January 10th, 2018
Political, Legislative and Economic Interdependence in Ireland
A country’s political factors influence business environment, for instance, by providing stability that enhances investor confidence. Political instability such as civil unrests affect business outcomes adversely since it disrupts business operations, thus deter potential investors from investing in the country. Such a case was for instance evident in Ireland in the period starting from the Anglo-Irish war of 1919-21 to the years following Ireland’s independence in 1948. During this period, the country’s exports and foreign investment declined leading to lower employment levels and subsequently reduced per capita incomes (Hill, 2007, p. 335/GC4). Such effects of political factors were alleviated in subsequent years when the country’s political stability ensured development and sustenance of economic policies that attracted foreign investors into the country (Hill, 2007).
The effect of political factors on business outcomes is more evident in a government’s economic policies, environmental commitments and legislation that affect an entity’s strategy. This occurs, for instance, when a change in regime results into a more liberal trading environment within a country or when a country joins a trading block that influences its economic policies and approach to international trade. Such aspects affect the performance of an entity’s operations within the country, thus are critical considerations for potential investors (Keim & Hillman, 2008). In the case of Ireland, such interdependence between political, legal and economic factors in shaping the business environment in the country was evident. For instance, in the period following independence from Britain, Ireland’s protectionist approach to international trade deterred foreign investment thus influencing employment levels and per-capita income in the country (Hill, 2007). Subsequently, a trend towards liberalizing economy beginning in the 1950s, led to enhanced inflows of foreign investment resulting into the country’s industrialization and increase in per-capita income (Hill, 2007). The government by the early 2000s had decreased its direct involvement in the economy, remaining only with few government-owned entities in core industries – e.g. the gas and airline industry (Hill, 2007). Such trend towards a more liberalized and privatized economy led to a constant growth in the country’s GDP, exemplified by an annual growth rate of 9.9 percent recorded from 1996-2000 (Hill, 2007, p. 355/GC-5). Other economic policies that favoured foreign investment included grants and concessions made to firms that invested in the country’s remote areas (Hill, 2007).
Ireland’s accession to the European Union had positive and negative effects on the country’s business environment. Although evidence remains equivocal on whether joining the European Union (EU) was the reason behind reduced trade between the UK and Ireland (e.g. Glick & Rose, 2002; Thom & Walsh 2002), such action provided Ireland with an opportunity to diversify the market for its exports (Hill, 2007). Accordingly, EU members such as Germany and France became significant trading partners for Ireland, although the UK and the U. S. remained the largest trading partners for Ireland by 2004 (Hill, 2007). Secondly, the strength of the Euro, the trading currency in EU, during the period of Ireland’s economic growth, helped the country to make savings in imports while enhancing earnings on exports to non-EU members (Hill, 2007). On the negative aspects, regulation imposed on joining the EU such as a requirement for a standardized corporation tax charged to foreign investors, despite Ireland’s prior approach of providing lower taxes as an incentive, reduced its attractiveness to foreign direct investment (Hill, 2007). Additionally, by setting uniform interest rates for members of the EU in an attempt to spur growth in countries such as Germany, the European Central Bank limited Irish government’s capability to deal with an inflation that was higher than that of other members (Hill, 2007). Such incapability could lead to social tension (for instance, as prices of common goods increase) thus precipitating a political crisis that affects business environment adversely.
The influence of political factors on business environment may also arise with enactment of legislation that regulates business aspects such as incorporation, acquisition, protection of property and labour. In Ireland, laws that determine the business environment include the Mergers, Takeovers and Monopolies Control Act that was enacted in 1978 to regulate acquisitions and mergers for foreign and domestic entities (Hill, 2007). Additionally, there are laws that govern competition behaviour, incorporation, employment, taxation and social security; such laws could affect the decisions of foreign entities to invest in the country (Hill, 2007). Although there are various laws that affect employment in the country, the business environment is enhanced by a collective bargaining approach introduced in 1987 where representatives of employers, government, trade unions and other relevant stakeholders establish fair remuneration practices within the country. For instance, such an approach allowed the Program for Prosperity and Fairness to offer higher wages to employees in exchange for income tax cuts from the government (Hill, 2007). A similar approach, creation of a board that determines size of insurance payments in cases such as personal injuries, was used to reduce the costs businesses would otherwise incur on insurance, since insurers charged more to cater for the costs they would incur in court proceedings to determine amounts payable on claims (Hill, 2007).