The number of firms and the level of investment in SMEs in Ireland dropped in 2020 relative to 2019, indicating that the Covid-19 pandemic is having an effect on investment in smaller firms, according to the Economic and Social Research Institute (ESRI).
A recent report found the level of investment declined sharply in sectors hit particularly hard by public health restrictions, such as hotels and restaurants, wholesale retail and construction.
The share of enterprises investing was lowest in Dublin (45 per cent) and highest in the Midwest (65 per cent) which may reflect the structure of high-tech and knowledge capital firms that are clustered around the capital.
It also found that SME investment and demand was in a downward trend pre-pandemic, which may be linked to Brexit uncertainties during this period.
The two factors impacting firm investment choices were risk and uncertainty. While 57 per cent of firms indicated that uncertainty was a major barrier to business investment.
Irish firms continued to display a preference for self-financing of investment and this trend has continued for many years.
Close to one-third of firms agreed or strongly agreed that access to finance was a barrier to investment. This is highest among younger firms.
In contrast, 47 per cent of enterprises disagreed that access to finance was a problem.
In terms of willingness to expand, 37 per cent of enterprises would be willing to borrow to expand, while 48 per cent or nearly one-in-every-two firms would not be willing to borrow.
The report said that a clear drop in borrowing appetite has occurred since the pre-pandemic period with the share of firms willing to borrow to expand falling from 45 per cent in 2019 to 38 per cent in 2021.
The share of firms who indicate they would not borrow to expand has increased by 39 per cent to 48 per cent, which highlights the drop in credit demand for investment purposes that has occurred since the onset of the Covid-19 crisis.
Minister for Finance Paschal Donohoe said: “I welcome the publication of today’s paper, which provides an important insight into the investment activity of Irish SMEs over the course of 2020 in the face of uncertainties caused by Brexit and the pandemic.
“This research will ensure a better understanding of the investment activity of Irish SMEs and provide evidence to support the further development of targeted policy initiatives around investment and investment financing.”
The paper, entitled Recent Trends in SME investment in Ireland: Exploring the Pandemic and the Barriers to Growth, looks in-depth at how SME investment activity fared in 2020.
It also provides a detailed examination of the information available on SME investment across a range of asset categories, how this investment is financed and the investment challenges faced by SMEs in the current environment.