Thursday, June 20, 2019

The poor state of entrepreneurship in Ireland

“Ireland is ranked among the most entrepreneurial countries in the world with increasing opportunities for budding MBA entrepreneurs,” according to a 2018 article sponsored by the UCD Michael Smurfit Business School. A year before Enterprise Ireland, the public enterprise agency, stated, “In Ireland, there was (sic) an estimated 35,000 new business owners in 2016. 1 in every 23 people in Ireland (aged 18 to 64 years) is a new business owner. This is similar to the US (1 in every 25 people), and high compared to many other European countries, where the average is 1 in every 29 people.”

Enterprise Ireland (EI) issued a press release in August 2017 with the headline, ‘Entrepreneurship in Ireland at pre-recession levels with 35,000 new business owners in 2016.’

This was classic propaganda as EI had commissioned an Irish focussed report in the annual international series of the Global Entrepreneurship Monitor and the Irish version did not hide the statement, “New business owners are people who have started a new business since January 2013 and have paid salaries for at least three months. These entrepreneurs at least part-owned and manage the new business.”

Simply, the 35,000 new business owners related to the four-year period 2013-2016.

Employer firm activity key measure of entrepreneurship

In 2016 there were 19,250 Irish enterprise births with 14,380 1-person firms and 4,870 with employees of 1 or more. There was a total net rise of 0.5% in enterprises of 250,000 — 139,000 were 1-person operations.

According to the Organisation for Economic Cooperation and Development (OECD), Ireland had a 4.4% employer firm startup rate in 2016. In 2015 the Irish startup rate was 4.1% and the death rate was 3.5%.

The Central Statistics Office (CSO) Labour Force Survey — the quarterly measure of employment — shows that the category ‘Self-employed with paid employees’ had 97,800 such firms in Q1 2000 and almost two decades later in Q1 2019 the total was 97,500. During the property bubble at the end of 2007, the total had risen to 128,000.

The 2000 workforce was 25% smaller than the workforce in 2019.

Business Demography data include a wider range of employer firms than the Labour Force Survey, including foreign-owned exporters and importers and shareholding firms.

The total in 2016 was 111,000 with 91,000 employer firms having 1-9 employees.

The Irish employer startup rate in 2016 at 4.4% was second last of 28 mainly advanced OECD countries. Belgium was last at 4%.

On average across all countries and years, OECD data show that young firms account for 21% of employment but create 47% of jobs and 22% to all job destruction making them net job creators. Older SMEs are typically net job destroyers.

The OECD enterprise death rates in 2015 to complement the chart below were for example: 8.2% in Australia; 8.1% Austria;  9.8% Sweden and 10.8% UK.

Business dynamism and high growth firms

The US Brookings Institution defines business dynamism as "the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly established that this dynamic process is vital to productivity and sustained economic growth."

The US employer firm startup rate has fallen from 13% in 1979 to 8.6% in 2O16. There is evidence that demographics are a factor even though research shows that the 40-year old founder of a tech firm is 2.1 times more likely to have success compared with a 25-year-old.

Declining startup rates have also been observed in other countries with incumbent large firms being in a position to acquire a lot of startups or kill them.

OECD research shows that only a tiny fraction of startups substantially contribute to job creation, while the majority either fail in the first years of activity or remain very small. The OECD policy note shows that out of 100 micro startups (less than 10 jobs) entering the market in a given year, after five years 26 to 58 are not active, 36 to 71 have still less than 10 employees, and only 1 to 8 have 10 employees or more.

"A growing number of studies have shown that the majority of small startups remain small and are likely founded by so-called subsistence entrepreneurs, where firm growth is not a key objective. However, the tiny proportion of transformational entrepreneurs’ startups that do grow – on average 4% of all micro startups – creates a disproportionate amount of new jobs: out of 100 jobs created or destroyed by micro startups over a five year window, between 22 (the Netherlands) and 53 (France) newly created jobs come from this group. The rapid scaling up of a small number of very successful startups is therefore one of the main drivers of aggregate employment growth."

Note: The graph shows the share of young firms (less than 6-year-old) in total employment, total gross job creation, and total gross job destruction, respectively. Data cover manufacturing, construction, and non-financial business services. Source: OECD DynEmp version 2 database

High-growth firms (HGF) typically range between 2% and 6% in most countries (based on the OECD's definition). They are found in all economic sectors.

HGFs are defined as enterprises with average annualised growth in the number employees greater than 20% per year, over a 3-year period, and with 10 or more employees at the beginning of the observation period (Eurostat-OECD Manual on Business Demography Statistics, 2008). However, in the European Union, the Commission defined HGFs as enterprises with at least 10 employees at the beginning of their growth and having average annualised growth in the number of employees greater than 10%.

Eurostat based on its lower definition estimates the number of Irish HGFs in 2016 at 3,500. However, the data are not reliable as a guide to entrepreneurship as it includes affiliates of foreign firms — which of course should not be treated as startups.

SEE: Few Irish firms in FT 1000 & Inc. 5000 Europe lists of fastest-growing companies

Both these rankings use revenue growth as the main metric. The FT excludes subsidiaries of firms while the INC. 5000 applies to private companies.

'Scaleup Europe 2019' defines a scaleup in relation to venture capital and in 2018 Ireland had 222 tech scaleups  — this too is unreliable as venture capital fundraising by foreign companies that become Irish for tax purposes, are included in the data.

Conclusion

Much of Ireland's economic and business data both foster delusion and misinformation.

If policymakers do not recognise a problem then they will do nothing to fix it. 

In recent years lobby groups have blamed the Irish capital gains tax rate as a disincentive to entrepreneurship as if a serious aspiring entrepreneur would stay in a 9 to 5 job because of fear of success.

Endeavor is a global entrepreneurship movement and in a report published in 2014 on a survey of 150 founders, it found that "two factors that are often discussed by policymakers and business leaders — low tax rates and business-friendly regulations — were mentioned only a handful of times in our surveys and interviews. In fact, words related to specific quality of life factors, such as 'park' and 'restaurants' were discussed more frequently than terms related to taxes and regulations."

Patrick Collison, an Irish founder of the American tech success Stripe, referred in a 2016 interview with the Irish Times to Picasso's quote that when art critics come together they talk about form and structure, while artists talk about where to buy cheap turpentine.

“When you get supporters of entrepreneurship together, they talk about vision and plans and ‘Entrepreneurship 2020 strategy’ or whatever,” he said.

“When you get founders together, they talk about how to set up a bank account, how to file your taxes and especially how to get visas.”

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