Irish businesses aren’t investing in themselves like they should, says a recent study by the Economic and Social Research Institute (ESRI). According to their research, small and medium-sized businesses are spending, on average, 30 percent less on themselves than would be expected considering their performance.
This lack of investment is harming Irish small businesses, and creating an opening for multinational competitors, who are currently performing significantly better. To deal with this, Irish SMEs need to find the motivation and means to boost targeted investment to drive growth and productivity.
Lack of investment is slowing productivity
The effect of this chronic underinvestment is that Irish businesses aren’t as productive as their multinational competitors. In fact, multinational businesses have increasingly begun crowding out domestic businesses, according to the Organisation for Economic Co-operation and Development (OECD). This isn’t to say that these businesses are failing at this very moment, but rather that they are becoming less competitive over time.
Low investment means that SMEs are left working with outdated equipment, inadequate training, and old technology. In addition, a lack of investment in research and development prevents businesses from improving themselves internally. The result is relatively slow growth in productivity, with just a 2.5 percent productivity increase between 2006 and 2014, compared to a 5 percent increase between 1994 and 2006.
Irish SMEs have few international connections
Compared to SMEs in other EU countries, Irish businesses are very reliant on local markets, exporting relatively little, and building few international business relationships. Similarly, few Irish SMEs expand to become multinational themselves. As a result, they don’t have access to the same resources that their multinational competitors do, and are left increasingly vulnerable as multinational businesses compete for Irish consumers.
SMEs are held back by a lack of financing and existing debt
Earlier, the OECD made claims that Irish businesses were lagging behind multinational competitors in productivity due to generally weak managerial skills. While this does appear to be a factor, the ESRI has now found that the largest contributor to to this rampant underinvestment is financial in nature.
The challenges faced by Irish banks have resulted in restrictions that leave Irish businesses without access to the same financing options that their international counterparts do. Worse, many businesses already incurred significant debts during the boom, and can’t readily afford to take on more despite steady growth in SME profitability in recent years. According to the ESRI’s study, these financial hurdles account for about two thirds of the 30 per cent investment gap.
Businesses do have financing options
Getting access to the funds your business needs to be more productive doesn’t necessarily need to involve bank loans and new interest payments. There are a range of alternative finance tools that are designed to give businesses access to funds in a sustainable way that doesn’t involve traditional loans. These make it possible for businesses to make necessary equipment purchases, deal with cash flow interruptions, or pursue growth opportunities whenever the time is most opportune for your business, rather than at some improbable future point where your business has excess capital lying around.
Instead of taking out a loan from the bank, invoice financing makes it possible to effectively borrow from your own business. It works by allowing businesses to trade outstanding invoices in to their financial institutions for most of their value up-front. After the payment is collected, the remaining funds are issued, minus a small fee. This makes it possible for businesses to effectively give themselves an advance on their own revenue, while also saving the time they typically spend chasing down late payments from problem clients.
Supply chain finance
Supply chain finance gives businesses access to working capital in another way, by delaying outgoing payments. Instead of making payments to suppliers directly, you can use a credit fund supplied by your financial institution’s investors to pay supplier bills. Paying the balance on that fund can then be deferred by several months, effectively allowing you to use those funds for other purposes during that time.
Going forward, the Irish SME sector needs to address its investment gap both to maintain its position in the Irish economy, and to be be able to begin competing against multinational businesses outside of Ireland. By using the financing tools available to them to consolidate funds and make the investments they need to grow and develop, these businesses will be able to work more efficiently and productively, and begin to drive innovation and development in their industries, revitalising the small business sector and the entire Irish economy with it.