Scott Shane: 4 Reasons for Small Business Pessimism


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For all the talk of the US economy rebounding, many small business owners continue to feel left behind by any recovery.  Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, sees little in the present economic situation or in the near future that suggests small business owners have much to be happy about.  Writing at Small Business Trends, Shane gives four reasons small business owners feel left behind.  First, the housing market woes have a greater impact on smaller businesses:

Moreover, small business financing depends a lot on housing prices. Big public companies obtain the capital that they need by issuing bonds and stock and selling them to investors, but small businesses rely heavily on personally guaranteed and personally borrowed money from banks. Analysis I conducted with my colleague Mark Schweitzer of the Federal Reserve Bank of Cleveland shows that the fall in housing prices has eliminated almost $25 billion in potential credit for small business owners.

Second, big businesses can better take advantage of the more robust economic growth occurring in other countries. Small Business Administration data shows that small businesses only account for 31 percent of exports but generate more than half of non-agricultural private sector GDP. The lesser reliance of large businesses on economic conditions within the country has worked to their advantage in recent months.

Third, increase in government regulation, as seen in the financial and health care reform bills have imposed a disproportionately large burden on small businesses. In a recent paper, Nicole and Mark Crain of Lafayette University wrote that “small businesses face an annual regulatory cost … which is 36 percent higher than the regulatory cost facing large firms.”

Fourth, most government policies to combat the weak economic conditions have helped lar
ge companies more than small ones. For instance, the stimulus program, which worked in part through government contracting, favored large businesses that knew how to work the public contracting system.

Read Is Small Business Prosperity Just Around the Corner? here.

Posted 01-25-2011 8:07 AM by Graham Griffith
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