Risk/Reward Balance Does Not entice Us To Start A Business

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Although Ireland has been experiencing challenging economic conditions, 37 per cent of Irish people stated that if they could choose between different kinds of jobs, they would prefer to be self-employed rather than be employed by a company (similar to the EU average). The survey, carried out by the European Commission in 2012, revealed that Irish people had a more positive view of entrepreneurs than their EU counterparts as 89 per cent of the population (compared with 79 per cent at EU level) agreed that entrepreneurs create new products and services than benefit us all.

However, there has been a significant change on this question since 2009, with far more people now saying that they would rather work as an employee (+11 points), and an even bigger decline in the number of people who favour self-employment (-12 points). This change is understandable given the need for people in Ireland to prioritise financial security for themselves and their families over riskier career options.

But if Irish people have such a positive view of entrepreneurship and have expressed a strong desire to one day start their own business, then the question must be asked as to why this is not happening? The 2012 GEM Ireland Report clearly showed that there was a decrease in the rate of Total Early-Stage Entrepreneurial Activity (TEA) in Ireland in 2012 (6.1% down from 7.3% in 2011) and these figures mean that Ireland is now ranked 14th across the EU and 18th among the OECD countries in terms of early stage entrepreneurial activity.

In the 2012 EU report, 28% of respondents stated that they do not regard self-employment as feasible on the grounds that they do not have enough capital or financial resources (more than the 21% of people who give this answer at EU level). This is a particularly interesting finding given the various government initiatives to finance business start-ups (e.g. Microfinance Ireland). More people in Ireland than in the EU as a whole (16% vs. 12%) also stated that the current economic climate is not good for a start-up although one could argue that many opportunities still exist in the global marketplace.

Roughly one respondent in seven in Ireland felt that they lack the skills to be self-employed, while less than one in ten gave other reasons, such as that they have no business idea  that they would have difficulty reconciling self-employment with family commitments, that they fear the risk of failure and its consequences and that they are put off by the burden of red tape. Perhaps, most interestingly, 43% stated that they would be afraid of the risk of going bankrupt if they were to become self-employed (the same as at EU level). However, slightly more people in Ireland felt that the risk of losing their property/home would concern them the most. Over a third of respondents in Ireland stated that the risk of irregular income would make them afraid of setting up a business.

A key element of entrepreneurship is the relationship between risk and reward and obviously many people in Ireland feel that gaining full-time employment is a better option as it reduces risk and offers certain levels of reward which cannot be guaranteed if a person starts their own business. But what about people who are unemployed and cannot find a job: would self-employment not be a better option for them as opposed to claiming welfare benefit? Indeed a common characteristic of recessions is that there is an increase in ‘push entrepreneurship’ as workers who have become unemployed utilise their skill-sets to create opportunities through self-employment but this trend has not happened in Ireland.

In unadjusted terms there were 441,976 people signing on the Live Register in July 2013 (13.5%). This is the lowest rate since March 2010 although some commentators have argued that emigration and government schemes are softening the real rates of unemployment. The number of long term claimants on the Live Register in July 2013 was 197,571 while youth unemployment remains a serious issue as it now stands at 16.4%.

A married person with a qualifying partner and two children can currently receive approximately €20,000 per annum in various welfare benefits. That person may also be eligible for a range of other supports such as medical card assistance and rent supplements depending upon their circumstances. To earn the equivalent amount that such a person receives from welfare benefit will mean that they will need to earn a gross income substantially above €20,000 given that there will be income tax, USI and PRSI deductions taken from any possible income, plus there will also be a number of indirect costs such as transport to and from work.

There is a scheme available to welfare recipients called the Back to Work Enterprise Allowance scheme which encourages people getting certain social welfare payments to become self-employed.  A person on this scheme can keep a percentage of their social welfare payment for up to 2 years while they are getting their business started. However, to qualify for this scheme a person must have been in receipt of a qualifying payment for at least 12 months (you do not qualify if you are unemployed for less than one year) and the scheme is also considered to be highly bureaucratic by many people who have availed of it. While I strongly believe that the vast majority of people who are currently unemployed would prefer to be gainfully employed, many are caught in the so-called ‘welfare trap’ where the security of their current income from welfare benefits makes the prospect of starting one’s own business less likely to occur.

If we are to examine the reward side of the risk-reward equation then the prospects look no stronger. Obviously starting one’s own business creates the opportunity to achieve significant wealth but the number of people who have achieved strong financial independence is a very low percentage of the entrepreneurial population. Additionally, Ireland’s marginal rate of income tax (52% for employees and 55% for the self-employed) penalises the entrepreneur even though they are the person taking the risk and potentially employing people.

While great success is possible, the reality is that the failure rate for new businesses is quite high as research in the US has found that 36% of firms failed after two years, 50% after four years and 71% after ten years. For an Irish entrepreneur, not only do they have to deal with the stigma of failure and live in a culture that does not celebrate the concept of ‘second chance’, they must also deal with a welfare system that acts against them. While an employee can apply for welfare benefits immediately after becoming unemployed, self-employed people pay Class S PRSI and this only covers people for certain social welfare payments and it does not cover a person for Jobseeker’s Benefit. There are other additional challenges in claiming welfare benefits that the self-employed must also endure that employees do not face, which combined reinforces the belief for many self-employed people that no safety net is available to them should their business fail.

There is a positive attitude to entrepreneurship in Ireland but it is arguable that the risk-reward relationship for people claiming welfare benefit does not entice them to start their own business. Future budgets will need to address this issue if we are to create a society of entrepreneurs who rather than wait to become employed (or hope that their local area attracts a multinational company), will instead utilise their expertise and skill-sets to establish their own business and potentially create employment for others. Within the 441,976 currently on the Live Register, surely a sizeable proportion of that population would like to become entrepreneurs but first the risk-reward system needs to move more favourably in their direction.

Copyright Irish Independent August 30th 2013

 

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About the Author:

Professor Thomas M. Cooney (B.Comm, MBA, PhD, MMII, MCIM, FIMCA)

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