The small start big

By R.A. | WASHINGTON

BRAD PLUMER posts a few charts indicating that the share of Americans working in large firms is quite large relative to other economies:

Given prevailing views about the importance of small businesses to economic growth, it's tempting to conclude that America has a major problem here. But Matt Yglesias makes the right point:

If you're talking about an economic indicator in which the U.S., U.K., Germany, Finland, and Denmark are at the bottom and Greece, Italy, Portugal, Spain, and Hungary are at the top, then you're looking at an economic indicator in which you want to be at the bottom. The economically more successful countries are less dominated by small firms. That shows us, I think, that the link between entrepreneurship and small businesses is much weaker than is often posited.

Entrepreneurs boost the economy by exploiting new ideas and business models in order to turn a profit. The ones that do this well don't stay small; they grow rapidly, helping to disseminate new technologies and create jobs. If your economy has a lot of small firms, that's an indication that some part of this process is broken. If you look at the Italian example, for instance, you find that a lot of small Italian firms are retail and service enterprises protected from competition by onerous regulation.

Now, if you browse through the OECD report on entrepreneurship, there are some worrying signs for Americans in the data. New firm formation is surprisingly and disappointingly low, for instance. It's good that the American economy enables successful businesses to grow rapidly, but it's problematic that there isn't a greater level of small business formation. I think there's a connection between obstacles to entrepreneurship, a shortfall in new firm formation in America, and the disappointing job creation performance of America's tech sector. These relationships deserve more attention.