If the hypothesis was correct, he reasoned, the evidence would lie in measures of value added. A vertically integrated company adds immense value to its inputs, taking raw materials in one end of the factory and pushing finished products out the other end. In the new, more specialized environment, companies would be focusing on individual parts of the production process and therefore adding less value. Sure enough: when Carlsson tabulated the numbers, the ratio of value added to shipments had declined over a 10-year period in 88 of the 106 metalworking industries.
Carlsson had also begun an intensive study of machine tools while he was at MIT and had noticed another phenomenon. "For more than 150 years, most changes in production technology favored large-scale manufacturing relative to small-scale production," he says. By contrast, today's computer numerically controlled (CNC) machines operate economically at lower production levels and can easily be reprogrammed to turn out a wide variety of customized products. That gives small companies a key advantage.
John Jackson, who studied the Michigan economy, in-dependently confirmed Carlsson's thesis. Michigan's machine-tool industry, he discovered, was split right down the middle: declining or dying companies lost 18,000 jobs over a six-year period, while new or growing companies created 15,000 new ones. Jackson and two colleagues had surveyed the industry separately in 1984, asking not only about changes in sales and employment, but also about the type of technology used. By far the greatest growth, both in jobs and in sales, took place among companies that utilized only CNC equipment. These companies, moreover, were significantly younger and smaller than the industry average.
Ever since David Birch sat down with a yellow pad to report his job-generation results, the small-business community has been quick to perceive the political implications of this field of study. "I had never talked to a small-business person in my life, and I had no idea there were small-business advocacy groups out there," Birch says, recalling his astonishment at the reaction to his original study. "Suddenly there I was, getting an award as SBA researcher of the year." Agencies such as the SBA and lobbyists such as the National Federation of Independent Business quickly latched on to Birch's work. If small companies create jobs, their argument ran, the government should do all it can to help them. Studies such as those by Reynolds and Jackson created similar stirs at the state level.
Scholarly research and politics, however, are uneasy bedfellows. Advocates for small business, Birch points out, often neglect to mention that most small companies grow scarcely at all, and that the job-creating high fliers such as Microsoft Corp. and Mrs. Fields Inc. frequently don't have much in common with more traditional small enterprises. On the other side, Birch's own work is mistrusted by some academics because of his reputation as a partisan of entrepreneurship, who oversimplifies the world on behalf of new companies.
The issue comes into sharpest focus over job generation. Nearly everyone now agrees that many of the new jobs created each year are in small companies. But, ask critics such as James Medoff of Harvard, how durable are the jobs? How well do they pay? In general, Medoff and other economists have shown, large companies pay higher wages and provide better benefits than small ones. And at least some studies suggest that larger businesses are more stable employers. "If a job generated today is gone tomorrow, another job will have to be generated," Medoff says.
Birch critic George Kalidonis takes a different tack, charging that attributing job creation to the small company that happens to employ a new worker is an oversimplification. If an Illinois company sells its widgets to a California firm, Kalidonis argues -- and if the order requires new printed material, thereby leading to 10 new printing jobs -- it makes little difference if the jobs are in a big company or a small one. "The jobs," he writes, "were created by the California buyer who placed the order."
The trouble with such arguments isn't that they're wrong, but that they miss the point. In the recent past, big business really did provide high-paying, stable jobs -- in the steel industry, the auto industry, and many others. It can no longer do so. Most growing companies can't yet either. But at least they're providing some jobs to replace the 3.1 million eliminated by the Fortune 500 over the past eight years. Kalidonis's notion of a demand-driven economy, similarly, makes sense only if we assume it's always big companies that "place the orders" and that small companies can only respond to such markets. It allows no room for small companies buying from one another or for small companies creating new markets through innovation. Kalidonis is getting at the notion of an economic "base" -- that is, companies that export their goods or services outside their home region. But these days small companies as well as large ones fall into that category.
All this skirmishing is likely to continue. Entrepreneurship has had a long day in the sun, and it would be surprising indeed if it didn't experience a backlash. From an academic perspective, however, it no longer depends on pioneers such as Birch or indeed on any single school of thought. More people are studying it than ever before. What they're learning is not simply that small companies create jobs, but that our economy is undergoing changes affecting businesses of all sizes. Maybe they'll help us, over the next several years, understand those changes better than we do now.
BIRCH'S REVENGE
The only thing you'll ever have to read about job generation
Pity David Birch. Not long after he wrote "The Job Generation Process" back in 1979, two researchers employed by Washington's Brookings Institution published a paper declaring him wrong. They had examined the job-creation data for 1978 to '80, they said, and discovered that small companies created only about 40% of the new jobs, not the 82% Birch had claimed for the years 1969 to '76. Maybe Birch had screwed up, they suggested, by confusing companies with individual workplaces. If IBM builds a new distribution facility and hires 100 employees, that's not a new business.
