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Is Small Business in Decline?

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:

  • Represent 99.7% of all employer firms.
  • Employ about half of all private sector employees.
  • Pay nearly 45% of total US private payroll.
  • Have generated 60% to 80% of net new jobs annually over the last decade.
  • Create more than half of nonfarm private gross domestic product (GDP).
  • Hire 40% of high tech workers (such as scientists, engineers, and computer workers).
  • Are 52% home-based and 2% franchises.
  • Made up 97.3% of all identified exporters and produced 28.9% of the known export value in FY 2006.
  • Produce 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 cited.


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 article:


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 U.S. 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 academic mind.


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.


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