“Small businesses vital to economic recovery go bankrupt” blares a new headlines from USA Today. Ok, so small businesses are going bankrupt. But why insert the “vital to economic recovery” assumption? It’s been constantly repeated as fact from pundits and politicians over the last few months that small businesses hold the key to the future. Even the Vatican has joined the choir, pushing for more credit for small businesses. Small businesses create 80 percent of all new jobs and drive “innovation in virtually every field,” according to a recent release from the US House Committee on Small Business.
But is all this actually true?
First of all, when many of us think of a “small business,” we think of our local bakery or bookstore. But according to the Small Business Administration, a “small business” in America has less than 500 employees. Now, where I come from, a 500 person company may not be the biggest business, but it sure isn’t a small one either. So many of the small business figures we keep hearing about may be based on a population set that isn’t quite valid.
Secondly, it makes sense to assume that we might see evidence of an economic rebound from smaller businesses first. If consumer spending inches up, restaurants may add a few more shifts before corporations start adding salaried positions to their payrolls. There may be plenty of indications of recovery from the small business sector. But the jury is still out as to whether small businesses actually cause economic growth.
Whether implicitly or explicitly stated, the “vital to economic recovery” argument really rests on the idea that entrepreneurs will save the day. We have all fallen for the romantic idea that today’s laid-off worker is really tomorrow’s Steve Jobs or Bill Gates, tinkering with the next billion dollar idea in their basements. Unfortunately, entrepreneurship may not be the economic silver bullet after all.
Here are a few of the reasons why, according to Scott Shane, a professor on entrepreneurship at Case Western Reserve University:
- To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they’re not.
- Far from being job creators, as a whole, new firms have net job destruction after their first year.
- On average, jobs in new firms pay less, offer fewer fringe benefits, and provide less job security than jobs in existing firms.
Shane concludes that the only small start-ups that actually create lasting, well-paying jobs and economic growth are the few hundred each year that receive substantial venture capital. In Shane’s view, government programs that encourage almost anyone to start a business are flawed because “they stimulate more people to start new companies disproportionately in competitive industries with lower barriers to entry and high rates of failure.”
