figures reported by MNCs in Ireland may be artificially high relative to the
true level of value added and production that takes place in Irish plants, to
the extent that there they engage in profit-switching transfer pricing.14 If
this is the case, our estimates of R&D intensity would be underestimated.
We do not have the same concerns regarding the R&D figures reported by
MNCs in Ireland. Indeed, the low corporation tax rate, which limits the
value to foreign-owned plants of write offs against R&D expenditures,
reduces the incentive for foreign-owned plants to undertake R&D
expenditures in Ireland, and may itself explain the relatively low rate.
To look at the dispersal of foreign affiliate R&D spend in Irish
manufacturing, we disaggregate by sector. Table 4 compares the national
share of R&D spend (both manufacturing and some non-manufacturing)
for 1986 and 1995 (Forfas, 1997). R&D spend by MNCs is predominantly
in the higher technology sectors. In 1986 all foreign plants accounted for
66 per cent of total business expenditure on research and development in
Ireland. Of this 66 per cent, two thirds was expended in both of the higher-
technology sectors. Again in 1995, the pattern is similar, as real rates of
growth were almost identical across all sectors over the period 1986-1995.
The OECD, on the basis of a further disaggregation of the Irish high-tech
sector into sub-sectors, reports that foreign affiliates were responsible in
1993 for 95 per cent of national R&D spend in the pharmaceutical sector,
78 per cent in the computer software industry and 64 per cent in the car
industry (OECD, 1998:68).
(Table 4)
13 R&D intensity is calculated as total R&D spend of all foreign affiliates divided by the sum of
manufacturing turnover produced by all foreign affiliates.
14 Profit-switching transfer pricing is a mechanism whereby foreign subsidiaries report a higher value
of their sales (profits) in Ireland to avail of the low corporation tax rate as discussed in Stewart (1989)
and Murphy (1998).
11