Election season is upon us, and no matter which party they are from, or which level of government they’re running for. You’re sure to hear every candidate tout the importance of small businesses to our economy. So the question is, are small businesses really that important to the health of the economy or is it all just political posturing? I mean, can your local deli that employs 10-12 people really be the driving force to our economy?
The answer, as you might expect, is complicated…
Politicians tout small businesses as a nod to the great entrepreneurial spirit that is revered by Americans. We love the idea that you can come up with an idea in your bedroom and make it big. People like Steve Jobs, Bill Gates and Mark Zuckerberg basically define the “American Dream”. People that are entrepreneurs and create small businesses are the key to economic growth, right? Not so fast.
A “small” business is generally defined as a business that employs fewer than 500 workers. By this definition 52% of all people employed in the U.S. work for a small business. To be honest, that number is a lot higher than I would have assumed before looking up the data. What’s really interesting though is looking at the countries with the highest percentage of people working for small businesses.
The Top 5 countries with the highest percentage of entrepreneurs (as of 2007):
5. New Zealand
Notice anything about that list? It’s basically a list of the most economically troubled European countries at the present time. (Furthering the point, Ireland is 6th. And yes, I know New Zealand isn’t in Europe.) If entrepreneurship and small business are so important to economic prosperity, why doesn’t the above list read like a who’s who of global powers?
It’s because it’s not small businesses that drive economic growth but new businesses, or better yet, growing businesses. Size of the business really has nothing to do with it. Your local mom & pop stores aren’t what’s really important to the economy, Facebook and Google are. These companies started small, yes. But the important factor is that they didn’t stay small.
The real job growth and economic impact from these companies comes as they start to take off and start to become a “large” business. It’s at this point that these companies start to create hundreds of jobs and move the economic needle a bit.
This isn’t to say mom & pop stores aren’t important. Small businesses are important for a sense of community pride. There are also studies that have shown that a dollar spent at a locally owned businesses will stay in the local economy longer and a greater portion of the dollar will be returned to the local economy. It makes sense considering all the profits from a local store stay in the local area instead of getting shipped to whatever state or country a big chain store may be headquartered in. On a national level however, it doesn’t really move the needle.
So in the coming months, every time you hear a politician ramble on about how they’re a supporter of small business, keep in mind that the size of business really means nothing as far as creating jobs and boosting the economy. It’s all about the companies that will start small, and continuously grow larger as they find success.