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.
It noted that the impact of FDI on the Irish economy is “significant”, but said the “evolving international tax landscape” highlights the need for an increased focus on developing a “robust and thriving” domestic SME sector.
“Indigenous enterprises with global ambition and the entrepreneurs that found them face considerable challenges in accessing risk finance to scale their businesses,” the group said.
“While the impact of FDI on our economy has been positive, domestic enterprises have not performed as well.
“When Ireland is assessed in comparison to other small, advanced economies, we see that Ireland has one of the weakest innovation records among these economies, with low total and business R&D spending relative to GDP.”
Research from the IVCA indicates that about 40 per cent of domestic R&D spending by SMEs comes from venture-backed companies. At any given time, there are around 100-150 venture-backed portfolio companies in Ireland.
“To ensure that the indigenous economy drives economic growth, it is crucial to significantly increase the number of R&D-intensive companies and the funding available for their growth and scaling,” the IVCA said.
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.
The IVCA said the Irish ecosystem for getting companies off the ground is “largely working well”.
However, it added: “The big challenge is our over dependence on unpredictable international investors in taking these start-ups to the next level of growth.
“We believe that the best way to invest and scale Irish companies is to create larger domestic venture capital and private equity funds who can support companies in the later stages of their growth journeys. Mobilising sources of private capital to do this will be crucial.”
The IVCA submission outlined how other European countries, including Denmark, France and the UK, have already generated scaling finance for start-ups and SMEs through access to pension and sovereign wealth funds.
IVCA director general Sarah-Jane Larkin said similar schemes here could “unleash a wave of investment, allowing innovation to drive our indigenous economy and our most promising companies to scale from Ireland”.
The report recommends a mandatory “opt in” to invest in Irish companies or funds by participants in the new auto enrolment pension scheme.
Since the introduction of a similar scheme in France in 2008, the amount of capital allocated to French funds grew to €6 billion from €200 million between 2002 and 2016, according to the submission.
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