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A Challenge to the Small Business Image

A new study points out that "small business" and "innovation" are not synonymous.
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Small businesses don't innovate, and most small-business owners have no desire to start, says a new study.

Just five to six percent of small businesses have applied for a patent, copyright, or trademark in their first five years—and 80 percent of small-business owners surveyed said they didn't even want to develop a new technology or process, says a new study from the University of Chicago Booth School of Business. The study, called "What Do Small Businesses Do?", paints a picture of small business that is a sharp contrast to the image of it as a hotbed of innovation.

Economics professors Erik Hurst and Benjamin Wild Pugsley surveyed 1,214 small-business owners about such topics as the number of employees they hoped to have and the number of patents they had filed for. They also asked why they started the businesses, and the reasons listed tended to be more about working from home or setting their own hours than industry-building based on a crazy idea. Fewer than half started a business because they "had a good business idea."

"Few small businesses intend to bring a new idea to market," the authors write. "Instead, most intend to provide an existing service to an existing customer base." Most of the business owners tended to be lawyers, plumbers, doctors, shop keepers, and real estate agents—businesses that fill a need, to be sure, but nothing innovative.

Only a small proportion aspire to get much bigger than a handful of employees. "[M]ost surviving small businesses do not grow by any significant margin," says the study. "Most firms start small and stay small throughout their entire lifecycle."
 
Hurst and Pugsley note that researchers and policy makers often equate small business owners with entrepreneurs. "While this association could be tautological, we show the typical small business owner is often very different than the entrepreneur that economic models and policy makers have in mind," they write.

The authors argue that Washington policymakers and economists should focus on the truly entrepreneurial and growing small businesses, as opposed to just all small businesses. The government should subsidize those firms that are expanding.

They write: "Often subsidies targeted at increasing innovative risk-taking and overcoming financing constraints are focused on small businesses. We believe that these targets are better reached through lowering the costs of expansion, so they are taken up by the much smaller share of small businesses aspiring to grow and innovate."

Last updated: Sep 26, 2011

COURTNEY RUBIN

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.




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