The Republic will only sustain its current economic growth in the long term, if it encourages small and medium companies to expand their own businesses, leading management consultant Mr Charles Handy has said. He also advocated more investment by the Government in transport infrastructure.

According to Mr Handy, the Republic has performed very well, embracing the euro, seeing it as an opportunity rather than a threat, managing the mix of foreign investment and securing social partnership.

However, he warned that if the Republic was "just going to be a launching pad into Europe for US multinationals," then "it is a very risky business if there is a downturn, because these guys will go".

"It is important to have your own Irish-born, Irish-managed businesses," he said.

Mr Handy, who was born in Kildare and is an internationally-acclaimed management consultant and author, says governments must encourage small companies to innovate through the use of devices such as generous tax breaks.

Mr Handy also believes that the Government should invest more in infrastructure, especially on roads, rail and airports. At present, he believes, there is too much concentration in Dublin. When this happens, he says, traffic problems get worse, house prices rise and the economy suffers.

Therefore, he says, the Government should ensure the right infrastructure is in place to develop industry on a more regional basis.

He says one of the effects of technology on patterns of work is that innovation has to come from small rather than large companies. "It is a great opportunity for small firms," he says.

Mr Handy calls it "bottom-up innovation", starting at the lowest levels of the supply chain. He says that innovation is missing in many large firms, because they outsource so much of their operations.

He cites British retailer Marks & Spencer as an example. "Everything they sell is produced by their suppliers," he says. "They do have design departments in the organisation, but to a large extent they are dependent on the suppliers being abreast of technology in their own spheres and to a large extent they want the suppliers to tell them what's new, what's coming up in the world.

"The only trouble is, I don't think they have explained this to their suppliers, who on the whole are responsive people rather than proactive, initiating people."

This is because suppliers generally deliver against tenders. "They [suppliers] don't actually think of going to their ordering people and saying `did you think of doing this, or this. . . ?' "

Mr Handy says innovation is supply-led: "No customer ever said I want to order books over the Internet.

"The public don't know what they want until it is offered to them," he says. "No customer came up with the idea of the World Wide Web, or modems.

"Since the suppliers are now outside the organisation they have to come up with the ideas because the central organisation doesn't know enough - even if they [the organisation] has a design function."

Mr Handy says the positive side of this is that it presents enormous opportunities to small and medium enterprises "who are basically selling to big corporations".

For small organisations, it means that they will have to be "very much in touch with the technology and the trends in the marketplace. They can't just sit back and respond to requests for tenders".

Mr Handy believes industries in Europe have not yet grasped this concept, "because we have had, on the whole, vertically integrated companies". For example, he says, when he worked in Shell it was a vertically integrated organisation, "where everything was done by Shell".

Now, he says, they expect their contractors to tell them what is new.

Mr Handy contends that businesses can be divided into two types of organisations - fleas (small firms) and elephants - big companies which will get bigger because they have to. He says small companies are the innovators and are usually eventually absorbed by the big companies.

"Ireland should concentrate on encouraging its fleas, because there will never be a home-grown elephant," he says.

"What we call fleas, we also call alchemists," he says, "people create something out of nothing, people who dream dreams and make them happen". Mr Handy has written a new book on the issue, called The Alchemists. It features entrepreneurs such as Charles Dunstone, founder of the Carphone Warehouse (which has a presence in the Republic); and Tim Waterstone, founder of Waterstone's bookstores.

Such people, he says, are encouraged "if there is a buzz around, or a cluster of creative people in finance, the arts or in the sciences or in business".

He says governments can make it easier to bring these people together by investing in the arts through tax breaks and by making it more viable to start a business. "Ireland is good at doing this," he says. "But I suspect it is very concentrated in Dublin and the Government should create more clusters [outside Dublin]."

He points out that there is general agreement that the major impact of the Internet is going to be on business-to-business dealings, rather than on business-to-customer dealings.

He cites the sale of books on the Internet as an example: "It looks as if Amazon.Com's share of the book business will peak at about 8 per cent.

"If you are a busy executive and you know what book you want, you can order it over the Internet. But if you just want to buy a book you go to a bookstore."

Therefore, he argues, the major effect of the Internet will be in relationships between the publisher and the bookstore and the printer and the wholesaler, which will now be able to have upto-the-minute stock levels. "What will happen in the end is we may have shops ordering directly from the printers, rather than the wholesalers who order from the printers. . ."

It is what Mr Handy calls "the law of disappearing middles".

Technologies such as the Internet make it extremely easy for small firms to set up, he says. "You can set up with no money, as long has you have the brains to create a website - it is a low-entry business which can cover the world."

This, he says, has to create more opportunities for small businesses.

However, Mr Handy maintains that people may be overestimating the effect new technologies such as the Internet will have on people and business. "When airplanes were invented we thought it would make travel easier and quicker - which it did - but it also introduced mass tourism which destroyed some places."

Mr Handy has written widely on business and corporate structures and one of his most recent books is called The Hungry Spirit, which argues that economic success is no longer enough for people.

He says one of the things that worries him about the Republic is that people used to have "a fairly non-materialistic view of life. They got their satisfaction out of relationships and community rituals and so on.

"Now clearly materialism is encroaching on that and I don't think it is so satisfying."

Mr Handy says he is looking for something which could be called Irish capitalism. "I don't quite know what its going to be. I'd like to think that it is inclusive and people are not exploited; that people see themselves as members of their organisations and not as employees; that businesses are working for Ireland as much as for their stockholders. I'd like to think that it is a more balanced workstyle - that we feel people can contribute as much in 35 hours as they can in 50 hours - if they work smarter rather than longer.

"I'd like to think that it is a capitalism that recognises that it is fun to work, and not just hard work for money; that it is a capitalism which is about making dreams come true rather than just producing more chips everyday; a capitalism that recognises equality of the sexes.

"I'd like to think it is a capitalism of relatively small units where people know and trust each other, rather than one of mammoth organisations. . ."

In this context, Mr Handy suggests that the Republic has the opportunity to redefine capitalism because it is a small State. "It is a time when people are beginning to question capitalism and where it will lead us if it is not reformed. Ireland actually has a chance to say it will be OK."

In his book The Hungry Spirit he referred to the concept of decent capitalism. "I now think maybe we need an Irish capitalism," he says.

Mr Handy will be in Dublin on October 21st where he will address the fifth National Innovation Conference - Managing Change in the New Millennium. It is being organised by Forfas, the government agency which co-ordinates Irish industrial policy.