The number of nonemployer firms has risen steadily in
this decade, from 16.5 million in 2000 to an estimated 21.1 million in 2007. An
estimated 637,100 new employer firms began operations in 2007 and 560,300 firms
closed that year.
That is what the Small Business Administration had to say
about the growth of small business over the last decade. According to the agency,
there has been a steady growth in the number of small firms opening up shop in
the United States.
As of 2007, small businesses (those with 500 employees or less) made up 99.9%
of the businesses active in the country. These small businesses also:
99.7% of all employer firms.
about half of all private sector employees.
nearly 45% of total US
generated 60% to 80% of net new jobs annually over the last decade.
more than half of nonfarm private gross domestic product (GDP).
40% of high tech workers (such as scientists, engineers, and computer
- Are 52%
home-based and 2% franchises.
up 97.3% of all identified exporters and produced 28.9% of the known
export value in FY 2006.
13 times more patents per employee than large patenting firms; these
patents are twice as likely as large firm patents to be among the 1% most
That is pretty robust activity for a sector of the economy
that some, like Scott Shane—Case Western professor of entrepreneurial studies
and New York Times small business blogger—say has been in decline for a
long time. According to Shane, we are creating fewer employer firms per capita
than we did a decade ago, we are creating fewer establishments than we were a
decade ago and fewer people are becoming self-employed than they were a decade
ago. Shane takes statistics from the SBA, the Census Bureau and the OECD
Factbook 2009 and uses them to paint a bleak picture of entrepreneurship in
the United States, blaming the rise of big box retailers like Wal-Mart for this
decline, citing how these “super efficient” stores (evidently, he has never
actually had to shop in one) have out-competed their small business
counterparts, driving them out of business.
It’s an ugly picture to be sure, but he doesn’t stop there.
No, Professor Shane goes on to say this:
Most Americans would like to believe that this country is
getting more entrepreneurial over time. While I wish this were true, the data
don’t agree. Policy makers need to take a look at these data and acknowledge
the pattern. More important, they need to understand why the rate of
entrepreneurship is declining over time.
So, now he is calling for Washington
bureaucrats to embrace this view, which, like global warming and other
hysterical claims, is not supported by real numbers. Nor is it supported by
experience. This should be no surprise, read enough of Professor Shane’s work
and you see a man who is a true tenant of the ivory tower, far happier with
nice, clean, abstract policy than he is with the messy realities of small
business and entrepreneurship that Case Western expects him to teach and that
the New York Times expects him to write about. Consider this from a recent CNNMoney.com
From a societal point of view, if you have a group of
people who do something that makes them happier but less productive (which the
data support), and you aggregate that, then entrepreneurship is an economic
drain. If the goal of the policymaker is to make everybody in your country
happy, then let everybody start businesses.
But most policymakers seek to create jobs and promote
growth. If that's your goal, you want to stop all these people from starting
marginal businesses that don't go anywhere and devote the resources to
encouraging high-growth companies. In terms of tax policy, for example, you
could argue that the government should eliminate the home-office tax deduction
- which doesn't differentiate between high- and low-performing businesses - and
beef up R&D tax credits.
Shane sees small business as a productivity drain that
policymakers should do something about. He says this in spite of the
overwhelming evidence that small business—American entrepreneurship—is the
engine that drives all economic growth. He also sees it along racial lines:
White Americans are three times more likely to start
businesses than black Americans are. And that's been pretty much the same since
1910. So what's going on here? If you measure psychological characteristics of
representative samples of whites and blacks, you see very little difference.
The main difference between white and black households is
net worth. White household net worth is 10 times that of black households on
average. Now, most
startups are self-financed. Entrepreneurs with 10 times more money take on less
risk because they invest a much smaller percentage of their net worth when
starting a business. So until you get rid of household wealth discrepancy,
you'll see that gap there.
His obvious point: Whites with money start more businesses
than blacks without money. His underlying assumption: Small business is
primarily a white activity, minorities don’t have a shot. Guess what: Poor folks
of all colors are at a disadvantage when it comes to a lot of things—including
starting a business—as compared to their more well-heeled counterparts and just
because you are white does not mean you have ten times the resources of your
black neighbor. Yet, that does not stop many of these disadvantaged people from
starting their own firms. In fact, according to the SBA,
between 1997 and 2002, black-owned small business grew by an astounding 45.4%.
Asian-owned firms saw a 12.6% expansion and Native American and Alaska Native
firms grew by 2.1%. Hispanics, however, owned the largest share of
minority-owned businesses at 6.6% of the total number of business in the
country. Do minorities start as many small businesses as whites? Probably not,
there is a financial disparity, but the small businesses that minorities start
are every bit as robust and their white counterparts and their owners are, like
all entrepreneurs, energetic and focused.
The Bottom Line
When you are discussing small business, bringing up the
entire racial issue is silly and deflects one from the real issue, which is the
strength of small business in America.
It has taken some hits of late, like every other sector of the economy, but it
is certainly not in decline. In fact, it is stronger than most, regardless of
what the good professor says, and it still provides the only real traction the US
economy has right now. So, instead of using his space on the New York Times
website to talk down the small business sector, why not talk it up?
In his CNN interview, Shane spoke of race and financing and
competition, but he missed the point of it. As Ken Blanchard, author of The
One Minute Entrepreneur put it, “Entrepreneurship is all about fire in the
belly.” That is something that Shane, for all his calculations, has no
reckoning of. You cannot chart a fire in the belly, that drive to excel, and it
does not fit into Shane’s preconceived narrative. His references to
policymakers and race, his stance that small business is less efficient and
than tax policy should be used to move the economy away from it, his very
connection with The New York Times all testify to someone with a policy-first
mindset, as opposed to an entrepreneurial or even an open and inquiring
Another point that Shane and the policy-first crowd always
miss, is that small business can and will succeed very nicely without them,
without their studies and without their interference. If Shane ever really
wants to see what American entrepreneurs can accomplish, he should be demanding
that those policymakers of his do everything they can to give small business
all the tools and freedom—mostly freedom—it needs to succeed.
If you enjoyed this post, please consider leaving a comment or subscribing to our free newsletter to receive future articles and information delivered directly to your email inbox.