Vasileios Madouros said research by his institution has found that attitudes to risk are more important than credit constraints when SMEs decide on investment.
Irish firms tend to invest less than their international counterparts. Since 2013, the rate of investment by multinationals has increased twice as fast as that of Irish firms.
The typical domestic company invests about €7,500 per employee a year – 25pc below the EU average.
In a speech on Thursday at TU Dublin, Mr Madouros said the investment gap is concentrated in knowledge-based capital, such as research and development.
Credit demand has been low among SMEs over several years
“The weakness in investment by indigenous companies appears to be driven mainly by factors related to businesses’ willingness to invest, rather than factors related to the supply of credit,” he said.
“Credit demand has been low among SMEs over several years. Indebtedness has fallen markedly, while deposits have increased substantially.”
He said surveys have found that half of Irish SMEs regard uncertainty as a key barrier to investment. This caution was partly due to the various shocks that businesses have endured over the last decade, including Brexit, Covid, the spike in energy prices and US tariffs.
Mr Madouros said there may be more friction around getting finance from private equity. “In our engagement with start-ups, the availability of scale-up financing for innovative companies is often raised as an issue, mirroring broader patterns in Europe,” he said.
Low investment, especially in R&D, affects productivity, he pointed out.
Productivity of domestic companies is about 15pc lower in Ireland than in other small, open European economies.
Arguing for a need to raise the investment rate over the coming decade, Mr said: “In aggregate, domestic businesses and households save significantly more than they invest. Those excess savings are, in turn, exported to the rest of the world, as reflected in Ireland’s [modified] current account surplus.
“To me, that is a further signal pointing to the scope that exists to sustainably increase the domestic investment rate into the future.”
Progress on the EU’s Savings and Investment Union policy agenda is critical
He noted that bank finance is often less suited to innovative projects, because they are high risk and do not offer collateral. However, there are significant savings in the Irish economy that could be unlocked. “This is why progress on the EU’s Savings and Investment Union policy agenda is critical. That aims to foster deeper and more integrated capital markets across the EU,” he said.
The deputy governor argued that government policy should aim to increase domestic investment, partly by creating the necessary fiscal and economic space. This includes not adding too much to demand when the economy is operating close to capacity.
He pointed out that under the Government’s medium-term fiscal plan, overall net spending is expected to grow at an annual rate of 6.7pc to 2030, with current spending growing at 5pc.
“These rates exceed the potential growth rate of the economy – at a time when the economy is already performing well,” he said.
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