Let’s Work Together

The Role of Small Business in Economic Development

financial analysis
Jul 8th, 2015

“Economic development.”  Elected officials recognize these words as a hot button of popular and sometimes controversial issues.  Wikipedia defines economic development as “The sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area.”  Strategy for economic development revolves around the broad primary components of human capital, infrastructure and environment.  For example, adding infrastructure such as a road to an undeveloped area helps to make it more prime for growth, but without business enterprises and people to work and / or people to consume, the road remains empty and thus there may be no return on the expensive investment.  It is a chicken versus the egg conundrum.  What can the community do to generate economic activity that will ultimately benefit us all?

Prior to the Great Recession, many economic development strategies were based upon “company attraction” logic – with the goal being to entice large corporations to locate in the community and bring along with them jobs to employ existing and new members of the locale.  Like any good competitive adventure, it was (and still is) a very big win for a community to attract a large new business.  The professionals in economic development call this “smokestack chasing” and it is difficult for most communities to win at, as there are very few candidates with many suitors.   During the recession, many people looked to form small businesses to create their own jobs to replace what they had lost via corporate downsizing.  Entrepreneurs have always been pioneering. Today, the trend is to attract citizens who supply the workforce which is coveted by existing and new enterprises (which is called a “Quality of Life” approach).  A parallel economic development model is to appeal to the entrepreneurial / creative class of entrepreneurs that will start new businesses.

Today, small business is playing a leading role in local economic development across the nation.  According to the SBA:

  • The 28 million small businesses in America account for 54% of all U.S. sales
  • Small businesses provide 55% of all jobs and 66% of all net new jobs since the 1970s
  • The 600,000 plus franchised small businesses in the U.S. account for 40% of all retail sales and provide jobs for some 8 million people

Furthermore, the small business sector is growing rapidly. While corporate America has been downsizing, the rate of small business “start-ups” has grown, and the rate for small business failures has declined (source: https://www.sba.gov/content/small-business-trends-impact).

It is much easier to attract, start and grow small businesses as an economic development strategy than it is to entice a “trophy company” to a community.  Small businesses often lead a community’s economic growth.  Small businesses tend to be more flexible than and just as innovative as their larger counterparts.  Perhaps more importantly – they work in their businesses, live near their businesses, provide jobs, add to the tax base, participate in community activities, support local charities and share community concerns.  Attracting, developing and supporting entrepreneurs is a desirable and important component of economic development that is sometimes overlooked in the community. The ISBDC is committed to providing entrepreneurs expert guidance and a comprehensive network of resources to aid in their development, which results in community growth.