Sector Variations in Small Business Productivity
America’s small businesses vary widely in productivity across different sectors. While U.S. MSMEs are on par with those in the United Kingdom, Japan, Germany, and Italy in many areas, they lag significantly in mining, transportation and storage, and administrative services. The productivity ratio of MSMEs relative to large companies also varies by sector, with the mining sector facing the widest gap, followed by information and communications technology and manufacturing. Conversely, MSMEs in administrative services are nearly as productive as their large peers.
Regional Disparities in MSME Performance
MSME performance and economic contribution also vary significantly across states and metro areas, MGI found. Northeastern states tend to have the highest contributions to employment and business revenue, while Southern states have the lowest. Among the top 40 metro areas by employment, small businesses account for 25-50% of revenues and 50 to 70% of employment in the business sector. Local economic conditions influence the productivity of all businesses, regardless of size.
What Explains the Productivity Gap
The productivity gap can be partially attributed to the nature of work undertaken by small and large businesses. Large companies often focus on core competencies and outsource less essential activities to smaller firms, leading to a concentration of higher-value-added activities in larger companies. However, the primary driver is the disparity in access to key competencies such as technology, human capital, market access, and finance. For example, only half as many MSMEs adopt technologies like customer relationship management systems and artificial intelligence compared to large companies. Large firms are twice as likely to provide formal training programs and are more active in performance monitoring and awarding bonuses. MSMEs derive just 5% of their total sales from direct exports, one-third of the sales made overseas by large enterprises. Large businesses are also 1.5 times more likely to use banks for working capital financing.
The Case for Collaboration
To drive greater growth, both large and small businesses should explore mutually beneficial relationships. Creating the right economic conditions can help both thrive, particularly given that all large companies were small at one point. Large companies can assist smaller ones in acquiring necessary competencies, while small companies can serve as customers, suppliers, and sources of innovation for larger firms. This symbiotic relationship can boost overall productivity in most sectors.
Supply Chain Partnerships
Collaborative supply chain relationships benefit both parties. Large companies gain resilience and flexibility, while MSMEs build know-how, human capital, and market access. Toyota, for instance, has worked with its suppliers for over 30 years, transferring knowledge in demand planning, cost reduction, and management. IBM’s Supplier Connection initiative connects small suppliers to large businesses, helping them access new opportunities. Studies show that 70% of small businesses in New York increased their revenue within two years of joining a corporate supplier base. Large companies can also advocate for small suppliers to secure better financial terms, as seen in DuPont’s efforts in Colombia.
Vibrant Business Clusters
Regional networks of large and small companies, like those in Silicon Valley, California or Grand Rapids, Michigan, foster mutual growth. Small companies benefit from the concentration of capital and talent, while large companies gain from the innovation and entrepreneurial spirit of smaller firms. The Sacramento agricultural technology cluster, for example, builds on the area’s strengths in both agriculture and technology. Start-ups like Scout benefit from the local ecosystem of research labs and expertise. AgStart, a nonprofit, provides lab equipment and incubation services, helping more than 20 start-ups. Small businesses also gain financial access through acquisitions, venture capital, and public grants.
Sector-Wide Infrastructure
Enhancing digital data and financial infrastructure can significantly boost productivity. An open data framework can help financial institutions use nontraditional data sources for credit underwriting, benefiting underfinanced MSMEs. For instance, including utility data increased loan approval rates for 20% of customers with limited credit history. Policy makers can promote technology adoption, as seen in Singapore’s GoBusiness initiative, which provides financial support for businesses adopting tech solutions. Establishing a training ecosystem, such as the U.S. Manufacturing Extension Partnership (MEP), can help MSMEs access technical and strategic expertise. MEP has interacted with over 36,000 small manufacturers, creating or retaining more than 100,000 jobs and generating significant economic returns.
Greater collaboration among MSMEs can enhance productivity through knowledge sharing, mentoring, and collective investments. By fostering these relationships, businesses can create a more resilient and innovative economy. For example, small businesses in the construction sector can benefit from shared resources and expertise to improve productivity, especially in the context of labor shortages and increased demand for construction services due to the growing demand for infrastructure and renewable energy projects.
Closing the productivity gap between small and large businesses in the U.S. is essential for boosting the nation’s economic competitiveness. By strengthening networks and interactions, both large and small businesses can thrive. Strong local ecosystems and network effects are especially critical for minority-owned businesses, as my colleagues’ research on Latino-owned small business has shown. Large companies can provide crucial support in technology, human capital, market access, and finance, while small businesses can contribute to innovation and flexibility. Successful models of collaboration offer valuable lessons and opportunities for mutual growth.
The article originally appeared in Forbes.
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