Entrepreneurship in crisis in Ireland, Europe and United States

The words 'entrepreneurship' and 'entrepreneur' are used by policy makers and the media to describe business enterprise founders while the stars in particular in the high tech sector are seen as risk takers who have bet big on what may have once been seen as implausible ideas. Here our main focus is on employer firms in all sectors with at least one employee and data from the United States show that since 1977 the rate of new employer business formation (before accounting for firm deaths) has halved while in Europe (2015) and Ireland (2016) the number of entrepreneurs is down from both the years 2000 and 2007 (the latter year was the last before the onset of the Great Recession).

The extent of new business formation is important as only a small number of young firms are responsible for the majority of net job creation (gains minus losses) in an economy.

About half of new firms survive to their fifth birthday and death rates are typically higher for non-employer enterprises than for employer enterprises, reflecting the often precarious nature of the former, according to the Organisation for Economic Cooperation and Development (OECD) in 2016. It added that in all countries the death rates of employer enterprises in the construction and services sectors are consistently higher than the corresponding rates in industry while very small firms, with one to four employees, have the highest death rates.

Most startups, including high-growth firms in the US, do not get venture capital (less than 5% do) and as in other countries, highly educated people from well-off backgrounds can take risks which middle class or poorer people cannot. The typical US tech firm founder is about 40, from a wealthy family; has industry experience and good connections; has attended an elite university and has a safety net to take risks. He can use bankruptcy to protect his personal assets if the startup fails — for example the system was kind to Donald J. Trump who used several bankruptcies to walk away from more than a billion dollars of debt.           

In recent times, western countries have experienced the ageing of populations and in the period 2007-2015 the number of self-employed (own-account) numbers rose by 760,000 in the EU28 — some of this trend reflects convenience and some necessity. The numbers in the 65-74 category rose a net 187,000 and the UK recorded an increase of 151,000 in 2009-2015.

Ireland

Employer firms* are seen as having economic potential by creating jobs and data published this week by the Central Statistics Office (CSO) show that in December 2016 Ireland had 95,000 such entrepreneurs compared with 127,000 in 2007 and 102,000 in 2000 — not only was there a plunge of 25% compared with 2007 but the number at the end of 2016 was at a level similar to the fourth quarter of the pre-property boom year of 1999. 

In December 2016 overall employment in the Irish economy was at 2.048m compared with 1.651m at end 1999 — a change of 397,000 or 24%.

The Irish recovery began in the latter half of 2012 and the net rates of growth for what are Irish indigenous firms were: 2013 6%; 2014 5.7%; 2015 0% and 2016 1.9%.

The overall change in self-employment shows that the total rose by 33,000 in 2013 to 324,000 and the numbers have effectively stagnated since then: 320,000 in 2014; 321,000 in 2015 and 321,000 in 2016.

In the three years 2014-2016, 138,000 jobs or 7% were added in the Irish economy and almost all of them were employee positions.

Last year we reported that Ireland had the second lowest enterprise birth rate in the European Union (see chart below).

The enterprise birth rate, which includes foreign-owned firms, was close to 7% in 2014 — the second-lowest in the EU. The death rate in respect of 2013 was at 8% while the number of active enterprises was down 2% since 2008.

Self-employment at 16% of total employment in 2016 is at the same level as in the UK.

The challenges posed by both Brexit for indigenous firm exporters, and the Trump Administration's "America First" policy for Ireland's foreign direct investment model, which is mainly reliant on jobs provided by US firms, deal with two key vulnerabilities for Ireland — for the first time since the late 1950s, Ireland's enterprise economic models are under attack.

Besides, there is a startling statistic: Ireland has one of the lowest ratios of exporting firms to active enterprises in the EU.

Ireland has about 4,260 exporting firms (3,000 indigenous firms based on data supplied to Finfacts in 2014 by Enterprise Ireland + 1,260 foreign firms as published in IDA Ireland's Annual Report 2015).

The Irish exporting firm to active enterprises (238,249) ratio in 2014 was 1.8%.

Ireland did not provide data for incidence of exporting that was published by the Organisation for Economic Cooperation and Development (OECD) in 2016. It covers 22 EU member countries + USA.

The chart here shows Belgium at 36%; Denmark at 34%; Austria 33%; Germany 31%, UK 23%; USA 22%, and both France and Greece at 13%.

The poor Irish entrepreneurship data has been ignored by policy makers and lobby groups. In recent years the focus of venture capital and accountancy firms has been on reducing the capital gains tax rate/ thresholds and providing new tax breaks for stock options.

The Limerick-born Collison brothers who founded their successful tech firm in California, last year criticised the focus on tax breaks.

Irish venture capital funding data are distorted by foreign firms becoming Irish for tax purposes and there have been no significant Irish high tech firm scaleups since the dotcom boom of the late 1990s.

Prof Daniel Isenberg of the US Babson College has said that many startups are not entrepreneurial and much entrepreneurship is not about startups:

Scaling up is vastly harder than starting up. What is much more certain is that, as anyone who has tried, as I have, can tell you, starting up a venture is just the first baby step on a long hard trudge to scaleup. But without the ability to scale way beyond start, all the blood, sweat and tears (and money) will be flushed right down the drain."

OECD data published last year showed that Ireland at 25% had the highest percentage of low pay jobs in the developed world. "Low-paying" jobs were ones that earn less than two-thirds of a country's median income (mid-point where half of a sample is above and half below) and the lack of exporting firms combined with a low level of entrepreneurship are factors.

Martina Lawless in a paper on research on Irish-owned firms, found that "larger, older firms that spend more on R&D and on average wages, are those most likely to export."

CSO data show that the per employee pay in SME firms (<250 payroll) in the Total Business Economy in 2014 was €35,280 while Department of Jobs, Enterprise and Innovation data for Irish exporting firms show the payroll cost (including employer PRSI/social security at standard rate of 10.75%) per employee at €47,100.

Last year the National Competitiveness Council said in its Costs of Doing Business in Ireland 2016 report:

Irish based exporters must scale and diversify sustainably and strategically to reduce exposure to external economic shocks. To increase competitiveness, economic growth and sustainable jobs, we need a strong and dynamic range of FDI firms, Irish owned businesses that export, an increased level of startups with the potential to scale and internationalise supported by an administrative and regulatory framework that facilitates enterprise and exports.

Also in 2016, Ibec, the lobby for big business firms said in a submission to the Low Pay Commission:

Despite Ireland being a small very open trading economy when it comes to exports the record of Irish SMEs mirrors the poor record of Irish indigenous firms in general. Irish firms account for only 14.6% of total exports from Ireland with SME’s accounting for 8% of this total.

* Self-employed are defined as those who own and work in their own business (owner-managers), including both incorporated and unincorporated businesses; employers and own-account workers, and declare themselves as “self-employed” in population or labour force surveys.

Europe

Germany's overall self-employment fell from 2007 as it added full-time employee jobs and achieved full-employment with a harmonised jobless rate of 4.1% in December 2016.

France struggled with a jobless rate that was 9.5% in December and since 2007 its self employment level has risen.

The UK had a jobless rate of 4.8% in November and of the big economies, it had the biggest jump in self-employment. However, the UK's owner-manager numbers fell from 803,000 in 2009 to 741,000 in 2015 — only 17% of the UK self-employed have any employees compared with Germany's 44%.

Real wages in the UK and Greece fell 10% in 8 years while Germany's average rose 14% — giving people an incentive to take employee jobs.

Izzy Hatfield of the IPPR, the Institute for Public Policy Research, the UK’s leading progressive think-tank, said in 2015:

In the UK, in 2011, the median self-employed worker earned over 40% less than the median employee. Across Europe, the median self-employed worker’s earnings have been falling at a faster rate than the median employee’s earnings.

Germany has 1.835m owner manger firms compared with France's 1.123m, and the UK's 741,000, according to Eurostat.

The numbers in Germany and France are essentially unchanged since 2007 while UK numbers are down 62,000 since 2009.

The OECD says the share of firms that export (import) in Germany is three (four) times as large as in France, reflecting the very low incidence of directly importing and exporting SMEs in France — large firms account for 92% of France's exports but 69% of Germany's, suggesting a wider spectrum of exporters.

Most of the former communist-ruled Eastern European countries have higher entrepreneurial activity than countries in Western Europe.

Overall the number of EU28 firms fell by 756,000 in 2007-2015.

Izzy Hatfield added in a 2015 paper that Germany has the greatest proportion of highly educated self-employed workers; this group is over 50% more likely to be highly educated (to hold a level 5 or 6 qualification) than the total workforce. Self-employed workers in France and the Netherlands are also slightly more likely than the workforce to be highly educated. In the UK, 38% of self-employed workers are highly qualified, which is a slightly smaller proportion than in the overall workforce. Self-employed workers in the UK are more likely to have low-level qualifications. The opposite is true in Germany, where self-employed workers are less likely to have qualifications at this level than employees.

Wim Naudé, director of the Maastricht School of Management (MSM) in the Netherlands, in a 2016 paper is pessimistic about entrepreneurship in an ageing Europe.

small businesses are not driving productivity or jobs growth, are faring increasingly less well in terms of earnings compared to wage earners, and will increasingly become run by older entrepreneurs. These small businesses do not create enough jobs for the working age population and they do not stimulate labour productivity gains. This is not helped by the fact that policies to productively assimilate immigrants and stimulate immigrant entrepreneurship and small business have largely failed. As far as the big businesses are concerned, they are by and large a legacy of Europe's past. Many are engaging more and more in lobbying and attempting benefit from the gravy train in Brussels. When they innovate it is increasingly to reduce dependency on labour. Some leave Europe or outsource their jobs, so as to take better advantage of emerging markets, and escape altogether from Brussels' bureaucracy. Other firms are being swallowed up by more efficient competitors from outside (in 2015 the value of acquisitions of EU-based firms from outside the EU was the highest since 1970). And a number of large, centuries-old European business icons have fallen in recent years, some as a result of weaknesses in the institutional framework. 　

According to the Economist last June, of the 50 most valuable firms in the world, only 7 are European (3 are Swiss; AB InBev, a beer firm, is run by Brazilians who have their headquarters in Belgium), compared with 17 in 2006. No fewer than 31 are American, and eight are Chinese.

European firms occupy the top spot in only one out of 24 global sectors (Nestlé in food). European leaders are typically much smaller than their rivals across the Atlantic.

The Economist adds: "As late as 2000 the old continent was dominant in mobile technologies, many of which had been invented there. Nokia, Ericsson and Alcatel were among the most valuable firms in the world."

According to the Joint Research Centre (JRC) of the European Commission in 2010, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975; in Europe the figure was 18% and in Japan just 2%.

Young companies are on average almost twice as research-intensive as old companies (3.3% vs 6.1%) according to the JRC. This suggests that young companies are more likely to be found in research-intensive sectors.

The dataset analysed consisted of 287 companies from the EU, 340 from the US, 199 from Japan and 174 from other countries (OC) . Fifty-one of the EU companies, 185 of the US companies, 3 of the Japanese companies and 87 from the companies from OC were young.

Almost 60% of US jobs in firms founded before 1980

Firms' birth rate and average size at birth, business economy, 2014 (own-account and employer)

United States

There are almost 2,000 full-time professors of entrepreneurship in the US, according to membership data from the Academy of Management but as these numbers grew the rate of entrepreneurship fell.

Last week the Wendy Guillies, CEO of the Ewing Marion Kauffman Foundation, America's leading entrepreneurship think-tank, said in a speech that the US is becoming more racially diverse, but entrepreneurs — 80.2% white and 64.5% male — do not reflect the changing population.

Despite recent upticks in business creation and growth indicators, new firm formation remains in a long-term deficit, roughly half of where it was a generation ago. Guillies described how this decline hurts more than just entrepreneurs. "It is a trend with broad implications for America’s competitiveness while also negatively affecting American workers. New economic research demonstrates that the entrepreneurship deficit is tied to stagnant productivity, job loss, inequality and growth, which means lower wages and living standards for Americans."

She also spoke about the link between revenue and jobs weakening:

In the past, as companies scaled their revenue, jobs scaled in an almost linear fashion. That's no longer true. Take, for example, two technological behemoths of their own times: Eastman Kodak and Facebook. In 1962, when Kodak sales first surpassed $1bn — the equivalent of $8 billion today — the company employed 75,000 people. When Facebook reached similar revenue, it employed 11 times fewer people at 6,300.

A small number of giants dominate each business sector and for example in high tech Google has acquired about 200 startups since it went public in 2004.

According to a report "there has been a wave of mergers totaling $10tn in value since the Great Recession, greatly increasing the concentration of major sectors of the economy. A tenth of economic activity takes place in industries where the top four firms control more than 66% of the market. Between 1997 and 2012, the 50 largest firms in the majority of industries increased their total revenue share."

Facebook owns four of the five most downloaded apps — WhatsApp, Messenger, Facebook, and Instagram while it tried to buy the other, Snapchat.

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