Too Many Accolades for Small Business

Small business gets more credit than it deserves for creating new jobs and stimulating economic growth during the recovery. Pro or con?

Pro: Mom and Pop Have Their Limits

To answer this question requires a deeper look into small business hiring and employment data to understand where new job growth truly comes from. There’s no question the majority of the U.S. workforce is employed by small businesses, but that doesn’t necessarily mean all small businesses create new jobs.

Your local dry cleaner, corner market, and hair salon provide services that are vital to the local economy and offer job opportunities for many in the community. However, mom-and-pop shops such as these typically are not fast-growth companies looking to hire new staff to accommodate for expansion.

Where you find innovation, particularly in the technology sector, is where you’ll find the real new-job creation engines. Our economy is driven by entrepreneurs who develop the next revolutionary mobile software applications and scientists who discover the next drugs to cure deadly diseases. Within industries where intellectual capital is a premium, you’ll find the high-growth startups driving new-job creation.

The devil is in the details, and once you look closer it’s easy to see why small, innovative startup companies contribute substantially to both gross and net job creation

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Con: Some Littles Are Bigger

Small businesses don’t get the credit they deserve for fueling our economy. Businesses with fewer than 500 workers make up 99.7 percent of all employer firms in the U.S., encompass more than half of all private-sector employees, and have generated 65 percent of net new jobs over the past 17 years, according to the Small Business Administration.

The U.S. has a global knowledge economy connected via technology, but the tech world has been given more than its fair share of credit for driving employment and has garnered more attention, energy, and possibly funding than warranted. “High tech” is after all, in the big scheme, a relatively new business.

Biotechnology, which claims media attention for growth, is not a large employer, with 95 percent of biotech firms employing fewer than 100 people.

The tech industry receives media accolades for innovation, and it is to be applauded for this. Outside capital infusion allows for hiring spikes and media attention, followed by additional capital, customers, and talent.

Meanwhile “real” small businesses such as modest-size restaurants, CPA firms, and in-home health providers keep pushing on as the true lifeblood of the economy, but they do so in relative obscurity because their story isn’t “sexy” as the media refers to such things. So yes, in reality, small businesses get far less credit than they deserve.

Opinions and conclusions expressed in the Bloomberg BusinessWeek Debate Room do not necessarily reflect the views of Bloomberg BusinessWeek, BusinessWeek.com, or Bloomberg LP.

Reader Comments

Tom Dewell

We're talking apples and oranges here. Small businesses account for most of the present jobs. But, do they create the most new jobs in a recovery situation?

Some businesses are never going to expand much: the mom-and-pop operation, small local businesses, small farms, etc. They will bring in new people only to replace people retiring or leaving for some other reason.

But many other smaller businesses are capable of expansion. The problem right now seems to be the relative difficulty in getting expansion funding. Without it, they are not going to be the engine of the recovery economy they could be.

Allow them access to those kinds of funds, and they will expand more quickly than huge corporations, which have much more bureaucracy to deal with when it comes to hiring.

Myles Frosst

Among the "intellectual capital intensive" or "high tech" firms that are small (by size of number of employees) are family farms. Not only do they generate employment throughout the economy (agriculture has greater domestic multiplier effects than most other industries given the reliance on domestic inputs, these small businesses make possible the provision of feedstock for many of the other "knowledge-based" goods producing (i.e. manufacturing) companies, large or small. Feedstock from farm businesses are inputs for renewable fuels, for phyto-pharmaceuticals, for "agbio materials" as well as, of course, food and environmental goods and services.

Do farm businesses receive too many accolades? I don't think so. Most news coverage focuses on government support, political debates on the what should and should not be allowed to occur or be used on the farm (thus hampering but not preventing innovation), and the financial struggles of some owners of farm businesses (i.e. farmers). Not nearly enough attention is paid to the possible and actual successes of farm businesses to profitably and sustainably meet consumer and societal demands.

Jack

Expansion takes capital, and from recent experience, unless you want seven figures or more, no bank seems keen to lend to even long-established companies with backlogs of orders.

Taking on that sort of exposure is exactly the wrong approach for a responsible business. Not everyone wants to leverage themselves so badly that a downturn turns into begging for a bailout.

Rick

They both miss the real issue, small local businesses, that mostly service or retail, only circulate money in local area. You need businesses that can get sales from other states, or most important for the nation, from overseas. Otherwise, local money is siphoned off to go pay for goods, fuel, and food produced in other areas. This is why manufacturing plants were key to many local economies. This was written many years ago by an economist and as valid today as ever.

John

I think Rick is right. Small business is good, but I think that in these bad economic times, it is a means of trying to make us feel like we can accomplish growth in this country while China eats our lunch.

It is ridiculous to promote small business as the way to regrow our economy, when our trade policies and greedy business practices in MBA's and business continue to pick our country clean.

Put another way: small business is taking a cue from special interest lobbying. But I guess that is the American way now.

Fimbulwinter

Small Business as a growth engine is nonsense. The best thing for small business is big business.

Look around. As more of our large businesses have moved off-shore, the loss of small business is evident by the vacancies on every street corner and industrial park.

The ironic thing is the Koreans, Chinese, and Germans know this and are prospering.

We will soon be a nation of shopkeepers but a great place for the aforementioned prosperous foreigners to vacation.

Elliot

I concur with the funding question, and my observation is that acessibility to funding is slowly increasing. Stability and fairness in the tax code would also help. If a small business owner shows an 'income' of over $250k, but most of that is in the balance sheet of their company and is actually part of their day-to-day operations (and therefore not actual salary) should they be taxed at the same rate as a professional who receives that amount as straight income? And does the tax code have to be so convoluted (at all levels)?

I think addressing these points will go a long way toward recovery.

Jim Preston

Everyone is wrong of course:-).

I was a CPA for 16 years and boom or bust there was a constant stream of new entrepreneurs coming in the door. That is the only reason I stayed in the business.

However, many small businesses depend on selling something to big biz. So what is really happening is that big biz is creating those small business jobs, as does government.

Reduce the size of governments and you wipe out piles of small businesses.

It is one ecosystem and the current liberal democracy/capitalism, regulated to stop the unethical opportunists that hang around any system, is the most successful ever created--by far.

On Deck

All businesses start small, and no matter the industry we should give them every opportunity we can to grow and reach their potential.

You don't become the world's largest retailer without first being a small discount store in Arkansas.

You don't become a 17,000-store coffeehouse chain without first operating a small Seattle store selling coffee beans.


Squeezebox

Growth is defined as an increase in economic output of goods or services, right? It seems that if you want to produce goods, your venture capitalist partner will tell you to open your factory in China so you can produce them cheaper. Why pay American wages when you can get the same skills abroad for less? The only production of goods that can't be outsourced is agriculture and mining. That leaves all the "growth" to come from services, and with fewer people working to make goods, who can afford services? You can't get your hair done if you don't have any money. Growth isn't coming from small businesses; it isn't coming period.

yes

The point of small business isn't to make people rich or expand past what they want to do. People have their reasons and their rights. But think about the people who used that job as a stepping stone to earn enough money to get what they are trying to do? That business you said that was useless helped someone do something that could be life changing to all of us. Everyone pays their share of taxes, just like you do. My mother is a surgeon, and all through college and 14 years of medical school she worked at McDonalds.

And also: The answer to a prospering economy isn't big government. The less bull small business owners have to go through to get their goods to the consumer, the better.

Beth Voltmer

Anyone who would not see the value of a small business is missing the point on several issues. First and foremost, it takes all kinds, and many a large business has been made by starting out as a small business.

Further more, not everyone is able, willing, or wanting to work for a big corporation, warehouse, factory, but instead value their community, staying close to where their children are, mother's hours, won't qualify for "higher education" careers, etc.

The small businesses are the mainstay and building blocks to keeping a small town alive and vital. Thank God for the mom and pops that offer gas and groceries, a pizza, and a movie rental. The hairdresser and bank.

I've been in real estate for many years and I would argue with most anyone that would not value the mom and pops/small businesses that add value to a community as far as real estate goes. And I think you'd be surprised at how many small businesses offer an opportunity to others who are stay-at-home parents, artists, crafters, small fabricators, or welders who do things behind the scenes and maybe sell their wares on consignment, wholesale, etc. It's far reaching.

I feel, rather than pick apart and get into the debate on who or what is more important is that we recognize that there is value in anything, and all that adds to our economy, whether it be local or widespread.

And, take it one step further--put your money where your debate is and support a locally owned and operated business whether it outwardly employs 2, 200, or 2000. I think you'd be surprised just how many people are affected by a small business.

Joe Scudder

Our economic structure is radically shifting with major losses in many small business sectors. Two big culprits are the internet and large corporations gobbling up small independents like candy.

The internet has eliminated many wholesalers and middle layers. Those eliminated have often been small businesses. Entire industries like travel agencies have been decimated by internet travel services.

Local financial institutions have been gutted of their power by selling out to large financial powers. Local financial services are a mere shell of what they were in 1985. Then, there were a lot of local jobs in local financial industries that were small businesses.

Large media corporations have gobbled up a majority of the small independent radio and television stations that were small businesses.

Independent bookstores have largely disappeared through mega-booksellers like Barnes & Noble and Amazon.com. I miss visiting the many small bookstores with interesting offerings beyond the best sellers. Those small business owners were an interesting part of my life just twenty years ago.

So, many jobs in small businesses are threatened too just as are more jobs in large business who have become so much more efficient and need less workers to operate the steel mills and auto plants that continue to exist.

Efficiency is a big culprit in the loss of jobs in small and large business. This is a factor that is rarely considered. It is much easier to blame it all on outsourcing to China.

We laugh at the notion of aliens taking over the world, but computers, robotics, and technology have already taken the livelihoods of many in our economy both in small and large businesses.

Kathy Saint

This is an interesting article and some conclusions and questions that I have drawn from the debate are:

* Small business accounts for a large percentage of jobs in the country.
Many small businesses have steady, long term employmentbut do not “grow” (there is high economic value to predictability so they should be rewarded)

Examples: dry cleaners, mom and pop grocery stores etc.
*There is exceptional value in a market sector that is small, steady, and grows = manufacturers. Add the fact that each manufacturing job creates 3 other jobs and it should be the main focus of government for creating policies to help us grow and compete.

*Without access to capital, small manufacturing businesses can’t grow and so they can't hire (plus, a manufacturer that isn’t improving their technology and infrastructure and keeping up with the times is not only not going to grow, it runs the risk of dying).

*Why is it that Wall St. investors are making billions in bonuses and paying 15% cap gains taxes on that money for doing what I call “churn” (buying/renaming/repackaging/selling/gambling on what’s hot and what’s not) and at the same time the banks who have received billions in the bailouts are not lending to small businesses like mine? (We were just turned down for a small line of credit by Bank of America in spite of the fact that we are turning a profit this year. Luckily, we also applied for a low cost loan from our state's dept of economic development and it looks like we should get it. Bank of America got billions from taxpayers and at the same time did a stealth lay off of 20,000 people countrywide and paid out massive bonuses to execs.)

*Rosa Delauro from Connecticut has proposed the Manufacturer's Reinvestment Act - H.R.6025--if this bill was in place we would be able to save our own money during good years to help us invest in technology and infrastructure and also our financials would look better if we do need to borrow money. It would reduce small businesses costs and risk. Debt for small businesses is incredibly risky--you buy an expensive machine and then have a couple bad years and you’re gone. On the other hand, when you have good years, if you don’t spend the money, as a sub-S which most of us are, you pay a third of it or more to the government so instead of saving for larger strategic purchases, many of us will make smaller buys that don’t have the same leverage potential for the company and don’t have the same external multiplier effect.

*This current economic crisis should represent an opportunity for us to effect change in tax policy that would help small manufacturers. Farmers get billions of dollars in subsidies. Big global corporations get billions of dollars in tax cuts. Wall Street gets billions of dollars in tax cuts.

*We are the true golden goose of the economy yet we are, essentially unrepresented.

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