“The share of Americans working for small companies fell to 27.4 percent in 2014, the most recent year for which data exists, down from 32.4 in 1989.” (David Leonhardt, The Charts Show How Big Business Is Winning, NYT, June 17, 2018)  

“One of the main question in macroeconomics today is why small firms are being replaced with larger ones.” (Juliane Begenau, Maryam Farboodi, Laura Veldkamp, Big Data in Finance and the Growth of Large Firms, October 13, 2017)

There has been a long and heated debate in the academic literature relating to the importance of small versus large firms as it affects a country’s economic growth rate and standard of living. Indeed, there has always been a vocal argument advanced by small business organizations that small firms are the key to supporting an economy’s growth and development.

The usual argument of small business advocates is that small firms grow faster than larger firms and are more important as a source of job creation. In the political arena the usual argument is made that small firms are more innovative and nimble and can get things done more quickly.

But as the data in the following charts emphasize, the relative size of job creation in the U.S. over the past half century clearly favours larger firms rather than smaller firms. Several different explanations for this trend have been offered, and none of them on their own, are completely convincing.

• One argument is that the cost of capital for large firms is lower than for small firms, a situation which may have become even more exaggerated in recent years since the revenue growth of large firms has become more stable than at small firms.

• Another hypothesis is that globalization provides extra advantages to large firms, particularly when measured in terms of productivity growth or efficiency gains.

• A third explanation, which is advanced by Begenau, Farboodi, and Veldkamp, is that the modern technologies and the digital revolution favour larger firms. Large firms, which have a greater ability to utilize modern technologies, seem able to attract proportionately more high technology workers than small firms. This enables large firms to invest relatively more cheaply and increase in size as well. In other words, the world of big data favours larger firms which have a longer track record and experience working with advanced technologies.  

• As well, smaller firms are more volatile than larger firms in terms of experiencing greater cyclical variation over the business cycle. But it does beg the question whether the cyclicality factor has changed over time, or whether cyclical factors accounted for the relative slippage of employment in smaller firms.

Finally, there is new evidence that the U.S. may be entering a new wave of consolidation, particularly in the media field.

As David Leonhartd of the NYT recently pointed out, AT&T has just purchased Time Warner, and Comcast and Disney are competing to buy 21st Century Fox. The incentive for consolidation is that increased size offers greater market power and improved profits.

In conclusion, from an economic policy perspective, there is no doubt that business start-ups and young businesses are important for job creation. But the notion that the small businesses deserve or need extra support versus large business, hardly holds up in the data.