The Small-Business Fallacy

Here's an oft-repeated saw: Small businesses are the foundation of job creation. Therefore, any policy designed to boost the job market should stimulate the small-business community with increased access to credit, tax cuts, etc.

The idea is mostly true. But Greg Ip points out an important distinction in his book The Little Book of Economics:

Small companies destroy just as many jobs as they create; they aren't disproportionate job creators. By contrast, new companies do create a surprisingly large share of new jobs. A 2009 study by Dane Stangler and Robert Litan of the Kauffman Foundation found that if you took out firms that were five years old or younger, employment would contract most months. So job creation tends to be primarily the product of entrepreneurs who have a crazy idea for starting a new company.

Size is not the important variable; it's age. There are plenty of companies that are large yet relatively young, like Google (Nasdaq: GOOG  ) and Netflix (Nasdaq: NFLX  ) , that create lots of jobs. Others are small yet outmoded, and add to the ranks of unemployed. Others still, like Kraft (NYSE: KFT  ) and Altria (NYSE: MO  ) , are extremely profitable, yet have simple business models, so the need to create new positions is rare.

What job growth comes down to is innovation. And if innovation is the key, this quote from CBS News should make you cringe:

The current wait for a patent is, on average, three years, or 36 months. The "in box" at the U.S. Patent and Trademark Office is stuffed with 700,000 applications awaiting review. Ultimately, only 4 out of ten applications, or 42 percent, are approved.

The director of the patent office goes on to admit: "We currently have systems that are not as capable as they need to be -- they're certainly not state of the art. As a result, our examiners are handicapped."

Forget small-business loans. Forget infrastructure projects. Forget one-time tax cuts. Let's give the patent office a boost.

What do you think?

Fool contributor Morgan Housel owns shares of Altria. Google is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers choice. Netflix is a Motley Fool Stock Advisor selection. The Fool owns shares of Altria Group and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (15)

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  • Report this Comment On November 29, 2010, at 1:04 PM, lctycoon wrote:

    Why any of these entrepreneurs would create a business in the USA instead of in one of the many first world countries that are friendlier to small businesses is beyond me...

  • Report this Comment On November 29, 2010, at 2:51 PM, Flishiz wrote:

    @Ictycoon:

    The US at least has a solid history of relative (to much of the world) stable growth. If nothing else, at least don't let yourself wonder if the world around you will arbitrarily kill your business before a decade. The future is absolutely unpredictable, but at least patterns help us plot a reasonable course.

    In response to the article: totally. I know Cornell researchers who create brilliant new inventions all the time but are let down time and time again by the USPTO's byzantine wait. A 9-year pending period for a patent shouldn't be a regularity, it should be bordering on criminal.

  • Report this Comment On November 30, 2010, at 10:24 AM, hammertongs wrote:

    Blaming the wait for patents as the major reason for slow job growth is a bit myopic.

    Like most things in life the answer is multi -faceted. If a small business has a bad idea or a good idea that cant be patented, a product with no demand,lousy marketing, bad management, bad business plan,no capital and unable to procure it, high taxes and expenses forced upon it by government or any combination of the above, that business will fail no matter its age, size or innovative thought.

    Im still trying to understand what a "small" business is. Not to mention what "rich" is......

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