2012-03-06 08:29:16
Why small firms are less wonderful than you think
Mar 3rd 2012 | from the print edition
PEOPLE find it hard to like businesses once they grow beyond a certain size.
Banks that were too big to fail sparked a global economic crisis and burned
bundles of taxpayers cash. Big retailers such as Walmart and Tesco squeeze
suppliers and crush small rivals. Some big British firms minimise their tax
bills so aggressively that they provoke outrage. Films nearly always depict big
business as malign. Tex Richman, the oil baron in the latest Muppets movie, is
so bad he reads The Economist. Small wonder that whenever politicians want to
laud business they praise cuddly small firms, not giants.
It is shrewd politics to champion the little guy. But the popular fetish for
small business is at odds with economic reality. Big firms are generally more
productive, offer higher wages and pay more taxes than small ones. Economies
dominated by small firms are often sluggish.
Consider the southern periphery of the euro area. Countries such as Greece,
Italy and Portugal have lots of small firms which, thanks to cumbersome
regulations, have failed lamentably to grow (see article). Firms with at least
250 workers account for less than half the share of manufacturing jobs in these
countries than they do in Germany, the euro zone s strongest economy. 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. For all the
boosterism around small business, it is economies with lots of biggish
companies that have been able to sustain the highest living standards.
Big firms can reap economies of scale. A big factory uses far less cash and
labour to make each car or steel pipe than a small workshop. Big supermarkets
such as the villainous Walmart offer a wider range of high-quality goods at
lower prices than any corner store. Size allows specialisation, which fosters
innovation. An engineer at Google or Toyota can focus all his energy on a
specific problem; he will not be asked to fix the boss s laptop as well.
Manufacturers in Europe with 250 or more workers are 30-40% more productive
than micro firms with fewer than ten employees. It is telling that micro
enterprises are common in Greece, but rare in Germany.
Big firms have their flaws, of course. They can be slow to respond to customers
needs, changing tastes or disruptive technology. If they grew big thanks to
state backing, they are often bureaucratic and inefficient. To idolise big
firms would be as unwise as to idolise small ones.
It s what you do with it that counts
Rather than focusing on size, policymakers should look at growth. One of the
reasons why everyone loves small firms is that they create more jobs than big
ones. But many small businesses stay small indefinitely. The link between small
firms and jobs growth relies entirely on new start-ups, which are usually
small, and which by definition create new jobs (as they did not previously
exist). A recent study of American businesses found that the link between
company size and jobs growth disappears once the age of firms is controlled
for.
Rather than spooning out subsidies and regulatory favours to small firms,
governments should concentrate on removing barriers to expansion. In parts of
Europe, for example, small firms are exempted from the most burdensome social
regulations. This gives them an incentive to stay small. Far better to repeal
burdensome rules for all firms. The same goes for differential tax rates, such
as Britain s, and the separate bureaucracy America maintains to deal with small
businesses. In a healthy economy, entrepreneurs with ideas can easily start
companies, the best of which grow fast and the worst of which are quickly swept
aside. Size doesn t matter. Growth does.
from the print edition | Leaders