small business essay

small business essay

The Importance of Small Businesses in Economic Development

1. Introduction to Small Businesses

The small business sector represents the overwhelming potential for job growth in the United States. Small service- and knowledge-based establishments have consistently accounted for most of the new jobs generated within the United States, especially in the latter part of the 20th century. In addition, they provide a source of non-corporate career satisfaction. The relevance for others – that is, clients or beneficiaries – is a direct source of personal reward, also contributing to an entrepreneur’s fulfillment. They provide meaningful work, growth opportunities, and career satisfaction for employees. Good incentives are inherent for small business success. The most successful can offer lucrative financial gains, the satisfaction of success, challenging growth potential, and professional work experiences in a variety of roles and jobs to employees. Moreover, small businesses contribute favorably to the standard of living. They introduce new goods and services and provide efficiency and cost-saving solutions. Goods and services are tailored for the marketplace created by other companies, adding considerable value.

Entrepreneurial spirit is universally considered a vital force in economic development. Business start-ups are a key influencing factor of dynamism associated with macroeconomic measures of GDP growth. As a result, small business policies are an essential component of vibrant and sustained growth. In particular, financial markets which consistently provide seed and expansion capital are also instrumental in promoting and supporting small business personalities. Entrepreneurs create economic growth, forming businesses from new or novel applications of skill, capital, and innovation. They mobilize and direct resources, thereby making them more productive. As successful small businesses grasp new opportunities, they generate wealth, demand, and income flows, often providing a personal sense of achievement to the entrepreneur and others.

2. The Role of Small Businesses in Economic Growth

This view can be attributable to the fact that small business entrepreneurs, with much lower costs of experimentation, can be the primary agents of disruptive innovations that drive economic growth. This conclusion applies more towards start-up businesses rather than the more established enterprise. For instance, much of the recent productivity gains observed in the United States from technology advancement resulted from the increased growth of productive firms, especially small businesses, during the information and telecommunications revolution. Moreover, technological change can come from public sector research and development, which accelerates through the commercialization process, with the help of the small business sector.

One important explanation of economic growth comes from endogenous growth theory, developed by Paul Romer, Robert Lucas, and others. This theory stresses the role of technological change in economic growth and explains how production functions, workforce education and training, natural resource availability, and research and development efforts could affect this change. David Audretsch and A. Roy Thurik find through their exploration of this theory’s implications that new firm formation is indeed an important mechanism by which technological change, new knowledge, and new production methods contribute to economic success. Thierry Voillat goes further in describing the relationship as a symbiotic one involving the transformation and rejuvenation of the business environment, through both the creation of new entities and the destruction of older ones, in free enterprise systems.

3. Challenges Faced by Small Businesses

Much of the current debate about the challenges faced by small businesses relates to the differences between business sizes. Small businesses are faced with particular difficulties which distinguish them from medium and large enterprises – the most obvious ones being scale and turnover. Differences between types of small enterprises, for example, manufacturing, retail, services and regulated, unregulated businesses, also have a significant impact, as certain sectors face particular burdens in terms of business policies, government policy-induced structural changes and regulatory regimes. These differences also determine the particular challenges faced by small enterprises. Some of these business types are micro- or informal and generally equate to the survivalist and marginalized activities generally associated with the ‘underground’ or ‘shadow’ economy.

The South African economic environment is characterised by an abundance of cheap skilled and unskilled labour, and the small entrepreneurial enterprises are increasingly regarded as the path to employment and the economic development of poor areas in the country. Despite a wide variety of support mechanisms meant to enhance the growth potential and development of small enterprises in the form of finance, regulatory reform, skills and training, enterprise creation, business information services, marketing consultancy and so forth, there is little conclusive evidence as to the efficacy of these packages in promoting enterprise development. There exists a critical need to gradually and systematically develop the necessary knowledge and understanding of the determinants of business success, growth or failure among small and micro-franchised producers in South Africa.

4. Government Policies and Support for Small Businesses

State support to small industry in many developing countries frequently takes the form of a variety of fiscal incentives. Some of the most commonly used fiscal concessions are: exemption from direct taxes, typically for a certain number of years; the right to deduct some amount of business income from taxable income; reduced customs duty on the import of capital goods used by small industrial undertakings; and a range of provincial and local incentives which vary greatly. Some of these fiscal incentives are applied on the basis of location or employment, while other fiscal concessions are not so conditional. The general purpose of these concessions is to help the creation of added value from industry for small industrial undertakings. These state incentives have been accentuated by the trade policies, which protect the markets for finished goods and intermediate goods for small industry.

In recent years, the governments of many countries in the world have introduced specific policies and measures aimed at promoting small industry. Policies for promoting small industry have also been advocated by international funding organizations, particularly the International Labour Organization (ILO) and the World Bank. Underlying these policies, for the most part, has been the belief that small industry is a vehicle of industrialization and urbanization, as well as of downsizing enterprises. From the viewpoint of the labor market, the importance of small industry as a major source of employment creation and thereby unemployment is an argument in support of public intervention in this sector of the economy. Such policies have been generally supportive and have taken the form of state support in the form of incentives, targeted investments in small industry, and interventions to increase the efficiency of financial intermediation in the economy, and labor market policies in support of micro and small-scale enterprise (MSE) employment.

5. Conclusion and Future Outlook

A small business sector or an entrepreneurial economy has increasingly been recognized as the backbone of local and national economies in most Western economies. This recognition is supported by the fact that the small business sector accounts for significant contributions to the local and national economy and society in general, and is therefore a substantial determinant of improved economic, social, and environmental well-being and sustainable development. With an increasing understanding that small business activity is important for economic growth and sustainable development, business support has been high on the political agenda over the last few decades. We suggest future research opportunities that utilize multiple theoretical and disciplinary approaches to help uncover new and important knowledge addressing the ways in which small businesses contribute to economic development. More importantly, combining our voices from western advanced economies with researchers in emerging markets will provide a contemporary understanding of the fundamental implications of entrepreneurship, small and medium-sized firms, and economic development, such as social welfare institutions, capabilities, and poverty eradication, to enhance collaboration.

The primary aim of this chapter is to review critically and evaluate the existing theoretical and empirical studies on small firms and economic development, and to provide an agenda for future research. Based on the discussion of the evidence provided, the conclusion suggests that further consideration should be given to the different conceptual connections, research designs, theoretical foundations, and multiple dimensions of social welfare implications, particularly the regulatory institutions for entrepreneurship, small and medium-sized firms, and economic development. Furthermore, given the complexity of the internationalization of small firms compared to established multinational enterprises, future research should pay more attention to this crucial economic determinant and the contextual specificities of small business internationalization in emerging economies. Furthermore, regarding the critical function of small businesses in large developing economies, particularly China, the next section provides the context of a fast-growing small business sector in these emerging countries.