Institutional Crowding Out? FDI and Centralized Wage Bargaining in Ireland

Abstract

Foreign direct investment (FDI) is widely seen as an indicator of economic health and is much sought after by developed and developing nations alike. I present here a theoretical basis for the possibility of perverse effects of FDI-oriented development on the underpinnings of the economy, even where FDI's first order economic effects appear positive. In a preliminary empirical application, furthermore, I suggest that Ireland’s highly successful strategy of attracting FDI has had such an effect by altering the dramatis personae of its political economy so as to constrain the margins and methods of adjustment available to it during its recent economic crisis. Specifically, the tendency of (mostly American) multinational corporations (MNCs) operating in Ireland to adopt the industrial relations practices of their origin country rather than those of their host country has contributed to the development of a trade union movement that is disproportionately dominated by sheltered, and in particular public sector unions – more so than might be the case in the absence of an FDI-oriented development strategy. This institutional crowding out has in turn undermined the capacity of Irish “neo-corporatism” to maintain (or regain) national competitiveness whether through wage-setting or fiscal policy – the two chief margins of national adjustment available to policymakers following Ireland’s entry into Europe’s Economic and Monetary Union (EMU). Instead the Irish system of centralized tripartite wage- and policy-bargaining – “neocorporatism” – that emerged to much surprise in response to one profound economic crisis in the 1980s, has collapsed in the face of one in the 2010s.