Event Report: The Future of Small Business

May 7, 2010

Editor’s Note: Douglas J. Elliott and Martin Neil Baily participated in this Brookings-Small Business Administration working group and present this overview of the session.

We at the Brookings Institution had the honor of co-sponsoring a forum with Karen Mills, the Administrator of the Small Business Administration, and her team, on March 15th. The forum focused on establishing a framework for the design of public policy decisions to support job creation through small businesses with high growth potential. It was intended as the first step towards finding more effective answers by gathering a select group of academic theorists, think tankers, government policymakers, financiers, and entrepreneurs to discuss the overall issues that will need to be tackled in more detail as we move forward. This paper summarizes the key points that were discussed and adds some of our own reflections. While the content in this document reflects the views of the participants of the forum, none of the opinions presented or policy solutions proposed in the document have been endorsed by the SBA, the Obama Administration, or Brookings, except where explicitly stated.

The forum was conducted on the basis that comments would not be attributed afterwards to specific individuals, in order to encourage a completely free discussion. In a few cases, it has seemed important to make clear in this paper who was speaking. For example, Karen Mills’ opening remarks lay out the specific purposes of the forum and we felt it would make a difference for the reader to be aware that these objectives were set by the SBA. In all cases, we received specific permission from the speakers to attribute their remarks.

The paper is organized around the following questions:

  • What do we know about high-growth small businesses?
  • What barriers exist that block high-growth small businesses?
  • What should be America’s policy goals for small business, particularly with regard to employment?
  • What are our initial policy suggestions?

The background and tasks for the forum

Martin Baily, of Brookings, opened the gathering by emphasizing the twin reasons for holding a forum on encouraging job growth at small businesses. First, unemployment is the worst problem the economy currently faces and is a contributor to many other economic problems, so there is excellent reason for the Administration’s choice to tackle unemployment as its number one priority. Second, small business has been a main driver of net employment growth for many years now, suggesting that improvements in public policy towards small business have the potential to yield a considerable number of additional jobs. At the same time, large companies are also important for total employment, so actions should not be taken that do offsetting damage to large firm employment.  To get the economy back to full employment, both small and large businesses must grow.

Karen Mills laid out the tasks for the day’s gathering, which she described as the first of a series that will examine how innovation, entrepreneurship, and small business come together to create job growth. The invitees to the initial gathering were disproportionately academics because she felt it was important to start by building a sound analytical framework that takes advantage of the best research that already exists. This research describes a dichotomy in the SBA’s world that is also very clear to those most directly involved. The SBA serves both “Main Street” businesses that are often not growth-oriented and another set of businesses that strive for more rapid growth and are generally somewhat larger.

The Main Street businesses consist of restaurants, car repair shops, dry cleaners, and the myriad of other small operations that we use in our daily lives. They are a critical part of the economy, and of the SBA’s mission, even though they do not tend to contribute very strongly to net job growth. In fact, their lives are often relatively short, as we can envision by remembering that corner where one restaurant after another opens, and then closes, over the decades. The SBA has a crucial role in helping Main Street firms find funding to start up and then providing them the guidance and ongoing funding assistance to increase their chance of survival and, in some cases, growth. The SBA recognizes the high level of churning of these businesses, a symptom of the fact that many close, but we also know that in normal times new businesses open in large numbers to replace the old ones.  If the process of new business formation fails, there will be a significant net destruction of jobs and harm to communities.

While the Main Street restaurants and repair shops are important to the economy and to the SBA, this forum focused primarily on the second category of small businesses, those with an ambition for rapid growth.  Sixty four percent of net new jobs over the last 15 years came from small business and a substantial portion of those new jobs were created by “gazelles”. These are high growth, high impact small businesses. The extreme examples that stick in people’s minds tend to be in high-tech industries. Google and E-bay and other success stories were gazelles for a significant part of their lives before they graduated to be truly large businesses. However, gazelles exist in all industry types and in all geographies across the country.  For example, Potbelly Sandwiches, a restaurant chain in the Washington, DC area, is a non-tech example,  as is the Gymboree Corp., the provider of child development programs and children’s clothing.

Karen Mills pointed out that the SBA has a powerful set of policy tools including:

  • An $80 billion loan guarantee portfolio
  • Specialized counseling and training centers, such as Small Business Development Centers, Women’s Business Centers, and chapters of SCORE
  • Specialized business development programs targeting the socially and economically disadvantaged
  • Official responsibility to ensure that at least 23% of federal government contracts go to small businesses
  • Several enterprises, including the Small Business Innovation Research (SBIR) and Small Business Investment Companies (SBIC) programs, to target innovation-based businesses

She also emphasized that the SBA staff were not at the forum solely to represent their own agency, but also to help gather ideas for the whole Administration. In fact, a number of other government policymakers were in attendance in order to participate directly. This Administration, she emphasized, is focused on ensuring that all relevant government agencies work together to tackle common problems. For example, the Departments of Energy,  Commerce, Housing and Urban Development, Education and Labor,along with  the National Science Foundation and SBA, have recently worked together to support an Energy Regional Innovation Cluster. Therefore, the gathering was urged not to confine discussion only to ideas that the SBA could implement on its own.

Karen Mills asked the gathering to focus on how to take all of these tools, across the government, and use them to encourage high growth, high impact companies. She stated that we do not yet have a good foundation for federal policy that says who these businesses are, why they are important, and how we can best help them.