Small business – the engine of the US economy?

Politicians and the media like to spout what seems to be conventional wisdom that “small business is the engine of the US economy” and that these businesses create the most jobs.  But is that so?

One of the criteria describing Collaborative Xceleration’s target market niche is “small companies looking for exponential growth”.  So, recently I’ve been doing some research into how many of these companies exist in the U.S., and what their geographic distribution is (this is also input to deciding where we are going live!).  As part of that research, I’ve come across some interesting data that addresses the “engine of the economy” statement which I thought I would share with you.

In this post I’ve decided to focus on the jobs side of the numbers, because the politicians and the media seem to be fixated on employment/unemployment numbers.  (High revenue growth doesn’t necessarily mean commensurate job growth – just look at hedge funds and ‘app’ developers, for example.)

In a recent New York Times article – Small Companies Create More Jobs? Maybe Not (February 25, 2012) – Floyd Norris discussed new U.S. Bureau of Labor Statistics reports showing the percentage change in private sector jobs.  The statistics cover the period from April 1990 to March 2011, showing a 19% overall rise in the number of private sector jobs during that period.  The numbers are also broken down by firm size: small – 1-49 employees; medium – 50-499 employees; and large – 500 or more employees.  During the period reported, small business jobs grew by 10.5%, while large company employment grew almost three times as fast at 29.2%.  These numbers run contrary to the belief that small businesses create a larger percentage of new jobs.

Maybe people are misled by the fact that there are so many more small firms than large firms?  For example, in other data from the Bureau of Labor Statistics, in 2010 there were ~4,568,000 firms (95.19%) with 1 to 49 employees, and only ~19,000 (0.38%) with more than 500 employees.  Even though the firms with 500+ employees had 45.29% of the total employees.

On the other hand, the Small Business Administration has some interesting contrary information.  In 2008, they published a report High-Impact Firms: Gazelles Revisited. The gazelles in the title referred to work done in the 1980s by a small business research pioneer, David Birch.  Birch’s gazelles were firms with rapid revenue growth – he found that they were also responsible for most employment growth.  The SBA report examined firms with significant revenue growth and expanding employment, which they then termed “high-impact firms”.  An updated version of High-Impact Firms was released in July 2011 (http://www.sba.gov/advocacy/847/17231).

In the 2011 update report it says that high-impact firms “represent about 5-7 percent of all employer firms”, and, as you can see from the table below, they account for ALL of the private sector employment growth over the 14 years covered.

One of the report’s highlighted statements was:

“The data suggest that local economic development officials would benefit from recognizing the value of cultivating high-growth firms versus trying to increase entrepreneurship overall or trying to attract relocating companies when utilizing their resources.”

I have to say, that I still do things to help “increase entrepreneurship overall” – after all, you don’t necessarily know where the next ‘high impact’ idea and business is going to come – but my business focus is on these ‘high impact’ firms.

So, lets break down the ‘high-impact firms’ and see if their data supports the “small business is the engine of the economy” statement.

As we can see from the table above – Job Creation by Segment – while the small companies (1 – 499) made up 99.77% of the total HIC companies, they provided 55.60% of the job growth; while the large companies at 0.23% of the firms provided 44.40% job growth.  I would suggest that this makes the large ‘high-impact firms’ as important an engine for the economy as the rest of the ‘high-impact firms’ – certainly it should be easier to target 842 companies for business development support than 350,996!!

So, are small businesses the “engine of the economy”?  If the growth they provide is only 55.60% of the job growth and that growth comes from only 7.69% of small businesses, then I would have to say NO!  That semantic brush is too wide for me – at least from a job creation point of view.  Maybe looking at revenue growth or innovation the view might be different; but that will have to wait for another day!

So, is your business ‘high-impact'[superemotions file=”icon_biggrin.gif” title=”Big Grin”] or is it ‘low-impact'[superemotions file=”icon_sad.gif” title=”Sad”]?

Excellent Execution