The Myth of the Entrepreneurial Economy: Employment and Innovation in Small Firms

Abstract

The benefits and limitations of the entrepreneurial economy in six countries are examined. Data and other international research evidence on employment generation, conditions of work, and innovation in small enterprises in these countries (Australia, France, Germany, Sweden, UK, and USA) are presented. Statistical evidence from the Organization for Economic Cooperation and Development (OECD) and the International Labor Organization (ILO) show that a significant amount of total job growth in the countries examined is ascribed to small and medium sized enterprises (SMEs). Early job generation studies tended to exaggerate the contribution of SMEs to job creation, as the analysis treated inadequately such aspects as the impact of job creation and destruction, firm births and deaths, and movements of firms between size categories. Longitudinal job generation studies in Europe show that few firms in the very small category (up to 20 employees) grow to employ more than 20 employees. Analyzing employment data in the six countries, it is suggested that SMEs are not characterized by higher quality employment than large firms, and there is a high level of insecurity of employment in small firms because of the high failure rates of SMEs in their initial stages. The data also suggest that most small firms are not innovative; their importance for net job creation depends on their existing employment share in a number of countries; and they are associated with low wages, insecure employment, and low rates of unionization. The success of small enterprises depends on large mass production firms or other small firms. These forms of inter-organizational cooperation that are associated with small firm success are, however, limited.(CBS)