Small Firms, Employment, and Federal Policy

[Excerpt] It is widely believed that small firms promote job growth. In fact, small firms both create and eliminate far more jobs than large firms do. On balance, they account for a disproportionate share of net job growth—however, that greater net growth is driven primarily by the creation of new small firms, frequently referred to as start-ups, rather than by the expansion of mature small firms. The greater net job-creation rates associated with new small firms could motivate lawmakers to consider supporting such firms through various policy initiatives. However, policies specifically favoring small firms have both advantages and disadvantages. For instance, policies designed to prevent discrimination or reduce pollution would probably have smaller adverse effects on employment if they exempted small firms in those cases where compliance was particularly costly for small firms. Conversely, some policies CBO has examined that would increase employment, such as reducing payroll taxes for firms that hire additional workers, would be less cost-effective if they were restricted to small firms. Under current federal laws and regulations, small firms already receive more favorable treatment than large firms do in many areas. For example, certain provisions of the tax code relating to capital gains and the expensing of capital investments favor small firms. The Small Business Administration (SBA) helps small firms obtain loans. And many regulatory policies, such as those prescribed by the Family and Medical Leave Act of 1993, include exemptions for small firms. Because further efforts to favor small firms may shift employment away from large firms in an inefficient manner, broadly targeted policies may spur total employment more effectively

Small firms and job structures

School of Managemen

Small firms, borrowing constraints, and reputation

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size

LIQUIDITY CONSTRAINTS AND SMALL FIRMS' GROWTH

There is general agreement on the difference, in terms of efficiency, between small firms in southern and northern Italy (see Prosperetti and Varetto, 1991; Giannola and Sarno, 1996; Giannola, Papagni and Sarno, 1998; Sarno, 1999). As far as technical efficiency is concerned (that is the ability to generate output from a given amount of factors of production) there appears, over the years, a persistent, huge differential (around 30 per cent) in favour of Northern firms. These findings (Giannola and Sarno, 1996; Giannola, Sarno and Papagni, 1998) show that Southern firms are not in a position to exploit economies of scale as northern firms do. The fact that firms’ size in the Mezzogiorno, for different size classes, is systematically smaller than in the rest of Italy, is a particular feature that seems to have major consequences. When the analysis shifts from technical to economic efficiency (i.e., the ability to combine the factors of production so as to equalize the weighted marginal productivity of factors), the gap between southern and northern firms in the level of production costs is dramatically reduced (ranging from 6 to 10 per cent). These results suggest that the North-South gap is not so much related to a specific inefficiency, but to the smaller size of southern firms that does not allow them to profit from returns to scale to the same extent. A possible conclusion (with relevant policy implications) is that the root of many problems of southern firms lies in the obstacles that prevent them from growing to reach an adequate operating size. A related implication is that the southern industrial structure, due to its size characteristics, is more easily affected by monetary policy and the economic cycle (Gertler and Gilchrist, 1991; 1993) The difficulties faced by southern firms become evident if we look at the evolution of the Italian manufacturing industry during the 1990s. For this purpose, we can proceed by considering a sample of firms which is representative of the entire population from a sectoral, dimensional and geographical standpoint. During the 1990s there was an overall decline in average firm size in Italian across all size classes. This is particularly marked for southern firms, in which firms’ size in 1990 was already significantly below average; by 1994 this character was considerably accentuated and was confirmed in 1997; by contrast, average northern Italian firm size showed a major increase in 1997. Moreover, the less pronounced and less persistent decline of the average size did not prevent Northern firms from expanding sales in the period in hand; this is due to the rapid growth of exports that followed the 1992 devaluation of the Italian lira. In the same period, in the Mezzogiorno, sales of local firms show a persistent and significant decline. As a consequence, the dynamics of the productivity of labour was negative (or stagnant) in the South, while it steadily grew in the rest of the country. Southern firms, while experiencing at the end of the period some significant progress in penetrating foreign markets, faced increased competition on the domestic market due to the contraction in aggregate demand, severely affected by the restrictive stance of the macroeconomic policy. All in all, these data illustrate the weakness (if not the worsening) of the competitive position of manufacturing firms in the South

Small firms, borrowing constraints, and reputation.

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size.Small Firms; Credit Markets; Borrowing Constraints; Repeated Games; Reputation;

Foreign Currency Borrowing by Small Firms

We examine the firm- and country-level determinants of the currency denomination of small business loans. We first model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs, and also examines the impact of information asymmetry between banks and firms. When foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firms revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. We then test the implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries. The survey contains details on 3,105 recent bank loans. At the firm level, our findings suggest that firms with foreign currency income and assets are more likely to borrow in a foreign currency. In contrast, firm-level distress costs and financial transparency affect the currency denomination only weakly. At the country level, the interest rate advantages of foreign currency funds and the exchange rate volatility do not explain the foreign currency borrowing in our sample. However, foreign bank presence, weak corporate governance and the absence of capital controls encourage foreign currency borrowing. All in all, we cannot confirm that "carry-trade behavior" is the key driver of foreign currency borrowing by small firms in transition economies. Our results do, however, support the conjecture that banking-sector structures and institutions that aggravate information asymmetries may facilitate foreign currency borrowing.foreign currency borrowing, competition, banking sector, market structure

Entrepreneurial Orientation as a main Resource and Capability on Small Firm’s Growth

This research provides a useful framework for identifying a small firms’ propensity to engage in entrepreneurial orientation. We examine the impact of the Entrepreneurial Orientation (EO) as a main resource and capability on small firm' growth. The growth seems to come out as an important demonstration of the entrepreneurial orientation of small firms (Davidsson, 1989; Green and Brown, 1997; Janney and Gregory, 2006). Thus, this research builds on prior conceptual research that suggests a positive integration between entrepreneurial orientation and resource-based view. In the first instance, the research will focus on reviewing literature in the emerging area of entrepreneurial orientation as it applies to growth oriented small firms and resource-based view of the firm. Secondly, an empirical study was developed based on a stratified sample of small firms of manufacturing industry. Data were submitted to a multivariate statistical analysis and a linear regression model was performed in order to predict the influence of the resources and capabilities on small firms' growth. In this sense, we consider the construct growth as a dependent variable and the ones relates with resources and capabilities (entrepreneur resources, firm resources, networks and EO) as independent variables. The research results suggest a set of resources and capabilities that promote the growth of the small firms. Also, the EO seems to have a predictive value on growth. Explaining variables related with resources and capabilities and EO were identified as essential in growth oriented small firms. It was still possible to conclude that the entrepreneurial firms which grew seem to have resources and develop more capabilities and take advantage in the search for those competences. This attitude reflects on the EO of the firm. This study has important implication for both researchers and practitioners. It highlights the necessity of firms to develop superior EO of all their members and also to invest on better resources and consequently superior capabilities as a way of reaching higher levels of growth. While previous authors have attempted to analyse certain aspects of this process (linkage between entrepreneurial orientation and growth), this research developed a framework that combines these and others factors (resource-based view) pertinent to growth oriented small firms. The results support the necessity to identify explicative variables of multiple levels to explain the growth of small firms. The adoption of an entrepreneurial orientation as an indispensable variable to the growth oriented small firms seems pertinent.Resources-Based View, Entrepreneurial orientation, Growth of Small Firms

Firm Failure and Relationship Lending:New Evidence from Small Businesses

We study the effect of relationship lending on small firms failure probability using a uniquely rich data set comprised of information on individual loans of a large number of small firms in Colombia. We control for firm-specific variables and find that small firms involved in long-term liaisons with commercial banks have a significantly lower probability of becoming bankrupt than otherwise identical firms not involved in a long-term credit relationship. We also find that small firms with multiple banking relationships face a lower failure hazard than otherwise identical firms involved in a unique long-term relationship.Firms, bank relationships, survival analysis. Classification JEL: G20, G21, C40.

Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms

The minimum wage rate has been introduced in many countries as a means of alleviating the poverty of the working poor. This paper shows, however, that an imperfectly enforced minimum wage rate causes small firms to face an upward-sloping labor supply schedule. Since this turns these firms into endogenous monopsonists, the minimum wage rate has the perverse effect of reducing employment in small firms as well as what these firms offer their workers. Thus, if there are only small firms, the minimum wage rate makes all workers that would be employed in the absence of a minimum wage rate worse off.endogenous monopsony, minimum wage, noncompliance, small firms