Job Growth Malarkey: Avoid the Mermaid Strategy

10/22/12

Last week’s presidential debate once again focused on the need to create new jobs in the United States. And yet with barely two weeks to go until the election, neither candidate presented a convincing or nuanced understanding of the dynamics of job creation.

Together the two candidates referred to “small business” 21 times during the debate, repeating the phrase like a mantra. And in one mystifying segment, Governor Romney implied that Bain Capital was a small business, presumably because it started with 10 employees, although it was generously endowed with $37 million in start-up funds and a safety net from its parent consulting company if things went wrong (see Paul Krugman’s post “Small-Time Mitt“).

Together the candidates displayed a surprising lack of clarity on what is and is not a small business and how these businesses fuel job growth. Indeed both seemed to be working off the same incorrect, but widely held, belief that small businesses create most new jobs. We beg to differ. It is new companies that have the potential to create new jobs.

The Kauffman Foundation found that new businesses—those less than five years old—created the lion’s share, two thirds, of all the net new jobs between 1980 and 2005. (See the foundation’s paper, Where Will the Jobs Come From?.) It is entrepreneurship, the creation of new businesses, that will lead to job growth, not small businesses as a general category. Talking about anything else is simply malarkey.

Based on our work at the Martin Trust Center for MIT Entrepreneurship, we see two clear and distinct types of new businesses that are creating new jobs: small and medium enterprises (SMEs) and innovation-driven enterprises (IDEs). The two types are different enough that governments looking to promote job growth will need to fully understand the difference and to put into place different policies and structures that addresses each type, rather than lumping them together under the one banner of entrepreneurship.

Small and medium enterprises offer traditional goods to a local or regional market. Your pizza place, for instance. These companies may employ only the founder and a spouse or a handful of employees. They serve local markets and are mostly service oriented.

Though they are truly important, these companies are not large enough to serve as engines for the entire U.S. economy. They do, however, offer important opportunities for employment and provide valuable services. In fact these companies are the lifeblood of many economies. In some countries and regions, such as Andalucía in Spain, they form the majority of employment.

These jobs are particularly important for individuals with relatively low levels of education and skills. A form of self-employment, small businesses give people the opportunity to work independently and to use their skills, particularly in times when large, established companies are laying off workers.

Contrast these companies with the innovation-driven enterprises we advise and nurture at MIT and in the larger Massachusetts innovation-driven entrepreneurial ecosystem. These companies serve global markets and their goal is rapid expansion. They start small only as a test bed before moving into larger markets. Ford Motor Company started as an innovation-driven enterprise, turning the horseless carriage into a reality for millions of Americans. So did Google, and so did Genzyme.

These companies generally employ individuals with high levels of education and training. New biotechnology companies, for example, are usually founded, led and staffed by individuals with PhDs in molecular biology as well as physicians and MBAs. As these companies grow, they create a wealth of high-quality, auxiliary employment for those with other skills—laboratory technicians, manufacturing staff, clinical trial managers, hospital workers, etc. The Massachusetts governor’s office has calculated that for every high-level biotechnology job created, five other lower-level jobs are also created. The same is true for … Next Page »

Bill Aulet is Managing Director at the Martin Trust Center for MIT Entrepreneurship and Senior Lecturer at the MIT Sloan School of Management. He can be reached at aulet@mit.edu. Fiona Murray is Faculty Director of the Martin Trust Center for MIT Entrepreneurship and David Sarnoff Professor of Management of Technology at the MIT Sloan School of Management. She can be reached at fmurray@mit.edu. Follow @

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  • http://www.facebook.com/lazowska Ed Lazowska

    AMEN!!!!! Rich guys who want to keep it all for themselves use the phrase “small business” to consciously mislead. They want you to think of your neighborhood dry cleaner. Two key points: (1) It’s *new* businesses, not *small* businesses, that drive growth – my neighborhood dry cleaner employs the same number of people that it did 30 years ago; and (2) The “small businesses” that would be affected by higher tax rates are the 5% of “small businesses” that are S-Corps and LLCs clearing millions of dollars per year, who could well afford to pay their fair share.

  • http://twitter.com/LevelUPgrowth Randy Albert

    There is one more distinction I’d like to point out. The lion’s share of innovation-based companies are not venture fundable, will never become global businesses, and aren’t necessarily technology driven. It’s not uncommon for the ones who grow past startup into a sustainable business with 10-100 employees to get stuck even though they have further growth potential. In my opinion, government policy and support for venture funded companies is adequate. It’s the second stage entrepreneurs who need a boost.

    Randy Albert
    levelUPbreakthrough.com

  • maxkava

    But, in the end, what’s the exact definition of IDE? Just ‘targeting a global market’? So, is McDonald’s an IDE?