Thursday, September 29, 2011

Should small businesses be encouraged?

Small businesses are thought to be rather inefficient because of fix and because of other issues that hamper the exploitation of increasing returns to scale in their size range. Yet, policies keep popping up that try to protect them. Why? Is it nostalgia, throwing us back to times were "better?" Or do we want to protect (inefficient) employment? Even this may be moot according to a previous post.

Ben Craig, William Jackson, and James Thomson claim that small businesses should be encourage because they have an inherent disadvantage on credit markets: there are information problems, more acute in downturns, that make access to credit more difficult for small businesses. Thus, it is good for a government agency to provide loan guarantees. Still, this does not address why we would want to have small businesses in the first place. If inefficient firms are getting rationed on credit markets, I am fine with that.

1 comment:

Tom M said...

I can see several options:

a) The premise is faulty; that is, small businesses are not inefficient. Instead they are far more flexible and reactive to their specific market than large businesses which do one thing very well, but are inherently 'brittle'.

b) There's an unstated assumption that big businesses are more efficient than small businesses. Perhaps both are inefficient.

c) Perhaps we need to encourage small businesses because some of these then become big businesses which become efficient; you only have those large, efficient businesses if you ensure there is enough fertile ground for small businesses

d) Further, big businesses may be more efficient because there is more competition on the large scale than at a local level (e.g. McDonald's has more competition than my local chippy which is the only one for a few miles), however there is only competition on the large scale because enough small businesses have been enabled to grow to large scale businesses.

I'd say either A) or C) seems intuitively true but would be interested in any data.