IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMY OF IRELAND: 1960-1977

The objective of this study was to investigate econometrically, using a simultaneous equation macro model of the Irish economy, the impact of private foreign direct investment for the period 1960-1977. The model included six stochastic equations and six identities, and was estimated using the method of Two Stage Least Squares (2SLS). The focus of the study centered on testing the following four hypotheses. The first hypothesis was concerned with determining the statistical significance of government grants in inducing foreign firms to locate in Ireland. The second hypothesis investigated the contribution of private foreign direct investment to the level of domestic capital formation. The third and fourth hypotheses posited that private foreign direct investment and the market size and accessibility to the U.K. were significant explanatory variables in determining the level of merchandise exports. The results of the study revealed that the wage rate advantage and not the grants variable was the most important explanatory variable in the foreign direct investment equation. The coefficient of the grants variable was not significantly different from zero at the five percent level. In the domestic investment equation the foreign direct investment variable was positive in sign but not statistically significant at the five percent level. Lastly, the coefficient of the private foreign direct investment variable as well as the U.K. market, denoted by the level of the U.K. GDP, were statistically significant in explaining the variation in the level of merchandise exports at the one percent level