Small business battles the odds to carve out the way of the future for US workers
November 29, 2007
Atlanta has become one of the fastest-growing cities in the US, thanks to exceptionally strong growth in small businesses over the past two decades.
This performance has been mirrored in the rest of the US economy. Professors at Emory University and its Goizueta Business School say that in the past decade, small business has created the majority of jobs in the US.
Companies of fewer than 20 employees account for half of non-farm gross domestic product, and yet have generated 60 percent to 80 percent of the new jobs in the past decade, according to the US Small Business Administration (SBA).
The growth of small businesses was a direct outgrowth of what was happening in corporate America, said Edward Hess, adjunct professor of organisation and management at Goizueta, executive director of the Centre for Entrepreneurship and Corporate Growth and executive director of the Value-Based Leadership Institute.
"Globalisation, corporate efficiency and the tendency towards ever-greater consolidation keep pushing more and more people out of the largest corporations," he said, "and that encourages more people to start their own businesses."
Small businesses are thriving throughout the US. In 2005 671 800 new firms were started. At the end of 2005 there were a total of 5.99 million firms with employees - the vast majority small businesses - and 19.86 million with owners but no employees. Some authorities estimate that nearly 25 million people, or 16 percent of the American workforce, are now self-employed - and that the number is likely to grow.
"Is small business the future of the American economy?" asks Hess. "It sure looks that way."
Small companies are a hidden source of strength in the stock market as well.
Big companies generally get the press, but the smallest public companies - those that become big enough to issue publicly traded stock - are actually better performers.
"Over long periods of time, small-cap stocks tend to outperform bigger-cap stocks on an absolute return basis," says Jeffrey Busse, a professor of finance at Goizueta.
But if prospects are so good for small business, why do so many investors tend to overlook the outsize contributions all these nearly anonymous enterprises make to the economy?
Name recognition, for one thing. "People just aren't aware of these companies," says Busse. Many investors tend to stick to names they know.
In addition, small-cap stocks are not especially popular for unit trusts, not only because of name recognition but because it tends to be more expensive to buy the shares of many small companies than one big company, according to Busse.
Worthy of respect
Wall Street isn't the only place where small business doesn't get the respect it should. The US government also tends to overlook the importance of small business.
In spite of advocacy by the SBA and the potential political heft of those millions of small business owners, the cost of complying with rules and regulations is actually much higher for smaller businesses than for the biggest, by several thousand dollars for each employee.
Paul Rubin, a professor of law and economics at Emory, says the difference in cost is largely because there was a large fixed-cost component in handling regulations.
"You have to hire a lawyer, you have to hire a staff," he says. But a larger company doesn't necessarily have to hire more lawyers and compliance staffers simply because it's larger.
"Many regulations are so specialised that small businesses outsource the functions, such as payroll," Carney adds.
"Others aren't susceptible to outsourcing, such as compliance ... which often requires highly specialised accounting experts within the corporation, and is virtually as expensive for small firms as for much larger firms."
Local government can be just as prejudiced against small business as big government. Economic development authorities tend to spend a lot of time and money courting large companies to open plants in their towns, according to Hess. When the town does land such a big deal, the plants do create jobs, he says, but the size of the subsidy often reduces the actual effect those new jobs might have.
Investors and government officials may not give small businesses the respect they deserve, but job hunters should.
Healthy small firms tend to be growing faster than large ones, says Ted Daywalt, chief executive of VetJobs.com, an Atlanta-based online job service for military veterans. Fast growth translates into more opportunities for promotion.
Indeed, taking a job at a small business may not be any more risky, statistically, than accepting one at a large firm.
Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of Wharton School of the University of Pennsylvania
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