small business vs fortune 500

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Mackendy Pierre-Louis Local Economic Development- Spring 2013 Small Business Vs Fortune 500 Companies- A Comparison. The definition of a small business varies in different parts of the globe; Great Britain, France and Germany have their own definition of what characterizes a small business. In the United States, a small business is any firm with fewer than 500 employees and generates less than $7 million in sales. Fortune 500 companies are public companies in the U.S., and are ranked by sales, assets, earnings, and capitalization (Fortune 500 Law & Legal Def. USlegal.com). The list ranks only public companies, or those which have issued securities through an offering and which are traded on the stock market (Fortune 500 Law & Legal Def. USlegal.com) . Both small and Fortune 500s play an important role in the United States economy. Both employ millions of individuals and together contribute to the largest share of the country’s gross domestic product (GDP). However, the role of a small business and a Fortune 500 company pertaining to jobs creation is a contentious topic that is subject to debate. This paper surveys accessible research data to explore the question whether small businesses in the United States create more jobs than Fortune 500 companies. The paper investigates what small business critics are saying, how U.S governments at all levels perceive small business. It also puts emphasis on the difference in working environment and job quality between the two. 1

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Page 1: Small business vs fortune 500

Mackendy Pierre-Louis

Local Economic Development- Spring 2013

Small Business Vs Fortune 500 Companies- A Comparison.

The definition of a small business varies in different parts of the globe; Great Britain,

France and Germany have their own definition of what characterizes a small business. In the

United States, a small business is any firm with fewer than 500 employees and generates less

than $7 million in sales. Fortune 500 companies are public companies in the U.S., and are

ranked by sales, assets, earnings, and capitalization (Fortune 500 Law & Legal Def.

USlegal.com). The list ranks only public companies, or those which have issued securities

through an offering and which are traded on the stock market (Fortune 500 Law & Legal

Def. USlegal.com). Both small and Fortune 500s play an important role in the United States

economy. Both employ millions of individuals and together contribute to the largest share of

the country’s gross domestic product (GDP). However, the role of a small business and a

Fortune 500 company pertaining to jobs creation is a contentious topic that is subject to

debate. This paper surveys accessible research data to explore the question whether small

businesses in the United States create more jobs than Fortune 500 companies. The paper

investigates what small business critics are saying, how U.S governments at all levels

perceive small business. It also puts emphasis on the difference in working environment and

job quality between the two.

Small Business and Job Creation in the U.S

There are many scholarly studies and research that support popular claims that small

business plays a very significant role in share of jobs creation in the U.S economy. Neumark,

Wall and Zhang (2011) argue that Birch in his central thesis provides evidence that small

firms are really the primary engine of job growth in the United States. Birch claims that 66

percent of all new jobs between 1969 and 1976 were created with 20 or fewer employees, and

81.5 percent of those by firms with 100 or fewer employees (Birch, 1979; 1981). Later, he

points out that from 1981 to 1985, firms with 20 or fewer employees accounted for 82

percent of  employment growth  through expansion or contraction of existing firms, and 88.1

percent overall of employment growth (Birch, 1987). Armington and Odle (1982) note that

from 1978 to 1980 jobs in the private sector increased 8.7 percent and approximately 78

percent of these increase occurred in establishments with fewer than 100 employees.

However, according to Birch, small businesses’ share of jobs creation is not static. It varies

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

enormously depending on the period studied (Birch, 1989). For example, in 1980, small

businesses’ share declined because large corporations or Fortune 500 companies performed

well. But, since 1980 there has been a shift in the job creation momentum, as large companies

struggled and their share of jobs creation plummeted. Meanwhile, millions of jobs have been

created by small businesses (Birch, 1989). Kirchhoff and Phillips (1988) later re-

investigate Birch; relying on his data, they confirm his findings that small business

contributes to a significant share of total net new jobs in the U.S. economy.

            Small firms are less able to survive periods of economic difficulty such as recession

or economic contraction because they lack the access to the financial resources available to

large firms or Fortune 500 companies (Armington & Odle, 1982). At the same time, results

indicate that small firms make a greater contribution to job creation during recessionary

period (Kirchhoff and Phillips, 1988). One simple explanation is that recessions spur new

business startups. Stangler (2009), for instance, provides an analysis as to why there are good

reasons to expect recessions and bear markets to open opportunities for new small business

startups. In the United States, particularly during times of turbulence, companies lay off

employees or go out of business: this usually encourages entrepreneurship.

Strangler (2009) explains that because increased in unemployment often concentrated

among large companies, it can free up pools of human capital in two ways: first, unemployed

individuals with some measure of experience may perceive a competitive opportunity to start

a new company; second, entrepreneurs may also target the unemployed as a potential pool of

labor force. This explains why small businesses contribute to a higher percentage of net jobs

creation when the economy is experiencing a downturn or recession. Nevertheless, although

small firms do create jobs in turbulent economic times, they have a limited employment

fertility rate which means they never entirely make up for the job lost by large corporations in

the labor market. In a study of small business fertility rate during the 1982-1984 recessionary

period, it was observed that large corporations lost 950,000 jobs during that period; small

firms, nonetheless, were only able to replace 680,000 of those (Birch, 1989).

More recent data from two relevant sources the Bureau of Labor Statistics’ Business

Employment Dynamics (BED), and the U.S Census Bureau’s Statistics of U.S Business

(SUSB) support the conventional wisdom that small businesses generate most new jobs.  BLS

research statistics demonstrate that a net of 1.5 million jobs were lost in 2008 and 68 percent

were from small business, but the data also show that about 65 percent of net jobs creation in

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

the private sector in the past 15 years  were from small businesses (Headd, 2010). On the

other hand, SUSB figures show that small businesses accounted for nearly 90 percent of net

new jobs growth through 2006 (Headd, 2010). Small business net share in employment

growth however is not uniform, and their share of growth is often influence by geographic

factors. Armington and Odle (1982) notice that small firms tend to thrive in weaker and

declining industries (i.e., manufacture, agriculture and retail). In these industries, small firms

usually employ a higher-than-average share of workers and have a much higher share of

growth than in fast growing industries such as mining, transportation, finance and services.

They add that in growing regions small firms’ share of growth is less than their employment

rate (Armington & Odle, 2010). This according to them seems to be the results of high rate

employment losses from small establishment demises, which are the consequence of

increasing share of employment by large firms in these regions.

Critics of Small Businesses; what the Evidence Reveals

As clear as the evidence may appears, many still question whether small business is a

very significant job engine for the U.S economy as popular perception often portrays it.  

Critics against small businesses argue “to portray small businesses as the engine of job

growth is to vastly overstate their role (Critics’ opinion. Bloomberg.com, Oct 2012).”  To

defend their arguments, they highlight all the loopholes and tax benefits provided to small

businesses. They bring four defensive arguments forward: First,  small businesses destroy as

much jobs as they create, and their share of employment is usually less than Fortune 500

companies; second,  to avoid paying corporate taxes, many small-business owners’ only

report profits on their individual tax returns; third,  the way small businesses are structured, it

is sometimes impossible to designate them as either small or large, and many businesses

designated as malls are not engaged in traditional small businesses activities, Instead, they

are partners in hedge funds, law firms and private-equity shops, or they are highly paid

actors, athletes, speakers and authors; fourth, small businesses enjoy a host of tax breaks,

including the ability to immediately deduct many costs as a business

expense. (Critics’opinion. Bloomberg.com, oct 2012). Despite the many dissenting views

“which may prove to be relevant in some circumstances”, it is evident, as Stangler (2009)

puts it, that small firms play an important role in digging the U.S economy out of recessions.

In time of economic recessions, small business jobs growth usually exceeds that of

large firms. Contrary to what critics highlight, their share of employment growth is usually

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

lesser than Fortune 500 companies. Headd (2010) observes that during the 2001 economic

downturn, firms with 20 to 499 employees experienced 43 percent of the net employment

losses, firms with fewer than 20 workers 7 percent, and large firms including Fortune 500

firms 50 percent. As the economy began to improve in 2002, firms with fewer employees

created net new jobs while large firms continues to shed jobs, but at a slower pace as did

firms of 20 to 499 employees. Research statistics have even shown that small businesses have

higher net employment growth rate when the U.S. economy begins to recuperate after a

downturn. As an example, Shane (April, 2012)  mentions that in a monthly employment

analysis of 300,000 private businesses using Automatic Data Processing (ADP) payroll

services, it shows that in March 2012 companies with 49 workers or more employed 2.6

percent more people than they did in July 2009, when the economic recovery began.

Similarly, businesses with 50 to 499 workers employed 3.2 percent more people in March

2012 than they did at the beginning of the recovery (Shane, April 2012. Bloomberg

Businessweek). Companies with 500 or more workers, however, employed 0.2 percent fewer

people in March 2012 than in July 2009 (Shane, April 2012. Bloomberg

Businessweek). Furthermore, in non-downturn periods, BED data show that small firms

account for around 60 percent of net new jobs and SUSB data show a larger figure of around

75 percent (Headd, 2010).

Localities, States, the Fed and Small Business

Headd (2010) reports that in 2006, small businesses contribute to an equal share of

employment in the overall U.S economy as large firms or Fortune 500 companies (e.g., small

firms employed 60 million and large firms 60 million of the country’s labor force

respectively). The small business sector represents an important source of employment for

most localities (if not all). Conscious of this fact, all local governments have instituted some

form of job creation assistance program in their economic development policy to either

encourage small existing businesses to expand, attract new business establishments or to

prevent businesses from failing in their jurisdiction. Hillsborough County, Florida for

example has a job incentive program designed to promote job creation in the area by offering

a wage reimbursement to small business owners (Hillsborough County News Release, Sep

2011). Through the program, the County dedicates up to 50 percent of three months’ total

salary of new jobs created, an equivalent of 3,900 per new employee to boost small business

jobs creation (Hillsborough County News Release, Sep 2011). It is estimated that the program

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Local Economic Development- Spring 2013

will encourage the creation of about 200 jobs, offering a total of 500,000 to local small

business (Hillsborough County News Release, Sep 2011). If a County government is ready to

dedicate hundreds of thousands of dollars to support and promote small businesses, there

must be some advantages associated with it. Armington and Odle (1982) comment “an

intrinsic part of a community; small business is more responsive to local influences, more

willing to adapt to local conditions and less likely to migrate to other locations.”

During election campaigns, politicians always put forth their desire to support small

businesses. The Obama administration’s aspiration to extend the Bush tax cuts for families

earning less than 250,000, for instance, is not only aimed at helping the working American

middle class, but the small business sector as well. Beside localities, the federal government

and the states make funds available (e.g., loans, grants, tax benefits and venture capital) to

assist small businesses. In 2010, the U.S Congress passed the Small Businesses Job Act or

(Lending Fund Act). The act is designed to provide capital to qualified community banks and

community development loan funds (CDLFs) to support small business lending (Small

Business Lending Fund. Treasury.gov). There are many organizations put in place to help

small businesses. These can be either governmental in nature (e.g., Small Business

Administration "SBA") or not for-profits organizations (e.g., chamber of commerce). These

organizations may exit at the local level to serve local small businesses’ purpose or at the

state and federal level to serve a broader purpose. The small business Administration (SBA)

is a federal agency independent in nature. It is there to aid, counsel, assist and protect the

interests of small business, to preserve free, competitive enterprise and to maintain and

strengthen the overall economy (SBA mission statement. SBA.gov). Local private institutions

or associations also often provide loans and venture capital to encourage new small business

ventures in their community. All these attentions and efforts put toward helping small

business development indicate that they do play a significant role in creating jobs in the U.S

economy.

Small Business and Job Quality

Let’s leave the job creation debate to cover another topic that also pertains to small

business: job quality. The number of jobs created by an employer is not the only thing that

matters (Halmilton & Medoff 1990; Neumark, Wall & Zhang, 2012). Comparing the quality

of jobs created by small firms and those created by large firms, these authors argue that small

firm jobs are less desirable because they tend to exist for a shorter period of time, pay lower

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

wages and have less generous fringe benefits in term of health insurance, vacation and

pension plan (Halmilton & Medoff, 1990; Neumark, Wall & Zhang, 2012). In addition, small

firms tend to have poorer working condition and provide fewer jobs training (Halmilton &

Medoff, 1990; Neumark, Wall & Zhang, 2012). Headd (2010) refutes the argument that small

businesses provide inferior jobs, maintaining that large and small firms have similar shares of

part-time employees. For example, about 21 percent of small firms’ labor force were part-

time employees compared to 18 percent for large firms (Headd, 2010). He also provides a

delicate explanation why small firms have a slightly higher share of part-time employees

“consider a firm with two employees that wants to increase employment by 25 percent; a firm

with one employee would add one employee part time. Whereas, a firm with 500 employees

would add 125 employees full time to achieve the same increase (Headd, 2010).”

On the other hand, Headd (2010) does support the argument that small business jobs

are less desirable. In contrast, he brings forward two different reasons why small firms’ jobs

are less desirable. First, small firms tend to fill the niches of the labor market that are

undesirable and often have high unemployment rates (e.g., unskilled employees and

minorities). Second, small firms employed more individuals with low educational attainment

compared to larger firms (Headd, 2010). Despite the detrimental epithet attributes to small

firms jobs, Birch (1989) notes that employees experience more job security working for a

small firm than a large one. He continues “employees going to work for a Fortune 500

company are less likely to have their jobs at the end of next year than they are if they go to

work for a small start-up company (Birch, 1989).” One way to examine the essence of

Birch’s statement is to go back to Headd’s argument that small firms tend to fill the niches of

the labor market that are un-deserved (i.e., the unskilled, minorities and individuals with low

educational attainment).  The disparity in job security therefore suggests that Fortune 500

companies tend to have a more skilled and educated workforce. An educated and skilled

workforce tends to enjoy greater mobility, to have more demands for his or her labor, and

more job options. It makes perfect sense if an employee has less demand for his or her labor

in the market. He or she has a higher chance of experiencing joblessness. This employee will

certainly hold firm to his or her job and that no matter what the job conditions might be.

Conclusion

Based on the many scholarly evidences, there is no doubt that small businesses are an

important force in the U.S economy. Small businesses’ impact on the economy can be felt

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

when an economic downturn or a recession surfaces. In time of recessions when businesses

of all types are filing for bankruptcy, laying off their employees or closing down their

facilities. This may eventually encourages more entrepreneurial quests which in turn give rise

to small business start-ups. As a result, small firms often lead Fortune 500 companies in jobs

creation during economic downturns. The role that recession play in encouraging new firms

formation and in return the role these firms play in enhancing back the economy led Stangler

(2009) to make this comment on the most recent 2007 recession “despite the current

recession, there is a reason for hope; good things do grow out of recession.”  Most of the

Fortune 500 companies that are now competing with small businesses started as small

firms and most came into existence during a bear market or recession. Microsoft and

Walmart started as small firms and then grew to become the big, global conglomerate that

they are today. Moreover, as the data show in this paper, jobs creation is not static, it involves

some up and down. During a downturn, small businesses usually produce more jobs. In non-

downturn period, sometimes small business lead Fortune 500 companies in shares of net jobs

creation, sometimes their shares are equal, and sometimes Fortune 500 companies do well.

Nevertheless, one thing to keep in mind is that all the attentions given to small businesses by

policy-makers, and the efforts put forward by private associations and governments at all

levels to support the small business cause, encouraging small business ventures validate the

popular notion that small businesses do actually play a significant role in creating jobs and in

boosting our country’s economy.

 

References

Birch L. D (1989). Change, Innnovation and Job Generation. Journal of Labor Research.

Fortune 500 Law & Legal Def. Retrieved (March, 2013).

From  http://definitions.uslegal.com/f/fortune-500/

Business Administration “Mission Statement.”         SBA.gov. Retrieved (March, 2012).

From http://www.sba.gov/content/mission-statement-0

BusinessWeek. Retrieved (March, 2013). From F:\small-business-job-creation-is-stronger-

than-we-think.htm

Headd B (March, 2010). An Analysis of Small Business and Jobs. SBA Office of Advocacy.

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Mackendy Pierre-Louis

Local Economic Development- Spring 2013

Hillsborough County News Release. Fund Still Available for Small Business & Job Creation

Program. Retrieved (March, 2013).

From http://fl-hillsboroughcounty.civicplus.com/DocumentCenter/Home/View/409

Kirchhoff B.A & Phillips B.D (1988). The Effect of Firms Formation and Growth on the Job

Creation In the United States. Journal of Business

Neumark D, Wall B & Zhang J (Feb, 2011). Do Small Business Creates More Jobs? New

Evidence for the United States Establishment Time Series. The Review of Economics and

Statistics. 93 (1). pp 16-29

Odle M. & Armington C. (1982). Small Business How Many Jobs. The Brooking Review,

Vol 1. No 2.

Shane S (April 26, 2012). Small Business Job is Stronger than we Think. Bloomberg Small

Small Business is not a Job Engine (Oct 2012). Retrieved (March, 2013). From F:\time-to-

debunk-the-myth-of-small-business-as-job-engine.html

Small Business Lending Fund. Treasury.gov. Retrieved March 2013.

From http://www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-Lending-

Fund.aspx

Stangler D. (June, 2009). The Economic Future Just Happened. Ewing Marion Kauffman

Foundation

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