Ireland’s success in attracting Foreign Direct Investment (FDI) has “masked the fact” that it has one of the weakest innovation records among small but advanced economies, venture capitalists have said.

The Irish Venture Capital Association (IVCA), which is the representative body for venture capital and private equity firms, published its pre-budget submission to the Government on Monday. The report warns against over reliance on revenues from FDI at a time of an “evolving international tax landscape” and argues that the country needs to focus on developing a robust and thriving domestic SME sector.

Ireland’s Innovation Record Lags Behind

While Ireland’s FDI record is impressive, the IVCA highlights the need for a renewed focus on innovation. The report states that when Ireland is compared to other small, advanced economies, it has one of the weakest innovation records among these economies, with low total and business R&D spending relative to GDP.

The Challenge of Scaling Up

The IVCA emphasizes the challenges faced by indigenous enterprises with global ambition in accessing risk finance to scale their businesses. The association notes that venture capital funding into Irish SMEs fell 48 per cent to €258.5 million in the first quarter of 2024, while international funding to Irish SMEs fell by 57 per cent to €184 million over the same period.

A Call for Action: Unlocking Domestic Investment

The IVCA proposes a solution: leveraging domestic capital to fuel innovation and scale up Irish companies. They advocate for a mandatory ‘opt in’ for participants in the new auto enrolment pension scheme to invest in Irish companies or funds.

Learning from Other European Countries

The IVCA points to successful examples in other European countries, including Denmark, France, and the UK, which have implemented similar schemes. The report highlights the substantial growth in capital allocated to French funds following the introduction of a similar scheme in 2008, increasing from €200 million in 2002 to €6 billion in 2016.

Addressing the EIIS Challenges

The IVCA also calls for changes to the Employment Investment Incentive Scheme (EIIS), which offers individual investors tax relief of up to 40% to encourage investment in small and medium-sized companies in Ireland. The association argues that recent updates to the scheme have created uncertainty for investors and diminished the capital available and the appeal of the EIIS for start-ups.

The Urgent Need for Infrastructure and Skills

The IVCA’s pre-budget submission echoes concerns raised by other bodies regarding Ireland’s over-reliance on FDI and the need for greater domestic investment. The report highlights the significant challenges facing the country in attracting investment, including slow progress on infrastructure development and skills shortages.

Infrastructure Deficits Hamper Growth

Multinationals are reportedly frustrated with the slow pace of addressing infrastructure shortfalls in areas like housing, energy, water, and transport. These issues, if not addressed more quickly, could further hinder the country’s ability to attract investment.

A Skills Gap Threatens Competitiveness

The report emphasizes the need for Ireland to align its education system with the fast-changing needs of enterprises. It places a particular focus on transversal, digital, green, and construction-related skills, highlighting the changing nature of business due to artificial intelligence. Education will be a key driver of future economic success, but the report does not address the funding issues surrounding higher education, a critical factor in achieving this goal.

A Balanced Approach: Fostering Domestic Growth While Maintaining FDI

The IVCA’s pre-budget submission presents a timely and urgent call for Ireland to diversify its economic strategy and focus on fostering domestic growth. While maintaining the current level of FDI investment and employment would be a significant achievement, the report underscores the need to diversify the economy and reduce reliance on foreign investment.

The Future of Irish Investment: A Call for Action

The IVCA’s recommendations highlight the crucial need for the Irish government to take decisive action to address the country’s innovation deficit and create a more robust and sustainable economic future. By fostering a dynamic SME sector, unlocking domestic investment, and tackling infrastructure and skills challenges, Ireland can move beyond its reliance on FDI and unlock its full economic potential.