Small and medium-sized enterprises scaled back capital plans as the Covid-19 pandemic struck in early 2020. Larger firms cut their level of investment by more than smaller ones, with spending on staff down by as much as a fifth, according to a new report.
The report by the Economic and Social Research Institute (ESRI) examines the information available on SME investment across a range of asset categories, how investment was financed and the investment challenges faced by SMEs.
It finds the drop in the level of investment was greater than the fall in the number of firms investing, “which suggests capital plans have been scaled back rather than cancelled altogether”, the report says.
A sharp fall in 2018-2019 is also evident in the data and may be linked to the Brexit difficulties occurring during this period.
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The proportion of investing SMEs was relatively constant in 2017-2019 at approximately 64 per cent, or just under two in every three firms. The impact of the Covid-19 pandemic can be clearly seen in the data as the share of investing enterprises dropped by nine percentage points to 55 per cent.
Larger SMEs cut their level of investment by more than smaller SMEs. While the share of investing firms dropped across all asset classes, the steepest drops were in machinery, equipment and other fixed assets.
There is a smaller reduction in the share of firms investing in larger fixed capital assets, such as buildings. “This is likely due to this type of investment being part of longer-term, multiannual plans, which firms may be unlikely to pull out of, even if short-term uncertainty rises,” according to the report.
The mean investment in 2020 was just over €93,000, down from €106,000 in 2019. However, it is “not clear” this can be entirely attributed to a Covid-19 effect as there was also a substantial drop between 2018 and 2019, when mean investment fell by 32 per cent from €156,000.
The median investment fell from €30,000 to €23,000 in 2019-2020. This represents a 23 per cent drop.
The proportion of younger firms investing dropped by 25 per cent, more than for older firms. Part of this “reflected a notable contraction in building and vehicle investors among young firms”.
Bucking the trend for younger firms was their continued investment in intangibles “which is important in terms of innovation and productivity”, the report notes. “Research has shown these firms are important as engines of employment growth.”
The level of investment declined sharply in sectors hit particularly hard by the public health restrictions, such as hotels and restaurants, wholesale and retail and construction.
While many firms continued to invest in these sectors, the typical value of each investment was markedly down in 2020 on 2019 levels.
The share of enterprises investing was lowest in Dublin at 45 per cent and highest in the midwest (65 per cent). Dublin also posted one of the larger declines in the share of enterprises investing between 2019 and 2020.
However, when it comes to intangible assets, Dublin and the mideast have considerably higher investment rates.
Overall, the share of SMEs investing in digital activities declined by five percentage points. However, the mean expenditure was up 22 per cent and the median expenditure was up 7 per cent.
The proportion of firms investing in staff dropped during the pandemic. In particular, larger SMEs cut spending in this area by one-fifth in 2020. Nearly eight out of 10 enterprises are happy with their existing capacity, which “may point to a low level of investment appetite”.
The share is notably lower for young firms (67 per cent) “who are often the drivers of job creation and may have a considerable demand for expansion”.
Two factors impacting firms’ investment choices are risk and uncertainty. Fewer than one in every two firms indicated they would be willing to expand if it meant more risk, with micro firms the least willing to do so.
