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Irish SMEs aren’t investing enough, warns ESRI study

Under-investment by small and medium-sized businesses was at over 30pc in 2016, with financial issues the biggest contributing factors, research has found.

The study by the Economic and Social Research Institute (ESRI) stated that there was “clear evidence” that actual investment is below what would be expected, given how companies are currently performing.

ESRI researcher Conor O’Toole concluded that financial factors explain between 12pc and 18pc of the investment gap.

“What we found was that there was clear under-investment, by about 30pc in 2016,” Dr O’Toole told the Irish Independent on the margins of a Department of Finance conference at which he was presenting the findings.

“We went on to say that part of that would be explained by financial factors, access to finance or indebtedness, and we found that 20pc of the gap was explained by financial factors.

“The gap has reduced dramatically from 2014, 2015 and into 2016. But it’s still there.”

The study comes in the wake of claims by the Organisation for Economic Co-operation and Development (OECD) that the large productivity gap between Irish-owned businesses and multinationals has widened, with home-grown firms held back by weak managerial skills.

The OECD said productivity has “stagnated” among local businesses, with the multinational sector in some cases having “crowded-out” domestic businesses.

There are also few trade links between the foreign and locally owned firms, the Paris-based body said.

“What we’re showing is that SMEs should be investing more, and one of the determinants of productivity is capital investment,” Mr O’Toole added.

“If they were able to make those investments, or encouraged to make those investments, that should help narrow the productivity gap and certainly allow them to increase their productivity.”

The ESRI research covered around 10,000 companies over the period 2013-2016 across all sectors in the economy, excluding the financial sector.

The firms ranged in size from micro enterprises, with up to nine employees, to medium-sized firms with up to 250 workers.

It looked at fixed investment by SMEs, including investment in machinery, equipment and property.

The separate OECD report said aggregate productivity has slowed over the past 15 years.

Labour productivity rose by above 4pc in annual average terms between 1994 and 2006, but slowed to below 2.5pc between 2006 and 2014.

It said productivity spillovers can be enhanced by raising the “absorptive capacity of local businesses” and “the capacity of local firms to absorb and implement new technologies is impeded by relatively weak managerial skills”.

It added: “This partly reflects the low proportion of workers participating in lifelong learning activities.

“With burgeoning skill demand, there should be an increase in the share of training funding to those in employment.

“Innovation and the ability for Irish firms to fully utilise new technologies is also weakened by low research and development activities.”

It isn’t the first time that the OECD has raised this issue.

In 2015, chief economist Dr Catherine Mann said the issue was striking, and the trend was not going in the right direction.

Three years later, the international body says that the problem is getting worse.

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