Small Businesses Innovate Around Government Barriers

U.S. "small businesses", unlike like their "big business" brethren, are the fodder of election year speeches, with political candidates enshrining American entrepreneurs with the true spirit of capitalism. This year is no different, but this year the definition of what political candidates are referring to as a "small business" has changed - at least according to the U.S. Department of Commerce's Small Business Administration (SBA). The SBA generally defines a small business concern "as one that is independently owned and operated, is organized for profit, and is not dominant in its field." Furthermore, to specifically qualify for eligibility for federal government contracts and financial assistance, the SBA takes into consideration specific size standard eligibility in an industry.

In March 2012, the SBA published a final rule that increases 37 of the revenue-based size standards in 34 industries and three sub-industries in the "Professional, Scientific and Technical Services" sector, and increases one size standard in the "Other Services" sector. For example, in the service sector, a small business may not have annual receipts exceeding $2.5 to $21.5 million - again, depending on the product manufactured. Overall, the SBA estimates as many as 8,350 additional firms will become eligible for SBA programs as a result of these revisions.

In February 2012, Congressmen Joe Walsh (R-VA), chair of the Small Business Committee's Subcommittee on Economic Growth, Tax, and Capital Access, along with Gerry Connolly (D-VA), co-introduced in the U.S. House of Representatives the "Small Business Protection Act of 2012" (H.R.3987). Bill H.R.3987 addresses alleged deficiencies in the then proposed SBA standard that defines what businesses qualify as "small" for federal taxation and contracting purposes. For example, it is argued that these proposed SBA size standards lump different industries together under one size standard, thus giving large corporations an unfair advantage over small businesses. As redress, H.R.3987 requires that the SBA, when it establishes small business size standards, establish or approve a single standard for a grouping of four-digit North American Industrial Classification System (NAICS) codes only if the SBA Administrator makes publicly available a justification that the standard is appropriate for each individual industry classification in the grouping.

Yet American small business, like their big business compatriots, can have varying views on the importance of specific public policy issues. The National Small Business Association (NSBA), a Washington, D.C.-based advocacy group representing more than 150,000 American small businesses, includes "Enhance Small Business Contracting" as one (No. 10) of its "Top 10 Priorities" for the 112th U.S. Congress. NSBA members have expressed long-time concerns about "leveling the playing field" for small business federal government contracting, and are particularly concerned with the new industry sector definitions and size standards that the SBA has put forward in its latest definition of "small business." In contrast to the NSBA, the National Federation of Independent Business (NFIB), a Nashville, Tennessee-based association representing more than 350,000 American small businesses (with approximately 70 percent of its members employing 10 or fewer people), takes a broader public policy view of what affects its membership, as regulatory standards affecting access to federal government contracts are not what fundamentally helps their small business members' success.

When it comes to broader economic policy issues, however, the difference between the NSBA and NFIB members' priorities tends to converge. For example, in its 2012 Mid-Year Economic Report, where a survey of 350 small business members of NSBA was conducted between July 11-28, 2011, when respondents were asked the question: "Which one of the following issues do you believe Congress and President Obama's administration should address first?", 34 percent reported "reduce the national deficit", followed by 14 percent choosing "reducing the tax burden", and 13 percent identifying "reducing the regulatory burden." Likewise, in the NFIB Small Business Economic Trends for September 2012, a monthly report compiled from a random sample of 736 small businesses who are NFIB members, the top single most important problem reported was "taxes", with 23 percent (up 5 percent from a year earlier), followed closely by "government regulations and red tape", with 21 percent (up 2 percent from a year earlier). With a combined membership representing some 500,000 small businesses in America, the consensus of these two "peak" small business associations is that government, in its roles of tax collector, deficit spender, and business regulator, is the primary concern of American entrepreneurs in this sluggish, low-growth U.S. economy.

Regardless of a less-than-ideal public policy and business environment, U.S. small business is doing what American entrepreneurs do best: innovate and re-invent themselves in the marketplace. "Small business owners are especially adept at re-invention - whether because of obstacles or new visions of growth," says Maria Veltre, Managing Director, Citi Small Business. In June 2012, Citibank released a survey conducted via telephone by Abt Research and Public Affairs among a national random sample of 750 small business owners/operators throughout the U.S. According to Citibank survey results, 47 percent of small business owners report that they have focused on overhauling their products or services; 24 percent have adjusted their infrastructure, such as technology or staffing; and 18 percent have improved their sales and marketing function. Nearly half (49 percent) of small businesses owners/operators plan to use social media, such as Facebook or Twitter, to market their business in the remainder of 2012.

So while most U.S. small business owners are concerned about government policies and regulations that adversely impact their economic performance, they are not waiting for relief, but working around these barriers and engaging in activities that they can immediately influence. Small business owners exercise competitive advantage over big business with the flexibility inherent in their relatively simple organizational structures, centralized managerial decision making, focus on emerging niche markets for differentiated products and services (often not, at least initially, cost-effective for big business to pursue), and shorter time-to-market of new products and services. Couple these inherent organizational advantages with what management thinker Professor Clayton Christensen of the Harvard Business School views as the advent of low-cost, sophisticated information technology - such as "cloud computing" - and U.S. entrepreneurs can now avail themselves of new technological innovations to help fuel their business success.