Systems for Supporting Small Business in the United States: Insights and Challenges from State Programs in Georgia. Philip Shapira

Transcription

1 Systems for Supporting Small Business in the United States: Insights and Challenges from State Programs in Georgia Philip Shapira School of Public Policy, Georgia Institute of Technology Atlanta, GA USA January 2001 Note: Forthcoming in Supporting Systems for Small and Medium-Sized Enterprises in the US (Kojima, N., Ed.), Tokyo: Japan Institute of Labour, An earlier version of this paper was presented at the Symposium on Small and Medium Enterprises of the Japan Institute of Labor, Tokyo, Japan, in December 1999.

2 Systems for Supporting Small Business in the United States: Insights and Challenges from State Programs in Georgia I. Small business development in the United States: A universe of diverse worlds Over the last decade, the development of small business in the United States has been viewed domestically and internationally as a great success story. Indeed, the aggregate statistics are certainly impressive, in at least three ways. First, there has been strong growth in new business formation. The number of corporations and partnerships in the U.S. increased from 5.2 million in 1990 to 6.3 million in Almost all of these additional business registrations represented new small companies. Over the same period, sole proprietorships grew from 14.7 million to 16.7 million. Second, these developments in business formation have been accompanied by equally strong employment growth. Of the more than 14 million net new jobs added to the U.S. economy in the 1990s, four-fifths were net new jobs in small and medium enterprises (SMEs) with fewer than 500 employees. The employment creation performance of very small firms was especially notable: one-half of all net new US jobs in the 1990s were added by enterprises with under 20 employees. Third, there has been a broadening of business opportunities. By the mid-1990s, nearly 40 percent of small businesses in the U.S. were owned by women up from just 5 percent in the 1970s. Minority-owned small business ownership grew less strongly, but it did grow from 9 percent in the 1980s to 13 percent in 1990s (U.S. Small Business Administration, 1998a). Contrasting explanations have been put forward for this strong expansion in the U.S. small and medium sized business sector, signaling that multiple factors are at work

3 There has been an ongoing structural shift in the U.S. economy from primary commodity products and secondary industrial goods to tertiary services, trade, and information sectors. By 1998, private tertiary services contributed 65 percent of current U.S. gross domestic product, compared with 51 percent in 1972 (Bureau of Economic Analysis, 2000). Enterprises in tertiary sectors are typically smaller, and this structural shift offers many opportunities for service company start-ups, franchises, retail outlets, home-based businesses, consulting, and self-employment. From a macroeconomic perspective, the strong overall performance of the U.S. economy and the resurgence of productivity has aided service-sector growth, increased discretionary income, and boosted confidence among consumers and entrepreneurs. Conversely, it has been suggested that the flourishing of entrepreneurship is itself the driver of American macroeconomic success in the 1990s (U.S. Small Business Administration, 1998a). Evolutions in scale economies, flexibility, and regional innovation cultures are also said to contribute to entrepreneurial and small business growth in the U.S. (Pyke and Sengenberger, 1992; Saxenian, 1994). Other analysts have argued that the aggressive restructuring of large U.S. firms over the last two decades has resulted in the downsizing of big companies and a corresponding outsourcing and shifting of work to smaller firms both to reduce costs and to increase flexibility (Harrison, 1994). Again, the outcome has been to open up new opportunities for small business formation. Finally, and perhaps most significantly, the 1990s has seen a new venture wave in the U.S., with many new start-up and spin-off enterprises offering innovative products and services. This venture wave has been boosted by developments in science and technology and the growth of research-based entrepreneurship in - 2 -

4 computing, the Internet, electronic commerce, biotechnology and other new fields (Zucker, Darby, and Brewer, 1998). However, in the rush to herald the triumphs of American small business and draw on U.S. experience to prompt change in other countries, there has been a tendency to overlook the less glamorous aspects to the story. Awareness of these elements is important in gaining a full understanding of the characteristics and context of American small business development. For example, there continues to be debate about the real contribution of small firms to U.S. economic and employment growth. Some researchers contend the contribution has been overstated (Harrison, 1994), others maintain that U.S. small business growth is real (Acs and Phillips, 1997). This debate notwithstanding, there is little dispute that beneath the gross estimates of U.S. small business sector change, there is a high degree of turbulence and variation. Of 2.9 million new businesses created in the U.S. between 1989 and 1995, 2.6 million went out of business during the same period, for a net gain of only 0.3 million additional firms (U.S. Small Business Administration 1998b). It is also evident that while there has been a much publicized surge in innovative technology venture startups, some of whom have created a great deal of wealth for founders and investors, such technology startups are regionally-concentrated and comprise a relatively small share of all SMEs. Only a very small proportion of SMEs conduct research and development, and many lag best practice in the use of technology and management methods. In manufacturing, in particular, SMEs comprise over 99 percent of enterprises, but only about 40 percent of employment and a somewhat lower share of value-added, indicating weaknesses in aggregate SME productivity. Similarly, - 3 -

5 while Seattle, Atlanta, North Carolina s Research Triangle, and San Diego have developed significant clusters of innovative new technology ventures, joining such wellestablished innovative regions as Silicon Valley, Boston s Route 128, or Los Angeles, the current wave of business innovation continues largely to bypass most inner city, older industrial, small city, and rural locations in the U.S. Finally, although much of the new SME job growth in the U.S. is in services, these jobs frequently provide poor wages and benefits (Belman and Groshen 1998). Average annual wages in small firms are 79 percent of those in large firms (with 500 or more employees). 1 About 47 percent of small firm employees received employerprovided health benefits, while only 30 percent are included in employer pension plans. For large firms, the comparable figures are 68 percent for health benefits and 58 percent for pension plans (U.S. Small Business Administration 1998c). The full picture of U.S. small business development is thus one that combines notable successes with a diverse range of outcomes. More so than in most other advanced economies, the framework for small business development in the U.S. allows, if not encourages, varied results. On the one hand, there are many incentives to start small businesses in the U.S. and real opportunities to gain significant rewards from entrepreneurship. About 1 in 1,000 owners of small businesses now have personal assets in excess of $1 million. Indeed, starting a small business offers by far the best odds of becoming a millionaire in the U.S. compared with other alternatives, such as playing the lottery where there is a very poor chance of great success (Puente 2000). On the other 1 Care is needed in interpreting aggregated data on wage differentials in small and large firms. Small firms employ proportionately more part-time, young, and less well-educated workers than large firms. However, even adjusting for such factors, there is little dispute that employee wages and benefits in small firms lag those in larger enterprises, on average

6 hand, there are undoubted risks: a majority of those who seek to start new businesses subsequently fail, at least in their first attempts. Even if the business survives, most remain small and do not achieve high individual rates of job or wealth generation. Typically, small business owners secure what could be regarded as modest to comfortable (rather than headline-grabbing) returns for the personal resources and sweat equity (i.e. the unpaid, long hours) invested in their businesses. Of course, there are significant private capital pools available for business startup and growth in the U.S., provided by private investors, venture capitalists, and corporate groups. Compared with other countries and adjusting for inevitable investment cycles, there are also unparalleled opportunities in the U.S. for very successful startups to access even greater funding through public stock offerings and stock market listings (for example, on NASDAQ). Yet, these resources are focused towards the relatively small number of start-ups with very high growth potential, particularly in innovative technological fields. Existing small businesses in mature fields or new start-ups offering more mundane products and services frequently complain about difficulties in obtaining equity or bank loan financing. The social framework in the U.S. further encourages entrepreneurship through a flexible labor market that facilitates spin-offs and spin-outs, relatively low social overhead requirements for SMEs, and the possibility of recovery from business failure to try again. The U.S. offers favorable tax relief and stock option incentives that support small firm formation. Increasingly, management training pays attention to small business start-up and management, successful business people are seen as role models, and there are a variety of business support networks. However, small business owners consistently - 5 -

7 References Acs, Z., and B. Phillips (1997), Why does the relative share of employment stay constant? Frontiers of Entrepreneurship Research 1997 Edition, Babson College, MA. American Electronics Association (2000), Cybercities: A City-by-City Overview of the High Technology Industry, San Jose, CA. Aoyama, Y., (1999), Policy interventions for industrial network formation: Contrasting historical underpinnings of small business policy in Japan and the United States, Small Business Economics, Vol. 12, No. 3, May, pp Atlanta Business Chronicle (1999a), Todd: Georgia among top tech states by 2010, July 9. Atlanta Business Chronicle (1999b), Red Hot Law Group expands incubator, October 29. Atlanta Business Chronicle (2000), High-tech start-ups hatch at legal accelerators, July 21. Bean, J., (1996), Beyond the Broker State: Federal Policies Toward Small Business, , University of North Carolina Press, Chapel Hill, NC. Belman, D., and E. Groshen (1998), Is small beautiful for workers, in: Small Consolation: The Dubious Benefits of Small Business for Job Growth and Wages, Washington, DC: Economic Policy Institute. Bureau of Economic Analysis (2000), Improved estimates of gross product by industry for , Survey of Current Business, June

8 Business Outreach Services (1999), Annual Report 1999, Small Business Development Center, University of Georgia, Athens, GA. Corporation for Enterprise Development (2000), Development Report Card for the States 2000, Washington, DC. Dusenbury, P. (2000), Case study of North Georgia Technical College Entrepreneurship Program. Report prepared for Regional Technology Strategies, Inc., Chapel Hill, NC. Harrison, B. (1994), Lean and Mean. New York: Basic Books, Lerner, J. (1999), The government as venture capitalist: The long run impact of the SBIR program, Journal of Business, Vol. 72, pp McMath, R., Jr. (1991), Variations on a theme by Henry Grady: Technology, modernization, and social change in J. P. Dunn and H. L. Preston (Editors), The Future South: A Historical Perspective for the Twenty-first Century. University of Illinois Press, Urbana and Chicago, IL. National Institute of Standards and Technology (1998), Small-Firm Experience in the Advanced Technology Program. U.S. Department of Commerce, Gaithersburg. MD. National Institute of Standards and Technology (1999), Business Planning and Progress of Small Business Firms Engaged in Technology Development Through the Advanced Technology Program. U.S. Department of Commerce, Gaithersburg. MD

9 National Research Council (1999), The Small Business Innovation Research Program: Challenges and Opportunities, Board on Science, Technology and Economic Policy, National Academy Press, Washington, DC. Puente, M. (2000), Everyone wants a shot at being a millionaire, USA Today, August 16, p. 8B. Pyke, F., and W. Sengenberger, ed., (1992), Industrial Districts and Local Economic Regeneration, International Institute for Labour Studies, Geneva. Saxenian, A. (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press, Cambridge, MA. Shapira, P. (1997), Manufacturing extension: Performance, challenges, and policy issues, in L. Branscomb and J. Keller, Investing in Innovation: Creating a Research and Innovation Policy That Works, MIT Press, Cambridge, MA, Shapira, P. and J. Youtie, (1997), Coordinating industrial modernization services: Impacts and insights from the Manufacturing Extension Partnership, Journal of Technology Transfer, vol. 22, no. 1, pp Shapira, P., and J. Youtie (2000) Innovation Challenges for Existing Manufacturers: Research and Policy Insights from the Georgia Manufacturing Survey, paper prepared for the EU/CIS Conference on Innovation Indicators and Innovation Policy, Sophia Antipolis, France, November. U.S. Census Bureau (2000), County Business Patterns, Georgia, 1998, CBP 98/12, U.S. Department of Commerce, Washington, DC. U.S. Small Business Administration (1998a), The New American Evolution: The Role and Impact of Small Firms, Washington, DC

10 U.S. Small Business Administration (1998b), Small Business Growth by Major Industry, , Washington, DC. U.S. Small Business Administration (1998c), Characteristics of Small Business Employees and Owners, 1997, Washington, DC. U.S. Small Business Administration (1999a), Small Business Profile: United States, Washington, DC. U.S. Small Business Administration (1999b), Small Business Profile: Georgia, Washington, DC. U.S. Small Business Administration (2000a), SBA Strategic Plan, FY 2001-FY 2006, Washington, DC. U.S. Small Business Administration (2000b), Small Business Economic Indicators 1998, Washington, DC. Wallsten, S. (1997), Rethinking the Small Business Innovation Research Program, in L. Branscomb and J. Keller, Investing in Innovation: Creating a Research and Innovation Policy That Works, MIT Press, Cambridge, MA, Wilson, L. (2000), Observations on the Small Business Innovation Research Program in Georgia, MS Paper, School of Public Policy, Georgia Institute of Technology, Atlanta, GA. Zucker, L., M. Darby, and M. Brewer (1998), Intellectual human capital and the birth of U.S. biotechnology enterprises, American Economic Review, March, pp

11 Table 1. Major Categories of Public Small Business Assistance Service in the U.S. Category of service Program example Business Business Information Centers information and (BICs) counseling Small Business Development Centers (SBDCs) Finance and investment Education & training Access to business opportunities Technology and innovation Business recovery Service Corps of Retired Executives (SCORE). Loan guarantee programs Small Business Investment Companies Certified Development Companies; Angel capital networks; state venture capital programs Entrepreneur training courses Start-up and business incubation Procurement assistance Entrepreneurship assistance for disadvantaged groups, women, minorities Advanced research and development Technology incubation for SMEs Technology transfer Networking - Inter-firm business networks; supplychain networks Disaster relief Trade Adjustment Sponsor example US Small Business Administration US Small Business Administration / States and State Universities US Small Business Administration US Small Business Administration; States; Community Development Organizations US Small Business Administration; States Community and technical colleges State and local business incubators Federal and state procurements assistance programs HUB - Enterprise promotion in Empowerment Zones; SBA Women s Business Centers SBIR - Small Business Innovation Research; NIST Advanced Technology Program; State Programs State and local technology business incubators NIST Manufacturing Extension Partnership; State Programs (e.g. Pennsylvania Ben Franklin Partnership) NIST Manufacturing Extension Partnership US Small Business Administration US Department of Commerce

12 Table 2. Examples of Small Business Assistance Programs in Georgia Category Program Targets Budget Activities Sponsoring innovative start-up ventures Promoting new high technology start-up enterprises About $1.5 million per year (state funds) Strengthening Existing Small and Medium- Sized Companies Broadening small business opportunities Advanced Technology Development Center (Georgia Tech Economic Development Institute) Georgia Manufacturing Extension Partnership (Georgia Tech Economic Development Institute) Business Outreach Services / Small Business Development Centers (University of Georgia) Business and technology assistance to manufacturers, focusing on firms with under 500 employees. Business services to entrepreneurs, start-ups, and existing small businesses, mostly in services and trade. $8.5 million per year ($3 million from federal government; $3 million from state; balance from fees) About $5 million annually ($3 million from state; $2 million from federal government) 60 graduate companies, over $350 million in annual sales, 4,000 employees; about 50 firms in current pipeline 17 fields offices; serves manufacturers a year; 2,500 business training participants. 20 SBDC offices; 5,000 cases of oneon-one business and start-up assistance annually; 17,000 training participants