Sunday 20 January 2019

Richard Curran - Let's be Frank: FDI has masked an Ireland of underinvestment and underachievement

The economy may be on the up, but there is a real danger is that we will believe our own hype about economic performance. Stock image
The economy may be on the up, but there is a real danger is that we will believe our own hype about economic performance. Stock image
Richard Curran

Richard Curran

Frank is a fictional businessman who runs his own company just outside Dublin. It is a small manufacturing firm that has been doing OK since the recession ended.

Frank was relieved to survive the economic crash. He is still going. He had to let a few staff go and introduce pay cuts for the rest but he has come through it. Now the economy is supposedly surging ahead, he feels he will be OK. But nothing is easy. He has to work harder for less as customers are constantly pushing him on prices.

His staff wants (and needs) pay increases as the cost of insurance, rent, housing and fuel continue to rise. Some are leaving his firm and working elsewhere because the commute isn't as big or they feel there are better wages working for a multinational.

There is always a new problem for Frank to deal with, so he finds it hard to take the time to innovate, plan ahead, or even have a strategy. He feels he knows his stuff, knows the business and his customers, but rarely gets time to improve how things are done.

Frank is exactly the kind of owner manager who featured pretty poorly in the recently published OECD Report into the Irish economy.

He just wouldn't have realised it.

The report found that productivity among local firms in Ireland is not only behind that of their multinational counterparts but the gap is widening in most sectors.

Frank hasn't done any new research on his product offering in years. The OECD found the percentage of Irish-owned firms engaged in joint research in 2015 was lower than foreign-owned firms.

Frank hasn't done an educational course of any kind himself since he finished college years ago. This means he has zero management training and isn't as good a manager as he thinks he is.

The OECD found the percentage of the population aged between 24 and 65 participating in education or training was just 7pc.

In Britain it is 16pc and in Sweden it is 28pc.

Ireland has very high third-level education participation rates among the young population but so-called lifelong learning isn't happening.

Frank has not offered much by way of ongoing training to his staff either. A recent Eurostat survey found that in Ireland just 23pc of workers participated in training courses related to their job.

In the Netherlands the figure was 61pc and Ireland came in well behind the likes of Sweden and Finland. In Ireland, skills shortages are emerging as a barrier to growth. The Government has identified this as an important area, but we clearly have a long way to go. There are other things in Frank's business that are holding it back and he may be simply too busy to see them. A World Economic Forum report found that Ireland ranked 37th out of 40 countries when it came to improvements in infrastructure.

The lower down the rankings you scored, the greater the decline in the quality of infrastructure - the Netherlands came fifth and France seventh.

Frank is being ripped off on his corporate borrowings by his bank. Interest rates on loans of under €250,000 averaged 5pc compared to under 3pc for both financially stable countries and financially weaker ones.

Frank says he wants to expand his business, but in reality he is scarred by the crash and doesn't want to take on any new debt. He is so relieved to have survived, when so many of his neighbours lost their businesses, that he doesn't want to do anything that will "blow it". Why would he want to borrow money at those rates anyway?

Bank finance isn't the only thing Frank is paying too much for. He recently had an insurance claim against his firm. He had to fork out 27pc of the cost of the claim on legal costs (the Irish average according to a World Bank survey in 2017).

A similar business in France would have paid 17pc or one in Norway, just 10pc. Irish legal costs, as a percentage of claims, are higher than the USA at 23pc, the so-called bastion of litigation culture.

Undoubtedly, the development of an entrepreneurial culture in Ireland took several steps forward in the 1990s with the growth in the economy and the creation of Enterprise Ireland (originally Forbairt). By the early noughties property had become the 'drug of choice' for those interested in becoming businesspeople.

After the crash, there has definitely been a return to enterprise and more people setting up new companies in the likes of food, services, IT and tourism.

But compared to other countries our numbers are still quite low. One measure is the number of firms started in a single year, as a percentage of the total number of firms in existence. Add on the number of firm exits as a percentage and you get a real sense of not just entrepreneurial activity, but also business dynamism.

The OECD found that in Ireland in 2015, firm births were just 7pc of the total number of firms compared to the UK at 13pc, Denmark at 11pc and France at 9pc. Our startup rate was higher than Sweden, Germany, Austria, Finland and Belgium. That was pretty good and it will have improved since 2015 as the economy recovered.

Peculiarly, our firm exit rate was just 2pc. Compare that to the UK at 10pc, Denmark at 12pc, Spain at 8pc or Sweden and France at just over 5pc.

It may be partially explained by people closing their business but not bothering to formally register the closure. Even with that, it is incredibly low.

It suggests that businesses that are set up, sort of hang on or just persevere. This isn't always good.

Business dynamism is about as many people starting businesses, and then exiting when it doesn't work out, to go on and set up another one. A higher turnover of new businesses brings about a dynamic. These figures suggest the business environment here is too static.

Some of this is due to government policy and some of it is about culture. There are fewer barriers to trade and investment in Ireland that the OECD average. This reflects the open nature of our economy. But the survey found that barriers to entrepreneurship are higher in Ireland than the OECD average. This paints a less favourable picture of the challenges facing our indigenous and small firms sector than headline figures about the 'fastest-growing economy in the EU' would suggest.

So what are the solutions? Some of these low scores will have improved since this data was collected. However, some are structural or endemic.

The OECD wants to; replace local business tax with a broad-based land tax; guidelines for banks that specify when personal guarantees from businesses should not be sought; develop alternative financing platforms; more public support for R&D and higher funding for training those in employment. Banks, local authorities, the legal professional, government and tax policy all play their part in this genuine weak spot in Irish economic productivity.

But perhaps Frank too needs to rethink how he does certain things. He could do a course, develop his business plan, train staff better and think about expanding.

The real danger is that we will believe our own hype about economic performance on the back of a small but growing number of very dynamic entrepreneurs and a vibrant multinational sector.

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