Monday, February 3, 2014

Small Business Start-Ups Create Economic Impact

Economic growth is important for cities, states, and nations. Research by Donald, et. al. (2009) helps decision-makers understand that a healthy balance between large and small business development puts economies on the right track to flourish while encouraging positive budget balances. Their study shows that the activity of business start ups foster growth not only in one state but also the surrounding states. Some businesses will succeed and others will fail but the economic activity of constant start ups is a revenue generator. 

The U.S. Small Business Administration reports small business activity is one of the major engines to economic growth and creates a majority of new jobs. It is possible that smaller businesses that are entrepreneurial by nature engage in research and development that have an even larger impact on the economy (Acs and Plummer, 2005). Both jobs and innovation are needed to keep the economic engine running at ideal speeds. 

There are a number of economic indicators of small business activity. States often focus on gross state product (GSP), state personal income (SPI) and total state employment levels. Much of the information is drawn from the Census or Bureau of Economic Analysis. These hard facts often ignore the rates of new business birth and death within a state. Yet it is this birth and death process that keeps momentum.

Small business growth contributes heavily to economic growth. There is a lag in the start of business and its overall contribution to the economy (Holtz-Eakin & Kao, 2003). It takes time to move from a start-up stage to a more sustainable stage where a successful process can compete on the market. When a number of businesses move into a sustainable stage they contribute to hiring, wealth, and product development. 

The environment is often a predictor of where small businesses will start. Entrepreneurs like places where an educated workforce exists (Lee et. al. 2004). Those who are investing their money want to connect up to those with the skill and knowledge to compete. Universities often act as hubs to entrepreneurial growth under the right conditions and a loosening of bureaucracy can make ideas more possible.

The results on small business for macro economic growth are mixed depending on which metrics one uses. However, by looking at birth and death rates the authors found that small business growth has a large impact on state economic growth. That growth also helps raise other states within their proximity. It is important to have increasing growth of business start-ups to raise tax revenue and positive economic output. The author argues that states who attempt to foster small business start-ups is a factor even more important than raising tax rates or implementing rules to create growth. 

Comment: The author did move into the concept of large firm and small firm growth. It appears that large firms provide a level of stability but higher levels of economic growth can be found in the constant starting of small businesses. Even when some small businesses die off in the first few years the entrepreneurial spirit raises its head again to start another business with new knowledge. Policy makers should be focused on ensuring that there is an appropriate balance of large and small business development and the environment to help encourage this higher economic activity.  States in close proximity also receive benefit in economic activity and should encourage each other to create larger synergy.

Ace, Z. & Plummer, L. (2005). Penetrating the knowledge filter in regional economics. Annals of regional Science, 39

Bruce, Et. Al. (2009). Business activity and state economic growth: does size matter? Regional Studies, 43 (2). 

Holtz-Eakin, D. & Kao, C. (2003). Entrepreneurship and Economic Growth: the proof is in the productivity. Working Paper No. 50. Center for Policy Research, Syracuse University, Syracuse, NY.

Lee, et. al. (2004). Creativity and entrepreneurship: a regional analysis of new firm formation. Regional Studies, 38.

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