Should Economic Developers Remove Small Business From Its Pedestal — To Help Them?
This may be heresy to many government agencies and politicians who need to wean themselves off their focus on small businesses if they want to create jobs and wealth – and help small businesses.
There are 3 principal business strategies to create jobs in an area and impact wealth creation:
. Job Catalysts–Wealth Importers: These are mainly midsized to large businesses that sell to regional, national, and global markets and import wealth into an area. But they often do not create many jobs because they need to be highly productive and labor-efficient if they are to be competitive on a global basis.
. Job Creators–Wealth Circulators: These are mainly small businesses, often retail or service, that cater to local consumers who circulate the wealth generated by the Job Catalysts. They need the wealth importers and are usually more labor-intensive than capital-intensive.
. Job Destroyers-Wealth Exporters: These are mainly product or service importers who may create jobs, but export area wealth generated by the Job Catalysts. These businesses need the Job Catalysts to generate wealth.
Yes, small business can create jobs. But small businesses do not create jobs in a vacuum. They mainly sell locally. They circulate money that is already in the area. To create jobs, they need increased area purchasing power, which needs someone to import wealth. This increased area wealth can be from the Job Catalysts who sell outside the region, or from government spending, including transfer payments. Small businesses benefit from this wealth that has been brought into the area – by others.
In the 1970s and 80s, many large U.S. manufacturers started outsourcing to cut costs. They were paying expensive benefits and huge salaries to their own employees, and they found that they could outsource to smaller subcontractors who would hire employees at lower wages and without corporate fringe benefits. The myth that small businesses create jobs took hold, and was actively promoted by some government agencies that benefitted from this hype, and it has never relinquished its position in our collective minds.
The net reality is that small businesses create jobs if someone else imports wealth, i.e., they need the increased direct and indirect purchasing power created by the exporting business.
To create or attract exporting businesses, areas can focus on attracting branch plants of corporations or develop their own unicorn-entrepreneurs who can develop exporting giants:
. Multinational and large corporations can locate plants anywhere – will they pick yours?
. What’s left are local entrepreneurs – can areas develop entrepreneurs who can develop exporting unicorns, compete with regional, national, or global competitors, and import wealth?
VCs do not finance ventures till after there is proof of potential, i.e., after Aha! This is because financing before Aha results in many failures and few homeruns, which is not a good recipe for VC success. Entrepreneurs need to know how to takeoff from Idea to Aha with finance-smart skills and strategies – and without VC. This means that areas with limited resources should focus on developing unicorn-entrepreneurs who can bridge the gap from Idea to Aha without VC.
By focusing on developing globally competitive unicorn-entrepreneurs to build more unicorns, areas can import wealth and help small businesses to flourish. They can do more for small businesses by doing less.
MY TAKE: Area developers can help small businesses by importing more wealth and purchasing power. To do this, they need to focus their resources on entrepreneurs who export from the area and import wealth. These exporting businesses need more sophisticated leaders who are can successfully compete against larger competitors in other areas. Areas can get more benefits by prioritizing unicorn entrepreneurs who import wealth into the area. They increase local purchasing power and enable small businesses to create jobs.