A publication of the Indiana Business Research Center at IU's Kelley School of Business
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Small Firm Growth: Important for Success

Timothy E. Zimmer

It is rare for smaller firms to make splashy headlines with growth announcements or expansions. However, in aggregate, small firms are vital to employment and economic growth of the state. Nurturing an environment for small firm development in a diversified mix of industries is a sensible approach to achieving the longer term goals of economic and employment growth within a state.1

This article analyzes the influence of small firm concentration on state employment and economic growth. While not exhaustive, the results suggest employment benefits of a diversified approach to develop small firms in multiple industries. The findings highlight the importance of small firms on state employment and the need for policies aimed at producing efforts to ensure the state becomes an incubator of small firm development.

The Data

The study examined publicly available statewide data for the 50 states and the District of Columbia between 2001 and 2011. CES employment data from the Current Employment Statistics data set, as well as industry concentration and firm size data from the Quarterly Census of Employment and Wages (QCEW) data set were collected from the Bureau of Labor Statistics (BLS).2

Table 1 shows the industry and firm size categories used in this analysis. Within each industry category for a state, firm sizes were calculated as a percent of QCEW employment. Some of the data were missing, with the largest source of missing data found in 2011 (as certain categories of data had not yet been posted at the time of collection ). Additionally, data were cleaned from the panel where inconsistencies existed between total employment and the sum of industry parts.

Table 1: Industry and Firm Size Categories

Industry Categories
Goods
    Natural Mining and Resources
    Construction
    Manufacturing
Services
    Trade, Transportation and Utilities
    Information
    Financial Activities
    Professional and Business Services
    Education and Health Services
    Leisure and Hospitality
    Other Services
    Unclassified
Firm Size Categories
Small
    1 to 5 Employees
    6 to 99 Employees
Medium
    100 to 249 Employees
    250 to 499 Employees
Large
    500 or More Employees

Source: Indiana Department of Workforce Development

Results

Regression models were used to test the influence of firm size and industry concentration on employment and economic growth. View the regression methodology and results.

The results confirm the close link between economic output and employment. They also suggest a lingering impact of economic growth on employment. Economic growth not only impacts the present, but also has a positive employment influence into the future. The model indicates that for every 1 percent growth in current state GDP, state employment will increase by approximately 0.69 percent.

The size class variables are also shown to be highly significant with respect to employment. A state having a higher percentage of their workforce in either large or small firms is likely to have more employment growth potential. While firms of all sizes are a benefit to the state, the results further suggest that small firm concentration is likely more of a positive influence on employment than large firm concentration. With regard to economic output, the firm size variables were insignificant. While firm size seems to have an impact on employment, the influence did not carry over into economic growth.

The industry concentration variables are largely insignificant with respect to employment. However, there are some muted benefits on state economic growth with respect to a higher concentration in the information/technology sector. While targeting specific industries for expansion does not appear to influence employment levels, the information sector does provide a slight positive influence on state economic growth.

Conclusion

The results suggest a positive correlation between small firm concentration and positive employment growth. While the results did not carry through to show a significant impact on economic growth, the benefits afforded employment warrant additional policy consideration to ensure small firm success in the state. Achieving small firm development in a well-diversified mix of industries will benefit the state’s employment and economic aims.

Notes

  1. See E.L. Glaeser and W.R. Kerr, “The Secret to Job Growth: Think Small,” Harvard Business Review, July 2010, as well as Rick Haglund, “Desperate for Diversification,” Dome Magazine, January 16, 2010, http://domemagazine.com/features/cov0110.
  2. The data were extracted from the BLS website (www.bls.gov) on June 8, 2012.