During the 2012 presidential election campaign, both Barack Obama and Mitt Romney highlighted the importance of small businesses in regards to the long-term economic recovery of the United States. Governor Romney even won support in Missouri by announcing a new coalition of local business owners, while pledging to reform the nation’s corporate tax structure and remove barriers to entry for aspiring entrepreneurs.
Despite these bold election promises, the question that remains is whether small and independent ventures can genuinely be relied upon to drive economic growth. While it is a common theory that has also been supported by the UK’s own coalition government, there is uncertainty as to whether it has a basis in fact or is merely a flight of political fancy.
What Drives Economic Growth?
Before considering the role that small businesses can play, it is important to understand the factors that drive economic growth. These include:
- Low Unemployment. This creates a thriving workforce and increases the average level of disposable income.
- Rising Consumer Spending. High rates of employment subsequently cause consumer spending to rise.
- Rising Consumer Demand. Increased spending allows firms to increase their turnover, which thereby creates additional jobs.
How Small Businesses Impact the Economy
The veneration of small business ownership can be traced back to the initial global recession of 2008, which dramatically changed the behavioral patterns of U.S.-based organizations and citizens. Subsequently, not only are entrepreneurs who started their business after the 2008 recession different in nature to those who did so prior to the financial crisis, but there are also a higher number of people who are more likely to establish themselves independently, rather than rely on an unstable job market. This is true across both sexes, with the Small Business Association (SBA) recently reporting that women-owned businesses now represent an estimated 30% of the entire sector.
With such an increase in the number of self-employed individuals and entrepreneurs, it is understandable that the small business sector should carry a greater burden of expectation when it comes to driving economic growth. However, this does not necessarily mean that it is viable, especially when you consider the fact that the level of small business employment dropped for four consecutive months between June and September 2012. But it is fair to say that small businesses have several advantages over large corporations, which may enable them to play a more crucial role in inspiring prosperity.
Advantages Over Large Corporations
1. Drives Local Employment
When it comes to unemployment, it is easy to overlook the fact that regional rates can vary significantly from the national level. Statistics released by the Bureau of Labor in September reflect this trend. For example, while Nevada recorded the highest regional unemployment rate of 11.8%, North Dakota registered the lowest at just 3.0%. Both of these were far removed from the national rate of 7.8%.
The establishment of locally based small businesses can have a direct impact on reducing regional unemployment, as they create a range of job opportunities within communities. This makes it far easier for people to find long-term positions that they can easily commute to, which should in turn help to lower the national unemployment rate over time.
The difference with national chains is that they recruit staff from a wider catchment area, which increases competition between job seekers and also creates a longer selection process.
2. Attractive Employee Benefits
It is not uncommon for locally owned businesses to offer better remuneration and more impressive benefits to their staffs, as they are not hampered by a vast wage bill or complex infrastructure. There is also a tendency for large brands to promote staff from within, which means that the majority of their externally advertised jobs are at entry-level. The same cannot be said of small businesses, however, which are more likely to advertise better positions with a greater chance of rapid advancement.
3. Better Customer Service
Another advantage that small businesses have over larger corporations is that they are able to offer better customer service, which is an increasingly important factor among a demanding consumer base. Data collected by Amex World Service suggests that 81% of U.S. consumers trust independent firms to deliver better customer service than big brands, while 60% are willing to pay significantly more for this privilege. Consumer spending is a big driver of economic growth, and the capacity of small business to understand local customers and their demands is pivotal in helping to increase this.
Why Small Businesses Struggle to Lead Economic Growth
These advantages suggest that small businesses play a vital role in driving economic growth, but their ability to lead this change remains in question. After all, the small business sector cannot push the economy forward if its independent ventures fail to grow, and recent studies do suggest that many are finding it difficult to sustain their existing operation in the current climate.
1. Potential Tax Increases and Reduced Government Spending
Merchant Circle found that just 23% of small businesses plan to increase their workforce between November 2012 and April 2013, while 8% are expected to lay off existing staff members. A total of more than 50% are plotting to maintain their current level of staffing, during which time it is hoped that the president will avoid a fiscal cliff that could potentially see $600 billion cut from the public spending budget and the introduction of higher taxes.
This philosophy is telling, as small business leaders are clearly more inclined to adopt a risk-averse approach and protect their interests. And while this approach may keep them in business, it does not drive growth. In contrast, larger corporations have the resources to fund growth during austere times, and naturally have a greater capacity to create new jobs and employment opportunities on a national scale.
Competition from leading brands is also a significant cause for concern, especially when you consider the relative budgets of large and small businesses. While the evolution of social media marketing has helped level the platform from which these organizations reach out to consumers, larger corporations also have the capital to invest in national paid advertising campaigns. Plus, the capacity of corporations to buy goods in greater bulk enables them to reduce their wholesale costs, which means they can often sell their merchandise cheaper than locally owned stores and firms. This affords large corporations a critical market advantage, especially when it comes to satisfying the financial needs of struggling families.
Given the rising number of small business owners in the U.S. and the tangible advantages that their ventures have over larger corporations, it is easy to understand why governments are becoming increasingly reliant on the small business sector to drive economic growth. However, despite the fact that small businesses have an increasingly influential role in inspiring economic growth, they cannot be expected to lead the way without having the requisite resources or government assistance to expand considerably.
Similarly, small businesses must acknowledge that many of their perceived advantages are offset by the sheer scope of the existing economic crisis. For example, while local businesses are ideally placed to lower regional unemployment, they do not currently have the resources to hire. Even the growing consumer demand for locally sourced goods and labor is restricted by diminishing levels of disposable income, which means that many customers are forced to buy from national corporations that offer reduced prices. So although small businesses can undoubtedly help in rejuvenating the economy, it seems unlikely they will lead the front ahead of national corporations.