Report

Introduction

The image of the American entrepreneur retains an enduring fascination in the minds of the public and policy makers alike. For example, testifying several years ago at a congressional hearing on "the entrepreneurial spirit in America," Wisconsin's Senator Robert Kasten said of entrepreneurs: "They create new jobs. They provide new competition to existing businesses. They help to improve product quality, help to reduce prices, add new goods and services never before thought of, advance new technologies, America's competitive stance." His statement captures the view that entrepreneurial enterprises are valuable sources of technological advance, jobs, and dynamism, a trait commonly attributed to small business as a whole.

Our national affection toward entrepreneurs also manifests itself in attitudes towards small business. "Start-up," "family," and other small-scale businesses carry an important weight in discussions of national policy. This durable affection stems in part from the perception that small business is the vehicle by which entrepreneurs provide needed vigor to the economy.

In the newly established democracies of Eastern Europe a widely discussed challenge is the need to regenerate a vital entrepreneurial sector. The centralized regime pushed the mass production paradigm to its limit, at times concentrating the entire production of a good in a single factory. The dismal record of poor quality products and stagnant economic growth highlights the need for the competition and vigor provided by start-up enterprises.

The national focus on small business is not merely talk. Many government policies are directed toward aiding small businesses. For example, the Revenue Reconciliation Act of 1993 (RRA93) permits the exclusion of 50 percent of capital gains on qualifying investments in start-ups and small businesses held for five or more years.

This brief surveys the various notions of "small business," presents criteria that should underlie policies toward business, and reviews the case for public policies to stimulate entrepreneurship and small business. It concludes that it is surprisingly difficult to construct a case in favor of systematically favoring small businesses. Indeed, it is probably not useful to think of creating a "small business climate" through policies like targeted tax breaks, wage subsidies, loan guarantees or outright grants. Instead, policies should be devoted to developing an environment favorable to innovation, employment, and growth in the economy as a whole.