small business essay example

small business essay example

The Impact of Small Businesses on the Economy: An In-depth Analysis

1. Introduction

There is no frequently used measure of sector importance of high growth, astronomical potential, and major labor market. Rather, this depends on how important the service is thought to contribute to economic growth and development, or on its role in the achievement of other economic goals. The relationship between firm size and economic growth is not clear-cut. Although the vast majority of research pertaining to firm size and economic growth has examined the U.S. economy, researchers have also studied the relation in other wealthy nations, where economies are operated and designed rather differently.

It is generally accepted that small businesses play an important role in the economy of most countries. In many countries, they are recognized as the engine of the growth of the economy, accounting for a substantial portion of domestic product, generating a substantial share of the jobs and providing the income and activity for the growth of the economy. How important, however, do specific groups of small businesses carry out, particularly for economic growth and development? This paper examines the role of selected service industries by firm size over a number of years. The reference period is 1988 through 1999. The focus of our work is accounting and real estate firms, travel and business services, and personal services, all of which are a significant sector of the economy. They are also grouped as high growth, astronomical potential, and major labor market for development.

2. The Role of Small Businesses in Economic Development

To make our analysis directed, we shall avail ourselves of a definition from the U.S. Small Business Administration, which defines small businesses in requirements to its licensing regulations. According to the U.S. Small Business Administration, a small business is one which is independently owned and operated and which is not dominant in its field of operations, regardless of industry or commercial classification. But big things are composed of very little atoms. These continue to be so very important that, in our modern industrial society, the concept and the definition of deletions designated by the service national accounting and from the U.S. Census Bureau preoccupies over what are the elements composing, by the number of different, these fine businesses complete whole. For example, in the United States, in the year 1976, over 85 percent of all commercial enterprises, which was about 17 million businesses, were listed as small businesses, which employed about half of the number of employees. Over 90 percent of workers are employed by small business proprietary trade.

It is evident that the diversity of the differences of definitions on small businesses contributes to further confusion as one searches to pinpoint the role of these businesses. The same confusion reflects itself in the diversity of roles small businesses play in the economies of our nations. Therefore, in order to evaluate the impact and the necessity of encouraging and developing, or for that matter, impeding and hindering the development of small businesses, and particularly the growth of these small businesses into larger entities, first an understanding of the operational environment and the existing structure is paramount.

3. Challenges Faced by Small Businesses

There are also specific Teach on Growth challenges entrepreneurs face. These include issues on management, labor quality and costs, and varying government programs and regulations. Social impediments, such as unequal opportunities and discrimination also get in the way of small business development. Technological change has also created difficulties for small companies. They may need new technologies, but the process of technology creation and adoption is complex and often beyond the capabilities of small businesses. Finally, the distribution of market power and access can significantly impede the ability of small businesses to mature for other reasons. Small businesses are dependent on buyers and sellers, and in the UK economy, 1000 companies control major supply chains. Only a few of them are large or indeed have a smaller number of firms controlling the main trade markets.

Despite their significance, small businesses struggle to grow. They are beset by specific sets of economic, social, and technological challenges. In addition, they find that not all impediments to growth are under their control. Public policies, as well as the working of the marketplace, provide further obstacles. Small businesses often lack access to capital. Banks are loath to lend to them, on the grounds of informational paucity, the generalization that small firms are riskier, especially in situations of asymmetric information, and the challenges that government markets inadequately address for entrepreneurs. Since the 2008 financial crisis, much of this credit rationing has gotten worse.

4. Policy Implications and Support Mechanisms for Small Businesses

The Mystery of Small Business It is indeed no easy task to specify an “ideal roadmap” for policy support of an economic force that has sustained economic growth, transformed, evolved, and continues to do so across different countries, industrial sectors, and over historical time. Policymakers need orientation to react to various types of constraints and issues, improve the embryonic conditions, or help businesses engaged in sufficient business activities make the transition to high value-added activities and transform the economic landscape. So far, analyses aimed at determining the contribution of small firms or small businesses to the economy have not been able to say much more than describe and quantify the different dimensions of what would constitute a ‘contribution’ and which should be an area of concern for the “business development sphere.” Their only common feature is that their objectives are tailored towards supporting the creation, survival, and prosperity of a subsector that in principle is “small.”

To examine the multi-dimensional aspects of small business promotion and policy support and provide suggestions that are meant to buy down the many risks and costs that limit small business formation and growth. Subsequently, orientations that can propel small businesses towards greater productivity, innovation, flexibility, and competitiveness are conceived. In general, though, the effectiveness of the small business sector depends on some critical supporting policy conditions, which include: supportive macroeconomic and structural conditions, or a favorable economy-wide business environment and rule of law; the existence and absence of certain factors that distort factor markets and the institutional environment within which small businesses are embedded, including a developed system of innovation; direct financial, technical, and training support; effective small business support institutions; the demand for their activities; and embedded entrepreneurship spirit and its development in the business population. Only constant cross-country evaluations will help gauge actual policy responses and interventions in the accelerating dynamism of the small business sector.

Defining small businesses is not an academic exercise, given the central role they play in transforming economies. Providing policy support to the subsector helps ensure that its impact on production, distribution, and employment are sustained and optimized. Since small businesses are individual enterprises, flexible and diversified institutions that facilitate the formation and development of small firms are required at the bottom level of development. Consequently, the challenges and issues raised at the outset of the paper should inform the type of support that policymakers conceive or the strategies that small businesses themselves are encouraged to put in place. The lessons we have gained from the above review and analysis of the extant literature provide several policy recommendations and suggest some framework conditions that are important, meaning that they should be considered in the design of small business development policies.

5. Conclusion and Future Outlook

As regards the dynamic implications, we find that a higher percentage of small businesses is associated with slower national income growth. However, this negative effect is not overwhelmingly strong. It can certainly be offset, or totally outweighed, by the faster national income growth that occurs in more innovative economies. Our finding that the faster national income growth in more innovative economies is positively related to the percentage of small businesses shows that innovation in small businesses is a key factor in counteracting any negative effects of their presence in terms of the dynamism of a country’s economy.

To conclude, our findings have calmly shown that the growth of the small business sector has both positive static and dynamic effects. In terms of the former, we have demonstrated that more small businesses per capita and a higher self-employment rate reduce income inequality. Moreover, the higher the proportion of small businesses in an industry, the larger the reduction in income inequality produced by those businesses. However, we obtain mixed results for the effect of the startup rate, which suggests that a rising startup rate is associated with a moderate decrease in income inequality in the long run and a modest increase in income inequality in the short to medium term. These findings are important, as a number of studies have shown that conclusions drawn from cross-sectional analysis, where regressions are based on data for a single period of time, can differ dramatically from those based on time-series data.