The American Small Business: Alive and Well

A study by the Harvard Business School reveals some intriguing insights into the makeup of small business in America. The study concludes that that the U.S. economy has made significant progress in recovering from a financial crisis of unusual depth and duration. But, as America passed the five‐year mark on its journey to recovery from the recession, it is clear that the U.S. is still gripped by an economic anxiety. Small businesses have to be at the center of this microeconomic competitiveness strategy because they are America’s job creators. The facts are that small firms employ half of the private sector workforce, about 120 million people. Since 1995, small employers have created about two out of every three net new jobs—65 percent of total net job creation. Small businesses are also instrumental to our innovation economy; small firms produce 13 times more patents per employee than larger firms and employ more than 40 percent of high technology workers in America.

Analysis of Census Bureau data shows that there are about 5.7 million employer establishments with fewer than 500 employees. The vast majority of these establishments are modest in size, with more than one‐half of them employing fewer than 5 employees and nearly an additional one‐third employing between 5 and 19 employees. In fact, of the 5.7 million active employer businesses, it is estimated that about 5 million are “Main Street” or “mom and pop” small businesses. These are the dry cleaners, mechanics and medical clinics that form the fabric of our communities. Many of these businesses exist largely to support a family and are not principally focused on expansion. While these businesses have high churn rates, opening and closing frequently, and contribute less to net job creation than high growth businesses, they are critical to America’s middle class.

Additionally, there are an estimated 250,000 to 750,000 small businesses that are part of commercial and government supply chains. These businesses are often focused on growth, domestically or through exports, and operate with a higher level of management sophistication than Main Street firms. Studies show that being part of a supply chain can help take a business to the next level, with one study finding that suppliers reported revenue growth of more than 250 percent just a few years after selling their products to a large corporation and employment increases of more than 150 percent on average.

A robust network of small suppliers is important to the long‐term competitiveness of large U.S. corporations. As Harvard Business School’s Michael Porter and Jan Rivkin have noted, strong supply chains bring “low logistical costs, rapid problem solving and easier joint innovation. Small businesses have created jobs in every quarter since 2010, and are back to creating two out of every three net new jobs, but still remain well below the job creation levels that we need to see to fill the “jobs gap” left in the wake the recession. Time will tell how well this is accomplished but if history is any indicator, small business in America will rise to the challenge and continue to be a growth engine for the American Economy.