Why Small Business Is The Engine of Every Growing Economy Big businesses work great for investors, but when it comes to building economies or creating jobs, they are a failed experiment. A wide array of research has recently proven they actually have the opposite effect; they hurt economic growth and destroy jobs. It is the small and local businesses, particularly those starting up, that data shows are the engine of economies and job growth.
Big Businesses Destroy Jobs
In 2010, the Kauffman Foundation published its groundbreaking research on who creates jobs (The Importance of Startups in Job Creation and Job Destruction – July 2010). Since then a lot of other researchers have confirmed their findings.
Using newly available data from the U.S. government called Business Dynamics Statistics (BDS), Kauffman concluded that all business more than one-year old, including those that are centuries old, are “net job destroyers, losing 1 million jobs net combined per year.” It turns out 100% of job growth actually comes from brand new companies in their first year of growth. 98% of those startups will never be bigger than nineteen employees, 99.6% will never have more than one hundred. Startups that will almost all exclusively stay small are the engine of job growth, and bigger, older businesses destroy jobs.
General Motors is a classic example. Started as a holding company in 1908, it bought companies like Buick, Chevrolet, Cadillac, Oldsmobile and many others. Every time it acquired on of those companies, GM laid off a high percentage of “redundant” workers. Everybody touts the 200,000 jobs GM provides, but if you take into account the jobs they have destroyed over the last 100 years by swallowing other companies, the net effect is more like a negative 200,000 jobs.
Big Businesses Slow Down Economies
Stephan Goetz, professor of agricultural and regional economics at Penn State and director of the Northeast Regional Center for Rural Development, says small businesses are good for the economy and big businesses are generally not. In his research, “Big companies that employ more than 500 workers and that are headquartered in other states are associated with slower economic growth.”
“Many communities try to bring in outside firms and large factories, but the lesson is that while there may be short-term employment gains by recruiting larger businesses, they don't trigger long-term economic growth.” Goetz says a better strategy to promote economic growth is to encourage local businesses rather than recruiting large outside firms. “We can't look outside of the community for our economic salvation,” Goetz said. “The best strategy is to help people start new businesses and firms locally and help them grow and be successful.”
Big Businesses Don’t Create or Innovate
One of the serious side effects of big businesses growing by acquisition is the effect it has on innovation. All of General Motors’ successful car lines were created by entrepreneurs, then swallowed up by GM, which itself has only created one internal car line in its 105 year history, the Saturn line, which failed. This is not atypical. One of the reasons large companies want to acquire small ones is because they produce 16.5 times as many patents per employee than large companies, and virtually all the game-changing innovations come from the Smalls. Big companies rarely do anything new.
Big Businesses Create Recessions
Big businesses also create recessions, something no small business has ever done. Before the 1850s, only governments had created recessions, usually by bone-headed decisions around devaluing currency, and then only rarely. In 1873, Jay Cooke’s bank failed, which took down Henry Clews bank, creating a chain reaction that took us into a depression that lasted until 1880. Sound familiar? In 1907, J.P. Morgan set off a national depression by a few very calculated comments about risky Wall Street investments intended to drive down the stock of his competitors so he could buy them cheaply. Ever since then, big business has taken over the central role from government in bringing down economies.
Big Businesses Drain National Treasuries
The bank bailouts of 2008, which started at $500 billion and ballooned to over $1.2 trillion by 2009, were deemed necessary to keep the world economy from collapsing. After accepting the money, the banks turned around and took away the credit lines of virtually every small business in America with under $1 million a year in revenue, without consideration of credit worthiness. It simply made their books look better.
This lack of credit for small businesses, those Kauffman and others claim are the engine of all job growth, continues today and is considered by many, including this author, to be the central reason we have experienced the slowest recovery since the Great Depression of the 1930s. Big businesses have always caused recessions and small ones have always brought us out. This time the Smalls are hobbled by lack of credit and have not been able to play their role.
Big Businesses Lobby to Be Seen as Small
The Small Business Administration has been just as destructive to small business. From 2008 through 2013 the SBA, under the leadership of Karen Mills, set about the biggest expansion of the definition of “small” since its inception in 1953. As a result, tens of thousands of extremely large corporations with $30-plus million in revenue and 500-plus employees were reclassified as small. The banks that work closely with the SBA had lobbied for this for years and rejoiced. Over the last couple years, you regularly see the SBA and the banks putting out press releases about how small business lending has increased. But this expansion of the definition of “small” tells a different story.
Big Businesses Receive Loans That Should Go To Small Business
The 98% of small businesses with 1-19 employees (98% of all businesses) need loans of $50,000 to $250,00. In 2008, the average SBA loan was $180,000 and 24% of them were under $100,000. In 2013, the average SBA loan was a bloated $485,000 and less than 9% were under $100,000, and declining. The SBA and their banks are making much bigger loans to a lot fewer, much bigger corporations, and claiming they are helping small businesses. Nothing could be further from the truth. The SBA is as infatuated with Big as the rest of the world.
Big Business Benefits From Government Regulation (Crony Industrialism)
Government attempts to regulate big businesses to lessen their effect on the economy have also hurt the Smalls and helped the Bigs. Dodd-Frank, which big businesses helped write, was signed on July 31, 2010. It was supposed to keep banks from being a threat to our national security. But instead it created such onerous requirements that small banks and small mortgage companies were crushed under the weight of them. The Bigs just added a few lawyers and accountants and went about acquiring the Smalls. By 2011, the top 15 banks in the U.S. were all larger than when they were deemed “too big to fail.” In an attempt to regulate the negative effect big businesses can have on the economy, they made it more likely.
What’s To Like?
So the facts are that big businesses create recessions and depressions, are national security threats, have proven to be net job destroyers, require government bailouts, encourage politicians to create bad regulations, and are infamous for crony industrialism and lack innovation.
But as long as the Bigs are the main source of political contributions for all politicians, the deck will continue to be stacked against the Smalls, which are the true engine of every economy. Every successful economy in the world is founded on 98% or more of the businesses with one to nineteen employees because small and local companies make the world go round. The sooner we get over our infatuation with Big, the better.
Chuck Blakeman, World-Renowned Business Advisor and Best-Selling Business Author of Making Money is Killing Your Business and Why Employees are ALWAYS a Bad Idea