Reading: Small Business and the U.S. Economy

The owner of Orox Leather in his shop, photographed behind the counter, helping a female customer

What Is a "Small Business"?

Before we talk about the role of small businesses in the U.S. economy, it's important to first specify what we mean by "small." The Small Business Administration (SBA) uses size standards to determine whether a business counts as small. These thresholds indicate the largest that a business concern, including all of its affiliates, can be and still qualify as a small business for most SBA and federal programs. The SBA has established two widely used size standards, expressed either in terms of average number of employees during the previous twelve months or the average annual receipts during the previous three years: five hundred (or fewer) employees for most manufacturing and mining industries and $7.5 million (or less) in average annual receipts for many non-manufacturing industries. (There are exceptions to these size standards, however; these are spelled out in the SBA’s Small Business Size Regulations). In addition to qualifying on the basis of its number of employees or total receipts, small businesses must also meet the following SBA requirements:

  • Is organized for profit
  • Has a place of business in the U.S.
  • Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor
  • Is independently owned and operated
  • Is not dominant in its field on a national basis
The business may be a sole proprietorship, partnership, corporation, or any other legal form. The definition of "small business" varies somewhat according to industry, but generally when we talk about small business we're referring to companies that employ fewer than five hundred people. 

Small Business Is BIG!

Consider the following impressive statistics:

  • The 28 million small businesses in America account for 54 percent of all U.S. sales.
  • Small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s.
  • The 600,000+ franchised small businesses in the U.S. account for 40 percent of all retail sales and provide jobs for some 8 million people.
  • The small business sector in America occupies 30 percent–50 percent of all commercial space—an estimated 20 billion to 34 billion square feet.
And, the small business sector is growing rapidly. While corporate America has been downsizing, the number of small business start-ups has grown, and the rate of small-business failure has declined.

  • The number of small businesses in the United States has increased 49 percent since 1982.
  • Since 1990, as big business eliminated 4 million jobs, small businesses added 8 million new jobs.

Economic Contributions of Small Business

Small business and entrepreneurs contribute to the larger economy in four very distinct ways:

  1. Job creation
  2. Innovation
  3. Opportunities for individuals to achieve financial success and independence
  4. Support large business by providing component  parts, services, and product distribution.


Each of these contributions is critical to the overall economic growth and prosperity of the U.S. economy.

Job Creation

Small businesses (firms with 1–499 employees) continue to add more net new jobs than large businesses (500+ employees). Through the first three quarters of 2014, small businesses added 1.4 million net new jobs. Firms with 1–49 employees have contributed the most to job growth recently. The Bureau of Labor Statistics (BLS) reported that firms of this size accounted for 39 percent of net new jobs in the first three quarters of 2014, while ADP (a national payroll-processing service) reported an even higher 44 percent for the same period. As shown in the graphic, below, it's clear that the economic recovery since the downturn of 2009 has, in large part, been fueled by small businesses. Pie chart showing share of net job creation since the end of the downturn by employment size of firm. Firms employing 1–499 people account for 74%; firms employing more than 500 people account for only 26% On January 15, 2015, Maria Contreras-Sweet, an SBA administrator, reported the following about the role of small business in job creation:

American businesses added back 252,000 jobs and the unemployment rate fell to its lowest level since June 2008. We’re in the midst of 58 month of consecutive job growth—the longest streak on record since the mid-1990s. Once again, it was not large corporations driving this train, but entrepreneurs and small businesses powering us out of the greatest economic crisis since the Great Depression.  Small businesses created nearly 2 million of the roughly 3 million private-sector jobs generated in 2014. More than 7 million of the 11 million jobs created during our recovery have been generated by start-ups and small enterprises. . . . Entrepreneurs have been our life preserver in this economic storm, because of their resilience in budgeting wisely and effectively deploying their capital.

Innovation

Innovation in the United States has been one of the driving forces in our development as one of the leading economies in the world. Innovations commercialized by U.S. companies have also benefited our society by allowing us to attain prosperity and a good quality of life. While large corporations and the federal government play important roles in the development of innovative products and services, the story is incomplete without the significant contributions and role of individual entrepreneurs and small, agile, high-growth businesses in developing innovative products in the fields of science, technology, and engineering.[3]  
Small businesses are especially leading the way when it comes to the development of "green" technologies. Small, innovative firms are sixteen times more productive than large innovative firms in terms of patents per employee. Small firms’ green-technology patents are cited 2.5 times as often as large firms in other patent applications, indicating that small firms' patents are more original and influential. In green technologies, while four times as many large as small innovative firms have at least one green patent, small firms are more likely than larger firms to have green technology as a core part of their business. 

Innovation is not confined to high-tech or green industries, either. In fact, many of the products and services that we use on a day-to-day basis are the result of innovations created in a small business environment.

Photo of Burt's Bee's Hand Salve For example, Burt's Bees is by far one of the biggest names in natural personal care products. Even though it's a multi-million-dollar enterprise, the company had very humble beginnings. In 1984, Burt Shavitz and Roxanne Quimby founded Burt's Bees, a mom-and-pop candle company in Maine. They used the excess beeswax from Shavitz's honey business to make the candles in an abandoned one-room schoolhouse that they rented, and Quimby began making homemade personal care products from the wax and other natural ingredients. In 1991, Burt's Bees incorporated, and the company started selling natural soap, perfume, and their best-selling lip balm. In 2007, company was purchased by Clorox for a reported $925 million.

In addition to inventing new products, small businesses change the way we do things. When he founded Amazon—initially a small business—Jeff Bezos transformed the way we read books, watch movies, and shop for everyday household items. The following short video explains:



Opportunities

Small business is the portal through which many people enter the economic mainstream. Business ownership helps individuals, including women and minorities, to achieve financial success and also take pride in their accomplishments. While the majority of small businesses are still owned by white males, the past two decades have seen a substantial increase in the number of businesses owned by women and minorities. From 2011 to 2016, the SBA’s flagship 7(a) loan program increased lending to Hispanic American small business owners by 65 percent, by 45 percent to African American small business owners, 44 percent to Asian American small business owners, 33.8 percent to women-owned small businesses, and 12.9 percent to veteran-owned small businesses.[4]

In 2016 the U.S. Census Bureau released its inaugural Annual Survey of Entrepreneurs, which provides annual estimates on the number of employer firms by economic sector, gender, ethnicity, race, and veteran status.  This survey found that:

  • About one-third of employer firms (33.6 percent) in the accommodation and food services sector were minority owned.
  • Among all employer firms in the educational services and the health care and social assistance sectors, 28.0 percent were owned by women.
  • About one-quarter (254,260, or 24.0 percent) of all women-owned employer firms were minority owned. More than half (137,321, or 54.0 percent) of these minority-women-owned employer firms were Asian owned.


Additional demographic information can be found in Table 1, below.

Table 1: Demographic Characteristics of Business Owners and Employees, 2013 (percent)
Owners
Age Under 35

35 to 49

50 to 88
15.6

32.7

51.7
Gender Male

Female
64.6

35.4
Race Non-Minority

Minority
85.9

14.1
Education High School or Less

Some College

Bachelor's or Higher
28.0

32.8

39.2
Location Metro

Non-Metro

Not Identified
79.1

16.7

4.2
Source: U.S. Small Business Administration, Office of Advocacy. Source data from U.S. Census Bureau, 2004 Survey of Income and Program Participation (SIPP), 2008 SIPP Wave 15 (2013 data).

Small Businesses to Big Businesses

Small firms complement large firms in a number of ways. In many industries, component parts are manufactured by small businesses and then used to assemble products bearing a big-business name. This relationship was recognized in 2012 when, as part of the Obama Administration’s American Supplier initiative, IBM created a coalition of more than a dozen corporations that together spend $300 billion on outside suppliers. This Supplier Connection effort invites businesses to register online (http://www.supplier-connection.net) for a chance to sell to large corporations. Companies with less than $50 million in revenue or fewer than 500 employees fill in their basic information, and large businesses can then search the site looking for potential suppliers. Another way that small business supports its larger counterparts is through outsourcing. Since the smaller firms can provide fast, flexible, and cost-effective services, many larger companies are passing off nonessential operations to these other companies.  Food service, accounting, customer service, and tech support are just a few of the services that small businesses provide to meet the needs of larger companies. Most obvious to the average consumer is the use of small business as a distributor for the products produced by big business. From the local deli that sells Coca-Cola from its soda machine to the fashion boutique selling Tory Burch handbags, each of these small businesses is serving the role of distributor/marketer/sales force. Without a network of small retailers across the country, big business would have to establish a massive network of outlets and a distribution chain to support these outlets. So, when a small business opens in your hometown and sells brand-name clothing, computers, or sporting goods, they are fulfilling a critical role. Big business needs small business to survive.

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