Although there are around 25,000 new VAT registrations a year, around 97% of small businesses stay small.

The large majority of small business owners in Ireland are sole traders. So do we need a middle layer of companies like the ones that exist in Germany in order to take our economy forwards?

Germany has a 'Mittelstand'. These are companies which employ up to 500 people and can have a turnover of several hundred million annually. Here, a small enterprise has fewer than 50 employees and an annual turnover not exceeding 10m, while a medium-sized enterprise has between 50 employees and 249 employees and has an annual turnover not exceeding 50m.

'Mittelstand' companies work on a multinational level but are family-owned, says Ralf Lissek, executive director of the German-Irish Chamber of Industry and Commerce.

"These companies are the backbone of the German economy; they are often secondgeneration companies which are market leaders in their field, offering a niche product which sells globally, " he says.

A Mittelstand company is home-grown and operates mainly in manufacturing.

"These companies are solid.

They don't really rely on foreign investment and they are generally heavy employers, " he adds.

German companies that started out as Mittelstand companies include the likes of BMW, Porsche, Daimler, Bosch, Siemens and Bertelsmann. They have since grown to become huge multinationals.

"We do not have the kind of Mittelstand companies in Ireland, like they exist in Germany, purely because traditionally in the 1920s and '30s we were an agricultural nation and skipped the phase of industrialisation, " says Kevin Sherry, head of the high potential start-up division at Enterprise Ireland.

"The structure of our economy is completely different, " says John Dunne, CEO of Chambers Ireland. "There is a whole range of different rules. Keeping costs down would be a great difficulty. We have a poorer infrastructure and delivery costs are higher."

"We do need a Mittelstand over here and are working to build it, but unlike Germany it will not focus on industry, rather on high-value-added software and services and the new economy industries, " says Sherry. These include emerging sectors such as life sciences and biotech services.

"We have a strong cadre of managers who have worked in multinationals based in Ireland. They have strong experience and skills and will be able to manage these kinds of companies, " adds Sherry.

Sherry says it is fundamentally important to any economy to develop a strong indigenous industry.

"The key focus now is to work with companies to develop mid-sized large-scale Irish companies with international potential, " he says. "That involves building management teams, helping them to develop new products and technologies and enabling them to access and penetrate international markets."

An Irish equivalent of the German Mittelstand company is Botany Weaving Mill, run by James Hackett.

Founded in 1934 by his father James Hackett, it manufactures aircraft seat fabrics and carpets. Employing just over 100 people, the company, which has its headquarters in the Liberties in Dublin, exports 98% of its output and is the second-largest manufacturer of aircraft seat fabrics in the world.

"The company has developed from being a traditional textile weaving company to one that has a leading position in the aircraft furnishing business, " Hackett says.

Botany Weaving Mill is approved by Boeing and Airbus to supply seat fabric and carpets and it supplies around 120 airlines worldwide.

"We have never felt it necessary to become part of a larger multinational group or conglomerate, " says Hackett.

"Being smaller and familyowned means we can provide quicker decision-making times and be more flexible in our response to demanding requests. As our competition is based in Germany, Switzerland and the UK, we find we can compete on an equal footing with our key competitors in what is an expanding market, " he adds.

Hackett says Ireland needs more companies like Botany Weaving. "The Irish economy is very reliant on construction and it is becoming increasingly reliant on services industries, " he says.

"Construction is ultimately dependent upon the wealth created in the economy and/or the level of government capital expenditure."

However the wealth in the economy is created by manufacturing. "Indigenous companies tend to be less footloose and tend to be here for the long term. Large foreign-owned multinationals are less loyal and more likely to move for cost or tax reasons, " he says.

Owner-managed companies tend to invest in the long term as opposed to PLCs, which have to watch every quarter's results and focus on the short term. "They tend to be conservatively run from a financial point of view, " adds Hackett.

Wholly Irish-based, all aircraft fabrics and carpets are manufactured in Ireland, which is hugely beneficial to the company and to the economy.

"The ethos of the company is to provide a solid foundation or platform for sustained and profitable growth with a view to establishing our position as a major force in the industry we occupy, " he says. "This way we will protect the longterm interests of our stakeholders . . . shareholders, employees, suppliers and customers."

In Ireland the tools are there to create a new wave of companies, says Sherry. "We have the right corporate tax rate; we have qualified people with skills; we are very pro businesses in terms of employment legislation."

Also Ireland has a strong entrepreneurial spirit, he says, adding that we should see more companies in Ireland like Quinn, Ryanair, Iona, Trintech and NorCom.

Dunne says the new model of Irish-led and owned businesses could have different activities in different parts of the world. In Ireland we will be managing the knowledge end of things, while operations and manufacturing will happen elsewhere. This will mainly be due to lower labour and production costs.

In Ireland most companies are started by entrepreneurs; they start up new projects very quickly and are not in it for the long haul. Many of these small businesses sell out to multinationals and don't grow and reach scale.

"Because of the size of the Irish market most companies enter overseas markets early in their development, " says Patricia McLister, manager of the scaling division at Enterprise Ireland. "This is a necessity rather than ambition driven. In my experience entrepreneurial ambition in successful companies is related to their ability to identify a pathway to grow the business internationally, " she says. "I don't think anyone sets out to either achieve global domination or to just manage a certain scale of business. It wouldn't work if they did because they would either be too far ahead or to nearsighted, " she says.

But 38% of small businesses close in their first year. Often this is due to management capability, the non-existence of HR or R&D facilities and the fact that owners have not taken time to evaluate and plan for the future. They often let initial growth take hold and don't have a long-term initiative.

About 70% of small companies in Ireland are in domestic services. They could start out as lifestyle businesses, where there is little growth potential. The biggest challenge domestically is if anything happens globally.

"The marketplace is small and if people don't have the same disposable incomes, they will have less money to spend on small business services, " says Patricia Callan, director of the Small Firms Association.

"Add to that increased labour costs and high energy costs, which could have a massive impact on the success of small businesses in Ireland, " says Callan.

Results from the Small Firms Association Annual Employment Survey 2007 are the worst on record, with just 7,787 new jobs being created in small business this year.

"The survey shows that the labour market is now less rigid;

those companies which are prepared to create jobs continue to be hindered by lack of skills, lack of response to advertised vacancies and unrealistic wage expectations.

There are now serious structural flaws in the Irish business model, which we must address if we are to maintain employment, " says Callan.

If you want to achieve success with an SME in Ireland, your timing has to be right, says Callan.

"Look at the big picture, improve productivity and keep costs down. Also put in place a strong management team around you and keep an eye on staff retention."