STOCK MARKET WATCH -- Monday, 16 January 2012

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33. Small Is Still Beautiful

http://www.slate.com/articles/business/small_business/2012/01/competition_and_big_business_should_we_ease_up_on_antitrust_enforcement_because_large_companies_innovate_more_.html

Americans love capitalism, and we also like underdogs, so nothing tickles the culture’s fancy quite like a dynamic small business. But when we boost small firms, are we selling short the value of big ones? That’s what Michael Mandel, chief economic strategist of the Progressive Policy Institute, argues. In a memo published last December, he contends that it’s big companies, not scrappy startups, that are the real drivers of innovation in the modern economy, and that as a consequence the United States needs to ease up on antitrust enforcement. The argument’s gained partial assent everywhere from Mother Jones on the left to National Review on the right to the Economist in between. But while there’s certainly something to it, the purported policy conclusion that we need to start caring less about competition policy is dangerously misguided.

Let’s start with what’s right about Mandel’s argument. An increasing body of formal research has found that a lot of small business’ role in job creation and economic growth is really just churn. Launching a small company is a risky endeavor, so in any given year lots of small businesses are shutting their doors and laying off their employees. This is counterbalanced by tons of new starts and minor employment increases, creating a huge gross flow of jobs but not necessarily a large net flow. The actual job-creation heroes of the economy are the relatively tiny minority of small businesses that grow fast and become big. Most small businesses, however, aren’t like that. The local hair salon or dental practice is not on the verge of becoming the next Google. Nor is the typical small business especially innovative, often by design. The majority of new restaurateurs, for example, have no intention of revolutionizing the food-service industry and expanding to become a multinational company. Small-business owners are happier than the average American, presumably because they enjoy more autonomy and control over their lives, and that’s an ample reason to become an entrepreneur.

Mandel is also right that large companies have the capacity to dedicate more funds to formal research and development activities. If you’re small, it’s difficult to make expensive investments with uncertain returns. Mandel, citing National Science Foundation data, writes that “big companies—those employing over 5,000 workers in the U.S.—spent an average of $3,368 per worker” while firms with 5 to 99 employees in the United States spent just $793 per worker.