Global Entrepreneurship Monitor (GEM) 2004

Published: June 2005

Executive Summary

The important contribution that Irish entrepreneurs are now making in terms of economic, societal and personal benefits are evident from this review of their activity for 2004. The further potential that they can make is evident from the role that they play and the contributions that they make to wealth and employment creation in other high income countries, such as the United States.

It is against this background that the GEM Irish national team are pleased to present the findings of their 2004 research. The level of entrepreneurial activity in Ireland in 2004 is analysed in depth and is compared to that in other high income countries. It is also tracked over time to detect changes and the early emergence of trends.

The 2004 annual report is more extensive than in previous years and includes an in-depth comparison with Finland, which has been written with the collaboration of the Finnish national team (Section 6).

GEM provides policy makers and others interested in entrepreneurship with a level of detailed information about entrepreneurship that was simply not available previously. We thank our sponsors, Enterprise Ireland and InterTradeIreland, for continuing to make this possible.

The summary results for Ireland in 2004 (Section 1) give an indication of the scale of the activity involved:

• The level of entrepreneurial activity (Total Entrepreneurial Activity Rate or TEA) in Ireland in 2004 is 7.70%.
• Approximately 193,000 individuals in Ireland are actively planning to set up a new business and are in the process of doing so, or have set up a new business over the 42 months prior to the GEM adult population survey.
• There are almost 2,000 new businesses being started in Ireland every month.
• Over 100,000 new jobs were created in Ireland in 2004 as a result of the entrepreneurial activity of Irish people. These jobs are created throughout the country in a variety of sectors and in new enterprises of different sizes and ambitions. [1]
• 13% of all entrepreneurs expect to employ at least 20 people within five years of start-up and one in twenty new firm entrepreneurs already employs 20 or more.
• Of new firm entrepreneurs, four out of every five have already generated some export sales within 42 months of starting their new businesses. Of these 24,000 or 29% currently export more than 50% of their output.
• GEM estimates that informal investment activity in Ireland over the last three years amounts to at least one billion euro. In addition, entrepreneurs have invested at least the same amount themselves in their new businesses.

In each of the last four years GEM research has detected a slight slowing down in the rate of entrepreneurial activity in Ireland. This downward trend continued in 2004, but should not be overstated, as Ireland still remains one of the most entrepreneurially active of the EU countries. While the number of new business owners fell by a smaller percent, the fall in the number of
entrepreneurs is primarily associated with a decline in the numbers of those actively planning to start a new business. Moreover, the percentage of the population that is considering becoming an entrepreneur in the next three years is lower than in many European countries.

These are worrying trends, as it is clear that going forward Ireland will need to maintain, if not increase, the number of entrepreneurs in the country, particularly within Business Services.

Ireland’s TEA rate is ranked 7th of the 22 OECD countries [2] that participated in the GEM project in 2004, and second to Poland among the participating EU member states. [3]

GEM research demonstrates that the level of entrepreneurial activity varies depending on a country’s relative income level. Comparing Ireland with other high income countries, it is apparent that the entrepreneurial activity rate in Ireland is significantly behind that of the most entrepreneurial of the high income countries, namely the US, Australia and New Zealand. Yet these countries actively encourage further increases in their levels of entrepreneurship, as high levels of entrepreneurship are perceived to be positively associated with growth, and with wealth and employment creation.

Section 2 examines the environment for entrepreneurship in Ireland in 2004 and finds much to celebrate and some areas in need of improvement.

Ireland has many positive features which indicate that it is well placed to support more entrepreneurial activity:

• The current and projected growth in the population,
• The age structure of the population,
•  A buoyant economy,
• The positive predisposition of individuals in Ireland towards entrepreneurship,
• A positive cultural context in that entrepreneurs and entrepreneurial activity are held in high regard,
• Very positive media coverage within the country,
• Many aspects of government policy that are supportive of entrepreneurs and entrepreneurial activity, for example a pro-business attitude, continuing low interest rates, and a fiscal regime that does not penalize success,
• Government programmes that support entrepreneurs,
• A range of benefits flowing from the strong high-tech FDI presence in the country,
• A highly skilled workforce,
•  A vibrant capital city, and
• A growing range of networks and advisors.

Set against these very positive features in the environment, however, are other less positive features, which include the following:

• In particular, the lack of an entrepreneurship policy results in a lack of stitched up thinking in and across Departments and development agencies which does not optimise the considerable investment currently being made in this area and hinders the entrepreneur by adding time and cost to his activities.
• The educational sector is not perceived to reinforce the strong entrepreneurial culture, as it inadequately supports entrepreneurship and fails to prepare individuals sufficiently for an entrepreneurial career.
• The clearly identified skills deficit in respect of entrepreneurs is not being tackled in any systematic way.
• The increasing regulatory burden that is flowing from the EU and Government is adding to the cost and difficulties for new firms.
• There are gaps in the information available to entrepreneurs and in their knowledge of where to access the available information.
• Specific shortcomings in the development agencies, related to their coordination, the appropriateness of the background and experience of many of their executives, and the time and effort required to access their support, are considered to impose unnecessary difficulties on entrepreneurs.

Other weaknesses within the environment include the following:

• The high cost economy,
• The limited size of the home market,
• Physical infrastructure deficits that impact on international trade,
• Skills gaps in the labour force, and
• Difficulties in accessing finance.

These factors are negatively affecting the time and cost of setting up and running a business in Ireland and are impacting on both competitiveness and profitability.

GEM research illustrates that most entrepreneurs require relatively small amounts of money to start their new business (Section3). The most important source of this finance is the entrepreneurs own resources, which includes the savings and the personal borrowings of the entrepreneur. In seeking external finance most entrepreneurs will rely on informal investment from family and friends.

There are also a group of entrepreneurs that have more significant financing requirements, amounts which the entrepreneur may typically find difficult to self-finance. These entrepreneurs are more dependent on external finance from informal investors, banks, development agencies, and in a small number of cases, from venture capitalists.

The policy challenge arises as GEM highlights the fact that the availability of funds for new ventures is comparatively low in Ireland. Relative to other countries both the rate of informal investment activity and the overall amounts of informal investment activity are both low. Specifically, GEM suggests the availability of informal investment is particularly low as a percentage of the funding requirements of nascent entrepreneurs.

Furthermore, GEM research suggests that the overall level of formal venture capital activity in
Ireland and the individual deal size is relatively low. This finding reflects the view of many of
the entrepreneus consulted. In the view of some of the experts and some venture capitalists consulted, however, the reality is a shortage of investment prospects, rather than a lack of venture capital funds to be invested.

Irish Government policy is particularly focused on encouraging new innovative enterprises that have growth potential and are export oriented (Section 4). This in the main is the focus of the development agencies’ supports. GEM suggests that in Ireland there is a much larger group of entrepreneurs currently exhibiting these characteristics than may currently be clients of the development agencies. This is apparent in the large number of new enterprises that have export customers and have aspirations to, or are currently employing more than 20 persons.

The real shortcoming among this group of entrepreneurs appears to be in the lack of balanced entrepreneurial teams, a shortage in the selling, communication and language skills necessary to develop export markets, and a lack of commercial skills among the technically qualified entrepreneurs on whom Enterprise Ireland, in particular, focuses.

There are also difficulties around the area of technology transfer and the conversion of research into commercially viable new enterprises.

Much of the discussion on growth focuses on the need to have new enterprises aspire to employ more than twenty people within a relatively short time frame. A relatively high proportion of entrepreneurs within Ireland would appear to have this aspiration. There would appear to be a related challenge of a different magnitude. That is to develop a cadre of entrepreneurs with global scale as their objective. In this Ireland is less strong.

The proportion of women who have set up new businesses in Ireland is particularly low relative to the number set up by men and is also low compared to the percentage of women involved in entrepreneurial activity in the most entrepreneurially dynamic of the high income countries (Section 5). For the first time in three years, however, this year GEM detected an increase in the number of women actively considering becoming entrepreneurs.

The personal context of women in Ireland with regard to their perception of opportunities for new commercial enterprise, their perception of their own abilities, and the personal acquaintance with an entrepreneur is considerably weaker than it is for men. Their fear of failure is also higher.

In at least half the cases women are becoming entrepreneurs after being employed part time or having been full time engaged in the home, whereas men more typically are coming from a background of full time paid employment. Women entrepreneurs are often more highly educated than their male counterparts.

Women have less money to invest in their fledgling businesses and are more reliant on external sources, namely the banks and family members for funding. As their enterprises tend to be less growth and export oriented, women entrepreneurs are eligible less often than their male counterparts for funding support from the development agencies.

In many entrepreneurial of the high income countries, for example the US, active measures are being taken to further increase the number of women active as entrepreneurs and to help these to develop sustainable businesses, despite the fact that the number of women entrepreneurs in these countries is already high.

The Irish GEM team consulted 75 leading experts and entrepreneurs during 2004 to ascertain their views about the current ‘‘state of the nation’’ with regard to entrepreneurship in Ireland. These experts and entrepreneurs were invited to give their opinion as to what they considered needed to be done to improve the environment for entrepreneurial activity and to encourage more entrepreneurs in Ireland. Their recommendations are detailed in Section 7.

Section 8 sets out the rationale that lies behind the recommendations of the Irish GEM team
for Ireland. There is a consistency between what many of the experts and entrepreneurs consulted are recommending and what the Irish GEM team is recommending, having considered not only the results for Ireland but also those available across other high income countries and the findings of GEM research at Global level.

The first recommendation, which calls for the development of a systematic and all embracing
review of entrepreneurship policy and supports, would compliment the review which has recently been carried out by the Enterprise Strategy Group, and would focus in particular on entrepreneurial activity within the country. The benefits of a highly thriving entrepreneurial
sector are well documented and are being actively embraced by policy makers in many
high income countries — even in those which have much higher levels of entrepreneurial
activity compared to Ireland.

The EU has emphasized the challenge to coordinate entrepreneurship policy as it embraces very many Ministers, Government Departments and development agencies.

Finland has an interesting model in this regard which could merit further examination.

A comprehensive national policy for entrepreneurship should be developed.

Such a policy would inter alia spell out

• The economic, societal and personal benefits that are targeted through the Government’s substantial commitment to this activity and the means by which these will be measured.
• Barriers within the environment that hamper entrepreneurship or add additional costs to entrepreneurs should be identified and lessened or removed, as appropriate.
• The wide range of programmes and other supports currently in place to encourage entrepreneurship (fiscal, educational, financial, and advisory among others), would be reviewed in terms of their effectiveness and efficiency.
•  An examination of the manner in which the existing supports are coordinated and structured should be made, at present these range across several
  Departments and agencies, and proposals made as necessary to further coordinate these in order to improve their efficiency and effectiveness.

In summary, the other recommendations that are being proposed for Ireland by the Irish GEM team are as follows:

• The skills deficit must be tackled

There is clearly a skills deficit surrounding entrepreneurship of different types, which needs to be tackled. The initiatives developed must be appropriate to particular groups of entrepreneurs and their needs. (For example, the skill needs of an entrepreneur starting and developing a micro-enterprise focused on local markets will be quite different to that of an entrepreneur who is starting a knowledge intensive new business, directed primarily at export markets.)
This might be carried out within an overall series of educational and training initiatives designed to develop both the required skills and confidence in individuals, through the formal general education system and through entrepreneurial specific initiatives.

• Finance for new businesses must be made more available

The availability of pre- and start-up seed capital for different types of business’ needs should be reviewed and any gaps in the availability of financing should be addressed. The relative attractiveness for investors of investing in early stage enterprises should also be examined and the risk/reward of such investment made more attractive as necessary.

• More women must be actively encouraged and supported to become entrepreneurs

Ireland should seek to learn from the experience of other countries that have successfully supported a higher level of women entrepreneurs. The barriers preventing a greater involvement by women in entrepreneurial activity should be systematically identified and removed.

• Means of transferring the significant research, technological development and innovation (RTDI) investment, currently being implemented, into new entrepreneurial initiatives should be actively encouraged and any barriers to its transfer should be identified and removed. 

Notes

1 GEM includes within its definition of entrepreneurship all kinds of independent start up activity, including self-employment.

2 The OECD 22 group consists of (in rank order) New Zealand, Iceland, Australia, United States, Canada, Poland, Ireland, Norway, United Kingdom, France, Greece, Denmark, Spain, Netherlands, Germany, Finland, Italy, Hungary, Portugal, Sweden, Belgium, and Japan.

3 The EU pre-accession Member States that participated in GEM in 2004 were Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the UK. Of the new Member States, Hungary and Poland are included.