THE ROLE OF SMALL BUSINESSES IN THE ECONOMY SMBs are a very important sector of the U.S. economy. For the purposes of simplicity and consistency, we define a small business as having less than 500 employees in all of the industries or business locations in which the firm operates. Eventually some small businesses grow to become large businesses. Importantly, small businesses are a dynamic force in the economy, bringing new ideas, products, technology, processes, and vigor to the marketplace. They fill niche markets and locations not served by large businesses. Large firms, on the other hand, generally provide stability to the economy. The differences in the small- and large-business workforces are, at least in part, a result of the inherent differences in small and large firms. Small firms are often younger (indeed, they are sometimes recent startups), and more apt to be in industries with lower economies of scale, such as services or technology. Small firms can represent a life stage before economies of scale are reached (or hoped-for future growth is attained), or they can be a stable anchor in the marketplace. These age, location, and industry effects constitute the basic differences between small and large firms. They can lead to different workforce needs and different resources to attract workers of various education levels and occupations. Small businesses are usually entrepreneurial. The creation of a new business or enterprise is an integral and significant activity in a growing U.S. job market. Just as new establishments are created, some existing ones expand, contract, or dissolve operations altogether. Countries that have the capacity and wherewithal to accommodate high rates of business formation and dissolution will be best positioned to compete in global markets. SMBs have unique requirements in their business infrastructure, as illustrated in Figure 16.1. -
Multi channel access— SMBs need an on demand business environment and a full range of channels, information requirements. -
Customer-centricity— SMBs concentrate very closely on their customers and need to react, change, and be agile as the market changes. -
Premium services— Those vendors who provide services and products to SMBs need to achieve multiple layers of services—anytime and anywhere. Consistency is the key. -
Best of breed— The products and services that SMBs use in their daily business need to be the best there is. Figure 16.1. Small business needs. 
Small businesses provide a competitive environment and prompt the economy to evolve by introducing new ideas, products, technology, and processes. Small businesses are the stock from which large businesses grow, the first job of many new workers, and an opportunity for their owners to achieve the American Dream. Small firms represent about 99 percent of employers, employ about half of the private sector workforce, and are responsible for about two-thirds of the net new jobs. While small firms contribute substantially to the growth of the U.S. economy, the number of small firms does not change dramatically over time. This is because the process of growth entails some small firms evolving into large firms and some large firms shrinking into small ones. The statistics, trends, and demographic makeup of the U.S. small business market is both interesting and surprising. Small business effects on the economy can be dramatic. There are an estimated 22.9 million small businesses in the United States: Those businesses: -
Represent more than 99.7 percent of all employers. -
Employ more than half of all private-sector employees. -
Pay 44.5 percent of total U.S. private payroll. -
Generate 60 to 80 percent of net new jobs annually. -
Create more than 50 percent of nonfarm private gross domestic product (GDP). -
Supplied 22.8 percent of the total value of federal prime contracts (about $50 billion) in FY 2001. -
Produce 13 to 14 times more patents per employee than large patenting firms. These patents are twice as likely as large firm patents to be among the one percent most cited. -
Employ 39 percent of high-tech workers (such as scientists, engineers, and computer workers). -
Are 53 percent home-based and 3 percent franchises. -
Made up 97 percent of all identified exporters and produced 29 percent of the known export value in FY 2001. Eighty-five percent of small businesses are expected to conduct business via the Internet by the end of the year 2003. Small business information technology-producing industries contributed more than one-third of total real economic growth between 1995 and 1998. |
