The Role of Small and Large Businesses in Economic Development
25 Pages Posted: 22 Jun 2007
Date Written: June 2007
Increasingly, economic development experts are abandoning traditional approaches to economic development that rely on recruiting large enterprises with tax breaks, financial incentives, and other inducements. Instead, they are relying on building businesses from the ground up and supporting the growth of existing enterprises. This paper explores whether promoting entrepreneurship and small businesses makes sense as an economic development strategy. It concludes that it probably does, but with some caveats. Small businesses are potent job creators, but so are large businesses. The attribution of the bulk of net job creation to small businesses arises largely from relatively large job losses at large firms, not to especially robust job creation by small firms. More important, data show that, on average, large businesses offer better jobs than small businesses, both in terms of compensation and stability. Further, there is little convincing evidence to suggest that small businesses have an edge over larger businesses in innovation. More research is needed to properly evaluate the case for a small business strategy, and indeed, to determine whether or not public engagement in economic development itself is a cost-effective and worthwhile pursuit.
Keywords: small business, economic development
JEL Classification: R58, R53, L11
Suggested Citation: Suggested Citation