Small, Older Firms Are Biggest Economic Drivers

Businesses that are big drivers of economic growth are generally small and about 25 years old, according to a new study (pdf) that contradicts prior research that found small, very young firms were responsible for the vast majority of job replacements.

The study, conducted by the Corporate Research Board for the Small Business Administration's Office of Advocacy, found that high-impact firms are "relatively old, rare and contribute to the majority of overall economic growth." They represent between 2 percent and 3 percent of all firms and account for almost all of the private-sector employment and revenue growth in the economy.

The 92-page report said that local economic development officials would benefit from allocating their resources towards cultivating high-growth firms rather than towards trying to increase entrepreneurship overall or working to attract companies that are relocating. It also ranks the distribution of high-impact firms by state, with Alaska, Arizona, Wyoming, South Carolina, North Dakota and Virginia performing the best. (See Table 8 on page 32 for the full list.)

Among large counties, the one with the highest share of high-impact firms is Fairfax, Va., followed by Du Page, Ill.; Franklin, Ohio; and Riverside, Calif. The lowest rates are found in Queens, N.Y.; Wayne, Mich.; and Kings, N.Y.

From 2002 to 2006 there were about 376,600 high-impact firms in the United States, an uptick from the 300,000 between 1998 and 2002. These firms generally make an impact on the economy after they have been in business for a long time. They come in all sizes, ranging from three employees to more than 500 and are found in all industries. The report noted that high-impact firms are not necessarily in the high-tech sector and that they can either create innovations or use them.

Nearly all job loss in the economy occurred among low impact firms with more than 500 employees, the report said.

High-impact firms operating in the manufacturing, finance, insurance, real estate, transportation and services industries generally performed very well, according to the report.

"The industries that are rapidly growing, which are led by high-impact firms, seem to shift over time," according to the report authors. "Therefore, encouraging diversity as a policy seems to make much more sense than targeting select industries."

Prior research by small business pioneer and economist David Birch in the 1980s showed that fast-growing firms, which he pegged as "gazelles," are responsible for most employment growth. Birch's definition of gazelles was based on revenue growth; the study released today looks at firms with significant revenue growth and expanding employment. Other small business studies have taken up the phrase "gazelles' and added "mice," which are small firms that add little to employment, and "elephants," which are large firms that shed jobs.

By Sharon McLoone |  June 23, 2008; 3:39 PM ET Data Points
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