Small vs Large Business - The Real Engine of the Economy

It has been widely accepted as of late that small businesses are the "fuel of the economy", that which keeps the economy running. It is true that there are many arguments in favour of this; however, when one looks at the rebuttals for the arguments on the small business side, the notion of such businesses fuelling the economy becomes highly debatable. As written in Economics Now – Analyzing Current Issues:

"Small businesses, by virtue of their numbers, constitute the engine that fuels the Canadian economy. Big businesses, each of which employs thousands of Canadians, have a great deal of political influence. Think of them as the wheel that steers the national economy in a given direction."

While it is true that the number of small businesses heavily outsize the number of big businesses, one must wonder how this constitutes them being the 'engine' as the book mentions. Yes, small businesses generally specialize in their operations in order to maintain a level of competitiveness against the countless other small businesses in their market, which allows them to be much more sensitive to change in the economy, but this isn't what makes changes and trends have the same impact as they do when the big business side changes for the market.

When there is a change in a market, the small businesses tend to hype up the change and do quite well financially, but once a big business entity meets the changing winds, they have the power to dominate the market regardless of the time difference it took to adapt – the small businesses just don't have the scale of operations needed to exploit a market.

This can be seen with innovation, something which is credited largely to small business. It is argued that the "hottest and latest" trends come from small businesses, therefore meaning that they are a stronger force in the economy; however, there is a good reason as to why the latest trends come from small businesses, and that is because small businesses generally have two options coming into a market:

1. Imitation – small businesses taking this path tend to go along with the current market trends, as it is the tried and true method and goes along with the idea of "safety in numbers".
2. Innovation – small businesses on this path are what really prompts the creation of new trends in the market, as these businesses go out on a limb with an idea and hope for the best.

Now all businesses, both big and small, are able to choose one of these paths; however, there is not much use for a big business to take the second. It is common knowledge that small businesses are more effective, and big businesses are somewhat cantankerous in the light of change. So if a big business wants to try something new and take a risk, they put a lot more on the line then a small business does.

A big business is responsible for so many people, so much money, and such a large part of the economy, that taking a big risk is in a lot of sense unmoral and just not a wise decision. For a small business, it is the opposite – they could take the imitation path and if done right earn a steady but low profit, or they can go for the big dollars and try innovation.

From viewing the economy in this light, it becomes apparent that most small businesses are all racing for the fame of being innovators, while they are huge risks for the success of the business itself. Once a small company does find that niche in the market for a new product or idea, they become the top dog until the big businesses move slowly into the market themselves. Once they do, they are able to use their size and influence in order to command control of the market, and the small businesses are back to their original two options of imitation or innovation.

The proof behind this theory is that when a small business gains their acclaim and status from being innovative, they are eventually put under extreme amounts of pressure from the larger and more powerful businesses. This puts them in a tough decision – they can continue being a small business, taking the risks of being innovative, they can continue in the trend they have created and coast along on their initial success, or they can grow in size and enter other markets in order to maintain the size (which comes with the success they earn) they have achieved.

This puts it into an entirely different light, and brings us back to the original quote from Economics Now – are small businesses really the engine of the economy whilst the big businesses are the wheels, leading the market in whichever direction it chooses? It now seems apparent that it is the small businesses which lead the economy in its trends, and the big businesses which really keep it going through the trends. Remember that it is extremely difficult for a small business to gain success through innovation without it in itself becoming a big business.