Google vs. the little guys: Who helps the economy more?

High-tech small businesses don't employ as many people or spend as much on R&D, so what are they good for?

On Monday, Scott Shane wrote a post at Small Business Trends titled "Do Small Businesses Matter in High Tech?"

As in most of Shane's writing he comes out swinging at small businesses in our economy. In his opening sentence, he proclaims: "Small Businesses are much less important in technology-intensive industries than in the rest of the economy."

In a conversation with Aron S. Spencer, Ph.D., who is an Assistant Professor, School of Management at New Jersey Institute of Technology, I found yet another kindred spirit in those who continue to be dismayed at Shane's antagonism toward small business.

Spencer asserts that Shane's premise "flies in the face of the conventional wisdom -- and common sense -- about high-tech entrepreneurship. It's also completely wrong."

As in past writings, Shane selectively uses and interprets data to make his case. "Shane begins his argument based on revenue share," said Professor Spencer, "citing evidence that small businesses generate small proportions of sales compared to overall high-tech sales. While this may be true, sales are only a small portion of the picture."

Spencer offers some specific evidence of his own. "Take, for instance Shane's discussion of R&D. Small business, he says, account for only about 1/5 of R&D spending (other studies I've seen indicate it may be as low as half that), whereas businesses with more than 25,000 employees account for 42% of the spending. Yet he fails to mention that about half of all patents awarded go to small businesses. That means that small business are 5-10 times as efficient with their research dollars. Patents awarded to small business are also more than twice as likely than those awarded to large businesses to be important patents, based on their impact on future R&D and patenting."

Spencer also takes exception, as I have in previous posts, to Shane's use of employment data. Shane argues that "small business also accounts for a smaller portion of technical employment than its share of overall hiring."

Spencer makes the following rebuttal to this: "The statistics he cites primarily indicate indicate that there are a lot of non-high-tech small businesses. The more interesting statistic is that small high-tech firms generate jobs at a rate over 5x their share of current employment (compared to just over 3x for non-high-tech small businesses), and therefor are among the most important drivers of employment growth."

Spencer also argues that Shane minimizes the importance of small high tech companies to the growth of the big ones. "Many of today's large tech firms drive substantial portions of their revenue growth via acquisitions. Cisco, for instance, has a reputation for 'growth by acquisition'. Harvard even wrote a case study about it. Google, in addition to their internal R&D efforts, has also shown a great appetite for purchasing outside technologies. Where do these acquisitions come from? Small high-tech business."

And that's why, once again, Professor Spencer and I both assert that Professor Shane is wrong. Small business does matter.

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