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MARCH 22, 2000

The Big Problems with Small Business Research

In a Q&A, Vanderbilt Professor Richard Oliver talks about the difficulty of doing studies in this field


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Everyone is interested in small businesses these days. So why is it so difficult to find good research on them? Academics, corporations, and trade groups emit a steady stream of papers on entrepreneurial companies, their contributions to the economy, what fosters them, what kills them.

Alas, few shed much real light on small-business dynamics. Some base dramatic conclusions on apple-to-oranges comparisons, ancient data, or tiny survey samples. Others don't define a small business -- or define it too broadly to draw meaningful conclusions. These failings are unfortunate, since both business owners and government policymakers could benefit from good research. (See "Related Items" at right for some examples of small-business studies that Business Week frontier Online has looked at critically.)

To understand what makes small-business research so difficult, Business Week Online Reporter Jeremy Quittner spoke with Richard W. Oliver, professor of management at Vanderbilt University's Owen Graduate School of Management, who led the team that produced "The Future of Small Business," a study sponsored by American Express, IBM, and National Small Business United, a small-business advocacy group. The study, which was released in mid-March, focused on how changing demographics in the U.S. will affect small business.

The study concluded -- among other things -- that small businesses will have an increasingly tough time competing with big business for labor in the coming years. It also asserted that immigrants will make up an increasing percentage of entrepreneurs and the small-business workforce. Here are edited excerpts of their conversation:

Q: Why is it so difficult to develop hard data about small businesses?

A:  There are some immense difficulties. One is: How do you define a small business? If you pick 500 employees and under, then you have one set of data, but a business that has 501 employees -- is that no longer small? We decided to take kind of a mushy definition. We are dealing with huge and diverse numbers, and some are very hard to get a hold of.

Q: What are some of those numbers?

A:  Like how many women-owned businesses there are. [Also] one year, [a company] may be a small business by an abstract definition. By the next year, it is already out of that category. Some big businesses could be made up of smaller, individual businesses. It is irrelevant that they are part of a bigger unit. What they do is compete as a small business.

Q: Federal studies use very specific numbers to define small business. Why don't you?

A:  Everybody has his own definition. If you go to the Commerce Dept., they will define it one way. If you go to the U.S. Labor Dept., they will define it another way. Ask them why they don't standardize. We simply decided that we would try to do a quantitative and qualitative look at the future that small businesses will operate in and some of them defy narrow definitions.

Q: But is your study more than anecdotal evidence?

A:  It isn't your standard, government-issued "Here's the labor-market forecast." I would say there is a breed of research called scenario analysis or jury of opinion. I proposed a scenario of what might happen to small business in 15 years, and I laid the scenario out for the five researchers.

They brought that back to reality by looking at some statistics and numbers. Federal data was the chief source -- the Small Business Administration, Census Bureau, Labor Dept., and the Commerce Dept.

Q: Were there advocacy pressures for your study to turn out a certain way?

A:  We were told from the beginning that the sponsors did not want us to take any advocacy position. I would say that the [researchers] whom we selected had a bias, and I would say the bias would be [in favor of] small business. And I have some personal perspectives on things like immigration. I am an immigrant.

Q: Is there political pressure from small-business groups not to offend with real data that might suggest small business is not doing the incredible job that everyone says?

A:  You are asking me about motivations or what might have gone on behind the scenes in some other study. I can't speak to that. I can only speak to ours. Never once did anyone say, "Let's make it look this way" or "Let's try not to offend." We feel that the statistics that we are presenting are really rocking the boat a little bit. We have suggested that things are not going to be all that rosy for small businesses because they are going to have a hard time competing against bigger ones.

Q: There's a fascination with small businesses these days. The underlying assumption is that they are the engine of the New Economy. Is there any real proof?

A:  I think the reason you hear such strong advocacy about small business as a job-creating engine and as an important part of the economy is that for a period of time -- in the 1980s and part of the 1990s -- the focus was on larger businesses in the U.S. and their struggle with global competitors. The smaller businesses got underrepresented in the discussion. Then you saw small businesses trying to wave the flag and say "We play a vital role in this economy."

What really came to light in this study is that small businesses play a vital role in job creation, but so do big companies. I don't think anybody was saying that small companies are better than big companies. Quite the reverse, actually. I think what we were trying to say was that there is an interrelationship between the two. Small businesses have become a safety valve for large businesses.

Q: Where in your study did you demonstrate this scientifically?

A:  You are asking me a difficult question. Were there numbers? No. I arrived at the conclusion by looking at the interplay of the five forces that we examined: commerce and competitive issues, financial issues, the technology issues, the labor force issues, and the demographics.

For instance, all of a sudden you have a bunch of small businesses that are outsourcing human resources or purchasing. It turns out they are doing activities that a larger business would have done internally in the past but were slowing the larger business down. So they have turned to smaller, innovative businesses who can do these things and free the larger business to concentrate on what it does best.

Q: Will the changing demographic makeup of the workforce affect small businesses more than large businesses?

A:  Yes. Large businesses in a very tight job market have the opportunity to offer bigger salaries, to offer more benefits, etc. But small business can provide flexibility. The new workforce [has many] married women with children, immigrants, and others who need that flexibility.


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