Three years ago, European governments and the International Monetary Fund sent Ireland a $113 billion (85 billion euro) bailout package to support the country’s budgetary needs and prop up the Irish banking system. The loan came after the Irish economy was devastated by the Great Recession. The bursting of the housing bubble was at the center of Ireland’s problems, and even with recent gains, home prices are still roughly 50% off their 2007 highs. Moody’s Analytics doesn’t expect home prices to reach 2007 levels for another two decades.
Yet despite these economic troubles, Ireland still maintains an extremely pro-business environment that has attracted investments by some of the world’s biggest companies over the past decade. In Forbes’ eighth annual ranking of the Best Countries for Business, Ireland grabs the top spot for the first time.
Ireland scores well across the board when measuring its business friendliness. It is the only nation that ranks among the top 15% of countries in every one of the 11 metrics we examined to gauge the best countries. Ireland ranks near the very top for low tax burden, investor protection and personal freedom.
Ireland moved up from its No. 6 ranking last year on the strength of improved scores on the Heritage Foundation’s measure of monetary freedom, which gauges price stability and assesses price controls. Ireland also benefited from a stock market that has been on fire. The 44% return for the Irish Stock Exchange Overall Index in the 12 months through Nov. 20 ranks first among the top 30 countries.
“Ireland has continued to attract direct foreign investment despite its problems,” says Melanie Bowler, a Moody’s Analytics economist focused on Ireland. Bowler highlights the educated workforce and 12.5% corporate tax rate—one of the lowest in Europe—as big draws, as well as the language factor for companies from anglophone countries. “You want to have a common language if you are setting up operations in Europe,” she says.
The American Chamber of Commerce Ireland released a report in October that shows U.S. firms invested $129.5 billion in Ireland between 2008 and 2012. It represented a greater total than had been invested in the previous 58 years combined. Ireland was the fourth-biggest recipient of U.S. foreign direct investment last year and attracted almost as much U.S. investment as all of developing Asia.
Dublin serves as the European headquarters for a number of U.S. tech firms including Google GOOG +0.23%,LinkedIn LNKD +0.83%, Twitter and Facebook. Twitter opened new Dublin offices in September where it employs 100 people with plans to double in size over the next 12 months. Facebook established a presence in Dublin in 2009 and is opening new office space in the city that will make it the social media company’s largest operation outside of its Menlo Park, Calif., global headquarters.
Ireland’s recent troubles have made it more attractive for companies moving in. Nominal wages fell 17% between 2008 and 2011, which helped keep labor costs in check. Unemployment remains stubbornly high—a recent 12.8%—providing companies a large labor pool to pick from. There are now more than 1,000 overseas companies with a presence in Ireland and they employ 150,000 of the nation’s 1.9 million workers. “Dublin has already established itself as a location for multinationals, so it has the necessary infrastructure for other companies to easily move into the country and set up shop,” says Bowler.
While Ireland moves up the ranks, the U.S. continues a four-year slide to No. 14 after ranking second in 2009 (the U.S. ranked 12th in 2012). The U.S. gets dinged for the Federal Reserve’s easy-money program, which has distorted prices and risked long-term inflation. It ranks 80th out of 145 countries for monetary freedom. Only the U.K. fares worse among the top 50 countries. The U.S. has also ramped up its rules on businesses. The Heritage Foundation cites more than 100 major new federal regulations on businesses since 2009 with an annual cost of $46 billion.
The U.S. fares poorly for its excessive tax burden, which ranks 51st (only Belgium is worse in the top 20). U.S. statutory corporate tax rates are the highest in the world among developed countries, although tax breaks reduce the overall burden. But an equally large problem is the complexity of the tax code. The World Bank says the typical medium-size business requires 175 hours to comply with U.S. tax laws.
We determined the Best Countries for Business by grading 145 nations on 11 different factors: property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance. Each category was equally weighted. The data came from published reports from the following organizations: Freedom House, Heritage Foundation, Property Rights Alliance, Transparency International, World Bank and World Economic Forum.
New Zealand ranks second overall, down one spot from last year. The $170 billion economy is the smallest of the top 10, but one of the fastest growing with GDP up 2.5% last year. New Zealand posted the best scores among all countries on four metrics including personal freedom and investor protection, as well as lack of red tape and corruption.
Hong Kong ranks third for the second straight year, although economic growth has slowed for the international trade and finance center. GDP grew 1.4% last year to $263 billion versus 5% in 2011. Hong Kong ranks among the top five for investor protection, trade freedom, tax burden and red tape.
Rounding out the top five countries are the Scandinavian kingdoms of Denmark (No. 4) and Sweden (No. 5). Both countries feature highly educated workforces with GDPs per capita among the highest in the world. Denmark scores better for its lower tax burden and corruption, while Sweden ranks first overall when it comes to technology and third for innovation.