Profit-led in effect or in appearance alone? Estimating the Irish demand regime given the influence of multinational enterprises

Ryan Woodgate

Review of Evolutionary Political Economy, 2022, vol. 3, issue 2, 319-350

Abstract: Abstract Most studies on the demand regime of Ireland tend to find it is profit-led. However, these studies use conventional national accounts statistics, which are grossly distorted in Ireland. Since the activities of multinational enterprises (MNEs) drive real demand on one level and severely distort conventional macroeconomic data on another, the possibility of bias due to omitted variables and measurement error arises. This paper summarizes the real and distortionary effects of MNEs in Ireland, and then adjusts and controls for these effects in an econometric estimation of the underlying Irish demand regime. It also addresses the threat of simultaneity bias by employing a three-stage least-squares approach. Ireland is found to be wage-led once the influence of MNEs is taken into account. Moreover, the average effective corporate tax rate (AECTR) on foreign affiliates in Ireland is found to be statistically significant in explaining investment. These results, alongside indicative foreign affiliate statistics, support the view that the underlying Irish economy is both wage-led and “tax competition-led” (Woodgate, Rev Keynes Econ 8:512–535, 2020), where a lower AECTR has a net positive effect on aggregate demand. It is contended that this beggar-thy-neighbor, tax competition-led regime helps explain why Ireland is profit-led in appearance rather than in effect.

Keywords: Distribution; Demand regime; Ireland; Tax competition; Profit shifting; E11; E12; E25; C22; C36 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s43253-021-00056-1

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