Over the past 15 years, taking the measure of small business's role in the economy has blossomed into an industry all its own. here are its key players, leaders, and pacesetters
Trailblazers never have it easy. These researchers are no exception. To appreciate their pioneering spirit, just recall how unforgiving the climate was for small business during most of the 20th century. In the early decades titanic corporations were worshipped as the sole creators of jobs, the builders of wealth, the purveyors of the American dream. And for the most part, they were.
"I was brought up by a family that weathered the depression, and I was taught from an early age that big corporations were the place to become employed," explains Bruce Kirchhoff, a professor of entrepreneurship at New Jersey Institute of Technology. "Through the mid-1960s the icebreaker at any party was 'Whom do you work for?' It wasn't 'What do you do for a living?' " Heaven forbid you worked at a small company, or worse still, launched your own.
To complicate matters, the most memorable flickers of entrepreneurial research were snuffed out. Take Austrian American economist Joseph Schumpeter's Capitalism, Socialism, and Democracy (1942; Harper and Row, 1975 reprint). Schumpeter suggested that competition was fueled by technological change, not the head-to-head bouts between industry players. Schumpeter's theory of "creative destruction" implies that start-ups have to displace seasoned businesses to advance an industry. It sounds logical now, but back in the 1940s, Schumpeter was pooh-poohed by the mainstream because his profound message was drowned out by grim Marxian overtones. Basically, he argued that if we don't wake up and realize that new enterprises catalyze economic growth, we're bound for socialism in a handbasket. Joe McCarthy blew the whistle, and some Schumpeterians were blacklisted.
OK. If people weren't ready to swallow the notion that bantam companies contribute to gross domestic product, perhaps they'd warm to the idea that the entrepreneurs -- ordinary folks like themselves -- generate the wealth.
So thought David McClelland, who tried to solve the economic-development puzzle by identifying the common quirks and motivations of company builders in The Achieving Society (Van Nostrand, 1961). Unfortunately, his conclusion -- that culture determines the ability to create new businesses -- silenced students of economic development in underprivileged areas. Soon thereafter, research projects involving the inner city and third-world countries came to a screeching halt.
Strike two.* * *
Timing Is (Almost) Everything
If by the late 1970s you still believed that corporations manufactured all the new jobs, then the oil crisis had to jolt you into thinking otherwise. "Before then," notes Zoltan Acs, a visiting professor of business and public policy at the University of Maryland, "everything was big, big, big. After, there was great uncertainty."
With good reason: times were uncommonly tough. "The dollar was under attack. Oil was $100 a barrel, and inflation was sky-high. Steel mills and auto plants were closing," recalls Acs. Everyone wanted easy answers to baffling questions: Where have all the quality jobs gone? Where should I peddle my products? People craved something -- anything -- that would explain away the recession and get the country back on its feet.
That's when David Birch, armed with yellow legal pads of computations proving that young companies do leave their mark on the economy, came to the rescue. But his analysis suggested that they don't leave dents. They form bulges. The news was music to everyone's ears.
Looking back, Birch couldn't have struck out. He parked the ball because his signature finding -- that small business creates most of the jobs -- still holds true, and he vigorously marketed the concept every chance he got. Birch sent copies, the story goes, of his original report, "The Job Generation Process," to every power broker in Washington. Scribbled on the cover page were the words "Just thought you'd be interested."* * *
Washington Gets Wired
In 1980 Congress passed the Small Business Economic Policy Act. It called for an annual report on the state of small business and for the creation of a national small-business database that would chart employment and income changes and the commercial doings of exporters and woman- and minority-owned businesses. To legislators, the requests seemed simple enough. But to the economists at the Small Business Administration, they were knotty. "We had this laundry list of items we were supposed to report on," recalls Bruce Phillips, then a staffer under SBA's chief economist, Bruce Kirchhoff. "But we had almost no data to begin to comply with the mandate."
Desperate for figures, the two Bruces wrote to state employment agencies for unemployment data. Some states agreed to send the data; others cited confidentiality restrictions. "Since we couldn't build a nationally representative database by company size with numbers from 20 states, we turned to Dun & Bradstreet," explains Phillips.
The D&B data, however spotty, were run until November 1991, when the SBA's Office of Advocacy penned agreements with the Census Bureau to exploit its data banks. But the SBA found its initial research outlay of $4.5 million reduced by 10% annually during the Reagan-Bush era. Today, its budget rests at a paltry $1.5 million, which has forced it to use resources more creatively.* * *
Divide and Conquer
Meanwhile, the nuances of Ronald Reagan's economic-development platform fell on listening ears. Let's return to individualism, he cried. Let's not look to Washington for the yellow-brick road to prosperity. Instead, let's prune government-sponsored programs and sweep responsibility back onto the states.
So researchers began putting mom-and-pops under their microscopes to unravel the mysteries of business volatility. Endowed chairs in entrepreneurship opened at universities far and wide, and the academics who occupied those thrones developed innovative ways to measure the entrepreneurial fray. Marquette University's Paul Reynolds scrounged for money to hire researchers to write questionnaires, interview chief executives, and literally count companies. Technowizards like the University of Michigan's John Jackson created databases that held at least five years' worth of data.
It was a filthy job, but Reynolds, Jackson, Acs, and several other Birch devotees validated his original job-generation findings in their own special ways. Collectively, they discovered that small companies were innovative, flexible, and resilient job-making machines and that the constant ebb and flow of new companies was a necessary (but hardly sufficient) condition for regional growth.* * *
Entrepreneurship research is still in its infancy, and it embraces a hodgepodge of activities. "We're studying material at the crossroads of economic life and social life," says Reynolds. "Real people start companies, and that act can only partly be explained by economics. That's why it's so interesting." But that's also what makes it so difficult.
Fortunately, these scholars are equipped for the challenge. "Researchers who don't have a more traditional economics background come to this field with very different sets of tools," explains Bill Bygrave, director of Babson College's Center for Entrepreneurial Studies. "Most doctoral programs in business give students hammers. We come with chisels and saws and other tools, not just hammers."
And they're not afraid to use them.
The Dynamic Capitalist
Bruce A. Kirchhoff, 57, professor of entrepreneurship at New Jersey Institute of Technology's School of Industrial Management, E-mail: email@example.com Fax: 201-596-3074
Fields of study: Business; chemical engineering
Areas of expertise: Entrepreneurial economics; start-up survival rates
Selected works: "Assessing Firm Failure Fictions" ( Journal of Private Enterprise, 1993); "Creative Destruction Among Industrial Firms in the United States" ( Economics of Small Firms, Kluwer Academic, 1990)
Discovery: Joseph Schumpeter was right: start-ups are the vitamins that keep our economy healthy. More than half of young companies survive through year eight, when growth kicks into high gear.
Kirchhoff's book Entrepreneurship and Dynamic Capitalism (Praeger, 1994) explains how entrepreneurs, by marketing inventions and creating wealth, invigorate the economy. Kirchhoff argues for a new brand of economics that embraces the pioneering contributions of the Bill Gateses of the world. Today the only models that policy makers trust are firmly anchored in general-equilibrium theory, which captures linear balances among factors of production. But they can't begin to grasp the changes of dynamic capitalism -- the new technologies, for instance -- that come out of the blue and knock the economy off its axis. If you're not one of the 350-plus people who have purchased Kirchhoff's book and you're dying to know how to benchmark entrepreneurial activity, he suggests you "pick up a book on chaos theory."
The Data Dispenser
Bruce D. Phillips, 48, director of the Office of Economic Research, the SBA Office of Advocacy, in Washington, D.C. Fax: 202-205-7064
Field of study: Economics
Areas of expertise: Data sources for small-business research; business dynamics, such as start-ups and failures
Selected works: "The Influence of Industry and Location on Small Firm Failure Rates" (Babson Entrepreneurship Conference, 1993); "Small Business in the Year 2005" (Office of Economic Research, SBA, 1995)
Discovery: Start-ups survive years longer if they spawn jobs, and when they eventually close shop, most do so willingly.
Many people assume that when a neighborhood business disappears, it must have flopped. Not so, argues Phillips, who wagers that 85% to 90% of all business closures are entirely voluntary. "In most cases, we see them rechanneling their resources from, say, a Chinese-food restaurant to one that sells seafood." That's hardly a textbook failure, a venture lost to creditors. So who will survive into the next millennium? Most likely, it'll be the proud owners of four dry cleaners or four office-product stores. "It's the single pizza place, the single anything, that's rapidly disappearing," Phillips says. "It's much harder to sustain that single location. There are far too many Boston Chickens and Starbucks."
Zoltan J. Acs, 48, visiting professor of business and public policy at the University of Maryland's College of Business and Management, in College Park, Md.; cofounder of Small Business Economics, a bimonthly journal that defines the role entrepreneurship plays in the global economy, E-mail: firstname.lastname@example.org, Fax: 301-405-7635
Field of study: Economics
Areas of expertise: Innovation; business dynamics; flexibility
Selected work: Innovation and Small Firms (MIT Press, 1990), with David B. Audretsch
Discovery: In industries dominated by large companies, it's the small players that do most of the innovating.
"I was looking at mini steel mills in the Midwest," Acs says of his work in late 1978. "There shouldn't have been any activity. The economy was sour. That's why I was looking at organizational differences, uses of new technology, and union activity." Well, not only did Acs find upstarts in a dying industry, he also found that they were remarkably innovative in the ways they organized and applied new technology.
Acs plans to take the basic principles of small-business economics (innovation, flexibility, and so on) and determine which ones have the greatest impact on competitiveness.* * *
The Human Microprocessor
John E. Jackson, 52, professor of business administration at the University of Michigan's Institute for Social Research, in Ann Arbor, Mich. E-mail: email@example.com. Fax: 313-764-3522
Fields of study: Political economy; economics
Areas of expertise: Regional and industrial job creation; wealth building in free-market and transitional economies
Selected works: "Firm Size and the Dynamics in a Market Economy" (University of Michigan Business School, 1994); "Seeing the Trees Through the Forest: The Changing Michigan Economy, 1978-1988" (University of Michigan Business School, 1991)
Discovery: Tiny start-ups, including ones in lackluster industries, create good jobs that become better as companies flourish. Large start-ups may survive longer, but they don't breed the same long-term jobs that tiny start-ups do.
Jackson's data refuted the then-popular notion that industrial policies subsidizing a few down-and-out industries would raise Michigan's economy. He advocates progressive policies that stimulate venture creation and productivity throughout that state.
Jackson's efforts suggest that transitional countries can build their own market economies by encouraging entrepreneurship. "The number of companies in a particular industry and location is much more important to job creation than the overall industry employment," says Jackson.
That dynamic is striking in Poland and in other heavy-manufacturing-based economies that look much like Michigan's economy did years ago. That's why Jackson is developing a database of Polish organizations. He wants to measure the economic activities of start-ups there to determine how their contributions stack up against larger private, foreign, and state-owned industries.
The Renaissance Researcher
Paul D. Reynolds, 57, the Coleman Foundation chair holder in entrepreneurial studies, Marquette University's College of Business Administration, in Milwaukee. E-mail: firstname.lastname@example.org. Fax: 414-288-1660
Fields of study: Sociology; engineering
Areas of expertise: Job creation; regional business volatility
Selected works: "The Entrepreneurial Process: Preliminary Explorations in the United States" (Eurostat International Workshop, 1994); "Local and Regional Characteristics Affecting Small Business Formation: A Cross-National Comparison" (Organization for Economic Cooperation and Development, 1993)
Discovery: At any moment roughly 4% of the adult U.S. population is starting a company.
Reynolds has been piecing together a national sample of adults who are early-stage entrepreneurs. Results show that one in 25 people are bootstrapping companies, but it's still too early to tell how those go-getters influence gross domestic product. We do know that in at least five years, half of those start-ups will still be around. It's clear, too, that company building is particularly popular among the ingenious Yankees of the Northeast and the rugged individualists of the West. What's more, most entrepreneurs start their businesses on the streets where they live: nearly 90% live in a state for six years before they incorporate there.
Donald L. Sexton, 62, director of curriculum at the Ewing Marion Kauffman Foundation's Center for Entrepreneurial Leadership, in Kansas City, Mo. E-mail: email@example.com. Fax: 816-751-6835
Fields of study: Strategic management; mathematics; physics
Areas of expertise: Problems of high-growth companies, turnarounds, and entrepreneurship
Selected works: Encyclopedia of Entrepreneurship (Prentice-Hall, 1982), with Calvin A. Kent and Karl H. Vesper; The State of the Art of Entrepreneurship (PWS-Kent, 1992), with John D. Kasarda
Discovery: Starting a company and growing one are entirely different tasks.
Sexton's compendiums, which are five-year snapshots of the entrepreneurial-research marketplace, are invaluable tools for anyone studying entrepreneurship. In 1982 Sexton and his coeditors divided the field into 14 niches to find the research gaps and suggest the next frontiers. Stack them up and you can see the waves of excitement, the growth in the number of niches, the progress of individual scholars, the perennially hot topics, and the passing fancies.
The books grew out of conferences on entrepreneurship that Sexton and Karl Vesper, of the University of Washington, first staged in 1980. It was the first time leading thinkers met to discuss how they could address the problems of growing companies. Sexton's traveling "State of the Art of Entrepreneurship" conference, held every five years, will be at the Kauffman Foundation in 1996.* * *
The Social Networker
Howard E. Aldrich, 51, the Kenan Professor of Sociology at the University of North Carolina at Chapel Hill, N.C. E-mail: firstname.lastname@example.org. Fax: 919-962-7568
Fields of study: Sociology; business
Areas of expertise: Social networks; organizational evolution
Selected works: "Gender Gap, Gender Myth" (Global Conference on Entrepreneurship, INSEAD, 1994); "Friends and Strangers: Early Hiring Practices and Idiosyncratic Jobs" ( Frontiers of Entrepreneurship Research 1994, Babson College.)
Discovery: Most entrepreneurs don't "go solo." Business formation is a cooperative, social endeavor.
Aldrich popularized the notion of social networking among growing companies. In the late 1970s he expected CEOs to turn to outside experts for business advice. Wrong. Nearly all rely on the people they've known for years. In the mid-1980s Aldrich figured women owners who needed quick banking or legal counsel would look to friends and family. Wrong again. They turned to perfect strangers and wound up paying below-market rates. Curiously, fewer than 5% of all owners, male or female, leaned on kin at all.
Jerome A. Katz, 43, associate director of the Jefferson Smurfit Center for Entrepreneurial Studies at St. Louis University, in St. Louis, Mo. E-mail: email@example.com. Fax: 314-977-3897
Fields of study: Organizational psychology; political science
Areas of expertise: Secondary analysis of entrepreneurship data; organizational emergence
Selected work: "The Growth of Endowments, Chairs, and Programs in Entrepreneurship on the College Campus" ( Entrepreneurship: Theory and Practice, 1991)
Contribution: Bringing entrepreneurial research on-line
In 1995 Katz and his associates rolled out the first Internet gopher for entrepreneurial topics, a one-stop shop of more than 400 indispensable academic and popular-press titles and sources of small-business information, for researchers, students, policy makers, journalists, entrepreneurs, and those who market to them. The Internet gopher address: sluava.slu.edu at the prompt; then choose SLU General and Department Information at the first menu and EGOPHER at the second.
The Woman Pioneer
Candida Greer Brush, 47, assistant professor of management policy at Boston University's School of Management. Fax: 617-353-2564
Fields of study: Business; Latin-American studies Area of expertise: Managerial styles of women business owners
Selected work: The Woman Entrepreneur: Starting, Financing, and Managing a Successful New Business, coauthored with Robert Hisrich (Lexington Books, 1986)
Discovery: Women entrepreneurs are a force to be reckoned with.
By 1985, Candy Brush and Robert Hisrich, who conducted the first nationwide study of female entrepreneurs, had compiled the first statistically significant sample of 400-plus woman-owned businesses. For the times, their results were eyepopping: women networked much better than men did, they elicited much more loyalty from employees, and they had a higher probability of surviving the critical three- to five-year hurdle than anyone had previously imagined.
Brush, who now studies women manufacturers who go international, writes case studies featuring female CEOs. Her work sparked researchers like Marquette's Nancy Carter to count woman-owned business starts and stops. But Brush claims there's more work to be done: while 32% of companies are run by women and they're appearing twice as often as those run by males, only 10% to 15% of research papers analyze their contributions.
The Disenfranchised Franchise guru
Timothy Bates, 49, professor of economics at Wayne State University's College of Urban, Labor, and Metropolitan Affairs, in Detroit. E-mail: firstname.lastname@example.org. Fax: 313-577-8800
Field of study: Economics
Areas of expertise: African American entrepreneurs; franchising
Selected works: Banking on Black Enterprise (Joint Center for Political and Economic Studies, 1993); "A Comparison of Franchise and Independent Small Business Survival Rates" ( Small Business Economics, 1994)
Discovery: Franchises close more frequently than independent businesses do.
Bates, who studied black entrepreneurship for two decades, has recently shifted to franchising. Corporate downsizing made him do it. "The disenfranchised are buying into franchises at an incredibly high rate," says Bates, adding that many are failing miserably. His statistics show that franchises are closing more often than independent businesses are. That's why Bates is now exploring how often African Americans, Asians, and Hispanics buy into franchises and which franchised industries have the highest survival rates.
The Self-Employment Specialist
David S. Evans, 41, senior vice-president at National Economic Research Associates Inc. (NERA), in Cambridge, Mass.; adjunct professor of law, Fordham University Law School, in New York City E-mail: email@example.com Fax: 617-621-2695
Fields of study: Labor economics; statistics
Areas of expertise: Self-employment; small-business regulation
Selected works: "The Determinants of Variations in Self-Employment Rates Across Countries and Over Time" (NERA, 1994); "Small Business Formation by Unemployed and Employed Workers" (NERA, 1990)
Contribution: Spearheaded the study of self-employment
Evans's least-anticipated statistical find was made in 1987, when he noticed that asset-rich individuals were more likely to become entrepreneurs. That breakthrough opened doors for scads of scholars to investigate the role that personal liquidity plays in the decision to go solo. Now, analyzing soloists worldwide, Evans sees tremendous diversity in self-employment levels among Organization of Economic Cooperation and Development and lesser-developed countries.* * *
The IPO Watcher
William D. Bygrave, 58, the Frederic C. Hamilton Professor of Free Enterprise and director of the Center for Entrepreneurial Studies at Babson College, in Wellesley, Mass. E-mail: firstname.lastname@example.org Fax: 617-239-5272
Fields of study: Business; philosophy of science; nuclear-structure physics Area of expertise: Venture capital, primarily high-tech start-ups
Selected work: Venture Capital at the Crossroads, with Jeffry Timmons (Harvard Business School Press, 1992)
Discovery: The health of the initial-public-offering (IPO) market determines the flow of money into venture-capital funds. And the once-mythological return rate of 40% for venture funds is now more like 20%.
Bygrave found that when IPO markets are hot, the returns on venture capital are hot; the converse is equally true, in which case cash flowing into the venture-capital market slows to a trickle. His work has been replicated in Europe, where similar trends are unmistakable. For that reason, in 1992 the European Commission asked Bygrave to head an eight-nation study to look into the lack of a second-tier stock market in Europe. Someday soon the NASDAQ's sister exchange will be known as EASDAQ. Bygrave's next project: finding out whether underwriters help or hamper the capital-formation process.* * *
The Russian Entrepreneur
Robert D. Hisrich, 50, the Mixon chair holder in engrepreneurial studies at Case Western Reserve's Weatherhead School of Management, in Cleveland. E-mail: email@example.com. Fax: 216-368-4785
Fields of Study: Business; English; biological sciences
Areas of expertise: International business; woman-owned businesses
Selected works: "Entrepreneurship in the Soviet Union and Post-Socialist Russia" ( Small Business Economics, 1995); "The Role of Women Entrepreneurs in Hungary's Transition Economy" ( International Studies of Management and Organization, 1994)
Discovery: If you build a business college in Russia, students will come.
"If economic development is going to happen here, it has to be through universities," says Hisrich, explaining why he opened the first accredited Western-style, four-year business college in Moscow in September 1991 to 35 eager students. Last September Hisrich struck again with the International College of Entrepreneurship and Management, an accredited four-year degree school also offering open-management seminars and a business-assistance center in remote Cheboxary. "The farther you are from the power source," explains Hisrich, "the easier it is to get things done."
The Granddad of Job Creation
David L. Birch, 57, founder and president of Cognetics Inc., an economic-research company in Cambridge, Mass. Fax: 617-661-0918
Fields of study: Physics; managerial economics
Areas of expertise: Job creation; urban and regional economics
Selected work: Job Creation in America: How Our Smallest Companies Put the Most People to Work (Free Press, 1987)
Discovery: Small companies are the engine of our economy. In 1978, when Birch was trying to identify the hot zones of the U.S. economy from his lab at the Massachusetts Institute of Technology, he accidentally discovered that the vast majority of jobs (some 82%) were created by a sliver (perhaps 5% to 10%) of the small-business universe. That find catapulted him and his "gazelles," the new breed of fast-growing companies, into the research Hall of Fame. It also sent shock waves through economic-development agencies, triggering Congress to devise more entrepreneur-friendly policies. Today, Birch is a corporate demographer.
The Johnny Appleseed of Entrepreneurship Education
Jeffry A. Timmons, 53, director of the Price-Babson College Fellows Program and professor of entrepreneurship at Harvard Business School, in Boston, and Babson College, in Wellesley, Mass.
Field of study: Economics
Areas of expertise: Entrepreneurship-curriculum development; venture capital
Selected work: New Venture Creation, 4th ed. (Irwin, 1994), based on the first undergraduate major in entrepreneurship set up by Timmons in 1973. Originally rejected by publishers who felt that with only 60 universities teaching new-company-formation courses Timmons's concepts would be passÃ‰ before the ink dried, this text is the world's best-selling entrepreneurship handbook to date.
Discovery: Entrepreneurship, a career all its own, can be taught. There's one shining lesson Timmons has gleaned from his years of rubbing elbows with company builders: they're superior learners and teachers. To usher more entrepreneurs into the classroom, Timmons, in 1985, started the Price-Babson College Fellows Program for successful owners wanting to share their passion for their craft with students. Over the past decade entrepreneurs affiliated with 150 universities in 30 countries have completed the intensive course and have ventured back into the classroom. The program, which has bent accreditation rules to accommodate practitioners, has changed the terrain of entrepreneurship education.
The Guardian Angel
William E. Wetzel Jr., 66, director emeritus of the Center for Venture Research and former Forbes Professor of Management at the University of New Hampshire's Whittemore School of Business and Economics, in Durham, N.H. E-mail: firstname.lastname@example.org. Fax: 603-862-4468
Fields of study: Finance; management; entrepreneurship; economics
Areas of expertise: Capital formation; the angel market
Selected work: "The Informal Venture Capital Market in the 1990s" ( The State of the Art of Entrepreneurship, 1992)
Discovery: Wealthy individuals make some of the best venture capitalists. Wetzel's been hounding the Securities and Exchange Commission to legitimize the role angels play in keeping struggling companies alive by, among other means, further reducing the capital-gains tax. He's proven statistically that the players in the angel market -- 75% of whom are self-made millionaires -- stand a much better chance of understanding what makes entrepreneurs tick. "Angels, who have the know-how to get rich and stay that way, can more readily spot fire, guts, and the ability to manage chaos than others," he reasons.* * *
E-mail addresses and fax numbers have been provided for those researchers who may be contacted directly about works cited or research in progress.