5/12/2013: Entrepreneurship Culture and Policies in Ireland: Sunday Times, December 1

This is an unedited version of my Sunday Times column from December 1, 2013.


According to Shutterfly CEO and veteran entrepreneur, Jeff Housenbold, “Entrepreneurship is a state of mind”.

While measuring the extent and quality of entrepreneurship in any economy is a tricky task, Ireland is an economy with two conflicting states of mind when it comes to start-ups. On the one hand, we have the official story of an entrepreneurship-rich nation. On the other hand, there is the hard data painting a more complex picture.

The latest Global Entrepreneurship Monitor Report, published earlier this year, ranks Ireland 14th out of 22 EU states surveyed in terms of the opportunities open to the entrepreneurs. We ranked at the bottom of the EU in the share of population with entrepreneurial intentions and 17th in terms of our population perception of entrepreneurship as a viable career option. In contrast, Ireland ranks second highest in the EU in terms of media attention given to the start-ups and in terms of the positive public image of entrepreneurship.

To put it simply, the Monitor data reveals the vast chasm between the media and political cultures promoting Ireland as an entrepreneurship haven, and the realities of running and growing a real start-up venture here.

This chasm was back in the spotlight over the last two weeks.

Last week, the Wall Street Journal published the results of a study that put Ireland in the first place in Europe in terms of venture capital raised in the tech sector over the period from Q1 2003 through Q3 2013. All in, Ireland-based tech start-ups and SMEs raised some USD278.73 per capita on average. This compared to the USD68.39 raised across the European Free Trade Association (EFTA) group of 32 states. Impressive as the number for Ireland was, it still falls short of the US figure of USD660.41 and Israel’s USD1,092.52.

Much of Irish media reported the results as being indicative of Ireland’s high success in entrepreneurship. Alas, the study simply does not support such a conclusion for three reasons. Firstly, the data covers only Venture Capital funding extended to tech sector firms. As the result, it excludes the vast majority of start-ups in the economy that are either operating outside the tech sector, or raising funding through channels other than VCs, or both. Currently, VCs-funded companies in Ireland employ around 9,000 people. This a drop in a bucket, given that there are 84,700 self-employed people with paid employees (just one group of entrepreneurs) in the country. The study also covers deals involving already established firms. Lastly, 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.

No one in the mainstream media noticed that less than two months ago, in its submission for Budget 2014, Irish Venture Capital Association (IVCA) said that “the shortage of entrepreneurs [in Ireland] has reached crisis levels”. Per IVCA, in 2011 only “8.5 percent of people in Ireland aspired to be an entrepreneur, down from a high of 12.5 percent in 2005.” The EU average in 2011 was 15.3 percent.

And no one bothered to cross check the results of the Wall Street Journal study with actual data on new enterprise creation in Ireland. According to the latest data from the World Bank, Ireland ranks seventh in the EFTA in the scope of entrepreneurship in overall economy. World Bank groups Ireland alongside with Russia, Romania, Hungary, Slovak Republic and Lithuania in terms of the rates of new enterprise formation.

Another piece of evidence on the gap between realities and perceptions of Irish entrepreneurship came from the CSO. Data released this week showed significant increase in employment across the employees and the self-employed. While the number of employees in Q3 2013 was up 27,300 over the year, the number of self-employed persons increased by 30,100. Traditionally, self-employment is the first step en route to entrepreneurship. The numbers of self-employed with paid employees in Q3 2013 was below that recorded in Q3 2011. This and the sectoral decomposition of the jobs creation suggests that the new employment is not being linked to entrepreneurship.


All of this suggests that we have significant road to travel before Ireland becomes a powerhouse of entrepreneurship. The good news is – there are plenty of reforms that can help us on the way.

Last week, the US-based Kauffman Foundation, the largest research centre in the world for studies of entrepreneurship, published the results of its annual Global Entrepreneurship Week survey. The study reveals the snapshot of the state of play in entrepreneurship and start-ups formation across 113 nations and 2,330 current entrepreneurs. Amongst the handful of nations that did not participate was the entrepreneurial haven of Ireland.
Nonetheless, coupled with other sources of data, the Kauffman study offers us some good insights into the role of policy and regulatory environments in supporting entrepreneurship. Many of these insights overlap with what we observe in Ireland.

One of the keys to creating an environment supportive of entrepreneurship is to incentivise equity-based investment. Instead, we have an environment that favours debt. The problem with over-reliance on debt to finance corporate investment is that it has been shown worldwide to stymie the rate of growth in firms. It also lowers the speed of transition from family ownership to professional management.

Ireland lags behind core competitors in terms of banking sector culture when it comes to funding entrepreneurs. This is a function of two factors: low lending capacity in the system that is currently undergoing deleveraging of bad loans, and the long-term historical legacy of lending against physical collateral. We can do something about both, if we get creative. A gradual improvement in lending capacity by the banks can be achieved by reducing risk profile of SME loans. For example, a co-insurance scheme for viable new and existing 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 the banks lend against market and product potential of the specific SMEs instead of lending against physical collateral.

Another area that is commonly identified as a strong support for entrepreneurship is cost of and access to advisory services, starting with accounting and legal services and extending into technological advice and strategy. Ireland has achieved some improvements in the accounting costs area, but is lagging in terms of legal costs competitiveness. Critically, however, there are too few private advice networks available to would-be entrepreneurs. And there are too many state-run ones, often with limited expertise and excessively costly bureaucracy.

One recent OECD report clearly states that Irish system of innovation and entrepreneurship supports is Byzantine – spanning over 170 budget lines and 11 major agencies relating to 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, bio, and food, but also in domestically-trading ones. Such centres can co-locate with major MNCs and / or be a part of broader business networks. However, the key point is resourcing them. Consolidating and re-configuring currently operating systems of local enterprise boards, FAS, and numerous other quangos crowding this space can help.

Tax systems need to be reformed to support not only creation of business, but transition into entrepreneurship. Currently, transition to entrepreneurship is only made more onerous by the absurd system of USC and PRSI taxation. To do better we need to increase VAT applicability threshold to EUR80,000-100,000 of earnings for self-employed, and dramatically reduce USC and PRSI on self-employed and sole traders.
The problem of tax disincentives for knowledge and skills-intensive start-ups is solely down to ridiculously high upper marginal tax rate on income. Per 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 e.g. sales and marketing elsewhere.”

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


Beyond this, employees share ownership taxation needs to be revised. In fact, we can be even more aggressive here by setting a CGT exemption or a reduced rate for all companies that facilitate creation of new enterprises. This will send a strong message to foreign investors that cooperative entrepreneurship with indigenous start-ups is encouraged here. Given that many Ireland-based MNCs 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.
In short, there is plenty of room for improvement and innovation in terms of national policies on entrepreneurship. This should be treated as a major opportunity for Ireland, a chance expand and strengthen our indigenous enterprise formation. If entrepreneurship is really a state of mind, policy and support institutions to foster entrepreneurial culture are a matter of will. Having the former without the latter is simply not enough.

Box-out:

A recent report from the McKinsey Global Institute examined the distribution of economic costs and benefits arising from the set of 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 benefited of USD1.6 trillion to the Government sector. These benefits were generated through reduced debt-service costs and increased profits remitted 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 channeling funds from the banks to the Exchequer via Central Banks. At the same time, larger non-financial corporations gained some USD710 billion due to lower interest rates on debt. The only sector of the economy that was an unambiguous loser in this game of monetary policy chairs were the households. Households in the US, the UK and the euro area lost USD630 billion in net interest income. The costs were mostly concentrated amongst older households that tend to hold more interest-bearing assets. The study excluded the adverse effects on households that arise from increased taxation, reduced public services and benefits, and from higher bank loans margins.

5/12/2013: Irish Education: In Need of Serious Reforms

This is an unedited version of my column in October-November issue of the Village Magazine.


Over the last two decades, Irish economic growth has been primarily driven by a series of financial and investment bubbles. Each one was fuelled by the ad hoc nature of our policymakers’ responses to shifts in global economic trends and their penchant for fetishizing foreign policies fads.

In the mid-1990s, on foot of the US-led dot.com industry explosion, Ireland became the focal point of the investment bubble that saw the state policies and funds inflating the already out-of-touch valuations of the companies. Promising to plug our economy into the Internet of Things, entities from Baltimore Technologies to MediaLab Europe, and everyone in-between, were hovering public and private funds in a race to leapfrog this sleepy island into the 21st century.

In the 2001, at the onset of dot.com hangover, government investment became the new rage. Social Partners climbed over each other to get funding for awe-inspiring schemes usually described as Global Centres for Excellence. This bubble too was based on fads that came to Ireland from abroad, namely from Brussels. To continue fund our fetishes for spending cash we built bungalows at an ever-increasing pace. From 2001 on, Irish economy became an economy built on breezeblocks.

With the bust and the ensuing Great Recession, one could have hoped for a mature review of the policies past and a shift away from our dreamt up grandiose plans. Yet, to-date, the entire response of the two successive Governments to the bust was to feed our hopium addiction. Budget 2009 announcements made amidst the ongoing implosion of the domestic economy promoted aggressively the concept of the Knowledge Economy as our salvation. Truth be told, the Innovation Island is a Potemkin Village.


To see this, one needs to look no further than at our ability to create the base on which a knowledge-intensive economy is built: the human capital.

In my recent speech at TEDx Dublin, I offered a systemic template for assessing any economy’s human capital potential. That system is called C.A.R.E. as it assesses how well a country can Create, Attract, Retain and Enable its workforce’s technical and social skills, talents, creativity, capacity to innovate, engage in entrepreneurship, willingness and ability to take risks. In the nutshell C.A.R.E. is about systems that should put human beings and their abilities at the centre of our society and economy.

Across the entire spectrum of C.A.R.E. systems, education plays a pivotal role. And it is exactly here that many of our policy gaps become painfully apparent.

Firstly, our education system does not enable seamlessly continuous and high quality life-long cycle of learning and training. Secondly, our education system is incapable of sustaining development of such vital aspects of human capital as creativity, ability to manage risks, and engage in ongoing innovation across various domains of knowledge and skills. Thirdly, our education system is inherently elitist. This prevents it from ever becoming a truly functional creator and enabler of human capital economy. With elitism comes the death of innovation and creativity. Fourthly, our education system is riddled with inefficiencies, protectionism and skewed incentives, which lead to sub-standard educational and research outcomes.


Let’s take some of these claims in detail, omitting many considerations for the lack of space.

Since the Finance Act 2004, Irish governments have been working on expanding indigenous R&D activities. Over the last ten years, billions of euros were poured into the tax credits and investment supports. Billions more went to fund higher education institutions’ efforts to sustain research and innovation.

While some third level institutions – namely the top four or five universities – have produced tangible results in driving research output up, the rest remained far behind. Even tope universities have shown weak performance.

The 2013 Academic Ranking of World Universities (ARWU) lists only three universities for Ireland, with best performer, TCD ranked in 201-300th place in the world. UCD and UCC rank in 301-400th places. On that, Ireland’s presence in top 500 universities as ranked by ARWU runs dry.

QS rankings list eight Irish universities in top 600 in the world, with TCD ranked the highest in 61st place. Second-best, UCD ranks 139th. Only six Irish universities make it into world’s top 300. Back in 2009, we had two universities in top 100, and seven in top 300.

Absurd centralization of education and research policies, coupled with budgetary pressures, centralized and politicized research and teaching funding allocations have accelerate the rate of brain drain from top Irish academic institutions in recent years. This, in part, is the driver for poor ranking performance over the recent years. However, even in 2005-2007, with cash abundant, Irish universities performance was far from stellar.

INSERT TABLE HERE

Meanwhile, across the rest of the higher education sector, both teaching and research remained stuck somewhere in the antediluvian age.

Instead of development of modern, research-capable and skills-based adjunct and clinical faculties, majority of our degrees programmes continue to operate on the basis of full-time faculty teaching out of a textbook and into a pre-set, standardized exam. Furthermore, programmes are often staffed with faculty members who are neither research active, nor have any appreciable experience in applied work relating to their teaching.

While top universities around the world are aggressively moving to new teaching platforms and broadening their programmes by erasing the boundaries between various degrees, in Ireland we still treat a slide projector as a technological enabler. Web-based apps, audio-visual tools, data visualisation and other core tech supports are virtually unheard of in even top-ranked Irish universities.

In many university classrooms, students are more technologically enabled than their lecturers.

Absent deployment of modern strategies and technologies, Ireland embraced the three-year degree system. If anything, lack of proper progression in developing teaching skills and tools should have led to a lengthening of the degree programme to maintain fixed quality of the graduates. Instead we opted to trade down the learning curve in pursuit of higher put-through numbers.

All of this stands contrasted by the fact that in our flagship universities there are some individual teaching and research programmes which operate at a world-class level. Irish academia, it appears, can do excellence, just not across the whole system.


On the research side, things are not stacking up in favour of our education being the enabler of Knowledge Ireland either. New Morning IP, the intellectual capital consultancy firm, publishes regular data on patenting activity by indigenous Irish companies, foreign inventors and Irish academic institutions.

Over the last 12 months, 2,580 patents were filed in Ireland by all types of academic institutions and private sector firms. Irish academic institutions accounted for only 9.1% of these filings. Irish private sector firms are considered to be relative underperformers in terms of R&D output compared to their counterparts across the OECD. Yet, of all patent filings, these firms account for almost four times more patents than all Ireland-based academic institutions taken together.

INSERT CHART

Not surprisingly, the European Patent Office data for 2012 put Ireland in 26th place in terms of total number of patent applications and in per-capita indigenous innovation terms, right between such powerhouses of the ‘knowledge economy’ like New Zealand and Cyprus.

The above data correlates with the poor performance by the country academic institutions in attracting private sector research funding. In August, a study by the Times Higher Education, ranked Ireland at the bottom of global league table in terms of private sector funding per academic researcher. Lower rankings for Ireland can be in part explained by poor innovation uptake by many domestic enterprises. However, these rankings also show that our system of higher education is inefficient in producing market-relevant research. Given the importance of such research to teaching and training future cohorts of human capital-rich workers, this is not a good thing.


Irish system of higher education requires serious and immediate reforms.

At the top, we need more flexible, more responsive public policy formation capable of supporting knowledge-intensive, skills-rich and rapidly evolving education. Fields of research and teaching, such as biotech, stem cells research, content-based ICT, remote medicine, human interface technology, customizable design and development technologies and so on all require a mix of skills we currently struggle to provide. Outside these, the world of business and the overall socio-economic make up is changing rapidly. In previous decades, generic management degrees offered a good starting point for on-the-job-learning. Today we need both specialist knowledge and general human capital as the basis for entering management areas of work. In the past, specialism was the differentiator into growth areas in the economy. Today, encyclopedism and ability to cross boundaries of defined degrees is increasingly a valued skill.

Policy level changes require introducing accountability and direct incentives into education system. Introduction of university-set fees are the starting point for this. Yet, even more institutional autonomy will be required to move to a system of higher education where both success and failure are reflected in actual outcomes. Successful institutions should be incentivised to thrive. Poorly functioning ones should be forced to shut down or be acquired by successful ones. Public funding should follow quality of teaching and research, not political considerations of which constituency is next in line for grants.

We must end political remit over the system of academic research and higher education. The best way to do so is by allowing more competition, imposing tighter quality controls and allowing institutions more freedom to price their offers reflective of both demand for and supply of quality.

4/12/2013: Brain Drain and Institutions

A very interesting working paper relating to the issues of human capital and its effects on society and economy, titled "Does Brain Drain Lead to Institutional Gain?" by Li, Xiaoyang and McHale, John (of NUI Galway) and Xuan, Zhou (http://ssrn.com/abstract=2350203).

Per authors, "A country’s endowment of human capital can affect its institutions through various channels. This raises the possibility that skilled emigration can leave its mark on a country’s institutional development. We combine recent datasets on emigrant stocks and institutional quality to explore the impacts of mobile human capital on home country’s institutional quality."

"Our results indicate that skilled emigrants have a positive effect on political institutions (i.e., voice and accountability, and political stability and absence of violence) but a negative effect on economic institutions at home (i.e., government effectiveness, regulatory quality, and control of corruption). These results are robust to the inclusion of other known determinants of institutional quality."

With some caveats relating to the difficulties involved in assessing causality in a cross-sectional data study: "...we attribute the association to be causal as we use geography-based instruments for emigrant human capital"

4/12/2013: Did US banks deregulations spur SMEs productivity?

An interesting study via Kauffman Foundation of the effects of banking sector deregulation and competition on SMEs productivity in the US.

Krishnan, Karthik and Nandy, Debarshi K. and Puri, Manju study, titled "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment" (published November 21, 2013 http://ssrn.com/abstract=2358819) assessed "how increased access to financing affects firm productivity" based on a large sample of manufacturing firms from the U.S. The study relied on "a natural experiment following the interstate bank branching deregulations that increased access to bank financing and relate these deregulations to firm level total factor productivity (TFP)."

Core results "indicate that firms' TFP increased subsequent to their states implementing interstate bank branching deregulations and these increases in productivity following the deregulation were long lived."

In addition, "TFP increases following the bank branching deregulations are significantly greater for financially constrained firms. In particular, …we show that firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and are thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained)."

Overall, the "results are consistent with the idea that increased access to financing can increase financially constrained firms' access to additional productive projects that they may otherwise not be able to take up. Our results emphasize that availability of financing is important for improving the productivity of existing entrepreneurial and small firms."

By proxy, the results also show that increased presence of banking institutions in the economy does contribute positively to productivity enhancing funding availability for the firms.

4/12/2013: Quote of the day

A quote of the day:

"A recent study by Federal Reserve economists concluded that America’s protracted high unemployment will have serious adverse effects on GDP growth for years to come. If that is true in the United States, where unemployment is 40% lower than in Europe, the prospects for European growth appear bleak indeed." Joseph Stiglitz

Via http://www.project-syndicate.org/commentary/joseph-e--stiglitz-says-that-the-europe-will-not-recover-unless-and-until-the-eurozone-is-fundamentally-reformed#vc6wVyQBWlqbgj7F.99

Agree or disagree with (as I do with some of) his prescriptions, but the above quote is a key to understanding why Euro area's economy is a brick that hit the water.

4/12/2013: IMHO launches a new service for distressed borrowers

Irish Mortgage Holders Organisation (IMHO: https://www.mortgageholders.ie/) have launched a new initiative today designed to provide free bankruptcy service for distressed borrowers.

Here are the details:

Contact details: via email info@mortgageholders.ie or Arthur Mullan, IMHO: 01-871 9411

3/12/2013: State Grants or Private Donations Incentives?

Should charities be directly (grant) funded by the Government (Ireland's core policy toward funding charities) or should they rely on raising funding, with the Government supplying a channel for private funding via (tax) incentives to individual donors?

I am not a researcher in this area, but here's an interesting study on the topic: Scharf, Kimberley A., Impure Prosocial Motivation in Charity Provision: Warm-Glow Charities and Implications for Public Funding (November 2013). CEPR Discussion Paper No. DP9749.
Available at SSRN: http://ssrn.com/abstract=2356979

Abstract: We show that warm-glow motives in provision by competing suppliers can lead to inefficient charity selection. In these situations, discretionary donor choices can promote efficient charity selection even when provision outcomes are non-verifiable. Government funding arrangements, on the other hand, face verification constraints that make them less flexible relative to private donations. Switching from direct grants to government subsidies for private donations can thus produce a positive pro-competitive effect on charity selection, raising the value of charity provision per dollar of funding.

3/12/2013: GoldCore research note on deposits bail-ins

GoldCore have published an insightful guide to banks bail-ins of depositors that the EU is rapidly falling toward as a default policy for resolving future banks crises.

Here's an inforgraphic from the report:
http://dzswc0o8s13dx.cloudfront.net/goldcore_bloomberg_chart1_03-12-13.png

And the link to the report itself:
http://info.goldcore.com/what-savers-and-depositors-need-to-do-to-protect-their-savings-and-deposits-from-bank-bail-ins

3/12/2013: Some top level results from PISA 2012: Part 2

In previous post I covered the PISA results (top-level overview) for Ireland (http://trueeconomics.blogspot.ie/2013/12/3122013-some-top-level-results-from.html). Here's a summary table showing 2012 data and changes on previous survey:

• As you can see, Ireland is ranked in a respectable 20th Mathematics place based on the mean score. 
• We rank 29th in terms of top performers in mathematics and 17th in terms of share of bottom performers in mathematics. This suggests that our system is performing better in raising students from the bottom than promoting students to the top. The first is a good thing, the latter is a bad thing.
• Another bad thing is that we are losing scores, down 0.6 points annually on previous survey.
• Ireland's maths score is statistically indistinguishable from the scores for Viet Nam, Austria, Australia, Slovenia, Denmark, New Zealand, Czech Republic, France, United Kingdom
• And we are statistically above the OECD average along with 22 other countries.

Relationship between annualised change in performance and average PISA 2003 mathematics scores:

• In reading, our mean score of 523 ranks us between 7th and 9th in the world - highly respectable achievement. However, the score is down 0.9 points year on year.
• We are comfortably ahead of OECD average here
• Our score on reading is statistically indistinguishable from Finland, Chinese Taipei, Canada, Poland, Liechtenstein.

Relationship between annualised change in performance and average PISA 2000 reading scores

• In science we have a score of 522 which ranks us 14th to 15th which is good. Even better: the score has increased by 2.2 points year on year.
• We are statistically above the OECD average and our science score is indistinguishable from that of Viet Nam, Poland, Canada, Liechtenstein, Germany, Chinese Taipei, Netherlands, Australia, Macao-China, New Zealand, Switzerland, United Kingdom.

Relationship between annualised change in science performance and average PISA 2006 science scores

3/12/2013: Some top level results from PISA 2012: Irish Education Performance

PISA results are out today. Here's the link: http://www.oecd.org/pisa/keyfindings/pisa-2012-results.htm

And some snapshots of Ireland's performance:

And comparatives to Hong Kong, Korea and Shanghai (just because we think we have the best educated workforce in the world):
Note: Ireland = Blue
Hong Kong:

 Shanghai:

Korea:

And to some European peers:
Finland:

Germany:

Sweden:

And so on. Not take these too seriously as standardised testing is hardly indicative of many important aspects and traits relating to education, but... we are reasonably good in reading skills, mediocre in mathematics and sciences... Improving in sciences, flat in maths, slightly down in reading... oh, and our top students are not really at the races, while our bottom students are. So who do we compete against? The brightest or the lowest performers? Makes you wonder, right?