Is the downturn unleashing our start-up spirit?
ECONOMICS:Without foreign companies, who do almost all of the exporting, Ireland would be the most closed economy among the EU 27
NECESSITY can be the mother of invention. Last year 2,200 people were involved in starting new businesses every month, an increase on the previous year. One in three did so out of necessity, up from one in five in 2008. Is the slump unleashing entrepreneurial animal spirits? The figures above come from the Global Entrepreneurship Monitor report on Ireland, published this week. It is important for many reasons. The GEM is one of the few attempts to measure and analyse rigorously the company start-up and growth process. Despite the centrality of entrepreneurial creativity in driving wealth creation, expanding employment and generating economic growth, the scholarly economics community has almost totally ignored it.
Another reason the GEM report is important is because its findings for 2011 are for the most part less positive than in previous years. Those reports found Ireland was a European leader in starting up companies. When politicians and policymakers claim Ireland is unusually entrepreneurial, the evidence to support the claim is the GEM – and the GEM alone.
But the new findings bring its evaluation closer to what other data sources suggest: that this economy does not have an unusually strong self-starting business culture.
One measure of entrepreneurial vitality is the number of people working for themselves. The pattern over the long term doesn’t suggest any increase in self-starters. In fact, for as long as figures have been recorded, the share of self-employed in total employment has been trending downwards.
Corporate demographics provide an even better measure of commercial dynamism. Eurostat figures show that there were almost 12,000 “births of new enterprises” in Ireland in 2008 (the latest non-estimate available). As a proportion of the population, that was one of the lowest start-up rates in the EU.
There is little doubt that, because Ireland went into recession earlier than other countries, the rate was depressed in 2008. But as figures from the same source put Ireland mid-table in the total number of existing “active enterprises” relative to population, claims to entrepreneurial exceptionalism are hard to support.
The starkest evidence that indigenous industry is not outperforming its peers elsewhere comes from the foreign trade figures. Irish-owned companies account for just 10 per cent of total exports. Without foreign companies, who do almost all of the exporting, Ireland would be the most closed economy among the EU 27. With such a small domestic market, the extent to which Irish businesses penetrate export markets must be the benchmark indicator of successful entrepreneurialism. By that benchmark, there is much more to be concerned about than there is to be celebrated.
This limited success in commerce is a puzzle. From the late 1980s to 2008, Ireland was among the best places in the world to do business. The list of positives was (and still is) very long: secure property rights; political stability; being part of the world’s largest single market; the English language; global connectedness via the diaspora; a decent State support framework in the form of Enterprise Ireland; a high proportion of graduates and a well-functioning labour market; low business taxes; and central geographical positioning in the Euro-American economy, to name but some business-friendly factors.
And while the environment for enterprise has deteriorated since the crash, some factors have boosted business. Commercial property prices have fallen dramatically, rents are down for those negotiating new leases (and some others) and trends in labour supply and costs have been favourable for companies.
If there are few barriers to business success and even fewer hard economic factors capable of explaining underperformance, one is forced – hesitantly, and by a process of elimination – to consider the nebulous and catch-all concept of culture.
Economists are loath to look to culture as a factor in economic success and failure, not least because cultural explanations have been proved wrong in the past – Confucianism, Hinduism and Roman Catholicism have, for instance, all been subject to claims of causing economic retardation.
A discussion of culture and economics is for another day, but if the recession is spurring more people to start businesses, as the GEM report suggests, then perhaps it is driving a positive cultural change.