Research shows small businesses intend to be small

University of Chicago professors Erik Hurst and Benjamin Pugsley recently released a research study titled “What do Small Businesses Do?”  It examines a few very important components, including the specific industries small businesses with between 1-19 employees serve (the majority in just a few categories), the motivations behind starting their businesses and their propensity to truly “innovate.” But more importantly, the survey shows the appetite for small businesses to grow their businesses in terms of employees and size.  As it turns out, most small businesses start out small, stay small and are very happy being small.

“We were mostly just curious because we do a lot of work on entrepreneurship and wanted to get a sense of what and who these small businesses are,” said Professor Hurst, when asked about the motivation behind the study. “If you just look around you get a quick sense that a lot of small businesses are skilled craftsmen, dentists and things like that, they don’t match the metrics of innovation.”

Analyzing data from a number of existing sources, including Statistics of U.S. Businesses compiled by the U.S. Census Bureau, as well as the Survey of Small Business Finances (conducted by the U.S. Federal Reserve), the report comes to a number of interesting conclusion.

• The vast majority of business owners do not expect to grow and report not wanting to grow.  In fact, most firms start small and stay small throughout their entire lifecycle.
• Small businesses don’t meaningfully “innovate.” Very few small firms report spending resources on research and development, getting a patent or even copywriting or trade marking something related to the business (including the company’s name).
• The most common response for starting their own business was the existence of non-pecuniary benefits (being one’s own boss, having flexibility of hours, etc.)
• It is often inappropriate for researchers to use the universe of small business (or self-employment) data to test standard theories of entrepreneurship.

“We think of entrepreneurs as being innovators and growers, and along with that growth comes employment,” Professor Hurst continued. “What we’d like to do in the future is research on the firms and industries that tend to be the growers and the innovators.  Like biotech is now or retail was in the 1980’s, even computer firms in the 1990’s.  We want to identify the job creators in sectors over a given period of time.”

He admitted that it’s difficult to inform policy decisions to help small businesses, but the conclusion of the report suggested that subsidies targeted at increasing innovative risk taking and overcoming financing constraints may be misguided.  They suggest lowering the costs of expansion, which can be taken up by the much smaller share of small businesses aspiring to grow and innovate.

Another statistic the study cited was the existence of 21.7 million non-employer firms (zero paid employees) in 2007 that reported self-employment income.  Those are typically side businesses or independent consultants, people just trying to make some extra money by doing something they like as a hobby.

What this report hammered home for me is a belief that I’ve had for a long time: the majority of small businesses in the U.S. are people trying to make a living at what they do.  Most aren’t interested in becoming the next Microsoft or Google.  For every wildly successful enterprise that started in a garage, there are hundreds of hair salons, plumbers, carpenters and landscapers that start up every day, hoping to simply support themselves or their families.  While the term “entrepreneur” sounds catchy and interesting, it shouldn’t necessarily be equated with “small business.”

As this research shows, there are very different attitudes and motivations between the two groups.  Does this research surprise you as a small business?  As a small business owner, how do you relate to the findings?  What makes an entrepreneur versus a small business in your opinion?