FOREIGN DIRECT INVESTMENT AND INDIGENOUSENTREPRENEURSHIP: EVIDENCE FROM WALES AND

IRELAND

Siri Terjesen: Queensland University Of Technology, Brisbane, AustraliaMax Planck: Queensland University Of Technology, Brisbane, Australia

Zoltan Acs: George Mason University, Washington, United States of America

∼

Contact: Siri Terjesen, Queensland University of Technology, B423, BGSB, 4001 Brisbane,Australia, (T) +61 7 3864 1105, (F) +61 7 3864 1299, Email: s.terjesen@qut.edu.au

ABSTRACT In this paper, we study the evolution of knowledge-based entrepreneurship in Wales and Ireland. Ireland and Wales offer a ‘natural experiment’ for exploring the impact of policy on the emergence of knowledge based entrepreneurship, and are similar in that they both face resource constraints in seeking to develop knowledge based entrepreneurship (in particular an absence of a strong indigenous industry and of a R&D base). In addition, Ireland and Wales are similar in terms of many of the factors that typically explain levels of entrepreneurial activity. However, there are what appear to be important differences in the policies pursued to create new knowledge. We use in-depth interviews with expert informants in the two regions, government statistics measuring knowledge creation activities, and GEM datasets for 2001-2005 that estimate the attitudes to, and capacity for, entrepreneurial activity. The cases are structured as follows: first, we estimate levels of knowledge-based entrepreneurship; second, we document the evolution of entrepreneurship and related policies; third, we assess the evolution of private and public knowledge creating institutions, and we detail how public policies have sought to develop and create such firms and institutions, focusing in particular on the attraction of inward FDI, a policy approach adopted in both regions; fourth, we explain how public policies have sought to promote knowledge-based entrepreneurship; and fifth, we assess how local conditions have supported or impeded knowledge spillovers.

INTRODUCTION In today’s global knowledge economy, foreign direct investment (FDI) and the internalization of firm activities enable the transfer of intangibles to another country and play a major role in the economic development of emerging economies. FDI lead to the establishment of new indigenous enterprises in the host country and knowledge spillovers create entrepreneurial opportunities. These knowledge spillovers should have a positive effect on entrepreneurial activity and entrepreneurial activity should have a positive feedback on additional capital inflows. Using a combination of secondary data and Global Entrepreneurship Monitor (GEM) population surveys in Ireland and Wales, we compare the entrepreneurial activity “experience” in these countries , and explore how inward FDI and the differing economic development policies might impact upon this. This paper thus explores the evolution of small countries’ policy orientation from one focused on international business to a larger international entrepreneurship focus (Acs, Dana, and Jones, 2003). Today, firms are more interested in countries in which they can take advantage of strategic assets, especially information intangibles. Once an MNE finds a country that offers a long-term strategic asset, there are advantages to maintaining a national presence. FDI enables institution-building of legal and business frameworks and physical infrastructure, increases local human capital, and reduces the stigma of doing business in the country. During the course of FDI activities, there is a transfer of technology and intangibles to the host country that involves people and machinery, and some of this

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knowledge spills over. Decision makers in MNEs and host country institutions (e.g. governments, locally-linked firms) are aware of the potential for knowledge spillovers and engage in a negotiation process in terms of the preferred type and scope of activities, as well as intellectual property protection issues. Host country organizations lobby for more knowledge-intensive FDI activities. The ability of these organizations to recognize new ideas and seize opportunities depends on ‘absorptive capacity’. An individual working in an MNE gains new knowledge and wishes to obtain the best returns, and may feel unable to realize appropriate returns in the existing firm or may believe that the bureaucratic MNE does not value this knowledge. The individual seizes the opportunity to create a new entity. Countries can also therefore benefit from FDI spillovers, such as knowledge transfer when there is a strong culture that supports entrepreneurial activity in terms of individuals’ opportunity perception, beliefs that they have start-up skills and knowledge and knowing an entrepreneur. Wales has limited knowledge-creation, in terms of R&D expenditure at least, and lacks large indigenous MNEs. It therefore needs to ensure that there are beneficial knowledge spillovers from FDI, and that entrepreneurial opportunities created by that activity are acted upon. Conversely, local indigenous entrepreneurs need to respond with their own knowledge and value adding creating activities, which FDI inflows will then be attracted to in order to take advantage of it. There is thus a potentially virtuous circle, which government policy can impact upon. Countries will benefit from FDI spillovers when there is a strong cultural and policy context that supports entrepreneurial activity. Such a context will lead to more individuals perceiving entrepreneurial activity as a desirable economic choice. More specifically, a strong supporting cultural context will lead to a higher percentage of the population having a strong personal entrepreneurial context. A strong personal entrepreneurial context is one where the individual perceives opportunities, believes that they have the skills, knowledge and experience to start of business, and has a personal entrepreneurial role model. The effect of a strong supporting culture, positive personal contexts and policies will be higher levels of opportunity-based entrepreneurial activity. It might be expected that for entrepreneurs to exploit opportunities that arise from knowledge spillovers, entrepreneurs will need both the appropriate personal absorptive capacity (appropriate 'knowledge' and resources) and access to the knowledge spillovers (FDI). Higher levels of education might indicate that entrepreneurs are using higher levels of 'knowledge' in their entrepreneurial activity, and thus have higher absorptive capacity. FDI and the policies surrounding it might be expected to impact upon such opportunity-based entrepreneurial activity in several ways. Entrepreneurial activity in Ireland and Wales might for example be more pervasive in sectors where entrepreneurs are exploiting opportunities relating to MNE economic activity. This will be dependent, however, on the types of FDI located in these sectors (activities and functions), which will also to an extent be a function of the supporting government policies surrounding FDI-attraction policy. Wales and Ireland are therefore first compared in terms of their current experiences of entrepreneurship, this data drawn from Global Entrepreneurship Monitor (GEM) survey data generated in these nations. The potential reasons for these differences linked to their different experiences of FDI (volume, value, sectoral breakdown and activities) and related policy are then explored, utilizing both secondary data and the literature. The potential role of FDI and related policy in entrepreneurship FDI has played an important role in the economic development policies of several countries including Ireland. Since the late 1960s, Ireland, for example, has focused mainly on foreign direct investment based industrial development policies. FDI inflows can bring in the latest technology, create employment and lead to tradable goods. FDI not only enables the transfer of intangibles to another country but also makes knowledge spillovers possible and therefore may play a role in indigenous entrepreneurship. These knowledge spillovers can lead to the establishment of new home-grown enterprises in the host country leading to further economic development (Young, Hood and Peters, 1994).i Software was the main sector where indigenous companies and not only Irish subsidiaries of MNCs achieved worldwide success. The number of indigenous software companies in Ireland rose from 129 in 1991 to 630 in 1998, while the total number of firms rose from 365 to 760 (Breznitz, 2007, p. 12). FDI is therefore a major Industrial Development Policy tool and has also been a growing phenomenon: between 1979 and 1999, the ratio of world FDI stock to world GDP rose 5% to 16% and the ratio of world FDI inflows to GDP formation rose from 2% to 14% (UNCTAD, 2000). Although the majority of the world’s $648 billion FDI inflows are to developed countries, FDI is the dominant source of flows of financing in developing countries and is especially directed to new Greenfield

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investments and certain industry sectors (UNCTAD, 2005). The role and scope of FDI has changed with the advent of the global knowledge economy. Internalization theory describes how local firms’ knowledge of laws and relationships with local players provide ‘home court advantages’. Foreign firms must therefore leverage special advantages, often information-based intangibles, in order to compete in these markets (Morck and Yeung, 1991; 1992). Foreign firms must choose from a number of international trade options such as exporting, licensing, strategic alliances, or joint ventures. MNEs find it difficult to leverage capabilities through arm’s length transactions such as exporting due to the need for on-the-ground service or the presence of high trade barriers. Options such as licensing, strategic alliances, or joint venturing may not be optimal due to MNEs’ concerns about piracy of intellectual property, reverse engineering of goods and also differing production qualities of branded goods. When faced with such problems, firms choosing to internationalize by retaining direct control of their intangibles become MNEs. In today’s global knowledge economy, firms are more interested in countries in which they can take advantage of strategic assets, especially intangibles such as information and human capital. This type of FDI is long-term and face-to-face and requires knowledge transfer across the MNE. The MNE’s ability to access countries’ resources depends on the relational capital (e.g. goodwill and trust between firm and its actors such as customers, partners, governments, suppliers). During the course of these FDI activities, there is a transfer of technology and intangibles to the host country that involves people and machinery, and some of this knowledge spills over. These spillovers are not necessarily intentional, given that the MNE is a profit-maximizing entity and is not willing to transfer knowledge unless it obtains a return. Knowledge spillovers result from a gap in technology between foreign and local firms. The amount of intangible spillovers increases with the presence of MNEs and the size of the foreign-local firm technology gap. MNE activities, which are more knowledge intensive, (e.g. R&D) will receive more knowledge. Also if the foreign unit of the MNE competes with local firms then the MNE may inject more support in the form of knowledge transfer. Technology transfer is said to increase with the sophistication of technology in the local environment. The extent of these spillovers varies with the stage of economic development. Not all types of FDI, however, will have the same potential for knowledge spillovers. The potential for knowledge spillovers is related to the type of FDI and the level of human capital in the host country. FDI in high technology industries is more likely to generate knowledge-intensive spillovers (Buckley, Newbould and Thurwell, 1988). High levels of human capital (formal education, on-the-job training including industry, management and business development experience) also make it easier for entrepreneurs to start high value-added firms. Individuals working in MNEs generally obtain higher levels of training and development than in local firms (UNCTAD, 1994) and wish to obtain the best returns for these skills. Individuals may feel unable to realize appropriate returns in the existing firm or may believe that the bureaucratic MNE does not value this knowledge, and seize the opportunity to create a new entity. Second, for such entrepreneurial activity to occur, the host country will require a cultural context that supports indigenous entrepreneurial activity. Such a context will lead to more individuals perceiving entrepreneurial activity as a desirable economic choice. For entrepreneurs to exploit opportunities that arise from knowledge spillovers, entrepreneurs need the appropriate personal 'knowledge' and resources. Furthermore, as different types of FDI enable different levels of knowledge spillovers, we expect that entrepreneurial activity will be more pervasive in sectors where entrepreneurs are exploiting opportunities relating to MNE economic activity (Acs and Varga, 2005). The FDI Evidence for Wales and Ireland Table 1 provides an overview of FDI inflows to a number of countries, including Ireland and the UK (from which we estimate Wales’s share as) suggesting the strong role that FDI has played in developing these economies. Table 1: FDI Inflows in 30 OECD Countries (in US$ billions)

Economy Cumulative FDI Inflows 1993-2002 United States 1284.5 Belgium/Luxembourg 682.4

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United Kingdom: of which Wales (est)

484.5 38.8

Germany 393.8 France 322.4 Netherlands 272.5 Canada 206.1 Sweden 167.9 Spain 152.7 Mexico 128.6 Ireland 97.2 Denmark 88.9 Australia 74.9 Italy 73.3 Switzerland 73.3 Poland 49.4 Finland 45.2 Japan 44.3 Korea 37.9 Austria 36.3 Czech Republic 35.9 Norway 35.1 Portugal 28.7 Hungary 22.7 New Zealand 21.9 Turkey 10.7 Slovak Republic 9.6 Greece 9.3 Iceland 1.0

Source: OECD, 2005

After 1997, FDI inflows to Ireland increased significantly while in Wales, FDI declined. The two countries’ dramatic reversal of net FDI inflows can be attributed to a number of factors. One of these is linked to industrial sector, as indicated in table 2. Table 2: Estimated Structure of FDI in Ireland (1998-2002) and Wales (1990-1999)

Industry/Branch Ireland % of Total

Wales % of Total

Manufacturing - Of food, beverages and tobacco - Of textiles, leather products and clothing - Of wood, pulp, paper, publishing and

printing - Of coke, refined petroleum products,

nuclear products and nuclear fuel, chemicals and chemical products and man-made fibers including rubber and plastics

- Of other non-metallic mineral products - Of basic metals and fabricated metal

products - Of machinery and equipment* - Of radio, television, electrical and optical

equipment* - Of motor vehicles/ transport equipment - Other manufacturing

4%

.001%

.001%

20% 1%

0.5% 10%15%0.5%

2%

3.3% 0.6% 6.6%

5.2% 2.5% 1.1% 1.1%

39.6% 15.7%

1.9%

Agriculture, hunting, forestry and fishing .001% - Mining, quarrying and petroleum .001% 0.01% Wholesale and retail trade, repair of motor vehicles and household goods

8% 2.8%

Construction 1% 0.1%

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Hotels and restaurants .01% - Transport, storage, post and communications 10% - Real estate, renting and business activities, including financial intermediation and insurance 22% 2.4% Electricity, gas, and water 4% - Education, health and social services .001% - Other sectors 0% -

Source: Ireland figures based on HCSO (2002); UNCTAD (2005); OECD (2005); ITD (2004); Wales figures based on Regional Selective Assistance data. * includes high technology In Ireland a significant share of FDI is in machinery and equipment, 10% versus 1.1% in Wales and electrical equipment 15%. In Wales, however, there is a real concentration of FDI (and support for FDI through RSA) in this area (39.6%), as well as automotive and transport equipment (15.7%) (Table 2). Sectors where there are higher levels of FDI in Ireland compared to Wales include chemicals, machinery and equipment, and services generally (with a clear focus in Ireland on transport, communications and financial services). Sectors where inward FDI is more important in Wales than Ireland include timber-based industries, electronics and motor vehicles. Thus, in Wales, policy focused support on different areas than in Ireland. This was for a combination of reasons (political, economic, and policy), which will now be explored in more detail.

Ireland : Crouching Tiger Ireland, like the East Asian “tiger” economies has become a large scale exporter of manufactured goods of increased sophistication. Ireland is a world leader in “high-tech” business activity, with 46.5 percent of value added in manufacturing from high tech companies (OECD, 1998), compared with 10% for the European Union and 16.4% for the United State. Ireland has also been the recipient of significant structural funds from the European Union, but so have other countries that have not grown as rapidly. It is also important to point out that Ireland performs well below the European average in higher education expenditures on R&D, number of patents per 100,000 population, business research and development per capita and business investment. Ireland, therefore, did not achieve its growth miracle in higher value added manufacturing goods by building a high tech economy on its own. Ireland’s recent economic success, earning it the label ‘Celtic Tiger’ii, was partially the result of four decades of pursuing an export-led industrial policy that relied significantly on attracting inward FDI. In particular, Ireland has sought to attract export-oriented firms. The motivation for the FDI policy was a strong desire to create employment and to stem emigration from Ireland. The FDI-oriented efforts seem to have been largely successful. By 2004, there were slightly over one thousand international corporations in Ireland employing 129,000 staff. Annual output for 2002 from foreign owned companies amounted to €69B, of which €65B was exported. Ireland’s success at attracting FDI also broadly reflects government commitment to the policy objective, government policy initiatives and instruments, and the extensive efforts of the Irelands’ Industrial Development Authority (IDA). These policies have evolved over time, as have the reasons for why firms have chosen Ireland as a location (Begley, Delaney, and O’Gorman 2005). The key reasons why firms have chosen to locate in Ireland are the following: low corporate tax regime, access to capital and employment grants, IDA lobbying, a pro-business regulatory environment and government, ‘demonstration effects’ and the availability, at a low cost, of a young, English-speaking, educated and trained workforce. Ireland’s first started attracting export-oriented FDI inflows with the introduction, in the mid-1950s, of a fifteen year ‘tax holiday’ on profits from export salesiii. At the time the Irish government funded the state development agency’s programs that built ‘advanced factories’ (purpose built factory accommodation for overseas firms) and provided generous capital grants to foreign firms. Such initiatives, aided by Ireland’s entry to the European Economic Community in 1973, led to significant success in attracting inward FDI during the period from 1973 to 1980 (Ruane and Görg, 1996). However the oil shocks of the 1970s and the ensuring global recession forced many foreign firms to close their operations in Ireland. In particular, labor-intensive firms involved in sectors such as man-made fibres, textiles, clothing and footwear, found that Ireland was no longer an attractive location. In response, the IDA developed new policies that targeted ‘flagship’ emerging high technology sectors such as electronics, computer software, biotechnology, and healthcare. Often, the IDA targeted relatively young firms in these new key sectors. For example, Apple Computers located in Ireland prior to becoming a public company in the US. The Irish government subsequently extended incentives

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to cover firms engaged in internationally traded services (e.g. financial services, call centres). Reflecting the nature of such activities, and the policy objective of generating employment, firms received employment grants as well as capital grants (that is, payments per job created). In addition, a broad range of policy tools such as training grants, subsidized rents, technology transfer grants and low interest loans were used by the IDA to tailor packages that would be attractive to specific firm needs (Murphy and Ruane, 2004). The Irish government also sought to increase the flow of trained graduates to industry by creating new National Institutes of Higher Education (tertiary colleges with a focus on vocational skills). From the 1990s, the number of firms investing in Ireland significantly increased. In particular, there has been tremendous growth in the scale of FDI inflows from the US. Of the one thousand foreign firms located in Ireland, 46% are headquartered in the US. These American firms account for 75% of all exports from foreign owned Irish subsidiaries and 69% of employment in foreign-owned Irish subsidiaries. This rapid growth may be partly explained by ‘demonstration effects’. In explaining the decision to invest in Ireland, executives of newly arriving firms in sectors such as computers, instrument engineering, pharmaceuticals and chemicals cite that their location decision is strongly influenced by the fact that other key market players were located in Ireland (Naveretti and Venables, 2004). There has also been a significant change in the sector representation of firms locating in Ireland since the 1970s, when foreign firms primarily operated in low technology sectors. For example, by the late 1990s, over half of Ireland’s foreign industry was in high technology sectors, with about a quarter each in medium and low technology sectors (Naveretti and Venables, 2004). Following government policy initiatives, a growing proportion of FDI was directed to ICT sectors (Carlsson, 2005) and key FDI dominated sectors in Ireland now include office and data Processing, medical and optical equipment, radio, TV and communications, chemicals, electrical machinery and apparatus, paper and printing, food, and pharmaceuticals. For example, investors in Ireland include thirteen of the fifteen largest global pharmaceuticals, seven of the ten largest information and communication technology and fifteen of the twenty-five largest medical technology firms. Reviewing the effectiveness of policies aimed at attracting FDI, Murphy and Ruane (2004:135) argue that three factors partly explain Ireland’s success: (a) the emergence of self sustaining clusters in area such as software, electronics, pharmaceuticals, and financial services that resulted from the targeted approach of the IDA and their efforts to build vertical linkages; (b) the extension of incentives to include internationally traded services; and (c) the emergence of a pro-FDI reputation, that reflects the consistency and pro-active nature of Irish government policies towards FDI. In addition to attracting inward FDI, however, Irish industrial policy has also sought to support export-oriented indigenous firms, including new enterprises. While the differences between foreign and indigenous firms have persisted, there is evidence that the performance of indigenous manufacturing firms has improved. Today’s indigenous manufacturing firms are more export-oriented and profitable than those operating before1987 (O’Malley, 2004). Industrial policy has focused assistance on established and new manufacturing firms, which had export potential, or to substitute for an imported product. As such, entrepreneurship policy in Ireland focused on a very narrow range of ‘high potential start-up’ entrepreneurs. This group consists of manufacturing businesses with export potential and ‘internationally traded services’ businesses. The range of measures used to assist established and new manufacturing firms includes preferential corporate taxiv and capital and employment grants. In 1978, the IDA initiated the ‘Enterprise Development Programme’ (EDP) which targeted managers, professionals (engineers and accountants) and academics to start businesses with high growth potential. Often the new EDP ventures supplied to foreign owned firms or import substitution businesses. EDP entrepreneurs received extensive state assistance in terms of loan guarantees and ‘soft supports’. Over the twenty years the EDP operated, about 350 businesses received state assistance, across sectors such as machinery/tool making/computers, electrical and electronics, food, instruments and medical devices and internationally traded services. The IDA also operated a ‘Linkages Programme’, under which it actively sought to encourage established and new firms to exploit sub-supply opportunities in foreign firms. This programme enjoyed moderate success in some sectors, such as electronics, although the nature of foreign firm activity means that a significant proportion of their exports consist of components sourced from outside Ireland.

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Current supports for entrepreneurial activity are focused on a small number of new start-ups engaged in manufacturing or internationally traded services (for example software firms) and are delivered by Enterprise Ireland, the sister organization of IDAv). Enterprise Ireland provided assistance to 54 HPSUs in 2002 and 65 HPSUs in 2004. Policy interventions by Enterprise Ireland have evolved to include initiatives aimed at stimulating venture capital investments (by part investing in venture capital funds), the funding on incubators for universities and institutes. In addition, regional County Enterprise Boards were introduced to support and promote entrepreneurial activity in a broader range of sectors, although they also act as the ‘seed’ development stage for future Enterprise Ireland clients. The period of rapid growth in the 1990s was also characterized by an increase in the number of new businesses. This entrepreneurial activity was primarily concentrated, however, in sectors related to the increase in domestic demand. The rapid increase in the numbers at work in Ireland translated into an increase in consumer spending, in real terms, of about 75% between 1993 and 2003. Using registrations for Value Added Tax (VAT), a requirement if a business or sole trader will sell more than €25,000 (service businesses) or €50,000 (manufacturing businesses), the areas of activity where entrepreneurial activity was most prevalent in 2000 were in the construction sector, one third of net new VAT registrations, and other professionals, a group comprising advertising, architects, barristers, solicitors, legal agents, press, one fifth of net new VAT registration.vi The nature and scope of entrepreneurial activity in Ireland suggests that entrepreneurship is now seen as a positive career choice for many well educated Irish workers. The question is the extent to which the FDI policy contributed to this. While knowledge spillovers from MNEs can be difficult to analyse, Grög and Strobl (2002) demonstrated that the presence of MNEs has had a positive effect on the entry of indigenous manufacturing firms in Ireland. They concluded that this effect reflects both the presence of MNEs in the same industry and the presence of MNEs in downstream industries. In estimating the impact of MNE purchasing of services and supplies from Irish firms, Barry (2004) suggested a ‘ballpark estimate’ that every 100 jobs in foreign-owned manufacturing firms create 100 service sector jobs and 10 indigenous manufacturing jobs through backward linkagesvii. Other research indicates that there is a positive indirect employment effect of MNEs on locally based suppliers, including both indigenous and foreign owned suppliers, in the Irish electronics sector (Grög and Ruane, 2001). Additionally, of the 270 new high potential start-ups that received assistance from Enterprise Ireland, for the period 1999 to 2003, eighty-eight (33%) were started by entrepreneurs whose immediate prior place of employment was a foreign multinational firm in Ireland; while twenty seven (10%) were started by entrepreneurs leaving universities and institutes. In some sectors, populated by foreign-owned firms, there has been an increase in indigenous entrepreneurial activity. The most striking example can be found in the software sector. Since the mid-1980s, the software industry has been one of the fastest growing sectors of the Irish economy. There have been significant inflows of FDI, with firms such as Apple, Lotus and Microsoft are among the over one hundred foreign firms located in Ireland. Foreign-owned MNEs are highly export-oriented, sending about ninety-eight percent of output overseas, mostly to European markets. These firms employ over thirteen thousand in Ireland, mostly in Dublin. In the early 1990s when Ireland was the largest exporter of software products in the world, firms such as Microsoft, involved in package software production, outsourced activities such as the printing of manuals, translation activities, and disc duplication to indigenous and foreign firms. In addition, firms such as Ericsson and IBM perform software development activities in Ireland. In addition to these inflows of FDI, there has been significant indigenous entrepreneurial activity. Ireland’s indigenous software sector has over five hundred and fifty firms, output of €1.35 B, and employs about eleven thousand, and exports eighty percent of all output. At least half of these firms have been created since 1991 (when there were 291 indigenous software firms in Ireland). These firms are concentrated in Dublinviii (seventy percent of indigenous firms) and spend 18% of sales on R&D, compared to just 1.5% of sales for other business sectors in Ireland (O’Malley and O’Gorman 2001). The presence of MNEs seems therefore to have had a beneficial stimulation effect upon indigenous investment and new companies in the same industries, but in different product categories (Carlsson, 2005). Foreign firms have had a significant positive influence on the emergence of strong competitive advantage in indigenous firms (O’Malley and O’Gorman, 2001). These benefits include the development of a skilled workforce and access to market opportunities and, in particular, export

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markets. Indigenous firms may have benefited from investments in the tertiary education system that sought to produce graduates with skills suitable to attracting FDI. In addition, ‘on the job’ learning in MNEs in a broad range of sectors was important in developing the skills of the indigenous firms’ workforce. Additionally, Irish software entrepreneurs have commonly gained some experience working in foreign MNEs in Ireland, in a variety of sectors. A survey by O’Malley and O’Gorman (2001) suggests that while a minority of the founding entrepreneurs worked in foreign-owned MNEs immediately before starting their own firms, over two-thirds of the new entrepreneurs gained experience working in a foreign-owned MNE in Ireland at some stage in their careers. About half of new Irish entrepreneurs had also worked abroad in software or a related sector at some time before starting their company. Second, a domestic market of sophisticated customers, many of whom were internationally competitive foreign owned firms, was important for emerging indigenous firms. Many indigenous software firms sell to subsidiaries of foreign firms located in Ireland, including firms in ICT and other sectors. Overseas MNEs, in a range of sectors, are relatively more important in Ireland than they are in most other countries. Two areas of concentration of sales from Irish software firms are banking/ financial services and process flow industries such as pharmaceuticals, chemicals, and diary products. The financial services sector, while not unusually large in Ireland compared to other countries, does include the Dublin-based International Financial Services Centre, which is home to over 450 firms, the majority of which are foreign owned. Process flow industries, many of which include subsidiaries of MNEs, count for a larger share of production in Ireland than they do in many other EU countries. Furthermore, a significant number of indigenous firms reported that selling to foreign-owned firms in Ireland had helped directly to provide access to export markets (O’Malley and O’Gorman, 2001). In addition, it appears that specific policies adopted by the development agencies were important in facilitating entrepreneurial activity in the software sector. In the survey by O’Malley and O’Gorman (2001), 80% of the respondents reported receiving some form of state financial assistance, and of those, just over half said that this had been important or very important to their company's development. The main impact of such aid is to enable firms to hire employees earlier and to build sales faster, to enable them to take risks which they might have had to avoid such as following speculative market leads, and to boost profitability which enables other finance to be sourced more readily (Clarke, 1995). A majority of firms also reported that they received non-financial assistance such as marketing information and assistance with developing management skills and business planning from state development agencies, though for most firms (80%) such non-financial assistance was not of great importance or not relevant at all. Wales Wales, with 5% of the UK population, has had a record of attracting a disproportionate percentage of the FDI coming to the UK, as table 3 illustrates. Table 3: FDI by Region in Great Britain, 1985-1998

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Given the extent of the resources given to inward investors, it is as well to ask what benefits are meant to accrue from it. FDI was targeted by Wales because of the anticipated benefits, both direct and indirect, to the economy. Additionally, whether FDI generates overall negative effects or positive benefits on the host economy depends on the strategy of the particular company undertaking the investment. Hood and Young (1984) summarised these potential effects under the headings of employment, competition, R&D dependence and truncation, trade, and resource transfer (which concerns the transfer of capital, technology, management and production techniques from incoming multinationals into the host economy). Young et al (1994) split the potential effects into the direct static effects of FDI through the abilities of the multinationals themselves, and the indirect dynamic effects on suppliers, customers and competitors which, whilst potentially also very important, are also the most difficult to measure. In terms of the direct impacts, therefore, an inconclusive picture is presented. Relatively large amounts of grant aid focused on the automotive component and electronics sectors, attracting a concentration of inward investors into these sectors and creating direct employment and raising wage rates. However, these sectors are relatively low paid, and overall there is a paucity of higher level functions in these industries in Wales. In terms of direct employment Welsh Office (1997) indicated that foreign firms employed around 75000 in manufacturing, over a third of the total manufacturing workforce. Of this around 30000 worked in the electronics and automotive sectors. This is approximately 70% of the total workforce in these sectors according to Census of Employment / Annual Employment Survey data, a proportion which has been rising. However, Lovering (1995) also pointed out that whilst between 1985 and 1994 the net increase in total jobs in foreign firms was 22,000, 18,000 of these came from acquisitions of existing firms and thus the net benefit from FDI in terms of employment could be seen as relatively small. Pike (1993, 1996) also argued that government subsidised FDI tends to displace local employment rather than add to it. Wales has also fallen behind the UK in terms of male and female average weekly earnings, the 1996 figures being only 87% of the UK figure (New Earnings Survey, 1996). Even in manufacturing, where the bulk of the FDI has been concentrated, average weekly earnings have fallen from 108.2% of the UK average in 1983, to 99.4% in 1990 (Hill and Roberts, 1993). Hill and Munday (1995) found that within manufacturing, foreign companies were paying wages 11% higher than the average in Wales. However, while foreign firms may be pulling up pay in the sectors in which they located, sectors such as electronics and automotive components are not relatively high paying ones. For example, in electronics, where females make up a large proportion of the workforce, pay is lower (£11583 compared to average foreign wages of £15374 (Hill and Munday, 1995)). Multinationals also have the ability to spatially separate assembly from higher level functions such as R&D in which higher wages are paid (Cantwell, 1989). Roberts (1996) found in Wales almost 77% of employees in foreign firms were classified as operatives or assembly workers, compared to the UK FDI average of 60% (CSO, 1992). Given that 48% of the Welsh workforce were in manual occupations at this time when FDI was at its height (Regional Trends, 1996) it is clear that FDI in Wales was not relatively concentrated in the higher paid non-manual occupations as a result of FDI. Morgan (1991) also concluded that Wales in particular was afflicted by the “branch plant” economy model in electronics because of the lack of R&D carried out by inward investors in Wales. In terms of the automotive component sector, Khan’s (1998) survey of Welsh first tier automotive suppliers found that 23% of UK firms, but 40% of non-UK firms performed no R&D in Wales.

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In terms of trade, Roberts (1996) and Phelps (1997) present pictures of large scale exports of finished goods, but also high input imports which obviously has a knock-on effect for SMEs lower down the supply chain. Phelps (1997) found that 55% of US firms’ and 41% of Japanese firms’ Welsh output was exported outside the UK. However, only 13% of US firms’ raw materials were obtained in Wales and the figure for Japanese firms was 18%. These figures were similar to those obtained by Roberts (1996) whose figures indicate that FDI makes an overall positive contribution to a trade surplus for Welsh manufacturing (final exports minus imported materials and services) in 1994. Thus relatively large amounts of grant aid have been focused on the automotive component and electronics sectors, attracting a concentration of inward investors and creating direct employment and raising wage rates in these sectors. However, these sectors are relatively low paid, and overall there is a paucity of higher level functions in these industries in Wales. The picture is made even more confusing when we look at the indirect effects. For example, Tewdwr-Jones and Phelps (1999) highlighted the high degree of competition between UK regions in their attempts to attract large scale Asian investments. This has involved not only large amounts of grant aid and associated aid (in the case of LG allegedly amounting to around £250 million), but also fast-tracking of planning processes, and circumvention of public and political scrutiny of the environmental impacts on (usually) greenfield sites (Phelps and Tewdwr-Jones, 1998). Peck (1996) also saw the creation of “customised” (purpose built) spaces as lying at the heart of competition between UK region for Asian inward investment. The LG site for example was seen as the most prestigious in South Wales (Tewdwr-Jones and Phelps, 1999). Thus valuable land and expertise resources, which could be used in developing SMEs are being used instead for inward investors. The lack of high level functions in Wales may also be having deleterious effects on SME development. Firn (1975) argued that the shortage of such jobs would force potential employees to leave the region, reducing the pool of potential entrepreneurs and innovators. The lack of local sourcing indicated by Roberts (1996) and Phelps (1997) may also be limiting the beneficial diffusion of management and production knowledge via buyer-supplier relations to SMEs in the supply chain, the most obvious conduit for transfer identified in studies such as Pickernell (1997). Beneficial resource transfers can take the form of importation of capital and technology as well as the diffusion of skills and techniques. Table 4: RSA Grants accepted by UK and overseas companies: offers accepted and payments made 1 January 1988- December 1998

Nationality Number of Offers

% Amount of RSA Offered,

nominal £m

% Average RSA per Offer,

Nominal £000s UK 561 65.2 269.3 42.8 480.0 France 21 2.4 24.0 3.8 1143.9 Germany 29 3.4 15.5 2.5 535.5 Other Europe 52 6.0 32.1 5.1 617.6 North America

111 12.9 110.6 17.6 996.8

Japan 49 5.7 52.4 8.3 1069.0 Other Asia 8 0.9 94.5 15.0 11813.1 Others 30 3.5 30.7 4.9 1023.6 Total 861 100.0 629.2 100.0 730.8

Source : Employment Gazette and Labour Market Trends Various Editions Munday (1995) saw some evidence of beneficial resource transfer in his examination of Japanese electronics companies located in South Wales. However, the skills of suppliers were unlikely to be developed, as Japanese companies lacked higher level functions and hence the demand for higher level skills was restricted. Overall he detected a lack of resource transfer. However, these may not be the only mechanisms for beneficial resource transfer to local SMEs. Nor are Japanese firms the only source of learning. Over the past ten years there have been widespread moves towards adopting or adapting Japanese style production methods in the automotive component and electronics industries. There is also evidence of non-Japanese companies bringing new working practices to the UK (Pickernell, 1996). Alternative resource transfer could occur via the labour market, through employment of staff who previously worked in other, multinational companies in the region, as well as

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via physical proximity giving the opportunity for visits and benchmarking (Pickernell, 1999 http://www2.glam.ac.uk/bus/weidemo/). This links into wider issues of resource transfer within Wales and supports the potential benefits of clustering in automotive components and electronics and indeed the learning region approach espoused by Morgan (1997). However, it also highlighted problems in maximising the benefits of such resource transfer because of weaknesses in the SME sector caused by inadequate management or finance. This indicates again important issues for firms with regard to the regional policy being undertaken by government. Wales has for many years, therefore, had access to UK government schemes such as Regional Development Grants (RDGs) and Regional Selective Assistance (RSA), and more recently to significant EU funds. As a result it enjoyed a relatively large share of the UK’s regional policy budget, between 1990 and 1997 receiving £890m in Regional Preferential Assistance (RPA) to industry, a third of the UK total (ONS, 1998) and a quarter of UK RSA spending (Industrial Development Act 1982, various). However, this did not show returns in terms of real improvements in economic prosperity (Brooksbank and Pickernell, 1999), GDP per head figures in Wales being only 83% of the UK average, a figure which had been falling over the previous two decades. The new policy focus away from attracting FDI and towards indigenous firm growth in Wales coincided with political devolution and a New Economic Development Strategy (NEDS) for Wales. The NEDS (2001) proposal document has been amended following consultations. Nevertheless it provides a useful illustration of the changing economic policy focus in Wales and illustrates dilemmas facing Wales more widely. NEDS (2001) had as its by-line “In search of economic growth, social justice, and sustainable and balanced development”. In its foreword the Minister for Economic Development, Michael German, acknowledges that,

“The challenges of regional economic competitiveness allied to social justice and sustainable development across our territory of our small country is in itself demanding – more so when we consider the pace of technological change and innovation facing us over the next ten years, but it is a challenge that we must meet with enthusiasm and determination”

This seems to highlight, however, that in Wales, unlike Ireland, there was not a “joined-up” strategy with regards to FDI and entreprneurship. Rather there was volte face from an overwhelming focus on FDI until the 1990s, followed by an ever increasing focus on entrepreneurship since then, with comparatively little attempt to link the two on any long-term basis. Certainly there appears little evidence linking FDI-concentrated sectors with new firm formation. The GEM Survey Data : Entrepreneurship Results Survey data is drawn from GEM population samples estimating the prevalence rates of nascent and new businesses. A standardized telephone survey was conducted of a representative sample of adults in 2002-2004 yields a total sample of 12,000 individuals. The survey requested a broad array of information related to individuals’ demographics, perceptions of the country environment for entrepreneurship, attitudes and awareness of entrepreneurship and the self-reporting of involvement in entrepreneurial activities. (See Reynolds, 2005 for a review of GEM methodology and approach.). This is now used to explore and report country differences in terms of entrepreneurial activity, individuals’ perception of the national environment for entrepreneurship and perceptions of entrepreneurs. There are significantly more entrepreneurs in Ireland than in Wales (p<.001). When considering only the population of entrepreneurs, there is no significant difference between Opportunity TEA in Ireland and Wales. Table 5: Total Entrepreneurial Activity

Entrepreneur Profile Variables Ireland Wales Significance Total Entrepreneurial Activity 8.07% 6.62% ***

Opportunity Entrepreneurship 6.64% 3.32% *** *** p<.001 At the country population level, people in Ireland are more likely than those in Wales to see entrepreneurship as a desirable career, entrepreneurial success as high status and that there is media coverage for new businesses. All three are significantly different at the .001 level.

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Table 6: Entrepreneurial Culture and Personal Context: Adult Population Country Environment Variables Ireland Wales Significance

Entrepreneurial Culture Desirable Entrepreneur Career: ‘In your country, most people consider starting a new business a desirable career choice’: % Yes response

66% 51% ***

Entrepreneur High Status: ‘In your country, those successful at starting a new business have a high level of status and respect’: % Yes response

81% 73% ***

Entrepreneur Media Attention: ‘In your country, you will often see stories in the public media about successful new businesses’: % Yes response

80% 59% ***

Personal Context

Personal Knowledge of Entrepreneur: ‘You know someone personally who started a business in the past 2 years’: % Yes response

41.8% 21.3% ***

Good Start-Up Opportunities: ‘In the next six months, there will be good opportunities for starting a business in the area where you live’: % Yes response

34.8% 24.7% ***

Knowledge and Skills: ‘You have the knowledge, skill and experience required to start a new business’: % Yes response

46.6% 45.8% None

Fear of Failure: ‘Fear of failure would prevent you from starting a business’: % Yes response

34.5% 30.8% ***

*** p<.001; Note: This is for entire sample, not just 18-65. There are no significant differences between the population of entrepreneurs in Wales and in Ireland in terms of perceptions of entrepreneurship as a good career choice, success as being high status and there being good media coverage for new businesses. In the populations of Ireland and Wales, the Irish people are are significantly more likely to indicate entrepreneurial awareness and that fear of failure would prevent them from starting a company (both at p<.001). At the entrepreneur level, there are no significantly differences on knowledge and skills between the Welsh and the Irish. Table 7: Entrepreneurs: Age, Education and Gender

Demographic Variables

Ireland Wales

Significance

Age (mean) 37.74 42.9 **

Highest Level of Education Completed - None - Some Secondary - Secondary - Post-Secondary - Graduate

0%

12.8% 31.5% 38.9% 16.7%

0%

18.5% 49.2% 18.8% 13.5%

*

Male : Female Ratio 2.30 2.80 * *** p<.001; **<.05; * p<.10 [Table 8 omitted due to space constraints in abstract process] Entrepreneurs in Wales are significantly older than those in Ireland (p=.000). There are significantly more female entrepreneurs in Wales than in Ireland (p<.003). – is this linked to policy (Wales really pushed female entrepreneurship for a couple of years – reduced funding recently and female entrepreneurship fell back). There are no significant education differences between the population of entrepreneurs in Wales and Ireland. – this is important – highlights that absorptive capacity might not be reason, but rather what’s there to absorb i.e. type of FDI . Entrepreneurs in Wales and Ireland do not

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start businesses in significantly different sectors. There are no significant differences between the entrepreneurs in Ireland and Wales in terms of start up jobs, future jobs, and one measure of market expansion. Conclusions This paper explores the evolution of a country’s orientation from one focused on international business to a larger entrepreneurial focus. According to FDI theory of internalization foreign firms must have special advantages that are generally information-based intangibles such as superior technology, marketing or other skills. This leads to knowledge spillovers. The ability of a country to benefit from these knowledge spillovers differs at different stages of economic development. The GEM data indicates that Ireland has a more robust entrepreneurial sector than Wales. It also appears that Ireland invoked policies to take advantage of knowledge spillovers from FDI, (for example in the software industry), to a much greater extent than has occurred in Wales. In Ireland, entrepreneurial activity became increasingly important about a decade ago, policies directed at attracting inward FDI, but also linked to policies focused on indigenous entrepreneurial activity, seeking therefore to maximize the benefits of inward FDI on indigenous industry. In contrast, Wales does not appear to have taken full advantage of FDI, partly as a result of a different policy focus (much more related to pure job-creation in deprived areas). In these times where attraction of general FDI has become much more competitive (with the expansion of the EU into central and Eastern Europe and the opening up of China), Wales would seem to need much more focused FDI-attraction polices that have a greater chance to lead to spillovers that local entrepreneurs can then exploit. This will also, of course, require entrepreneurship policies that encourage entrepreneurial activity among those with the resources and knowledge to exploit such knowledge spillovers. In terms of FDI, government policy must seek to attract FDI that has potential to spillover into the local economy. Such spillovers can be encouraged by using FDI to support and initiate clusters (Carlsson, 2005). Second, Wales needs increased levels of high-tech or knowledge intensive entrepreneurship.

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