In Irish manufacturing, the foreign sector accounts for about one half of employment and some  % of gross output. The Irish experience therefore provides us with a textbook case study of the effects on an EU host economy of export-oriented FDI. We explore in this paper the structural changes induced by FDI and the effects of FDI on the determinants of growth in Ireland. We also consider some possible adverse effects that may be associated with such strong reliance on multinational investment.

In Irish manufacturing, the foreign sector accounts for about one half of employment and some  % of gross output. The Irish experience therefore provides us with a textbook case study of the effects on an EU host economy of export-oriented FDI. We explore in this paper the structural changes induced by FDI and the effects of FDI on the determinants of growth in Ireland. We also consider some possible adverse effects that may be associated with such strong reliance on multinational investment.

Many previous studies have shown that the localisation of firms can be an important factor in attracting new foreign direct investment into a host country. What has been missing in this literature thus far, however, is an investigation into the reasons why industry clusters attract firms. We distinguish between "efficiency agglomerations" as firms locating close to each other because they can increase their efficiency by doing so, and "demonstration effects", whereby existing firms send signals to new investors as to the reliability of the host country and newly entering firms follow previous firms. In this paper we try to disentangle these two effects, by examining the location of US and UK firms in Ireland.We calculate proxies for "efficiency agglomerations" and "demonstration effects" and include these proxies in an empirical model of the location decision of firms. For US firms, we find that both efficiency agglomeration and demonstration effects are important determinants of entry. For UK firms, however, the evidence is not as clear cut.JEL classification: F23