Yes, it is a misconception. The reason being that the literary output/tradition/heritage of a population can be connected to population sizes in several different ways. For example, within the modern publishing industry view of literature, a certain reader base is necessary for an author to be able to make a living, and the niche market for professional storytellers is even smaller (certain librarian positions being about it). Within this system, a small population with a large number of writers and a large corpus of literary works could be said to indeed have a "relatively strong" literary tradition.

Such a model of literature however is very new and very culturally dependent: many/most small societies actually have a very high proportion of individuals tasked with the maintenance and development of literature. Many extremely small communities have a professional class of poets/musicians/rememberers of history and of songs, meaning that population-wise, these communities have far "larger" literary traditions in proportion to their population than almost any major groups.

The next question is what is meant by "strong". Is this a measure of output, or of societal impact, or of perception of importance?

You should probably ask literary experts whether Ireland's writers deserve their reputation in terms quality. There have been four Irish nobel laureates for literature plus Joyce which is remarkable but they were all highly individual. Only Heaney was accepted by official Ireland in his lifetime. Joyce, Beckett and Shaw didn't even live in Ireland.

If we leave out literary merit (which I have no qualifications to judge), are there other factors helping Irish writers to international renown? An obvious advantage is that they write in English thus reaching the huge British and American markets. There is also a big Irish diaspora which has produced large Irish Studies programmes worldwide which helps Irish writers to become known. Ireland has also had significant periods when it became fashionable due to revolution, the Troubles etc.

We are also talking about Irish writers of the twentieth century. There are far fewer examples from earlier periods, not least because a lot of Irish writers of those times wrote in Irish.

Overall historians are very wary of these sorts of comparisons. There is so much subjectivity and fashion involved that it is hard to be objective.