Irish Outlook

The fuss around start-ups won’t help it go through inspections.


“Entrepreneurship is a state of mind”, says the chief executive of Shutterfly Jeff Housenbold. Learning about the capacity and quality of any country’s entrepreneurship isn’t easy, but Ireland even shows two different “states of mind”. The first draws a nation rich with talented entrepreneurs, the second draws a picture of no opportunities and lack of will to take up entrepreneurship.

According to Global Entrepreneurship Monitor, Ireland in on the 14th place in the rating of 22 EU countries that offer opportunities for young businesspeople. Besides, Ireland is the last in terms of the population part that takes up entrepreneurship, and 17th in the rating of countries where people consider starting their own business the best career choice.

On the other side, there’s a rating of media fuss given to new start-ups, and Ireland is the 2nd on the list.

The report reveals the vast chasm between the media and political cultures promoting Ireland as an entrepreneurship haven, and the realities of running a real start-up here. This chasm was back in the spotlight over the past two weeks.

Last week, The Wall Street Journal published the results of a study that put Ireland first in Europe in terms of venture capital raised in the tech sector between the first quarter of 2003 and the third quarter of 2013. All told, tech start-ups and SMEs here raised some $278.73 (€205) per capita. This compares well with the $68.39 raised across the European free trade area comprising 32 states.

This is impressive, though the number still falls short of figures for the US ($660.41) and Israel ($1,092.52).

The data covers only venture capital (VC) funding in tech sector firms. As a result, it excludes the vast majority of start-ups in the economy. VC-funded companies employ about 9,000 people. This a drop in the ocean given that there are 84,700 self-employed people with paid staff here.

The study also covers deals involving already established firms. Finally, the study suggests that the banking crisis, resulting in the complete drying-up of new lending, could have contributed to increased demand for VC funds.

Less than two months ago, in its submission for Budget 2014, the Irish Venture Capital Association (IVCA) said that “the shortage of entrepreneurs [in Ireland] has reached crisis levels”.

According to the IVCA, in 2011 only “8.5% of people in Ireland aspired to be an entrepreneur, down from a high of 12.5% in 2005”. The EU average in 2011 was 15.3%. The World Bank ranks Ireland seventh in the European free trade area in the scope of entrepreneurship in the overall economy. It is grouped alongside Russia, Romania, Hungary, Slovakia and Lithuania in terms of the rates of new enterprise formation.

Data released last week showed a significant rise in employment in both employees and self-employed. While the number of employees in the third quarter of 2013 was up 27,300 over the year, the number of self-employed rose by 30,100.

Traditionally, self-employment is the first step to entrepreneurship. Yet the numbers of self-employed with paid employees in the third quarter of 2013 was below that recorded in the same period in 2011.

The sectoral composition of jobs creation also suggests that new employment is not being linked to entrepreneurship. So it seems we have a significant road to travel, yet there are plenty of reforms that can help us on the way.

Last week the Ewing Marion Kauffman Foundation, a research centre, published the results of its annual Global Entrepreneurship Week survey. The study gives a snapshot of the state of play in entrepreneurship and start-up formation across 113 nations and 2,330 current entrepreneurs. Among the handful of nations that did not participate was the entrepreneurial haven of Ireland.

Nonetheless, the study offers us some insights into the role of policy and regulatory environments in supporting entrepreneurship. Key to an environment supportive of entrepreneurship is to incentivise equity-based investment. In Ireland the environment favours debt. Over-reliance on debt to finance corporate investment stymies growth in firms. It lowers the speed of transition from family ownership to professional management.

Historically, debt finance has also centred on lending against physical collateral, so many small firms are lumbered with massive unsustainable legacy debt.

A gradual improvement in lending capacity by the banks can be achieved by reducing the risk profile of SME loans. For example, a co-insurance scheme for loans using Enterprise Ireland funds can work to free some of the better quality business loans for securitisation. Co-insured loans can have an equity conversion component for added security.

Such enhancements of better loans can help start the process where banks lend against a company’s market and product potential, and not physical collateral.

Advisory services, starting with accounting and legal services and extending into technological advice and strategy, are also a key component. Ireland has improved in accounting costs but is lagging in legal cost competitiveness. Critically, there are too few private advice networks and too many state-run ones.

A recent OECD report clearly states that Ireland’s system of innovation and entrepreneurship supports is Byzantine — spanning over 170 budget lines and 11 big agencies for scientific innovation alone. We need a more active system of business development and incubation centres not only for start-ups in strategic sectors, such as ICT, biotech and food, but also in domestically trading ones. Such centres can co-locate with multinationals or be a part of broader business networks.

The key point is resourcing them. Consolidating and reconfiguring our system of local enterprise boards, Fas and numerous other quangos will free up money.

The tax system needs to be reformed to support not just start-up creations, but the transition into entrepreneurship. Currently, the transition to entrepreneurship is made more onerous by the absurd system of USC and PRSI taxation. We need to increase the VAT applicability threshold to €80,000-€100,000 of earnings for self-employed, and dramatically reduce USC and PRSI on the self-employed and sole traders.

Tax disincentives for knowledge and skills-intensive start-ups is solely down to the ridiculously high upper marginal tax rate on income. According to the IVCA Budget 2014 submission: “The effect of [high marginal tax rates] is that Ireland is becoming a ‘development ghetto’, with high-growth start-ups doing development here but building other functions, eg sales and marketing, elsewhere.”

An income tax incentive in the form of applying only the lower marginal tax rate on earnings over the first three years of self-employment can rectify this problem. It should also align taxation treatment of corporate entities with that of sole traders.

Beyond this, taxation of employee share ownership needs to be revised. What is required is a capital gains tax exemption or a reduced rate for all companies facilitating the creation of new enterprises. This will send a message to foreign investors that back co-operative entrepreneurship with indigenous start-ups. Many multinationals are actively developing partnerships involving start-ups around the world.

An aggressive tax policy stance in this area can even act as an added incentive for MNCs to invest more in Ireland.

Forget the political hype about jobs: there is plenty of room for improvement and innovation. This should be treated as an opportunity for Ireland, a chance to strengthen our indigenous enterprise formation. If entrepreneurship is just a state of mind, then policy and support institutions must foster an entrepreneurial culture, not merely bask in its reflective glory.

PS: A recent report from the McKinsey Global Institute examined the distribution of economic costs and benefits from the unprecedented monetary policies in the advanced economies.

The study found that, from 2007 to 2012, quantitative easing measures deployed in the euro area, the UK and the US yielded a net benefit of $1.6 trillion to the government sector. The benefits were generated via reduced debt-service costs and higher profits from central banks.

Even euro area peripheral states’ governments have gained from these measures by facing lower costs of funding their crisis responses and by channelling funds from the banks to the exchequer via central banks. At the same time, larger non-financial corporations gained some $710bn due to lower interest rates on debt.

The only losers in this game of monetary policy chairs were households, which lost $630bn in net interest income on their savings.

The costs were mostly concentrated among older households. The study excluded the adverse effects of increased taxation, reduced public services and benefits, and higher bank loan margins — all of which made the situation worse.

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