Rebalancing our economy

Posted on September 08, 2018 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The role of small and medium-sized enterprises is crucial to the goal of a renewed domestic enterprise sector.  The unrelenting pressure of competition, technological change and environmental challenges, not to mention the uncertainties and risks associated with Brexit, call for a coordinated approach to enterprise development. 

Ireland has followed, in many respects, a different pathway to that followed in other Northern European countries in terms of industrial and business development over recent decades. It will not be possible to re-invent the shape and nature of enterprises, here, suddenly. A pragmatic and ‘what works’ approach needs to be explored in key areas of difficulty as well as opportunity. Many businesses will continue to be forced to find new markets or reinvent themselves as patterns of consumer demand and trade change. To this end, appropriate state supports and the development of an environment that is favourable to innovation, investment and risk-taking is vital.

In the challenge of environmental change there is a huge opportunity for small and medium-sized enterprises to target new markets and activities including services and products that will enable Ireland to transition to a low- and, eventually, zero-carbon economy.

To date, attempts over many decades to develop a much stronger indigenous enterprise base have not yielded the results hoped for. Export capacity, productivity and market share, with some notable exceptions, have been disappointing. A disproportionate focus of domestic enterprise activity during the boom years of the early 2000s has been in low-productivity sectors including property development. Compared to Northern and Central European economies, a disproportionate amount of activity and employment has been concentrated in distributive and hospitality sectors while manufacturing has been relatively smaller.

The OECD, in its most recent Economic Survey of Ireland, points out that ‘the capacity of local firms to absorb and implement new technologies is impeded by relatively weak managerial skills. This partly reflects the low proportion of workers participating in lifelong learning activities.’  Productivity in Irish-owned enterprises has been largely stagnant over the ten-year period, 2006-2016. By contrast, foreign-owned firms have surged ahead (influenced in part by reclassification of activities from 2015).

Although written over 30 years ago, the following extract from an ESRI publication still has relevance in considering a strategy to develop locally-based but export-oriented small and medium-sized enterprises.

“In making these points, however, we would not claim that the encouragement of new small enterprises in the private sector is the only, or perhaps even the main, avenue to the development of indigenous manufacturing entrepreneurship.  The development of established private enterprise, the scope for new forms of enterprise such as workers’ or producers’ co-operative, and even the possibility of direct state manufacturing enterprise in selected areas, are also major areas that should be considered” (Kennedy and Healy, 1985:83).

Across the globe, many different types of enterprises co-exist and compete with other enterprises for the benefit of local communities. In many European countries, these may take the form of workers’ co-operatives, municipal enterprises and civil society and social enterprises run on a not-for-profit basis. The possibility of new enterprises being established by local authorities or as part of existing commercial state enterprises is worth exploring. 

The government plays a key role in the development of innovation inputs most importantly through its funding of R&D, education, and knowledge infrastructure. The Irish Government’s Innovation 2020 strategy commits to a research intensity target of 2% of GDP with one quarter of this coming from public investment in R&D.  Staff at the NERI have made the case for higher public spending on research and development and tertiary education in more than one working paper or report. This can particularly benefit SME’s who may face funding, talent and marketing constraints.  The Chart, below, demonstrates the weakness of public spending on R&D among comparator ‘Northern’ European countries (similar to Ireland either by virtue of size or overall level of economic development).

 Given the gathering storm of climate change, Brexit, threats to world trade and volatility in medium-term foreign direct investment, now is the time to ramp up, equip, co-ordinate and invest in a new generation of SMEs. It could be that labour as the key factor of production could be central to this.

Digital Revolutionaries