By Dr. Ron Cook, Rider University
In these uncertain economic times, what is the role of small businesses in the economic recovery? Given that small businesses have played an important part in past recoveries, should we be looking towards them again to be the “job creation engine”? However, before I examine that issue, some background information may be helpful.
Basically, over any time frame, companies are either expanding, contracting, opening or closing. Job growth will come from two of these activities- adding workers to an existing business or creating a new company. Tracking all of this activity can be, at times, a confusing task. For example, one statistic says there are around 5.7 million businesses in the US, and then another says there are about 28 million. How can this be?
Well, according to the US Small Business Admistration (SBA) and the US Bureau of Labor, 5.7 million is the number of businesses with employees, in 2009. Three things will happen to these existing firms going forward- grow, stay the same, or shrink (which may also result in closing). Growth is what we hope for but does not always mean more employment. If productivity increases, output can rise while still using the same or fewer workers. The result can be prosperous, competitive firms, but not a lot of job growth.
So we now turn to the other major opportunity for job growth – new ventures. Some of these new ventures will have employees- making them part of the 5.7 million (think new restaurant)- but many others will not. These are non-employers (think solo consulting firm) and are part of the 28 million.
Since tracking is much easier with employer businesses, the SBA regularly compares previous vs. current year of this subsector and noted a 12 percent drop in employer business births from 2007-2010. Further, they noted the size of these employer firms at creation is currently smaller than before, resulting in less overall job creation. Obviously, if you are concerned with job creation, this is not good news (regardless if the business is doing very well, as mentioned before).
Non-employer business births (i.e., self-employed) are tougher to track as they may not get recognized until tax returns are filed, as they may initially float under the radar screen. Unlike employer businesses, they are increasing in number but by definition, will not add employees- hence jobs. While some of these ventures may ultimately turn into significant employer businesses, they are often founded by individuals who are not interested in growing larger ventures, so they stay small.
So, what does the above mean in terms of small business and job creation? The recession was harsh in terms of job losses- in part because of its impact on the housing market. Therefore, we regularly hear the public policy discussion about job creation. However, I want to look at the broader picture than just our current economics condition. What will the future possibly look like for small firms and overall entrepreneurial activity? I think there will be some common trends to focus on:
First, globalization and information technology have combined to change the marketplace. With the web, companies can often tap into resources around the world, and find and deliver goods to customers easier than ever before. Therefore, to create a sustainable competitive advantage, you need to be adaptable as competitors emerge and markets change. In general, small firms are more adaptable because their key people are closer to their customers, resulting in a better chance of being in sync with their markets.
Second, the pace of change is accelerating. Not only do you have to increase awareness, but you need to adapt quicker. What this means is that everyone will need to think holistically- a big picture perspective- like an entrepreneur. Interest in this entrepreneurial mindset- which can apply to working in larger firms as well as smaller firms- is growing.
Three, the US practices opportunity entrepreneurship. People believe that a venture’s potential outweighs the opportunity cost that they may occur to pursue it. The silver lining in a difficult economy is that the opportunity cost for many people has declined, particularly for younger individuals. For example, if the alternative to pursuing a venture idea is a job offer, then you have a higher opportunity cost than someone who may not have any offers. In the latter circumstance, it can be a €œheads I win, tails I don’t lose much€ scenario. Hence, more people may try out venture ideas at a younger age.
I think you see this trend in the current economy. Whereas the number of employer business births has declined, non-employer business births have not. In general, the smaller, non-employer ventures require less resources and would likely be within the reach of more individuals. Once started, some of these ventures will prosper but if not, the entrepreneur will have gained valuable experience for their next one. As a result, if the entrepreneurial activity begins sooner in someone’s life, they may have a smaller business (as resource availability usually increases with age) and the economy may have to wait until more of these firms, and their founders, mature to see significant job gains.
About Dr. Cook:
Dr. Ron Cook is a Professor and the Entrepreneurial Studies Program Director at Rider University, where he develops and teaches upper-level undergraduate and MBA courses in team-based small business consulting, entrepreneurship/small business, new venture planning and corporate entrepreneurship. He directs Rider’s Center for Entrepreneurial Studies and heads Rider’s Small Business Institute®, where his student consulting teams have earned multiple national and regional awards for excellence. Ron is a member, a Fellow, a Mentor, and past president of the Small Business Institute® association. He has published a number of award-winning articles on small business and entrepreneurship and was the recipient of Rider University’s Distinguished Teaching Award. He serves on the Editorial Board of the Journal of Small Business and Enterprise Development and is also a member of the United States Association for Small Business and Entrepreneurship.
