Do Small Businesses Matter in High Tech?

Small businesses are much less important in technology-intensive industries than in the rest of the economy.

They account for a slender portion of high tech sales. A recent report by the National Science Foundation (NSF) indicates that, in 2008, businesses with between 5 and 499 employees accounted for 11 percent of sales of companies that conduct research and development (R&D).

Even for domestic sales, the contribution of small business isn’t very large. The NSF report found that small companies were responsible for only 14 percent of the U.S. sales of firms that perform R&D.

Small business’s share of sales by R&D-performing companies is much lower than its percentage of sales by all businesses. Back in 2002 – the last year for which comparable data exist – firms with between 5 and 499 employees accounted for 59 percent of revenues of all businesses with five or more employees, but only 20 percent of sales of companies that conducted R&D.

Small business also accounts for a smaller portion of technical employment than its share of overall hiring. In 2006, businesses with between 5 and 499 employees were responsible for 48 percent of employment of all firms with more than 4 employees. But in the same year, firms of this size accounted for only 27 percent of employment of scientists and engineers and only 14 percent of domestic employment of these personnel.

Large firms account for the lion’s share of R&D expenditures. The NSF report also shows that only 19 percent of R&D expenditures belong to small businesses. (Small companies paid for 22 percent of R&D undertaken in the U.S.)

This number is much smaller than the R&D expense accounted for by giant firms. Businesses with more than 25,000 employees paid for 42 percent of R&D. (Giant companies accounted for one third of the R&D conducted in the U.S.)

However, small high tech firms focus more on R&D than large high tech companies. Elsewhere I have explained that small R&D performing businesses devote a larger share of their employment and sales to R&D. And the NSF report shows that in 2008, R&D conducting businesses with at least 5 employees spent an average of 3 percent of their sales on R&D. In contrast, R&D performing businesses with between 5 and 499 employees spent 5 percent.

Small firms are certainly important to the U.S. economy. Businesses with between 5 and 499 employees account for over 99 percent of all companies with more than 4 employees. They also account for the majority of business revenues and nearly half of private sector employment.

But when it comes to the high tech part of our economy, small businesses are less central. Despite spending a greater share of their sales on research and development, small R&D performing companies only account for a slender portion of high tech company sales and technical employment.

This pattern provides a conundrum for policy makers who believe that small business is a central pillar of the American economy and that high tech is the future of the nation. Efforts to promote technoligcal innovation depend disproportionately on large companies. And as high technology becomes a more important part of our economy, the overall contribution of small business to sales and employment will decline.

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.