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Source: “Table of Small Business Size Standards Matched to North American Industry Classification System Codes,” US Small Business Administration, August 22, 2008, accessed June 1, 2012,http://www.sba.gov/content/small-business-size-standards.

The SBA definition of what constitutes a small business has practical significance. Small businesses have access to an extensive support network provided by the SBA. It runs the SCORE program, which has more than 12,000 volunteers who assist small firms with counseling and training. The SBA also operates Small Business Development Centers, Export Assistance Centers, and Women’s Business Centers. These centers provide comprehensive assistance to small firms. There can be significant economic support for small firms from the SBA. It offers a variety of guaranteed loan programs to start-ups and small firms. It assists small firms in acquiring access to nearly half a trillion dollars in federal contracts. In fact, legislation attempts to target 23 percent of this value for small firms. The SBA can also assist with financial aid following a disaster.

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Small Business in the American Economy

In 1958, small business contributed 57 percent of the nation’s gross domestic product (GDP). This value dropped to 50 percent by 1980. What is remarkable is that this 50 percent figure has essentially held steady for the last thirty years. [14] It is interesting to note that the contribution of small businesses to the GDP can vary considerably based on particular industries.Table 1.2 “Small Businesses’ Component of Industry Contribution to GDP”presents data for selected industries for the period 1998–2004. It can be seen that in some industries—construction and real estate—80 percent or more of that industry’s contribution to the GDP comes from small businesses, while in the information industry that number is 20 percent or less.

Few people realize that the overwhelming majority of businesses in the United States are small businesses with fewer than five hundred employees. The SBA puts the number of small businesses at 99.7 percent of the total number of businesses in the United States. However, most of the businesses are nonemployee businesses (i.e., no paid employees) and are home based.

Table 1.2 Small Businesses’ Component of Industry Contribution to GDP


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Year Construction (%)

Real Estate and Leasing (%)

Wholesale Trade (%)

Transportation and Warehousing (%)

Information (%)

1998 88.0 80.4 59.1 39.1 26.4

1999 87.2 80.0 57.5 39.4 25.4

2000 85.4 79.8 56.8 39.0 22.7

2001 85.1 80.3 55.3 41.1 19.7

2002 84.6 79.4 56.3 41.0 20.3

2003 85.4 79.5 54.6 39.1 20.3

2004 85.6 79.6 55.4 38.6 18.0

Source: Katherine Kobe, “Small Business Share of GDP (Contract No. SBAHQ-05-M-0413),” SBA Office of Advocacy, April 2007, accessed October 7, 2011, http://archive.sba.gov/advo/research/rs299tot.pdf.

One area where the public has a better understanding of the strength of small business is in the area of innovation. Evidence dating back to the 1970s indicates that small businesses disproportionately produce innovations. [15] It has been estimated that 40 percent of America’s scientific and engineering talent is employed by small businesses. The same study found that small businesses that pursue patents produce thirteen to fourteen times as many patents per employee as their larger counterparts. Further, it has been found that these patents are twice as likely to be in the top 1 percent of highest impact patents. [16]

It is possible that small size might pose an advantage with respect to being more innovative. The reasons for this have been attributed to several factors:

• Passion. Small-business owners are interested in making businesses successful and are more open to new concepts and ideas to achieve that end.

• Customer connection. Being small, these firms better know their customers’ needs and therefore are better positioned to meet them.

• Agility. Being small, these firms can adapt more readily to changing environment.

• Willingness to experiment. Small-business owners are willing to risk failure on some experiments.

• Resource limitation. Having fewer resources, small businesses become adept at doing more with less.



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• Information sharing. Smaller size may mean that there is a tighter social network for sharing ideas. [17]

Regardless of the reasons, small businesses, particularly in high-tech industries, play a critical role in preserving American global competitiveness.

Small Business and National Employment

The majority—approximately 50.2 percent in 2006—of private sector employees work for small businesses. A breakdown of the percentage of private sector employees by firm size for the period 1988 to 2006 is provided in Table 1.3 “Percentage of Private Sector Employees by Firm Size”. For 2006, slightly more than 18 percent of the entire private sector workforce was employed by firms with fewer than twenty employees. It is interesting to note that there can be significant difference in the percentage of employment by small business across states. Although the national average was 50.2 percent in 2006, the state with the lowest percentage working for small businesses was Florida with 44.0 percent, while the state with the highest percentage was Montana with a remarkable 69.8 percent. [18]

Table 1.3 Percentage of Private Sector Employees by Firm Size

Year 0–4 Employees

5–9 Employees

10–19 Employees

20–99 Employees

100–499 Employees

500+ Employees

1988 5.70% 6.90%% 8.26% 19.16% 14.53% 45.45%

1991 5.58% 6.69% 8.00% 18.58% 14.24% 46.91%

1994 5.50% 6.55% 7.80% 18.29% 14.60% 47.26%

1997 5.20% 4.95% 6.36% 16.23% 13.73% 53.54%

2000 4.90% 5.88% 7.26% 17.78% 14.26% 49.92%

2003 5.09% 5.94% 7.35% 17.80% 14.49% 49.34%

2006 4.97% 5.82% 7.24% 17.58% 14.62% 49.78%

Source: US Census Bureau, “Statistics of U.S. Business,” accessed October 7, 2011, http://www.census.gov/econ/susb.

Small business is the great generator of jobs. Recent data indicate that small businesses produced 64 percent of the net new jobs from 1993 to the third quarter of 2008. [19] This is not a recent phenomenon. Thirty years of research studies have consistently indicated that the driving force in fostering new job creation is the birth of new companies and the net additions coming from small businesses. In the 1990s, firms with fewer than twenty employees produced far more net jobs proportionally to their size, and two to three times as many jobs were created through new business formation than through job expansion in small businesses. [20] The US Census Bureau’s Business Dynamics Statistics data confirm that the greatest



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number of new jobs comes from the creation of new businesses. One can get a sense of the extent of net job change by business size in Table 1.4 “Job Creation by Firm Size”.

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