Most Small Businesses Shun Innovation and Hiring, Study Says
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Love of small business cuts across all party lines and political orientations in America. Candidates for every office from president to dog catcher can barely finish their breakfast without praising the small businessmen whom they credit with creating jobs and driving innovation. It's a great story, except that most small businesses neither add jobs nor innovate, and most small- business owners have no desire to do either.
Erik Hurst and Benjamin Wild Pugsley, economics professors at the University of Chicago Booth School of Business, looked at the responses of 1,214 small-business owners about the number of employees they hoped to have and the number of patents filed by their companies. Contrary to the image of Silicon Valley innovators building industries from nothing but a good idea, only 5 to 6 percent of the small businesses applied for a patent, copyright or trademark in their first five years. In fact, 80 percent of the respondents said they didn't want to even develop a new technology or process, let alone build their company around one.
"The typical small business is a skilled craftsman or a skilled professional. Plumbers, doctors, lawyers, carpenters, accountants, maybe a shopkeeper. And once you see that, you can compare that to the image of a young Bill Gates or a tech startup. It just feels different," Hurst told InnovationNewsDaily. "Not only do they not do much in terms of growth or innovation, but when you ask them about when they founded the business, most report that they had no intention to grow or innovate. When you ask them how big they want their business, they say small, maybe a few employees. And when you ask them if they want to do research or development, they say no."
According to the small-business owners interviewed by Hurst and Pugsley, the main reasons that entrepreneurs start small businesses has more to do with working from home or being their own boss than exploiting an untapped market or monetizing a brilliant new idea.
In fact, the Mark Zuckerbergs of the world are so few and far between that Hurst and Pugsley couldn't even analyze them.
"A small number of the new small firms create most of the job creation and innovation. They are the minority amongst small businesses. They are so rare, you can't study them quantitatively," Hurst said.
This is not to say that small businesses don't create most of the jobs in the United States, or that small businesses don't generate a significant number of new patents. Rather, Hurst and Pugsley note that all the job creation and innovation concentrates in a very small portion of small business, and that using that extreme minority to generalize about all small business can lead to flawed policies, such as directing subsidies intended to spur innovation to small businesses uninterested in using the money for innovation or job creation.
This all leaves politicians and voters facing a paradox. Americans naturally sympathize with the pioneering spirit embodied by entrepreneurs, and small businesses will generate the new jobs and innovations needed to turn around the economy. But since all that heavy lifting will get done by a statistically insignificant portion of small businesses, any policy directed at the entire community of small businesses will necessarily squander the majority of its funds on companies that don't contribute to hiring or invention that drives economic recovery.
"There's something very universal about the warm glow we get when we talk about small businesses. There's something very freeing about owning a business that predisposes us to liking small businesses," Hurst said. "But when we subsidize small businesses based upon firm size, the majority of small businesses won't do what we think they're going to do with the money."