The Impact of Small Business on the American Economy - Term Paper Example

? Impact of Small Business on the American Economy Your al Affiliation The paper explores small businesses in United States and their impact on national economy. Numerous books, articles, and speeches of prominent people in small business sector are consulted for research and reading. All the research material discusses small business, its impact on national economy over a period of time, and what needs to be done to enhance the positive impact. During research, it is realized that better government policies and further investment can work wonders for small business and consequently, for U.S. national economy. Impact of Small Business on the American Economy United States probably has the largest small business sector in advanced western economies. Small businesses play several auxiliary roles in the U.S. economy; these roles vary depending on stage of evolution and overall economic state. In 1990s, small business held nearly half of total private sector employment and production (Gaddy, 2002, p.182).When it comes to defining what constitute a small business, there is no standard consensus because it varies from country to country. According to U.S. Census Bureau, in United States, nearly 80% of small businesses have less than twenty employees (2004). Earlier than 1970, the term small business was rarely used in media or business news. It became popular after the publication of David Birch’s work. His work’s summary in a one liner that made small business famous was, “two third of all the new jobs created were produced by firms with twenty or fewer employees” (As cited in Dunkelberg, 1995). Small businesses serve as backbone of the U.S. economy. Approximately 25 million small businesses provide jobs for half of private employees in America. For more than a decade, small firms proved to be an economic steamroller for the U.S. national economy. During this time period, small businesses created nearly 75% of all new jobs, innovated more than 50% of new technologies, and generated over 50% of private GDP. Moreover, small firms laid stable economic and social foundations which were integral for American towns and communities (Manzullo, n.d.). Global trade by small businesses also boosted in the similar time period. Today, more than 250,000 small firms export; it is thrice the number of companies exporting a decade ago. Several small businesses work for exporters indirectly, such as, local suppliers and subcontractors working for larger firms. Every one from three export sales dollar is invested back into small business. However, the numbers should multiply rapidly in order to cope with the challenges posed by globalization and trade imbalances (Manzullo, n.d.). Job Opportunities Small businesses contribute enormously for the U.S. economy and society. Most evident of them all is new job opportunities created by small businesses every year. According to an estimate, on average, three of every four jobs are offered by small companies having less than 500 employees. Considerable share of these jobs are created by small companies having four to fewer employees. Small firms support and contribute to numerous industries, such as, restaurants, service businesses, amusement and recreation, wholesale trade, engineering, management services, and construction trade contractors (as cite in Boone & David, 2010, p.194). Boone and David (2010) further state: Small businesses form the core the U.S. economy. Businesses with fewer than 500 employees generate more than half nation’s gross domestic product. Small firms represent 99.7 percent of all the employer firms and pay more than 45 percent of the total U.S. private payroll. Over half of firms are home-based, while 2 percent are franchises. In addition, small businesses employ almost half of the nation’s private nonfarm workforce. (p.194) New Industry Creation Small business sector provides an outlet to entrepreneurial innovation and ideas which generate completely new industries. News businesses and industries fuel local economies, create new and improved products, and provide new services. Most of the 21st century’s huge high tech firms started as small business, such as, Microsoft, Yahoo, Cisco Systems, and Google (Boone & David, 2010, p.195). Source of Innovation Small businesses are a huge source of innovation and new technology development. According to an estimate, as cited in Boone & David (2010): In a typical year, small firms develop twice as many product innovations per employee as larger firms…In addition; the fact that small firms are a richer source of innovations is even more evident than these statistics show because large firms are more likely to patent their discoveries. (p.195) 20th century’s most prominent innovations developed by small businesses are; airplane, audiotape recorder, the optical scanner, double-knit fabric, zipper, soft contact lenses, and personal computer. In 21st century, the most important area of small business innovation is security of people and information (Boone & David, 2010, p.195). Efficiency and Dynamics Bo Carlsson highlights the importance of small business for economy in terms of efficiency and dynamics. For the sake of macroeconomic growth and stability, small firms are required to provide variation and entrepreneurship. In fact, it is crucial from economic growth perspective. Static effects of labor division between large and small firms are associated with increased number of small firms, while dynamic factors are associated with subset of entrepreneurial firms. He concludes that small firms certainly perform better than large firms in certain things. Efficiency of the economy is accelerated by labor division in small and large firms. The argument is valid, particularly in case of innovation (Acs and Audretsch, 1988) and production (Pratten, 1991) (As cited in Acs, 1999, p.13) A high rate of new entrant firm in economy is associated with the dynamics of economy. Small firms provide a huge share of entrepreneurship in the U.S. economy. It is due to the fact that highly structured organizations prove inefficient while dealing with changing environment and circumstances. Therefore, young and small firms serve the purpose of variety production and elimination of stagnation in the economy (Acs, 1999, p.13-14). Opportunities for Women and Other Groups According to U.S. Department of State (n.d.) small businesses are continuous source of dynamism for American economy. It has increased opportunities for new groups into the mainstream economy, such as, women and minorities. Women participation level is particularly high in small businesses. Between 1987 and 1997, women owned businesses rate increased up to 89 percent which amount to nearly 8.1 million. Other groups, such as, older workers and par-time job seekers are also accommodated by small businesses. Small firms not only provide jobs for half of American workers but also for the youngest and the oldest people in country. They boost economy and generate employment not only for those who find it difficult to get job in larger firms but also welfare recipients (as cited in Boone & David, 2010, p.195).Small firms work as integral mechanism which introduces and regulates millions in economic and social mainstream of American society. It is the access point to enter the mainstream for women, immigrants, and minorities. In this evolutionary process, community provides the social bonding and networking for different small businesses in a dynamic economic system (Acs, 1999, p.17). Community Development and Rehabilitation Considering their limited budget, small businesses are often located in remote or economically depressed areas. Such ventures assist the economy in rehabilitation and poverty reduction by generating job opportunities in addition to providing assistance and training to locals. For instance, Dancing Deer Bakery is located in inner-city Boston where they not only hire local people but also offer them partial ownership through educational support and stock options (Boone & David, 2010, p.195). Economy Renewal One of the indispensible contributions of small business is that it is a vital part of renewal process which defines and diffuses through market economies. Extensive experimentation and resulting innovation lead to technological change and productivity enhancement. They give rise to change and competition which defines market structure. The American economy is not the established one, it is dynamic and receptive to change and modification (Acs, 1999, p.16). Undoubtedly, small or young businesses play a major role in continuous renewal process of the American economy. Creative Destruction Newer and smaller firms flourish and assist the economy by destroying the market of already established competition. Joseph Schumpeter attributes it to be a creative destruction which is vital for a successful entrepreneurial environment. Economies which protect market and profits of established larger firms tend to block the essential process of creative destruction which is crucial for growth. A clear indicator of economic and social well-being is continuous creation and development of small ventures from most if not all segments of society. Government policies play very important role when it comes to the facilitation of this process by removing the barriers to entry and exit and minimizing the costs involved. In addition, anti-competitive behavior from larger firms can also be discouraged by effective policy making (Acs, 1999, p.17). Economic Revival and Recovery Serious economic conditions in U.S. are evident from statistics. According to the Bureau of Labor Statistics, unemployment rate in United States in August 2009 was 9.6 percent while it is estimated to be twice the national rate among Native Americans according to the Harvard Project on American Indian Economic Development (as cited in Johnson, 2009). Furthermore, some sources report Native American unemployment rate as 80-90 percent in some states (Johnson, 2009).Moreover, low number of Native American or Alaska native-owned businesses is alarmingly increasing. According to Native Americans in Business, Economics and Commerce, merely 206,125 American Indians and Alaska Natives out of approximately 2.5 million own their business in 2002(as cited in Johnson, 2009). In this unreliable economic condition, small business is the only solution for revival that can contribute to the national economy. Small firms’ growth is integral for economic restoration. With 10% of Native American and Alaska natives involved in their business, we can imagine the huge impact of their involvement in small business at 60 to 70 percent. Moreover, it will create new jobs, decrease unemployment, provide localized and bias free environment for Native Americans, and contribute to the national economy. Typically, an average American can not influence any major change in economic system at national level. However, small businesses provide them the opportunity and power to act as leaders and contribute to the U.S. economy by exploring new and challenging forms of entrepreneurial ventures (Johnson, 2009). According to Pianalto (2010) small businesses are anything but small when it comes to early stages of economic recovery. Its support for the U.S. national economy has been enormous in last 15 years and being the most innovative and flexible part of economy, it still has lot more to offer. Productivity Cycle Small firms serve in many ways as “R&D” for the American economy. Any individual can start his own business and through this simple mechanism, new ideas, new and developed ways to do things and new products are made to serve new niche markets. More efficient solutions equate more profit which becomes a stimulus for further expansion and investment in the market and formation of competition. Business experiments that fall short lead to bankruptcy and termination but invested resources are not wasted, they serve society in a way or the other. These resources are “repriced” and redistributed in yet another entrepreneurial experiment. By repeating the process continuously, resources gather competitive return which symbolizes the fact that these resources are productively redistributed. Considering the whole economic process is integral for understanding entrepreneurial change for success in the American economy (Dunkelberg, 1995). According to NFIB’s Quarterly Economic Survey of Small Business (as cited in Dunkelberg, 1995) “Taken alone, U.S. small business would constitute an economic entity exceeded in size only by Japan, and, of course, the total U.S. economy”. Considering its multiple role in different economic settings, it is hard to draw a consensus on the definition of small business. However, in the United States, small businesses are considered to have less than 20 employees. Small businesses are considered to be the backbone of the U.S. national economy for what it has offered and yet to offer. It provided support to economy even in the hardest times by creating new jobs, supporting established businesses, developing new ideas, products, services, niche markets, developing innovations and technologies, by supporting and assisting disadvantaged and kept the economy progressing. However, its potential is still not completely tapped. Better policies, favorable terms and conditions, and more investment in small business sector will have great impact on not only our recession prone economy but society as well. Work cited Acs, Z.J. (1999).The new American evolution. In Acs, Z.J (Eds.),Are small firms important?:their role and impact(13-14).United States: Kulwer Academic Publisher. Boone, L.E. &David, L.K. (2010).Contemporary business (13th ed.).Danvers, MA: John Wiley & Sons, Inc. Dunkelberg, W.C. (1995, January).Presidential address: small business and the U.S. economy. This Presidential address was given at annual meeting of The National Association for Business Economists (NABE) in Washington, DC. Cengage Learning 30(1) Retrieved from http://www.freepatentsonline.com/article/Business-Economics/16348995.html Gaddy,G.C.(2002).Small business and the macro economy: some observations. In Committee on Small Innovative Firms (Eds.), Successes and Difficulties of Small Innovative Firms in Russian Nuclear Cities: Proceedings of a Russian-American Workshop (182).Washington, DC: National Academy Press. Johnsons, S. (2009).Small businesses can have big impact. Retrieved from http://alaskadispatch.com/voices/tundra-talk/2749-small-businesses-can-have-big-impact Manzullo,D.A.(n.d.).Small businesses drive the global economy: let’s make it easier for small U.S. firms to trade. U.S. House of Representatives Retrieved from http://www.ad-mkt-review.com/public_html/docs/fs057.html Pianalto, S. (2010, February).When the small stuff is anything but small. Speech by President and CEO of Federal Reserve Bank of Cleveland at Dayton Chamber of Commerce Governmental Affairs Breakfast in Dayton, Ohio. Retrieved from http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm U.S. Census Bureau. (2004).Statistics about business size (including small business) from the U.S. Census Bureau. Retrieved from http://www.census.gov/epcd/www/smallbus.html U.S. Department of State. (n.d.).Small businesses and the corporation: United State Economy. Retrieved from http://countrystudies.us/united-states/economy-4.htm Read More