Start-ups, not small businesses, spur economic growth according to research

The popular perception is that small businesses drive economic growth. Politicians have latched on to the idea and repeat the phrase with frequency and intensity. Take for example comments made by Rep. Sam Graves, R-Mo. In a blog post for "The Hill," Graves argued that small businesses drive job creation and economic growth.

From his post, "Small firms consistently create 60 to 70 percent of new jobs, year after year, and employ more than half of the entire U.S. work force at 27 million different places of business. That means we all have a vested interest in keeping that dynamic job creation going strong."

So if small businesses are so vital for the economic well-being of the country, why don't their concerns drive more economic policies, Graves asks.

Part of the reason economic policy may not be more tailored to the needs of small-business owners is that small businesses don't actually drive the bulk of this country's economic development, according to research by John C. Haltiwanger, Ron S. Jarmin and Javier Miranda.

Using longitudinal Census data on business dynamics, Haltiwanger, Jarmin and Miranda showed that firm age distorts the relationship between firm size and economic growth.

"It’s a classic spurious relationship: When one controls for firm age, the negative association between firm size and net growth disappears. The implication is that, if job growth is the goal, what we need is many young firms, not many small ones," wrote Lucas Mansfield and Christopher Wimer in their write-up on the research for Stanford's Pathway's magazine.

Their research suggests that is is start-ups, not small businesses, that spur economic growth. Start-ups account for only 3 percent of total employment but they provide nearly 20 percent of newly created jobs. While it is also true that many start-ups fail, and their employees lose their jobs, those that survive tend to grow extremely quickly and more than compensate for the numerous failures.