Is Support for Small Business Misplaced?
Summing Up Is small business overhyped as a panacea for our economic troubles? Jim Heskett's readers don't think so.
Do Concerns About Job Creation by Small Businesses Miss the Point?
Judging from responses to this month's column, there appears to be a visceral reaction to any suggestion that small business fails to live up to the many promises that have been attributed to it, including job creation.
In fact, job creation appeared not to be a major concern of most respondents. For example, Jade Chang Sheppard said "Small business … is where society's culture, motivation and inspiration come from. It is the American Dream" Other comments suggest that the dream is not confined to America, but also includes Finland (according to Nina Rautiainen), the UK (Andrew Swayne), and India (Kamil Kumar Sopory). Ravindra Edirisooriya put it succinctly: "These 'small' businesses did not go into business with the idea of creating (jobs) …" Ajay Kumar Gupta suggested that, "(small businesses) … help in reducing unemployment, illiteracy, poverty, and unsocial practices."
Several responses delved more deeply into issues associated with bigness and smallness. Edware Hare commented that "Better we should understand when and where 'bigness' actually really matters. Small businesses often answer unmet wants and needs that they see on a local level." Gopal Padinjaruveetil asked "… where is the wealth … created? In the case of small business the wealth is created in the local economy." Gerald Nanninga commented that "… it is no longer big business versus small business. (Because of outsourcing) It is big networks made up of small partners. And the way to make this type of enterprise thrive does not really follow either model (big or small). It is a third way."
The importance of small business for innovation, in spite of relatively small investments in research and development, was emphasized by several respondents. Mark Hopkinson remarked that "most big companies … rely for their tech pipeline of new products on the innovation that comes from small business, acquiring companies, products or rights to market as their lifeline to continued survival." Mark Gomulka, found the question of whether or not it is "time to recognize the advantages of bigness when it comes to employment," posed in the column, as "literally infuriating," He added that "If we want innovation, free thinking, and the spirit to win then the obvious answer (to the question) … is NO!"
Other comments emphasized values of small business for management development. David Lindsay commented that "… managers evolve their wisdom through responsibility and decision-making which is far more empiric with a small business …" Tom Dolembo said, "Many small businesses are learning machines, every day creating a new lesson, or crisis with opportunity."
Responses were quick to point out many perceived benefits of small business while only occasionally mentioning job creation. They raise several questions: Are efforts to point out possible misconceptions about job creation by small businesses off the mark? Do they miss the point? What do you think?
In the late 1990s, a group of faculty at the Harvard Business School proposed a new approach to the teaching of a subject for which the School had been well known for decades: general management. The old way, centered around cases involving the leadership of large corporations, was not working. (I can speak from experience, because I led one of the unsuccessful efforts.) Student interests had shifted to the world of startups and self-employment. So a required course called The Entrepreneurial Manager was created.
TEM focused on financing and development of new ventures, with a few cases dealing with entrepreneurial managers in large organizations included. The course quickly rose from one of the lowest-rated in the required curriculum to the highest.
The course orientation fits with popular conceptions of the world of small business, offering visions of highly energized individuals passionate about doing their own thing developing new ideas and creating most of the jobs in an economy. This vision extends back in history, at least to the farms of Europe and the US. It helps explain laws to protect small business from the ravages of the A&Ps and Walmarts. It increasingly drives politics as well as government policy. It is especially attractive at times of low growth and low employment, because this ideal of small business as the center of economic development can be held up as a possible antidote to macroeconomic stagnation. That's why a recent article by Charles Kenny caught my eye.
Kenny, a fellow at the Center for Global Development and the New America Foundation, cites a growing body of evidence that suggests that a reassessment may be in order. Consider the conclusions from some recent research: Small businesses may not be a strong source of prosperity. Not only are they less productive than their larger counterparts, they have, according to a World Bank study, a lower rate of productivity growth because they invest only a small proportion of total R&D money. They therefore charge higher prices and pay lower average wages.
An analysis of census data by economists Erik Hurst and Benjamin Pugsley found that companies employing fewer than 20 people made up 90 percent of the six million businesses with one or more employees in the US in 2007. Most were small entrepreneurs creating what might be considered "lifestyle" jobs for themselves, intending to stay small and avoid employing many others. Eighty percent that were studied in detail didn't create a single job between the years of 2000 and 2003. Another study, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, by Scott Shane, found that while small businesses create more jobs than their larger counterparts, they also destroy more jobs. While they created jobs in the year of their founding, they netted out destroying jobs in years two through five as most of them failed, suggesting less job security than in larger organizations.
At the international level, economists Rafael La Porta and Andrei Schleifer conclude that a nation's wealth is inversely proportional to the share of jobs provided by small businesses. Again, this is due in part to the lower productivity of such jobs.They conclude, as have some others, that a better strategy for job creation would be to attract large multinational corporations with better-educated managers and more stable financing. In fact, large global companies to which jobs were formerly outsourced have begun setting up operations in the US and United Kingdom.
Is it time to recognize the advantages of bigness when it comes to employment and economic development? If so, what does this mean for government policy? Are tax policies and other support for small businesses misguided? Does it suggest a return to an emphasis on big business management by pioneers in MBA training such as Wharton and Harvard? What do you think?
To read more:
Erik Hurst and Benjamin Pugsley, What Do Small Businesses Do?, Brookings Conference on Economic Activity, Fall, 2011.
Charles Kenny, Rethinking the Boosterism About Small Business, Bloomberg BusinessWeek, October 2011.
Rafael La Porta and Andrei Schleifer, The Unofficial Economy and Economic Development, National Bureau of Economic Research Paper No. 14520, December, 2008.
Scott Shane, Case Western Reserve University, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By , 2009.