between 1966-71 FDI created—as distinct from promoted—11,600 new jobs in Northern Ireland. However, between 1972-76, as a result of civil unrest, FDI generated only 900 jobs. Civil unrest cost Northern Ireland an estimated 46,000 FDI jobs which went elsewhere between 1972 and the mid-1980s.

  1.3  Northern Ireland's economic performance during the 1980s was poor. Unemployment was over 15 per cent by 1989 and manufacturing lost 35,000 jobs.

  1.4  The Northern Ireland economy enjoyed a period of sustained economic growth during the 1990s, due largely to growth in the services sector but with manufacturing also growing faster than the UK average. During the decade some 89,000 jobs were created and levels of FDI, particularly in knowledge-based industries, recovered.

  1.5  Looking towards 2010 as many as 55,000 jobs particularly in the traditional sectors may be at risk as the economy undergoes a major transformation.

  1.6  Over the next decade there will be a net increase of around 67,000 in the working age population and Northern Ireland will have to create 132,000 additional jobs, if the economy is to converge with UK average employment rates.

  1.7  This means creating an additional 4,000 to 16,000 jobs per annum as well as replacing the jobs at risk, equal to almost twice the fastest job-creation rate ever recorded.

  1.8  The Strategy 2010 report suggests that if its recommendations were adopted, 80,000 to 90,000 new jobs could be generated from the knowledge intensive growth sectors by 2010. However, these jobs depend on available skills and high levels of specifically targeted FDI.

  1.9  PricewaterhouseCoopers completed a major study of FDI in 1996. This involved interviewing a representative sample of the 5,029 FDI companies in the British Isles. The conclusions of the study said:

—  Northern Ireland faced more competition for FDI than any other region in the British Isles;

—  available labour and skills outweighed grants as inducements to locate in Northern Ireland;

—  operating costs were lower than any other region in the British Isles;

—  major attractions were infrastructure, communications and university/industry links;

—  the perception of violence made Northern Ireland the least attractive location in the British Isles for investors with no direct experience of the region;

—  FDI firms with operations in the Province said Northern Ireland was the most commercially attractive location in the UK;

—  the taxation incentives offered by the Republic of Ireland were the most influential attraction.

  1.10  There are direct linkages between FDI and increased activity and competitiveness in indigenous industry and the small firms sector.

  1.11  In our opinion the Northern Ireland economy cannot achieve any of the targets set by Strategy 2010 without substantial increases in existing levels of FDI as part of an overall integrated economic development strategy.

  1.12  The major threat to Northern Ireland's economic regeneration, apart from a lack of security and political stability, is competition from the Republic of Ireland.

  1.13  The Republic's marketing appeal has been strengthened since they became the only English speaking country in Euroland. The fact that they share a landmass with Northern Ireland exacerbates the problem of comparison.

  1.14  The benefit of flexible fiscal incentives to address specific issues for Northern Ireland business competitiveness should not be underestimated.

  1.15  The issue of tax incentives will continue to impact on competitiveness in comparison with the Republic of Ireland and must be addressed explicitly if FDI policies are to succeed. Incentives which should be considered include:

—  reintroducing the extension of first year allowances;

—  extension and acceleration of industrial building allowances;

—  de-rating of all commercial property in Northern Ireland;

—  reintroducing enterprise zone status;

—  introducing non taxable revenue grants;

—  allowing double deduction for key expenditure;

—  introducing an extended initial tax holiday for inward investors;

—  reduced tax rate or tax credit for export sales profits;

—  launching a tax exempt Northern Ireland bond.

2.  THE HISTORIC IMPACT OF FOREIGN DIRECT INVESTMENT IN NORTHERN IRELAND

  2.1  In seeking to identify the issues surrounding Foreign Direct Investment (FDI) in Northern Ireland, it is important to understand the historic impact of FDI on employment and society.

  2.2  Northern Ireland emerged from the Second World War in the strongest financial position it had enjoyed since the foundation of the state. With UK Treasury approval, the region had accumulated reserves as a consequence of buoyant revenues and tight expenditure restrictions. Britain's continued payment of post-war food subsidies and support for agriculture helped Northern Ireland's generally healthy financial situation.

  2.3  However, the linen industry was badly hit by the recession of 1951-52 and unemployment, which had fallen to historic low levels during the war, rose to four times the national average during the 1950s. This led to measures such as the Industries Development Act and the Capital Grants to Industry Act. These provided Northern Ireland with a legislative and incentives framework more favourable than that available to other development areas of the UK.

  2.4  So, as traditional employment in agriculture, shipbuilding and textiles continued to contract dramatically in the 1950s, the combination of available labour and investment incentives led to active marketing of Northern Ireland to external investors. Overseas companies rapidly identified in Northern Ireland a ready supply of labour, low operational costs, ready access to the Great Britain market and all backed with financial incentives.

  2.5  Between 1947-67, over 90 per cent of all new industrial jobs in Northern Ireland were created by externally owned companies establishing "branch" operations in Northern Ireland. The Northern Ireland Economic Council (1992) estimated that, in 1990, there were over 200 externally-owned plants in Northern Ireland employing 41,000 people. These 200 plants accounted for 39 per cent of total manufacturing employment in the Province.

  2.6  Given the specific attractions of Northern Ireland to FDI at that time—available labour, low operational costs, market access and financial incentives—inward investment policies were successful insofar as they contributed substantially to net job creation. However, those attractions were sidelined by the increasing civil unrest that increased in intensity by the early 1970s.

  2.7  Between 1973 and 1990, there was a decline of foreign-owned investment that caused total employment in Northern Ireland to fall by some 46,000. That suggests that, in 1973, the dependence of manufacturing employment on FDI was such that foreign-owned undertakings accounted for more than 50 per cent of manufacturing employment (Borooah 1998).

  2.8  Until the onset of serious civil disorder in 1972, there was no evidence that the level of FDI was declining. Between 1966 and 1971 multinational undertakings created—as distinct from promoted—11,600 new jobs in Northern Ireland. However, between 1972 and 1976, the number of jobs created through FDI slumped to a mere 900. An extrapolation of the annual rate of FDI job creation suggests that, had civil unrest been avoided, an additional 46,000 jobs would have been created between 1972 and the mid-1980s.

  2.9  Manufacturing was the major beneficiary of FDI and was consequently the greatest loser as a result of the post 1972 failure to invest. Between 1972 and 1993, manufacturing employment as a percentage of all Northern Ireland employment halved from 36 per cent to 18 per cent. The relative stability of total employment in the Province between the early 1970s and 1993 is accounted for by a significant increase in public sector employment.

  2.10  In 1960, the Northern Ireland public sector employed an estimated 97,000, representing 22 per cent of the workforce. Between 1970 and1974, public sector employment increased annually by over 9 per cent to reach 40 per cent. As at September 1999, public sector employment had fallen back to almost 200,000 jobs, representing 32 per cent of employees in employment. Nevertheless, the public sector in Northern Ireland still accounts for more than 55 per cent of GDP and a significant renaissance of private sector investment is required to offset the likely reduction in public sector support for the economy.

3.  ECONOMIC PERFORMANCE IN THE 1990S

  3.1  The 1980s in Northern Ireland reflected a disappointing economic performance with unemployment rising to over 15 per cent by 1989 and manufacturing employment falling from 135,000 to just over 100,000. However, the performance of the Northern Ireland economy in the 1990s has been impressive (see Table 3.1):

—  Manufacturing output has increased over the decade by almost one-third which is over six times the UK average rate (although this was from a much smaller base);

—  Total employment has also risen by 13 per cent which is over 10 times the increase in the UK as a whole;

—  As a result we have seen a steady fall in unemployment to a point where it is just above the UK average; and

—  Although GDP data is only available up to 1997 nevertheless it clearly shows the strong performance of the Northern Ireland economy with nominal growth of over 50 per cent in the first seven years of the decade compared with just over one-third in the UK as a whole.

  Sources:   DED—Index of Production, Labour Market Statistics; NISRA Annual Abstract of Statistics; ONS—Labour Market Trends, Regional Trends.

  * GDP figures are from 1989-97 and are expressed in nominal terms.

  3.2  A sectoral breakdown of growth in GDP (1989-96) and employment (1989-99) suggests that growth came from the following areas:

Source: ONS, Regional Accounts

—  The financial and business services sector has been the fastest growing sector of the economy with 87 per cent growth in GDP (up to 1996) and 53 per cent growth in employment;

—  The education and health sector has been the other major growth sector in terms of output with growth of 83 per cent in GDP (up to 1996), although employment growth was more modest at around 16 per cent (up to 1999);

—  The distribution sector, including hotels and restaurants, also enjoyed above average growth of 69 per cent in GDP (up to 1996) and employment growth of 44 per cent (up to 1999);

—  While most of the growth was in the above services sectors, the manufacturing sector's contribution grew by over 50 per cent (up to 1996) and employment grew by 1.3 per cent (up to 1999) while manufacturing employment elsewhere in the UK was in decline; and

—  The data also highlight the difficulties of the agricultural sector—while there was some growth in agricultural output up to 1996, its share of total GDP fell from 5.1 per cent to 4.5 per cent and the employment decline of 23 per cent up to 1999 reflects the further contraction of the sector after 1996.

Source:   DED, Labour Market Statistics.

  3.3  There were a number of factors contributing to the growth in the services sector during the 1990s. These include the following:

—  The relative buoyancy of the UK economy and the growth in demand for a wide range of services;

—  The continuing significance of public expenditure to the Northern Ireland economy—between 1980 and 1990 public expenditure fell as a proportion of GDP from 70 per cent to 60 per cent but by 1997 it was still over 55 per cent;

—  Most of the growth in services employment has been as a result of increased numbers of part-time jobs for females;

—  Growth in the financial and business services represents a degree of catching up with proportions employed in this sector elsewhere in the UK; and

—  The growth in the health and education sectors has been driven by the rising demands for the services of these key sectors and output has risen significantly faster than employment leading to perceived reductions in the quality of services.

  3.4  Explanations for the exceptional performance of the manufacturing sector are less clear cut but include the following:

—  The success of continuing inward investment in Northern Ireland, mainly by American companies;

—  The increased levels of exporting by local firms to markets outside the UK;

—  The adaptability of the traditional sectors of our industrial base to changing market conditions through reinvestment and restructuring; and

—  The buoyancy of the UK economy, which remains our key market and destination for over one-third of our total manufacturing output.

  3.5  Despite the relatively strong performance of the economy during the 90s the issue remains whether this performance can be sustained and the extent to which FDI will, or may, play a greater role in regenerating economic competitiveness in the future.

4.  THE JOB GAP 2000-2010

  4.1  As we enter the 1990s there are a number of sectors of the economy facing particular difficulties. There may be currently up to 55,000 jobs "at risk" in these sectors (see Table 4.1).

  4.2  The underlying causes of the specific sectoral problems are well known as illustrated below:

—  In textiles the decline in output and employment due to the shift in production to low cost centres in Eastern Europe and the Far East has already begun and during 1999 over 2,000 redundancies were announced in the sector;

—  The agricultural sector faces accelerated decline as more farmers are forced to move out of the industry at least on a full-time basis;

—  In the public sector, employment in the police and prison services is likely to decline as a result of the continuing ceasefires and prison releases;

—  Finally the voluntary sector has expanded rapidly in recent years largely on the back of European funding but, as the funding declines, employment in the sector is also likely to decline sharply given the lack of sustainability in a number of the projects.

  4.3  In addition to these specific sectoral problems a number of our larger traditional manufacturing firms face difficult trading conditions. The most current example of these problems is Harland & Wolff where up to 1,800 jobs are at risk as the shipyard seeks to find new contracts in a highly competitive market.

  4.4  The continuing strength of sterling relative to the euro is a major problem for many of our traditional exporting companies.

  4.5  Furthermore as the population of working age continues to grow there is a need not just to replace jobs lost but also to provide new jobs for entrants to the workforce. The latest official projections for the population of working age are set out in the Table 4.2 below. This shows that there will be a net increase of 13,000 (or 6 per cent) in the number of 16-24 year olds in the population of working age over the next 10 years up to 2010. However the fastest growth will be in the number of older persons aged 50 and over.

Source:   Government Actuary Department.

  4.6  The current working age population of 1.028 million will therefore increase to 1.095 million in the course of the decade. However, Northern Ireland's percentage of the working age population actually employed—at 66 per cent—is significantly below the UK average of 74 per cent. It must therefore be assumed that, Northern Ireland will be expected to increase from the existing low base towards the UK average.

  4.7  At existing (66 per cent) levels of activity, Northern Ireland will need to generate 44,000 net new jobs over the next decade. However, at UK average rates (74 per cent) that job target rises to 132,000 net new jobs. This compares with net growth in employment over the last 10 years of some 89,000 jobs, of which 1,300 came from manufacturing, 1,300 from construction and 19,500 from financial and business services, 39,000 from distribution, catering and hotels, 3,600 from transport and communications and 4,500 from other services. The majority of the remaining employment growth was generated by education, social work and healthcare.

  4.8  These represent challenging targets and if the additional problem of the 55,000 jobs at risk are added to the equation, the job gap becomes even wider. Not only does the economy have to generate between 4,000 and 16,000 new jobs each year to accommodate natural growth in the population and increased participation in the labour force, but we also have to deal with the effects of the structural adjustments that could add another 5,000 to 10,000 per annum to the normal growth figures.

  4.9  These figures also assume a limited level of net outward migration of around 1,000 persons per year most of whom tend to be in the under 25 age group. Clearly if outward migration were to rise, for example to the Republic of Ireland, the projected job needs would be lower than those outlined above. On the other hand if the net inward migration trend of the 1990s were to continue then the potential job gap could be even wider.

  4.10  The Sectoral Overview chapter of "Strategy 2010", the public/private strategy for economic regeneration, which was published in March 1999, set out an overview of six key growth sectors and five sectors which face less favourable market conditions, based on the work of the sector working groups. The main projections for the six growth sectors are set out below in Table 4.3.

Source:   Strategy 2010.

  4.11  If these estimates and targets were all to be met, they suggest a net increase in employment of around 80,000 to 90,000 jobs. This would go a long way to meeting the job requirement of between 44,000 and 132,000 new jobs set out in para 4.7 above.

  4.12  However, these assumptions carry some serious caveat, namely:

—  they do not take account of job losses in other sectors of the economy which could be as high as 55,000;

—  all of the above sectoral reports qualified their potential employment creation with warnings over the lack of available skills already apparent in the economy;

—  with the exception of tourism, all of the above depend upon FDI to:

—  secure the key market players to invest in Northern Ireland;

—  stimulate the indigenous sector to grow towards critical mass; and


—  effect skills transference necessary to create a dynamic small and growing business sector.

  4.13  In effect, without successfully attracting specifically targeted FDI, the substantial job creation proposals contained in Strategy 2010, may not be achieved.

  4.14  It is in this context that the significance of FDI for the Northern Ireland economy should be seen. With only 3 per cent of Northern Ireland companies employing more than 100 people and some 60 per cent of local firms employing fewer than five, there is a need for larger organisations to provide critical mass within the local economy.

  4.15  The challenges facing the economy are considerable and the gradual decline of the traditional industries will continue.

  4.16  Recent successes in call centres and software suggest that Northern Ireland remains attractive to FDI and that knowledge-based industries could make a substantial contribution to economic regeneration.

  4.17  The key issues in respect of FDI are:

—  Is Northern Ireland as attractive to FDI today as it was at the height of the FDI boom in the late 1960s?

—  What are the factors preventing greater levels of FDI and how can they be overcome?

—  Can alternative policies and strategies to attract additional FDI be developed within the framework of the UK legislative and taxation framework?

1. THE ATTRACTIVENESS OF NORTHERN IRELAND AS A FDI LOCATION

  5.1  In 1996, Pricewaterhouse Coopers—then Coopers & Lybrand—interviewed a representative sample of the 3,925 FDI companies then operating in England, Scotland, Wales and Northern Ireland. In addition, interviews were conducted with a sample of the 1,104 FDI companies located in the Republic of Ireland. Companies interviewed had their corporate headquarters in Europe, North America and Asia-Pacific.

  5.2  The independent Coopers & Lybrand survey attempted to measure the relative attractions of a number of UK regions by interviewing foreign companies that had already invested.

  5.3  The issues investigated were as follows:

—  factors influencing a location decision;

—  other locations considered but rejected;

—  post-investment view of the selected location;

—  future investment intentions;

—  perceptions of Northern Ireland;

—  impact of a cessation of violence on future investment.

  5.4  Over the survey period, Northern Ireland, with only 3 per cent of the UK's population attracted 9 per cent of all new jobs promoted in the UK. This performance was only surpassed by the North-East of England, which with 4 per cent of the UK's population attracted 15 per cent of all new mobile inward investment jobs.

  5.5  Northern Ireland faced the greatest competition for inward investment with 84 per cent of the companies that located in the Province having considered at least one alternative location.

  5.6  English regions fared best and it would appear that England remains the automatic choice for many foreign investors. Based on a further analysis by country of origin, 84 per cent of US companies only considered England, compared with 20 per cent of firms from the Asia Pacific region.

  5.7  The Republic's 10 per cent corporation tax rate for manufacturing provided a significant advantage over the UK's Corporate Tax regime. Nevertheless, a number of companies faced with a choice between Northern Ireland and the Republic of Ireland, invested in the North. The 10 per cent Corporation Tax is a formidable attraction for the Republic, but skill shortages, personal taxation and infrastructure/communications issues had occasionally proved a disincentive.

  5.8  In summary, the main features in the competition for inward investment were:

—  84 per cent of companies which located in Northern Ireland considered other locations and this represented the most competitive situation of any region;

—  the Republic of Ireland had the second highest level of competition, thus the island of Ireland faced the greatest competition for investment projects; and

—  the Republic of Ireland is Northern Ireland's main competitor followed by Scotland.

  5.9  One of the objectives of the research was to establish the extent to which the perceived attractions of a given region were actually delivered once the company had invested. It was apparent that when they commenced trading, a number of foreign investors found difficulties in their selected location, while others discovered "hidden" advantages. This was most apparent when companies compared their actual operating costs, after start-up with the operating costs they anticipated before the investment was made.

  5.10  Many investors underestimated the cost of doing business throughout the British Isles. However, the cost of operating in Northern Ireland was significantly less than was anticipated by virtually all those who subsequently gained direct experience of investing there.

  5.11  Some companies referred to high transportation and energy costs in Northern Ireland. However, when these were integrated into the total operating costs, Northern Ireland undercut every other region in the British Isles in terms of overall operating costs.

  5.12  The same contrast emerged when the relative advantages of infrastructure were examined.

  5.13  While Northern Ireland ranked last in terms of the perceived importance of infrastructure as an influence on investment, the actual experience was virtually the opposite. Only Republic of Ireland actually proved to have a marginally better infrastructure than Northern Ireland, with the Province performing significantly ahead of every other region in the UK.

  5.14  Inward investors who had located in Northern Ireland specifically complemented the road system, telecommunications and the potential to create links between industry and the universities.

  5.15  The main findings arising after location included:

—  Republic of Ireland delivered broadly to expectation and remains highly competitive, especially with 10 per cent corporation tax regime;

—  Northern Ireland improved its position significantly as actual operations confirm advantages not previously recognised;

—  Northern Ireland operating costs were the most competitive, even when electricity and transport were included;

—  While Northern Ireland's infrastructure was not perceived an advantage prior to location, nevertheless post-location, Northern Ireland has the best infrastructure in the UK and is competitive with Republic of Ireland;

—  S E England and S W England scored especially low in infrastructure performance.

  5.16  The survey attempted to gauge the overall satisfaction of FDI firms with their chosen location by seeking to establish the extent to which future and additional investment was planned. The survey team asked each of the companies to confidentially indicate the future investment plans of their parent organisation, both for the existing British Isles plant and for other operations in Europe.

  5.17  In this regard, future planned investment in existing Northern Ireland operations significantly exceeded investment planned for any other region. The specific value of potential planned investment in Northern Ireland from overseas companies already operating in the Province was identified as exceeding £270 million.

  5.18  The main investment findings for companies in Northern Ireland were:

—  73 per cent of firms were planning further investment in Northern Ireland;

—  when grossed-up, the value of these investments exceed £270 million;

—  30 per cent of Northern Ireland inward investment companies indicated their organisations would be investing elsewhere in Europe.

  5.19  It has been perceived that violence and civil unrest in Northern Ireland was a major disincentive to inward investment. The survey attempted to determine the extent to which companies already operating elsewhere in the British Isles would invest in Northern Ireland if there was a total cessation of hostilities.

  5.20  Firms that had located in the Republic of Ireland and Scotland were most likely to change their investment policies towards Northern Ireland post a total cessation of violence. Some 56 per cent of FDI investors in Scotland said that the impact of peace would have either a significant or some effect on their predisposition to invest in Northern Ireland while 58 per cent of FDI companies operating in Republic of Ireland would also consider investing if there was a total cessation of violence.

  5.21  The survey concluded by weighting the responses of all FDI companies to determine the most attractive region based upon a matrix of investment criteria and post-investment commercial experience. This concluded that Northern Ireland was the best performing and most attractive region in the UK and the second best in the British Isles, only marginally beaten by the Republic of Ireland.

  5.22  In summary, Northern Ireland was not considered as the primary FDI destination at the investment planning stage due, primarily to:

—  the perception of violence and civil unrest;

—  negative media coverage, particularly in North America;

—  an attractive taxation package from the Republic, backed by a sophisticated government and Irish-American lobby; and

—  growing competition from other regions within the UK and EU.

  5.23  However, those firms that did invest reported that:

—  Northern Ireland outperformed expectation in terms of labour skills, labour availability, operating costs, university/business links and communications and infrastructure;

—  grants were no more an issue in Northern Ireland than in Wales and Scotland; and

—  the environment was conducive to further investment.

6.  CREATING AN ENVIRONMENT FOR FDI

6.1  A key objective of any new economic development strategy for Northern Ireland must be to move the Province from a public sector dominated economy to a private sector led one. This will require significant growth within the private sector involving:

—  increased inward investment;

—  internationalising our key indigenous growth companies; and

—  the development and growth of a buoyant small business sector.

  6.2  The current size and structure of the indigenous and small business sectors are such that increased levels of FDI are required to stimulate greater activity. It has already been argued in section 4 that job creation of up to 132,000 jobs over the next decade may be required to absorb the projected increase in working age population and to bring the workforce, as a percentage of the working age population, into line with current UK levels.

  6.3  Such levels of job creation have not been achieved over the last decade of strong performance and have never been achieved since 1921. In addition, further job shedding could reach 50,000 over the same period with a significant shift away from traditional industries and skills towards new knowledge-based activities.

  6.4  Falling levels of public expenditure and increased demands for spending on the levels of educational and training incentives needed to deliver the requisite skills will put greater pressure in limited fiscal resources.

  6.5  We believe significant levels of FDI will be essential to maintain economic competitiveness in Northern Ireland. Failure to deliver high levels of FDI may result in a serious deterioration in economic performance and higher level of social exclusion.

  6.6  The results of the comprehensive survey of FDI companies, published in 1996 and summarised in section 5, confirm that Northern Ireland has the skills and resources to prove an attractive FDI location for those firms that can be persuaded to take what they perceive is the commercial "risk". The survey also confirmed that the major competition for FDI is the Republic of Ireland with its sophisticated package of incentives and the 10 per cent corporation tax rate.

  6.7  Currently the Republic of Ireland is proposing to replace its 10 per cent manufacturing tax rate with a 12.5 per cent Corporate Tax rate across all sectors in order to overcome EU objections to the existing 10 per cent rate. In these circumstances the Republic of Ireland will be utilising its low tax rate, combined with the fact that it is the only English speaking country within Euroland, to attract inward investment projects particularly from the USA.

  6.8  Irish-American lobby groups in the USA have been strongly briefing business leaders, politicians and journalists on these perceived additional advantages. This will be a strong marketing message and their track record indicates that it will appeal to the larger multinationals with a better risk profile than the companies who are cash hungry and will be attracted by cash grants.

  6.9  If Northern Ireland is to compete effectively with the Republic of Ireland it must be able to address the competitive advantage of low tax rates both in terms of its practical effect on individual projects as well as the overall marketing impact of the tax regime. Consequently this may require Northern Ireland to secure better or more appropriate tax incentives within the overall structure of the UK tax regime.

  6.10  The linkages between FDI and indigenous growth are well established in the Republic of Ireland. Currently the Republic is the world's third leading exporter of computer software while its indigenous software sector is enjoying annual employment growth of 20 per cent. A decade ago there was no indigenous software sector, with expansion during the 1990s being driven by employees of FDI firms leaving to start their own businesses.

  6.11  It is therefore essential that our indigenous companies become more corporate in their approach and more international in their outlook if we are to achieve the economic growth required in the years ahead. While we have some examples of the indigenous business driving forward on the international scene, currently there are not enough of these companies to make a significant impact on the Northern Ireland economy.

  6.12  Amongst the more progressive indigenous companies there are a number already operating on a cross border basis. The current and proposed fiscal arrangements in the Republic of Ireland could represent a major threat to maintaining the corporate headquarters of these organisations within Northern Ireland.

  6.13  The Republic's proposed 12.5 per cent corporate tax rate for all sectors, lower interest rates and attractive financing arrangements, will prove highly advantageous compared with Northern Ireland. As well as maintaining a significant advantage in attracting FDI, this package could persuade current Northern Ireland based business to locate their corporate headquarters in the Republic.

  6.14  Consequently, we need to ensure that our fiscal incentives both attract and retain FDI and encourage our indigenous companies to become more international and export orientated. This is essential if we are to protect and retain our corporate base in the face of renewed competition from the Republic of Ireland.

  6.15  The development and growth of Northern Ireland's small business sector is highly dependant on a flourishing indigenous industry and FDI activity. Our private sector has a high proportion of small businesses with only 3 per cent of all private sector businesses employing more than 100 people. In addition the high level of family owned and owner managed businesses within the business base means that the particular issues and problems of small business need to be addressed as part of an holistic approach to economic development. As with the indigenous sector, fiscal incentives could be utilised to promote both entrepreneurship and further growth in the small business sector.

  6.16  In the light of the foregoing, it is evident that the Republic is perceived as Northern Ireland's greatest—and most effective—competitor for inward investment. The Republic's experience is that a regular flow of quality FDI stimulates both the indigenous and small business sector, both in terms of supply chain and management development.

  6.17  Consequently, to compete effectively for mobile inward investment projects and to develop viable and sustainable growth companies from our indigenous corporate base we need to have the ability to alter the fiscal incentives within Northern Ireland.

  6.18  Whilst we are negotiating the changes in our political structures, it is vital that we also negotiate the ability to control the fiscal incentives applicable within Northern Ireland, albeit within certain constraints set by the UK Government. We should not miss the opportunity to alter the fiscal arrangements in principle, even if the detailed fiscal regime has still to be worked out.

  6.19  Any suggestion to vary current fiscal legislation should be seen in the context of the existing levels of Corporate Tax that accrue to the Revenue. The structure and ownership of corporate Northern Ireland creates difficulties in determining where the taxable activity is undertaken—as distinct from where the tax is paid—it is therefore impossible to accurately assess the level of corporate tax generated in Northern Ireland.

  6.20  The full economic cost of varying current fiscal legislation—including revenue forgone—must take into consideration measures to ensure the tax incentives are related as far as possible to taxable activity undertaken in Northern Ireland. This would be intended to prevent a displacement effect where national companies relocated corporate headquarters in Northern Ireland simply to participate in any incentive programme.

  6.21  The successful utilisation of a new and flexible fiscal programme will significantly increase levels of FDI, indigenous activity and small business growth, thus offering a de facto gain in tax revenues, relative to tax deferred by a new fiscal incentives programme. In this regard time is of the essence and consequently we need to understand the benefits to be gained from having fiscal flexibility.

  6.22  In order to promote economic development in Northern Ireland and to differentiate the Province in a highly competitive environment for mobile inward investment projects, we have to be creative in our approach to fiscal incentives. While recognising the need to obtain UK approval for any changes to the regime (as well as EU agreement on certain aspects) nevertheless it is possible as an initial step to consider potential initiatives that might be applied in order to assist in delivering the new economic strategy and growth targets for Northern Ireland.

  6.23  The following list is by no means exhaustive rather it is illustrative of the type of initiatives that might to introduced within the context of the current UK tax regime to promote differentiation and to assist in achieving Northern Ireland's new economic goals.

Extension of First Year Allowances

  6.24  The standard rate of capital allowances for plant and machinery is 25 per cent per annum on a reducing balance basis. As part of the Chancellor's 1998 package for Northern Ireland a 100 per cent First Year Allowance (FYA) was reintroduced—for a three year period—for expenditure on plant and machinery used in the Province.

  6.25  This accelerated rate of write down for tax purposes applied only to small and medium sized businesses using the Companies Act definitions. Consequently it excluded many inward investors who are part of a large group as well as other larger indigenous businesses whom we would expect to be the major growth companies in international markets. The proposals were subsequently withdrawn for certain industries after a challenge from the EU as to the extent to which they could have been deemed as anti-competitive.

  6.26  The proposals would also have excluded a number of the international and local hotel operators essential to develop the Northern Ireland infrastructure for leisure and tourism—already the largest and fastest growing industry in the world.

  6.27  If the FYA regime were extended to all businesses, irrespective of size, then the effectiveness of Northern Ireland as an investment location for both inward investors and larger indigenous businesses would be significantly enhanced.

  6.28  The Capital Grants given by IDB and LEDU towards capital expenditure rate "tax free" up to a 45 per cent grant in that they do not reduce the expenditure in respect of which capital allowances may be claimed. This "tax free" grant option is currently under review and might be removed. The ability to retain this initiative would be beneficial to promoting economic development as the interaction of the grants and their tax free status with a FYA regime significantly reduces the cost of the investment in plant and machinery.

Extension and Acceleration of Industrial Building Allowances

  6.29  Cuirrently Industrial Building Allowance at the rate of 4 per cent per annum is available for capital expenditure on buildings used for manufacturing (in addition allowances are available for hotels).

  6.30  As a first step we should consider making the Industrial Building Allowance available for expenditure on commercial buildings used for specified purposes such as call centres, software houses or tourist facilities. Again the applicability of this allowance could be matched to those non-manufacturing sectors we wish to encourage as part of the new economic development strategy contained in Strategy 2010.

  6.31  In addition to the extension of the range of sectors to which the allowance is applicable there is a need to accelerate the rate of allowance to 10 per cent or above per annum in order to make it attractive as an investment incentive.

De-rating of all Commercial Property in Northern Ireland

  6.32  At present there is industrial de-rating for all manufacturing property in Northern Ireland but this benefit does not extend to the service sector that has been the main source of economic growth on a global basis in recent times.

  6.33  There is the option to extend de-rating to all commercial properties in Northern Ireland or again to be more selective and focus on key sectors such as call centres and software houses that will form part of the targeting within the new economic strategy.

  6.34  There are wider implications of this initiative in terms of the rates system and the knock-on effect into the Water Service income. However it needs to be recognised that the competitive advantage of the current position is being reduced by the global move to non-manufacturing investment projects.

Enterprise Zone Status

  6.35  The time period for the two Enterprise Zones in Northern Ireland at Campsie in Londonderry and the North Foreshore in Belfast expired some years ago.

  6.36  However the legislation still exists and while the previous Government appears to have taken the view that no new zone would be designated, nevertheless the recent shift toward service sector growth would make these zones extremely attractive in today's environment.

  6.37  Enterprise Zones offered 100 per cent Industrial Building Allowance on all commercial building as well as complete de-rating. Such a zone would be extremely attractive for projects such as a science park, call centres and software houses. In addition there may be an argument for such status to be extended to certain areas of Northern Ireland where the need for economic stimulus is greatest.

Non Taxable Revenue Grants

  6.38  Based on a number of surveys there is evidence that indigenous Northern Ireland companies do not spend sufficient on the following key activities:

—  Research and Development;

—  Training; and

—  Marketing.

  6.39  Consequently IDB, LEDU and other DED agencies provide grant aid towards these types of expenditure in order to promote awareness and to encourage further commitment and growth in these areas.

  6.40  Currently, these grants are taxable as income on receipt so that only the net cost is tax deducted. The tax attractiveness of the current financial package could be improved if these revenue grants were made non-taxable like capital grants.

Multiple Deduction for Key Expenditure

  6.41  To further promote expenditure on research and development, training and marketing it would be possible to provide a "multiple deduction" for these types of expenditure.

  6.42  Currently expenditure on these activities is by and large tax deductible when incurred. A further allowance could be made so that a multiple of the cost is tax deductible and this will assist in focusing reliefs on the key areas required for future international growth and competitiveness. If appropriate this relief could be limited to specific industries as identified within the economic development strategy as being key to future economic growth within Northern Ireland.

  6.43  While all of the above initiatives, with the exception of the FYA which were changed during 1999, could be accommodated within the existing UK regime, it will require new legislation to effect the options listed below. Again this list of options is not exhaustive but rather merely illustrative of the type of initiative that might be contemplated in order to make Northern Ireland attractive from a taxation perspective and to encourage accelerated economic development and growth within the Province from both FDI and indigenous businesses.

Initial Tax Holiday for Inward Investors

  6.44  It would be possible to provide an initial tax holiday for inward investment companies for up to seven to 10 years.

  6.45  This would encourage companies to be profitable in the early stages, as the incentive would be linked to profitability. The short-term nature of the incentive reduces the overall exposure on this initiative but it would be attractive in competing with the Republic's lower tax rate, particularly as most companies do not review the future much beyond a five year planning horizon.

Reduced Tax Rate or Tax Credit for Export Sales Profits

  6.46  In order to encourage export sales and partly to address the issue of Sterling versus the Punt and the Euro, it might be worth introducing a reduced rate of Corporation Tax or a tax credit in respect of profits derived from export sales of products manufactured in Northern Ireland. It is recognised that the required legislation under this option would be complex.

Tax Exempt Northern Ireland Bond

  6.47  It may be worth introducing a tax exempt Northern Ireland Bond to raise funds specifically to develop the infrastructure in the Province that will be required to promote industrial development and tourism.

16 May 2000