Has Ireland lost its way as an entrepreneurial nation and could our social welfare system be acting as a disincentive to enterprise? Many in the business community believe it is time for a major re-think of our tax and social welfare system? FRANK DILLONtakes a look...

THE HISTORY of downturns suggests that it is innovative small businesses that lead the economy out of recessions. Their nimbleness and market focus means that they are well positioned to drive export growth and to create jobs. Ireland’s economic boom was largely based on foreign direct investment and stimulating the construction sector. The prevailing view now is that somewhere along the way, the culture of traditional enterprise and entrepreneurship seems to have taken a back seat.

Speaking in a recent interview with The Irish Times, Craig Barrett, the former chief executive of Intel, made the observation that Ireland effectively has no internal economy and that foreign direct investment would not be driving growth in the years ahead. Instead, our future prosperity lay with encouraging small indigenous companies run by smart people creating value-added jobs with a focus on exports. To do this requires risk-taking.

“You need to grow your economy from within and that will come from start-ups and risk-takers. Ireland struggles in this area and that is a societal issue,” he said.

Barrett is no stranger to Ireland and was one of the key figures in the Farmleigh Summit tasked to find new ways forward for our economy. His views echo many in the business community here. But is he right?

Eilis Quinlan, chairperson of small business body ISME and owner of her own accountancy practice certainly agrees with Barrett’s assessment. “The problem with foreign direct investment is that it can relocate and it has, and it will, where competitiveness becomes a problem. SMEs represent the brave innovators in the economy who are rooted in the country. There has to be incentives to grow small indigenous business and to recognise and reward risk-taking yet there are a range of disincentives in place instead,” she says.

Among the specific obstacles Quinlan sees are the fact that the eligibility limits for the employment subsidy scheme – the need to have 10 employees effectively rules out 90 per cent of small businesses – and the lack of a Government-backed loan guarantee scheme similar to that operating in the UK. The high level of employer PRSI is another bugbear for small entrepreneurs, she says, and the Government has resisted intense lobbying on this last issue, especially by the small firms sector, for many years, she says.

The design of the tax and social welfare system is not creating a climate that is conductive to enterprise, she adds. The self-employed, for example, don’t receive the same favourable tax credits as PAYE workers and receive a significantly reduced range of social welfare benefits. This becomes a particularly acute issue when a self-employed person loses their source of income and finds that they are not entitled to the unemployment benefits a PAYE worker in the same situation receives.

The culture seems to be one of believing that the self-employed don’t need any security blankets, Quinlan believes.

Contrast that with the relatively generous social welfare entitlements PAYE workers receive by international standards and it’s easy to see why the self employed feel peeved. Moreover, small businesses feel that the social welfare system is actively encouraging people not to find work. “Many of our members feel that they are competing with the social welfare system and that it is not in people’s interests to come off welfare. There are people who are taking advantage of the system. The average wage in an SME is around €2,000 less than the average industrial wage and some people on social welfare are earning more than this so what incentive have they to work?”

Employers’ body IBEC has looked at these figures in detail recently. It says that over the past year increases in real welfare rates, falling wages and tax increases have all altered the balance between the relative value of welfare payments and the net income from work. It says that the average weekly and annual benefits which a married unemployed couple with two children are eligible for are now close to €34,000.

IBEC also looked at the after-tax earnings of a single-income married couple at various gross earning levels. It found that for a couple with a single gross income of €40,000, their after-tax income would be about €500 less than their social welfare benefits were they to receive them instead. They would need a gross income of at least €41,000 to provide a financial incentive to work and taking into account costs associated with working, such as travel, etc, the gross income would need to be almost €45,000, IBEC claimed.

“Given that our benefit system now means that average industrial earnings are lower than the value of social welfare benefits, we need to address this for competitiveness reasons,” says IBEC director general, Danny McCoy. “The rates are simply too high. While there needs to be a short-term safety net for those who find themselves unemployed and need to readjust, unlike other countries, we are not providing enough longer-term incentives for people to re-join the labour market.”

To encourage entrepreneurship, McCoy also believes that a significant business bank is essential to unlock funding and he believes that this could comprise of a niche division of a third banking force competing with AIB and Bank of Ireland. “We’ve had these models before in the form of the Industrial Credit Corporation and the Agricultural Credit Corporation (ACC) and the timing is right for some form of specialist financing institution. It would also send a signal to the international community that we support indigenous enterprise. This could have the effect of lowering risk premiums that our financial institutions pay for funds, facilitating the release of more credit, so it would be a virtuous circle.”

Tom McCarthy, chief executive of the Irish Management Institute, believes that the huge role that the state currently has in the ownership and/or support of financial institutions should be used to mould decisions about enterprise support. “There’s scope for some innovative thinking here. I’m not suggesting that the Government interferes in the day-to-day decisions of credit committees on who gets funding, but the development plans of the banks could be aligned with the strategic development plans for the Irish economy, including supporting small enterprise,” he says.

McCarthy is more sceptical about Craig Barrett’s proposition that the foreign direct investment plot is over for Ireland. “I think we should be cautious about simply accepting that. There are still rich waters that we can fish in for FDI, such as Asia which needs to sell into the west and there are still advantages that we can play to. Expecting the small indigenous enterprises to deliver our recovery on its own might be setting unrealistic demands.”

Are there cultural barriers associated with enterprise in Ireland? It's a subject former finance professor Finbarr Bradley, co-author of the book Capitalising on Culture, Competing on Difference(Blackhall Publishing, 2008) has devoted some time to.

Bradley, who was also chairman of Zamano, a company set up by his final-year undergraduate students, and is listed on Irish and UK stock exchanges, says self confidence and self-reliance are essential ingredients for the creation of an enterprise culture.

“These values grow naturally out of a robust sense of identity and intimate connection with one’s own heritage and place, characterised by rootedness. People grounded in their own culture appreciate diversity and the cultural values of those with whom they must do business. They learn to identify difference, appreciate distinctiveness and absorb ideas. This generates a dynamic enterprise culture,” he says.

However, Ireland’s ruptured roots have resulted in an ethos lacking in self-help, self-discipline and sense of responsibility, Bradley argues. “It is this risk-averse mindset, combined with a social welfare system that saps self-confidence and fails to strengthen self-reliance, that discourages people from working in small companies in particular,” he says.

Other senior business figures have also been speaking out about the lack of enterprise culture. Another Farmleigh Summit attendee Martin Murphy, managing director of Hewlett Packard here, made the following case writing in this newspaper before attending the event: “An enterprise culture has to be a cornerstone of our national recovery plan. Equally – let’s not be naive – the reality is that business will only come to Ireland if the business case to come here stacks up; the same rule applies to retaining business that is based here today. The great trading nations of the future will not just be competitive, they will be super competitive.”

Murphy went on to argue that Ireland’s national competitiveness needs to move to a completely new level, where we do not settle for being stuck well down the pile on an international competitiveness index. Nor, he said, can we leave Ireland’s future wellbeing in the hands of the politicos alone. Industry leaders both in Ireland and from the Irish diaspora abroad, he acknowledged, have a key role to play in supporting our embattled Government.

The business community is not short of ideas on what needs to be done to restore a positive climate for enterprise.

The feeling that the Government is receptive to it and willing to take the tough measures required – including a radical revamp of our tax and social welfare structures – is one that seems to be missing, however.

What the entrepreneurs think

Bernie Cullinan, chief executive of Clarigen, an outsourced HR solutions company and former president of accountancy body CIMA.

Cullinan does not believe the social welfare system should be cut for those who need it as Ireland is a a high cost country. However, she believes that there should be strong in incentives for people on social welfare to establish enterprises.

We also need to overcome the cultural stigma associated with business failure and to support people a second time around, she says. “In the US, to have failed is seen as a learning experience,” she says.

Cullinan would like to see the establishment of an enterprise bank and thinks the French model, FSI, established in late 2008, could be one approach. “They are investing €20 billion into the bank. Given that we are about 5 per cent of the French economy, the equivalent investment here would be €1 billion. They have managed to get around any possibility of it being considered state aid. They are also using highly knowledgeable people with deep expertise in the areas they will invest in, as opposed to just having banking skills. We could have a significant impact on the entrpreneurial activity with such an approach,” she says.

Donal Ryan, chief executive of Equinome.

Equinome, was established in 2009 as a result of research, led by company founder Dr Emmeline Hill, which made the first known identification of a gene contributing to a specific athletic trait in thoroughbred horses. This breakthrough led to the development of the Equinome Speed Gene Test, which was launched by the company in January 2010.

Ryan says that the formal structures that are in place in Ireland – such as Enterprise Ireland, SFI and incubation centres such as NovaUCD – are critical resources for start-up companies. “Many very successful people are also willing to give their time freely to contribute back to Irish business. However, I think that culturally we are not as inclined to shout from the rooftops about ourselves or our technology as much as the Americans, for example, which can hinder us in attracting external attention,” he says.

Ryan says that the current social welfare system also punishes rather than supports those who set-up a new business that dont succeed. “There is no logic to punishing the very behaviour that you’re trying to encourage,” he says.

He also believes that the various state agencies tasked with promoting enterprise should be merged into a single entity with a more coherent, unified strategy and that support should be concentrated on small number of niches.

David Kavanagh. chief executive of Scrazzl.com:

Scrazzl.com is an internet application that is being developed at UCD to provide services to scientists that will streamline research administration, thus improving time, communication and monetary efficiencies within research groups.

Kavanagh is positive about the climate for enterprise. “There certainly seems to be a drive towards better support and regulation of business enterprise at present, in particular the proposed reduction of administrative burdens and costs on start ups and SMEs. Better use of ICT, e-mail and standard online forms will assist business and cut down on ‘red tape’,” he says. “This should speed up critical investment decisions by companies over the coming months and will be predicated on the ability of our economy to remain an attractive place to do business.