Why Washington Has It Wrong on Small Business

For starters, policy makers should ask a simple question:
What is a small business, anyway?
Source: Wall Street Journal, November 12, 2012

With sluggish growth numbers, the public is waiting for small businesses to help restore the national economy. The Small Business Administration assists people that want to open things like hotels and restaurants by providing financial assistance such as loans. However, the global economy necessitates a new approach to helping small businesses which involves helping high-potential startups. [Says Aaron Chatterji, an associate professor at Duke University's Fuqua School of Business and a former senior economist at the White House Council of Economic Advisers.]

• The Small Business Administration (SBA) started in 1953.
• A small business is generally considered to have fewer than 500 employees.
• Less than a quarter of the 27 million small businesses have employees, and a smaller proportion of those companies don't grow beyond 20 employees.

The government lumps all small businesses together, regardless of the type, size and so forth and imposes the same rules and regulations on all of them. While a small business may have meant a new restaurant, hair salon or dry cleaner some 20 years ago, today it is more likely that startups are technology-based and require different approaches to helping them.

If the government offers a tax credit for hiring new workers, that may work well for a new restaurant. However, a tech startup is unlikely to benefit from such a tax credit because it places more emphasis on having high-skilled employees that have more advanced technical knowledge.

The Small Business Innovation Research program awards over $2 billion in grants to help businesses commercialize research that is deemed innovative. However, the agency has prevented any startup that is receiving support from venture capitalists. Instead, some are suggesting that the government should consider helping these startups because there is a high chance that these ideas have huge potential. Of course, one needs to be careful that we don't end up with the government picking winners and loosers (often loosers as political considerations are inserted into the mix, e.g. the Green Energy movement and Salindra).

Rather than having the same approach for every startup or small business, governmental programs should make a distinction between a small business and a startup company. The latter would imply a young company that has potential for rapid growth and innovation. This would allow a tailored solution to many upcoming tech startups while still keeping important incentives for small businesses such as hotels and restaurants.

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