Small business, the romance is over

Posted on October 26, 2011 in Policy Context

Source: — Authors: – business
Published On Thu Oct 20 2011.   By David Olive, Business Columnist

Perhaps you hadn’t noticed that we’re wrapping up Canada’s 30th Small Business Week. That would be a surprise, given the more than 350 events across Canada celebrating small biz that have taken place over the past week.

I took a pass on them, for reasons I’ll get into.

In a Financial Post op-ed Oct. 17 titled “The week to hug an entrepreneur,” Rick Spence, a small-business consultant, warns that “Canada’s prosperity will crumble unless we become a nation of entrepreneurs.”

“Look at McDonald’s, Dollarama and Wal-Mart, which upended their industries,” Spence observes.

I’d rather not, actually. In its early years, McDonald’s cooked its books to qualify for bank loans. And Wal-Mart remains a retail sweatshop. None of Spence’s firms upended anything until they’d gained the heft and critical mass required to do so, as giants like Magna International Inc. and Four Seasons Hotels Inc. have done. Steve Jobs didn’t start “punching a dent in the universe” until Apple was counting its revenues in the millions of dollars.

“Everyone here knows that small businesses are where most new jobs begin,” Barack Obama told the U.S. Congress last month in unveiling his proposed $447-billion jobs bill. I almost gagged.

Yes, small businesses, and particularly start-ups, create more jobs, per existing employee, than hulking enterprises. That’s because when a car mechanic hires a helper he’s just expanded his workforce by 100 per cent. To boast the same growth rate, Rick Spence’s former employer, Rogers Communications Inc., would have to have hire 30,000 workers.

Fact is, the dismal failure rate of small businesses is such that they kill about as many new jobs as they create. About 40 per cent of new businesses fail in their first two years.

Imagine if 40 per cent of the Fortune 500 disappeared every two years. General Electric Co. alone employs more people (300,000) than live in Iceland. Would we tolerate that kind of employee, supplier and customer instability outside the small-biz sector?

We can’t even agree on what exactly is a “small” business. The U.S. Small Business Administration (SBA) puts the cutoff at fewer than 500 employees. The American Small Business League lobby group puts it at fewer than 100. The European Union puts it at fewer than 50 workers.

By the SBA’s broad definition, 99.6 per cent of America’s private employers are small businesses. No wonder politicians to pander to this apparently huge constituency. For its part, the Canadian Federation of Independent Business (CFIB) claims 108,000 small-business members – just shy of the population of Prince Edward Island.

Size matters. “A 400-employee firm probably looks more like a 4,000-employee firm, in terms of wages, survival probabilities, growth rates and so on, than like a 40-employee firm,” says Ron Jarmiri, assistant director of the U.S. Census Bureau.

Our misplaced romanticizing of small business is lousy public policy. We chronically misallocate taxpayer resources to subsidize with tax breaks and other largesse the lifestyle choice of folks who prefer to be their own boss.

Most small businesspeople are not interested in growing their firms and increasing their workforces. Or so a majority of small-business owners canvassed by Erik Hurst and Ben Pugsley of the University of Chicago said. They’re just in it for the flexibility and freedom.

Hurst and Pugsley found that only three per cent of companies they studied launched between 2004 and 2008 added more than 10 employees in that time. An even smaller percentage had ever visited the patent office. So much for the myth of small business driving innovation in products and processes.

Small business is a low-wage, low-benefits ghetto, as chronicled in Barbara Ehrenriech’s seminal Nickel and Dimed (2001). It pays an average of $16 an hour compared with $27 at large firms. It’s a productivity sinkhole, lacking the resources and motivation to buy the equipment and upgrade worker skills to achieve efficiency gains. It’s also a conspicuous non-participant in Canada’s export-driven economy.

Small Business Week should be a time to think about scrapping misdirected “small-business” assistance that goes to doctors, accountants, travel and real estate agents, beauticians, the trusts of wealthy families, and recipients of rental income on vacation homes and commercial real estate. None of those are risk-taking job creators. Yet they’re classified as small businesses for purposes of tax breaks and other public largesse.

If we’re to encourage genuine entrepreneurship, let public assistance be targeted to small firms with promising R&D projects underway, or commitments to hiring and skills upgrading, as Obama’s proposed jobs bill does.

I’ll start taking small business seriously as an engine of prosperity when it’s no longer the case that about one-third of the 20 or so employees at my local Tim Hortons franchise are holding down a second job elsewhere to make ends meet.

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