Popular Fetish For Small Businesses At Odds With Economic Reality

People like small businesses, they find it harder to like businesses once they have grown beyond a certain size. This is because the banks that were deemed “too big to fail” ignited the global economic crisis and in turn, cost the taxpayer a vast sum of money. Big retailers such as Tesco and Walmart crush small rivals squeeze suppliers and in the UK. Abroad big firms minimise their tax bills so vehemently that they provoke outrage and disgust among the public. However, big firms are proving to be increasingly more effective and appealing over smaller businesses.

Big firms are generally more productive and offer higher wages to its workers. Manufacturers in Europe with more than 250 or more employees are 30%- 40% more productive than “micro” firms, with fewer than ten employees. It is telling that micro enterprises are rare in Germany but common in Greece. Around a third of Greek manufacturers are “micro” firms with fewer than ten workers compared with 4.3% of firms in Germany. It is no surprise then that the German economy saw a record GDP growth of 2.2 percent in 2010 whilst the latest numbers for the fourth quarter of 2011 show Greek GDP shrinking by as much as 7% a year. Is the dominance of small firms in Greece a contributing factor to its title as the progenitor of the euro zone debt drama? Certainly so.

Economies dominated by smaller firms are often sluggish. Countries such as Greece, Italy and Portugal have a number of small firms which thanks to cumbersome regulations, have failed lamentably to grow. These are the cumbersome regulations within its licensing set-up that have meant that in order to gain final approval for a business plan, it can take visits to ten or more bureaus at several ministries as well as having dozens of documents filed. A shortfall of big firms is linked to the sluggish productivity and loss of competitiveness that is the deeper cause of the euro-zone crisis. If the best small firms were able to grow bigger, Greece might solve its competitiveness problem without having to cut wages or leave the Euro.

Big firms do however have their flaws. They have proved to be slow to responding to customers’ needs and in changing tastes. With the help of state backing, they also often become bureaucratic and inefficient. In essence, to worship big firms would be as erroneous as to worship small ones. Nonetheless, size allows for specialisation, which subsequently fosters innovation, a quality smaller firms lack. Big firms can reap economies of scale. A large factory uses far less cash and labor to make each steel pipe or car than a small workshop. Large supermarkets such as Tesco offer a wide range of high quality goods at lower prices than any corner store.

The problem with small businesses is that they many of them stay small indefinitely. Some are exempted from the most burdensome social regulations which provide incentive to stay petite. Governments ought to remove barriers to expansion instead of spooning out subsidies and regulatory favors to small firms.

Ultimately, a bias to small firms is costly; the productivity of European firms with fewer than 20 workers is on average little more than half of firms with 250 or more workers. A study by John Haltiwanger of the University of Maryland, with two researchers at the US Census Bureau, finds that young firms, most of which happen to be small, account for much of America’s jobs growth. Mature small firms other destroy jobs as do small start ups that do not survive. Perhaps in this case then, it is better to be young than petite and essentially it is not size that matters but growth. Economic reality may show that big firms are better than small ones, but it also shows that growth is a factor simply too significant to overlook.

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