Supporting entrepreneurship is on the minds of most economic development professionals, and rightfully so. Supporting the right kind of entrepreneurial activity can unlock the potential of local economies. The key word here is ‘the right kind’, as the relative merits businesses of different size are numerous.
Businesses differ in many ways, including by size. While small and micro-businesses are quicker to adapt to change and more likely to explore new ideas, large firms are well positioned to buy and sell large quantities, invest in research and development, and influence policy (for better or for worse).
However, if an economy has too many of one type, its economic growth may suffer. Too many small firms and job creation may slow down; too many large firms and innovation might decline. This begs the question: is there a magic ratio of different business types that policymakers need to track as they work towards economic growth?
Judit Albiol-Sanchez and Andre van Stel from the University Rovira I Virgili were examining this issue in the context of 27 EU countries before the financial crisis, investigating the links between economic growth and the distribution of different business types in each of the member countries. There are three key take-aways from their research.
1. The research implies that there is in fact ‘a magic ratio,’ or an optimal distribution: the closer an economy is to that ratio, the better it does in terms of employment growth and growth of value added production.
2. An expanding share of mid-sized businesses had a positive influence on economic growth, especially in higher income EU countries. This likely indicates a significant number of growing firms in the economy that are moving up from the small-size category.
3. An increase in the share of micro-enterprises and large businesses had a negative impact on economic growth, especially in lower-income EU countries. (The authors defined micro-enterprises as enterprises with 1-9 employees and large enterprises as those with more than 249 employees.)
The authors attribute the importance of medium-sized businesses to the fact that they are small enough to quickly adapt to changing economic realities, but large enough to compete with larger firms, improving their competitors’ performance.
Contributed by Lili Torok.
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