Sunday 22 April 2018

Dan O'Brien: We must face facts on startups: our rate is one of the worst in Europe

Click to enlarge graphic
Click to enlarge graphic
Dan O'Brien

Dan O'Brien

Every year thousands of companies are born and thousands die. The process of creative destruction in all economies makes this inevitable, and in many ways healthy.

But economists have traditionally had a bit of a blind spot about the nuts and bolts of the process. Despite the central role firms play in economic activity, the dismal science has not paid enough attention what makes people start companies, how many startups there are, how companies grow and evolve, and how they die.

That, thankfully, has been changing in recent times, even if there is still a long way to go. The relatively recent interest in the company activity is to be seen in the rise of "business demographics". The surveys of businesses are to the corporate world what the census is to wider society. Both provide invaluable insights into their respective worlds.

Most national statistical agencies in developed countries have only begun publishing figures on corporate demographics in the 21st-century. Irish figures date from 2008.

Ireland's statisticians in recent weeks have published their latest batch of business population figures. Europe-wide figures have also been published over the past few weeks. They make for fascinating perusal.

Among the standout facts on a comparative basis is Ireland's low rate of startups. In 2014, the most recent year available for all countries, Ireland ranked behind every other country in the EU bar Belgium. In order to avoid clutter, the graphic on startup rates below shows only the rich western European countries. It would look even worse for Ireland if the former Communist countries, which tend to have higher rates of new business formation than the richer economies, were included. The average startup rate across the EU 28 is half as high again as Ireland's.

Frances Fitzgerald, officials in her Department of Enterprise, Innovation and Employment and anyone else who makes claims about Ireland's supposedly high level of entrepreneurialism might want have a look at the hard data before perpetuating that myth in speeches and other public utterances.

The latest CSO figures are most up to date than the EU-wide data. As of 2015 there were a quarter of a million active companies in Ireland. What is striking about the trend is how little it has changed over the past decade. In 2008, just as the economy began to crash, they were almost the same number of firms. Despite brutal trading conditions, there was no big upsurge in company wind up during the recession - the peak to trough decline in the number of active companies registered in Ireland fell by a mere 2.4pc.

Nor did the startup rate change by much over that time.

If there is any good news in the figures it was that 2015 recorded the largest number of startups, at 18,000 since records began in 2008. That pushes the startup rate (measured as the number of firms established in that year as a percentage of the total number of active firms) to 7.3pc, up from 6.8pc in 2014. Let's hope it is the beginning of a trend.

Before looking at startups in more detail, it is worth highlighting an eye-catching figure: one-in-five Irish companies are in the construction business. That is the joint-highest among the 28 countries. The unusually large proportion of firms accounted for by the building trade is all the more eye-catching given the large number of company closures - the net number is down more than 10,000 - since 2008. It makes the acute under-supply of housing all the more perplexing.

After the construction sector, the second-largest industry by number of firms is the distribution business. As of 2015 there were almost 47,000 individual companies in the wholesale and retail and trade. In third place were "professional, scientific and technical" firms (40,000) and in fourth place was transport and storage (25,000). The hospitality sector accounted for the fifth-largest share of companies in 2015 (18,000).

If the stock of existing companies by sector in 2015 does not show a hypermodern economy, startups by sector are a little more encouraging, notwithstanding the fact that the building trade accounted for far more new businesses than any other sector (a quarter of the total).

The second-biggest startup sector was the "professional, scientific and technical" category. While the economy might need more builders, over the longer term the productivity growth which really drives standards of living higher comes in sectors which are innovative. The building trade internationally is notoriously un-innovative. Science-focused firms are, almost by definition, at the other end of the innovation spectrum. That 3,000 new ones were created in 2015 can only be positive. The only cloud to that silver lining is the 2,500 firms in the sector were wound up in the same year.

Technology is another sector that is ripe with opportunity. Startup activity in the "information and technology" category has been on the rise, but does not stand out. There were 1375 new tech businesses started in 2015. That was only mid table in terms of the 13 sectors the statisticians give data on.

As regular readers of this column will know, it is a bugbear that we are not more honest with ourselves about our entrepreneurialism. Getting more people to think about starting their own businesses can only be of benefit in the short and long term. It won't be easy to achieve, but accepting that we have a problem is the first place is surely the first and most essential step in addressing it.

Sunday Indo Business

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