Small Businesses’ Share of Employment 7
It is hoped that this chapter furthers the discussion of small businesses
as a whole, what the trends have been, what the future holds for the small
business economy, and how this fits in the larger macroeconomy. The next
section will discuss what small businesses bring to the economy, which with
a decline in small businesses would presumably be declining. This will be
followed by a section addressing the cause of small businesses’ decline in the
share of employment. Finally, this chapter presents a discussion on how gov-
ernment policies affect small businesses.
SMALL BUSINESSES’ ROLE IN THE ECONOMY
Small businesses’ 5 million employers provide significant economic and
social benefits to the economy.14 Without small businesses, we would have
less economic output, growth, and opportunity for economic mobility. Small
businesses facilitate competitive markets, play a unique role in technology
creation, and are central to net job creation.
The most indisputable role of small business in the economy is providing
competition or the threat of competition.15 This competition leads to win-
ners and losers as firms constantly strive for better ways to produce to obtain
a competitive edge. Joseph Schumpeter lauded this virtue of small business
in the process he described as “creative destruction,” where start-ups will sup-
plant existing companies and then eventually be replaced by start-ups them-
selves.16 Labor and capital will become too expensive for the unproductive
firms, and, through business failures, these resources will become available
for existing productive firms and new untested ventures. This can appear like
a wheel spinning without the car moving forward as ventures come and go
with little impact on the economy overall, but eventually a new process or
technology will be developed that will diffuse through the economy to other
firms and make the economy more productive.
Developing a new process or technology or being innovative is the goal
of many small and large firms. However, the way small and large firms carry
out innovation may differ. Large firms tend to have more formal research and
development (R&D) processes, while small firms tend to have less formal
R&D. In fact, much of the small firm R&D may have begun before the busi-
ness was founded, transforming the old adage “Don’t quit your day job” to
something like “Don’t quit your day job until you have tinkered enough to be
ready with your prototype.”
With different methods, this leads to small and large firms having differ-
ing but complementary and necessary roles in innovation.17 William Bau-
mol mentions the incremental changes of large firms versus the revolutionary
changes from small firms.18 Stated another way, one could say that large firms
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