Thursday, 9 September 2010
Shrinking Independence
Wednesday, 3 March 2010 at 08:39, Scott Shane, Mixon Professor of Entrepreneurial Studies, Case Western Reserve University
Observers have presented two conflicting views of what has been happening to entrepreneurial activity in the United States over time.
One perspective argues that more people are becoming entrepreneurs, shifting out of employment at large organisations into business formation.
The other perspective holds that the efficiency of big companies has led to the demise of many small businesses and their replacement by outlets of large chains. Which perspective is correct?
Below is a figure that I created from data provided by the Office of Advocacy of the US Small Business Administration that clearly shows support for the latter perspective. It shows the number of business establishments – which the US Census defines as “a single physical location where business is conducted, or where services are performed” – divided by the number of self-employed people.
A growing ratio means that the number of outlets where business is conducted is growing faster than the number of people who work for themselves. This pattern indicates that the American economy is increasingly being made up of large chains rather than independent small businesses.
The pattern might be the result of existing businesses adding new establishments at a faster rate than people are starting new companies or it might be the result of greater survival rates for establishments of existing businesses than new independent businesses. Either way, the data suggest a trend toward bigger chains and away from independent businesses.
If you are a believer that independent businesses are valuable because they represent something important in American culture, or provide a degree of variety not possible with larger chains, then these data indicate a problem. The US market appears to be evolving away from reliance on a lot of independent small businesses.
But this pattern isn’t necessarily bad from an economic perspective. If larger businesses can achieve economies of scale or can purchase and advertise at a volume not possible for small businesses, the movement towards a growth of chain businesses represents a rise in economic efficiency.
Perhaps the romance of entrepreneurship has blinded us to the trend away from a reliance on small business in the United States, as well as the realisation that this evolution might not be such a bad thing.
Email the writer: s.shane@alrroya.com
One perspective argues that more people are becoming entrepreneurs, shifting out of employment at large organisations into business formation.
The other perspective holds that the efficiency of big companies has led to the demise of many small businesses and their replacement by outlets of large chains. Which perspective is correct?
Below is a figure that I created from data provided by the Office of Advocacy of the US Small Business Administration that clearly shows support for the latter perspective. It shows the number of business establishments – which the US Census defines as “a single physical location where business is conducted, or where services are performed” – divided by the number of self-employed people.
A growing ratio means that the number of outlets where business is conducted is growing faster than the number of people who work for themselves. This pattern indicates that the American economy is increasingly being made up of large chains rather than independent small businesses.
The pattern might be the result of existing businesses adding new establishments at a faster rate than people are starting new companies or it might be the result of greater survival rates for establishments of existing businesses than new independent businesses. Either way, the data suggest a trend toward bigger chains and away from independent businesses.
If you are a believer that independent businesses are valuable because they represent something important in American culture, or provide a degree of variety not possible with larger chains, then these data indicate a problem. The US market appears to be evolving away from reliance on a lot of independent small businesses.
But this pattern isn’t necessarily bad from an economic perspective. If larger businesses can achieve economies of scale or can purchase and advertise at a volume not possible for small businesses, the movement towards a growth of chain businesses represents a rise in economic efficiency.
Perhaps the romance of entrepreneurship has blinded us to the trend away from a reliance on small business in the United States, as well as the realisation that this evolution might not be such a bad thing.
Email the writer: s.shane@alrroya.com
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Your comments
Great article, thanks for the information in this area, it is critical to understand this so that policies are in place that allow for a good balance between business sizes.
The smaller business are needed to find the match between product and service and market, and the larger groups provide an exit opportunity for many small investors. This excludes lifestyles businesses that are self funded, they are they not driven by the same forces as an externally funded group.
There is one concern about the economy of scale argument. Moebs Services, a financial research company posted data in a chart form that showed that the larger the financial business was the higher the fees for comparable services.
This indicates a more controlled market place since customer no longer understand the cost of what they are paying or have no choice because the small banks are gone from the area.
I don't know if you agree with their data on banks but I was curious if you had an opinion on that happening in other areas of the economy as the ratio increases?