Working Paper

The role of small business in economic development

Abstract: This paper sets out to evaluate the role that entrepreneurs and small businesses play in economic development. How important are entrepreneurs and small businesses in creating jobs, and are these the types of jobs that should be encouraged? How important are entrepreneurs and small businesses in the development of new products and new markets? Does promoting entrepreneurship and small businesses make sense as an economic development strategy? The answer is yes, but with some qualifications. Small businesses are potent job creators, but so are large businesses. The attribution of the bulk of net job creation to small businesses arises largely from relatively large job losses in large firms, not to especially robust job creation by small firms. More importantly, data show that large businesses offer better jobs than small businesses, on average, in terms of both compensation and stability. Further, there is little convincing evidence to suggest that small businesses have an edge over larger businesses in innovation. However, research and experience show that pursuing large businesses is likely to be a poor economic development strategy, which suggests that promoting entrepreneurship and fostering small businesses may offer a more viable alternative. But more research is needed to evaluate the case, and indeed, to determine whether or not public engagement in economic development itself is a cost-effective and worthwhile pursuit.

Keywords: Small business; Economic development;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Community Affairs Research Working Paper

Publication Date: 2004

Number: 2005-01