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Can a PIIGS Spell-Check Happen?
|I.||Ireland`s and Portugal`s fiscal policies||5|
|Corporate tax rate||5|
|Income tax rate||6|
|Total tax revenue||7|
|Gross fixed capital formation||8|
|III.||Balance of Payments||15|
|Foreign Direct Investment||20|
|FDI by origin||22|
|FDI by type of operation||23|
|Portraying Ireland in ASADNX||24|
|Portraying Portugal in ISLMBP||25|
|IV.||Long-term prospective: impact of FDI on TFP||27|
|Quantifying productivity determinants||27|
|Global Competitiveness Index||27|
|Disaggregating GCI: where does the difference in TFP come from?||29|
|Findings. Foreign direct investments and their impact on productivity parameter||32|
|Increase in productivity parameter: impact on GDP development||32|
In general, the Irish people worked harder to improve their competitiveness: boosted the level of education, made FDI a close-to-national dedication, and with a touch of luck in terms of cultural ties and possibly a more favourable location were unbelievably successful (Hansen, 2006) . The work paid back in two ways – not only in terms of attracting FDI and using it to solve present current account issues, but also using FDI to increase their productivity even more and boost the potential output far beyond and expectations. Whereas Portugal’s conclusions are not so amazing – they did not manage to increase ‘a’ as many as was needed to attract FDI amount similar to Ireland’s ones and the FDI that did come does not generate exports to cover for Portugal’s imports.
From the analysis conducted, we can conclude that FDI have a significant impact on the national economy. As we explored government’s policies in Portugal and Ireland, current budget balances and balance of payments of the countries, as well as the underlying level of foreign direct investments into these countries’ economies, the influence of FDI on the economy in case of Ireland is the following:
• FDI improving national balance of payments via capital inflows from abroad
• FDI leading to higher level of exports and current account surplus (or lower CA deficits)
• FDI generating high government revenues, providing a reach base for taxation
In the long term, we consider the causal link between FDI and TFP:
• FDI stimulating R&D and innovation in Ireland, thus contributing to the TFP growth
• Increases in TFP leading to sustainable economic growth in the long run
The linkages drawn were explained using the theoretical frameworks of AS-AD, AS AD NX, IS LM BP and neoclassical economic growth models.
Before analyzing the positive effects of FDI on Ireland’s economy, we explored the preconditions for successful attracting FDI by Ireland, as well as the mistakes made by Portugal in terms of policymaking. Thus, we developed a set of suggestions concerning the direction of economic policy necessary for Portugal, and possibly other PIIGS, necessary to influence the economic situation from the supply side using such tool as foreign direct investments:
• Increase Innovation factor of GCI via boosting R&D spending (can be both private and government), granting patents for innovations, spreading university-industry collaboration, increasing availability of scientists and introducing closer ties between science and industry.
• Raise Business sophistication factor of GCI via improving value chain breadth, production process sophistication and willingness to delegate authority.
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