Does it help or does it hurt – relying on foreign firms in times of crisis: the case of Ireland
Press Release March 6, 2012
The Irish economy relies quite heavily on affiliates of foreign multinational enterprises in both manufacturing and services sectors. In crisis this may have two opposite effects: more stability due to sunk costs, as those firms do not quit a market easily. After all, it would be hard and quite expensive to re-enter in the future. On the other hand, however, those multinationals may be less involved in the local economy and it is therefore easier for them to leave the market, when the situation becomes difficult.
IfW researchers Olivier Godart, Holger Görg and Aoife Hanley investigate in a recent CEPR working paper the evidence in the Irish economy before and during the crisis from 2006 to 2009. Their analysis looks at the likelihood of firm exits and shows quite different pre (2006–2007) and post crisis (2008–2009) evidence. In general service enterprises are definitely more prone to the financially difficult situation than firms in the manufacturing sector, their exit probabilities increased much more during the crisis. And for the manufacturing firms there is no observed difference between foreign and domestic firms. In the service sector however the foreign enterprises were right before the crisis about 50 percent less likely to close than Irish owned firms, whereas during the crisis this advantage vanished—they are now just as likely to exit as are Irish firms.
Thus there is no real evidence that foreign multinational firms introduce instability into the economy in times of crisis.
Contact: Prof. Holger Görg, Ph.D.