In Search of the Celtic Gazelle.

This is a version of a column published in the Irish Examiner on 9 November 2013. When Deng XiaoPeng was in his younger days, in 1961, he uttered his most famous aphorism “It doesn’t matter whether it’s a white cat or a black, I think; a cat that catches mice is a good cat”. This presaged his pragmatic approach to economic management which he eventually put in place when he assumed power. We need something similar in relation to employment, in Europe and in Ireland.We need to create jobs..lots of jobs.However, the menagerie that we need to think about lies perhaps not in the feline species but amongst herbivores. We have had a Celtic Tiger – now we seem to want to look at becoming the Celtic Gazelle

Firms, in the entrepreneurial literature, can be divided into Mice (small established firms which are unlikely/unable to grow), Elephants (the large established companies) and gazelles (small companies with potential). Much Irish economic policy appears to be about fostering the latter. The ostensible rationale is that these companies create a large proportion of new jobs.  This has been known for 40 years. Recent central bank of Ireland research confirms that for Ireland. Small firms make up about 70% of the Irish firm universe but employ only approx. 14% of the relevant employment universe.  The same research also indicates that foreign owned companies (in effect , multinational branches) have a consistently higher job creation rate than Irish owned across all size categories.  This is a persistent finding in Irish job creation literature.  They also find that small firms tend to be very fast growing. The takeaway might be that we want therefore more small firms which tend to be young which leads to a need for more startups.

However, that is not quite the issue : in the small firm literature it is perhaps more useful to look at age of firms than only at size.  Firms start, but they also stop.  There It is also important to not conflate the issues of innovation and entrepreneurship. For a firm, large or small, to remain in business long-term it is important that it be innovative in its processes.  Entrepreneurship however is important when the company is starting up. The characteristics of an innovative manager and an entrepreneurial one are of necessity quite different.There is little doubt that an industrial policy, such as we have, which is now geared heavily towards the cult of startups, can show significant short-term effects in firm creation and job creation.  Shortterm is best perhaps seen as “six months or so less than the time to the next general election” The issue is not that – the issue is how sustainable is this? Do these fast-growing SME’s, which appear in the newspapers and on the radio each morning, with impressive growth over two three or five years, actually sustain this?  Increasingly the answer is that they may not.  We note from the central bank study that there is an overwhelming likelihood of small firms staying small, and large firms staying large.

A recent Danish study looked at fast-growing firms, gazelles, and their long-term survival and employment creation. It found that these firms could not sustain. In fact they found a negative relationship between survival and job creation in the medium term and how fast the company grew in its first five years. This is classic hare and tortoise ourcomes. This they attribute to the creation of an organizational culture that  focuses on outcome and not enough on process. In that regard some government investment into the organizational and managerial skills might reap rewards. It is striking that Science Foundation Ireland has extended its ambit towards innovation in service and manufacturing process innovation, which is welcome. However, there remains a gap in targeted support for organizational and managerial competence and skill building

Other research also suggests that looking at startups to power employment is likely to give only partial success. US research indicates that it is firms with greater than 20 employees or greater than 500 that generate the great bulk of medium term employment growth.  Research from Austria suggests that policies focused on increasing the lifespan of companies might be more advantageous, although these tend to also reduce the number of gazelles. Swedish research also casts doubt on gazelle growing : it might be better to focus on existing companies that are stymied in growth opportunities than focusing on fastgrowing new companies.  This is also found in very recent Finnish focused research, as well as for Canada. Finally a broad survey of the research suggests that gazelles can be found across all size and age categories but crucially the biggest impact on employment comes from larger firms that manage to become gazelles.This research should give us concern. We have a banking system that is  broken and incapable of giving credit to SME’s , when the M part is evidentially crucial. We have government and media obsessed with small scale high tech “sexy” startups. We have a push to make universities and institutes of technology into polytunnels for entrepreneurs. In an environment where less than half of companies founded last beyond five years we need to focus less on startups and more on sustaining companies. Sustainability comes from innovation excellence not entrepreneurial excellence, it involves organizational and financial and managerial skill enhancement and requires a long-term aim to make less S and more M in the SME sector. This is duller stuff – there are fewer media appearances and fewer job announcements. Dull it may be but it is vital