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How can small businesses promote economic growth?

Dr. Shay HershkovitzFeb 13, 2012

In today’s uncertain economy, it’s better to make things happen rather than to wait for them to happen. When a person opens a small business he is creating financial independence - helping not only himself, but also the economy and society, by creating jobs and lessening the reliance on the welfare system. Starting a small business is all about initiative and entrepreneurship.

Entrepreneurship often kicks starts economic development which is a synonym of growth. Many small businesses are founded not only to provide income based on an existing profession or product, but also as a way to introduce new processes, ideas and products to the market. Only 13 years ago, a small business called “Google” - operating out of a garage in California, forever changed the way we use the internet. With today’s world being globally connected, a small business in Sweden can have an immediate effect in the US, Portugal or even Thailand.

As a matter of a fact, whenever someone criticizes small businesses, claiming their output is inferior to that of the giant corporations and that a country will be better off investing in large corporations that will put the money to better use (from the macro economy perspective), he needs to be reminded of one thing: almost all businesses start small. A research by the U.S. Census Bureau’s Statistics of U.S. Businesses (SUSB) shows that over the last 20 years, about 95 percent of new employer firms started with fewer than 20 employees.

However, the same research also shows that employer firms with 20 employees or less also account for 95 percent of closures. To that the critiques will say that most small firms start small, stay small and close after a few years, thus having a negative effect on growth. The truth is that this cycle doesn’t really effect growth and employment ratings. The Census Bureau’s Business Dynamics Statistics (BDS) shows that firms created 70.5 million jobs in their first year of existence between 1977 and 2000; 57 million jobs remained by the time those firms reached their fifth year. So as far as “staying small” - opening a business has greater consequences for job creation than expanding a business does.

The claim that new businesses close quickly is also weak: about half of new firms survive five years or more. Of course there is always the additional argument for the value of new firms, which should be repeated, that almost all fast-growing firms started small, as did most large firms.

But we already knew that, didn’t we?