Small Business Share of Economic Growth

by Joel Popkin and Company. 2001. [50 pages.]

 Washington, D.C.

under contract no. SBAHQ-00-C-0001

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Knowing small businesses’ share of economic output

helps to understand their role in the economy, but no

data are available from government sources. To find

out this statistic, Joel Popkin and Company used various data sources to create estimates by industry.

This extends work previously done by Joel Popkin

and Company for the SBA that calculated the small

and large business shares of private nonfarm output

for the period 1958-1992 (most recently under contract SBAHQ-95-C-0021).

Overall Findings

A more appropriate title for this report might be

“Small Business Share of the Economy,” as following firms through time and determining which size

class causes economic growth is difficult, if not

impossible, with current data.

The study did find that the importance of small

business in the economy overall is closely tied to the

continued robust growth in the small-business-dominated sectors of the economy, particularly services.

This may be obvious, because in a growing economy

some small businesses will grow out of their “smallness” and become big businesses as they expand their

employment. That is part of an ongoing process in

the life cycle of many businesses and reflects a myriad of factors. Some of those factors will be positive

for businesses in general and for the small businesses

that are growing rapidly. And that can be true even

though the net effect may be a downward trend in

small business share. Growth in industry sectors most

conducive to small business startup and expansion

helps promote an ongoing stream of new small businesses and the continued health of many others.

Overall, the small business share of private sector

gross domestic product (GDP) has remained around

50 percent. This is a result of services becoming both

a larger part of the economy and less small-firm-oriented, while manufacturing has become dominated

by small firms.

Small Firm Share of Private Nonfarm GDP

Estimates (Percentages)

1980 1990 1999

Total .51 .51 .52

Services .77 .71 .68

Mining and

Manufacturing .24 .25 .27

Wholesale and

Retail Trade .72 .64 .65

Note: Includes figures from previous report.

Highlights

• The share of private, nonfarm GDP produced by

small businesses fell slightly between 1992 and

1997, from 51 percent of the total to 50 percent. This

share has been relatively stable for the past two

decades, varying between 52 percent in the late

1970s and 49 percent in 1982.

• Very preliminary estimates for 1998 and 1999

indicate a possible increase in the small business

share to 52 percent.

• Small businesses’ increasing share is influenced

by a unique factor: a shift in the economy towards
growth in sectors heavily populated by small businesses. Consider, for example, the services and manufacturing sectors. From the mid-1980s to today,

services had a 5-percent higher share of private sector output, while manufacturing had a 5-percent

lower share.

• Considering that government represented 11 percent of the GDP in 1997, small firms represent about

45 percent of total GDP.

Scope and Methodology

U.S. GDP is the market value of the goods and services produced by labor and property located in the

United States. When GDP is allocated according to

the contribution each private industry sector and the

government makes to its production, it is called gross

product originating or GPO. This research takes each

component of private nonfarm GPO and estimates the

proportions produced by small and large businesses.

The Bureau of Economic Analysis (BEA) publishes information on GDP by major industry and valueadded component. Researchers have calculated

small-firm (fewer than 500 employees) and largefirm shares for each value-added component in each

industry for the years 1992-1999 (1998 and 1999 are

preliminary estimates). Those shares are then applied

to the BEA data to separate each component into a

large- and small-business share. Once all the components are divided, they can be added up to determine

how much of gross product originated in small business in each industry. All the small business components can then be added to determine how much of

private nonfarm GDP was produced by small businesses and how much by large businesses.

Producing business-size shares for each valueadded component in each industry, however, requires

additional data sources. The data with which to produce the firm-size shares comes primarily from the

quinquennial economic censuses, most recently collected by the Census Bureau in 1997, and annual

data from the Statistics of Income (SOI) program of

the Internal Revenue Service.

Comments from Advocacy

“It is interesting to note that as firms start, grow,

merge, split, contract, and exit over time, the share of

output in the economy produced by small firms remains

stable. So while individual firms change size classes

over time, in the aggregate, the role of small businesses in the economy remains steady and important,”

said Susan Walthall, chief counsel for Advocacy.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available on the Internet at www.sba.gov/advo/research.

Copies are also available for purchase from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

Order number: PB2002-102202

Price codes: TBA