Thursday, February 20, 2020

Irish employer entrepreneurship remains on respirator

OECD: Business economy excluding holding companies

In 2017 Ireland had the second-lowest rate of employer firm births among the mainly rich country members of the Organisation for Economic Cooperation and Development (OECD).

Business demography data from the Central Statistics Office (CSO) last year show that Ireland had 271,000 enterprises in 2017 and 58% of them had no employees.

Here the focus is on firms with at least 1 employee as such firms may have a better chance of growing.

For example, the broad definitions of entrepreneurs of the Global Entrepreneurship Monitor (GEM) report can be confusing: Nascent Entrepreneurship Rate; New Business Ownership Rate — "Percentage of the 18-64 population who are currently owner-manager of a new business, i.e., owning and managing a running business that has paid salaries, wages, or any other payments to the owners for more than three months, but not more than 42 months"; Family-based Entrepreneurship; Employee entrepreneurship activity (EEA) etc.

In Ireland in 2017, the Enterprise Ireland agency issued a statement with the headline 'Entrepreneurship in Ireland at pre-recession levels with 35,000 new business owners in 2016.' However, the 35,000 related to more than 3 years and covered both non-employers and employers.

The birth rate for Irish employer firms was 4.2%, ahead of Belgium at 3.9% (see chart above). The overall rate including firms without employees was 8.45%.

The death rate for the four years featured in the chart above was 3.2%; 3.1%; 3.4% and 5.1%.

In 2017 there were 76,000 additional full-time jobs in the Irish economy while total employment rose by 68,000.

There was a break in the CSO's series in 2013 when zero job firms jumped from 87,000 in 2012 to 136,000 in 2014.

Zero and employer firms

The CSO said last year that 318,000 people were employed by foreign firms in 2017. As the Department of Business Enterprise and Innovation separately reported that foreign exporting firms employed 223,000 in that year, the other 95,000 were employed in domestic retail, distribution, banking, aviation etc.

The foreign firms dominate the Irish economy — IDA Ireland, the inward investment agency, has about 1,500 client companies of the total of over 2,000 foreign firms.

IDA Ireland said in 2018 that its client companies accounted for an estimated two-thirds of Ireland’s Corporation Tax receipts and one-third of combined Income Tax, USC and Employer PRSI tax.

Indigenous exporters in 2017 employed 203,000 people and the local linkages in the food sector are much more important than the Pharma sector as the latter has very low Irish materials and services purchases.

Indigenous tradeable exports in 2017 accounted for 6.5% of the massively inflated total value of €353bn.

Micro (0-9) and Small (10-49 employees), accounted for 10% of the custom-tracked goods exports in 2017 while accounting for 87% of total goods exporters in 2017.

Ireland had 8,600 goods exporters in 2017 and while a small number of big companies typically account for the majority of export value, the Irish ratio to population is below that of several smaller economies.

OECD data show the number of merchandise exporters in small economies in particular: Austria 44,000; Belgium 81,000; Canada 43,000; Czech Republic 18,000; Denmark 26,000; Estonia 16,000; Finland 15,000; France 107,000; Germany 296,000; Greece 18,000; Hungary 39,000; Isreal 15,000; Italy 222,000; Latvia 12,000; Lithuania 16,000; Netherlands 116,000; Spain 166,000 and Sweden 46,000.

In 2016 almost 3,400 Irish exporting businesses traded exclusively with the UK, according to the CSO.

While inward foreign direct investment is important, it is also important that what is going on in the economy is not opaque.

It is striking that economists at the Central Bank (CB) and Economic and Social Research Institute (ESRI) avoid acknowledging the impact of tax avoidance on data even though they should be independent of government sensitivities.

The Central Bank this month highlighted the growth of pharmaceuticals and computer services which are the main sectors for tax avoidance — in 2019 'Chemicals and related products' exports were valued at €93bn and it produced a massive surplus of €76bn resulting from profit shifting while overseas 'contract manufacturing' will have produced additional net exports of €40bn (more profit shifting), which will be known when the CSO will publish the Balance of International Payments data in March.

Misleading research is usually published in the media as fact e.g. here, here and here.

Irish economic growth data remain unreliable

Business dynamism slowing

In 2017 the UK had a 13.9% birth rate — which was the highest among big OECD countries — and a death rate of 12.6% while the US Census Bureau reported rates of 10.2%/8.7%.

Business dynamism is the process of high rates of firm births and deaths that give a small number of fast-growing firms the ability to engage in creative destruction.

So far the UK is the best example of strong business dynamism in Europe. We will have to wait if Brexit impacts that trend.

There was some hope in the 1990s that Irish home-grown high tech firms could create conditions for a strong indigenous sector but companies such as Parthus that had promise ended up like others with international potential as acquisitions for bigger companies overseas — with no home market for tech startups with international ambitions and reliance on venture capital, it still seems the only viable route.

State of Irish high tech and biotech 2020

In the US, firm creation and exits have halved since the 1980s and young high tech firms have been casualties from the 2000s.

Economists Ufuk Akcigit of the University of Chicago and Sina T. Ates of the Federal Reserve, argue that the following have been factors:

  1. Market concentration has risen;;
  2. Average markups have increased;
  3. The profit share of GDP has increased;
  4. The labour share of output has gone down;
  5. The rise in market concentration and the fall in labour share are positively associated.
  6. Productivity dispersion of firms has risen. Similarly, the labour productivity gap between frontier and laggard firms has widened;
  7. Firm entry rate has declined;.
  8. The share of young firms in economic activity has declined;
  9. Job reallocation has slowed down;
  10. The dispersion of firm growth has decreased.

They also note that:

"while 30% of the transacted patents were reassigned to the firms with the largest patent stocks in the 1980s, the share went up to 55% by 2010. This drastic increase has crowded out small players in the market.... The figure shows the likelihood of a patent to be assigned to a small firm, conditional on that patent being transacted from another small firm and recorded. In the past two decades, the fraction of transacted patents that are reassigned to small firms has dropped dramatically, implying a shift of ownership from the hands of small firms to large ones. These figures reveal that concentration in patent production and reassignment has surged, and firms with the largest patent (knowledge) stock have further expanded their intellectual property arsenals. Given that patents are exclusively used to prevent competitors from using the patent holders’ technology, these trends can imply that the heavy use of patents by market leaders might have caused the decline in knowledge diffusion from the best to the rest."

Changing Business Dynamism and Productivity: Shocks vs.Responsiveness

Also in 2019 European Central Bank economists said that the Euro Area had escaped the falling business dynamism trend so far.

However, they acknowledge that "it could be argued that the Euro Area has missed out on the superstar firms, which enjoy some market power but also have the incentive to invest and to innovate."


Entrepreneurship in rich countries declining; Innovation also sliding