There is a widely held and long-standing belief that small and medium sized companies (SMEs) generate the most jobs, which is why most governments around the world have designed and implemented affirmative action policies to help them in recent decades.
However, over the last five years or so, a growing amount of research has begun to challenge this view. A new database, published by the US Census Bureau that makes it possible to follow the development of businesses and the jobs they create from their beginnings, shows that it is not small businesses that generate the most employment in the United States, but rather new companies.
Needless to say, new companies tend to be small; however, analysis of the age variable revealed by the data indicates that companies create jobs not simply because they are small, but because they are new.
The contribution new companies make to job creation is much higher than their contribution to the economy: they contribute just 3% of total jobs in the US economy, but create almost 20% of new jobs (Haltiwanger, Jarmin and Miranda, 2013, who reach similar conclusions to Stangler and Litan, whose 2009 study was a breakthrough). New companies also destroy jobs: almost 40% of the new positions created are eliminated within five years when those startups fail; however, the new companies that survive create employment much faster than their more mature counterparts manage to do.
In response to such new data, the OECD has conducted its own research around the world, reaching the conclusion that new companies do indeed play a big role in creating employment. A study it commissioned (Criscuolo, Gal and Menom, 2014) shows that out of 17 OECD members, as well as Brazil, companies aged five years or under make up only 17% of total employment, but contribute to the creation of 42% of new jobs.
The need to understand better this phenomenon and its contribution to generating employment will undoubtedly prompt further research around the world. It should also motivate decision makers to revise economic policies of recent decades, now that it is clear there is an inverse relationship between the size of companies and their contribution to employment.
In light of the aforementioned data, it is apparent that policies aimed at creating jobs through measures aimed at SMEs will not have much impact if they ignore the important role played by new companies. If size doesn’t matter, there is no reason for governments to continue to focus on SMEs.
Moreover, these recent findings beg the question as to what extent the current legal framework discriminates against new businesses, limiting their chances of reaching the market, consolidating and growing. This question is addressed by another recent OECD study (Calvino, Criscuolo and Menon, 2016), which looks at whether the rules of the game in different countries disproportionately favor established companies over new entrants; or to put it another way, whether new entrants to the market are up against barriers in the form of policies and conditions that add to the difficulties they already face as new businesses. The authors of the study demonstrate that new companies or startups are more vulnerable to economic policies and market conditions than established businesses, and that it is precisely the startups which compete in fast-growing sectors which are most affected. Although the key role of new companies in creating jobs has been observed in every country analyzed, there are important differences in their business dynamics (business creation, size, growth, survival, etc.), which are likely explained by local policies and conditions.
I am not suggesting the solution is to grant startups a type of support they do not receive from the market; but rather that we take into consideration new companies and revise issues they face, such as access to funding, bankruptcy procedures and contractual compliance.