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Date: July 12, 1995

Title: Interview/ Bruce Kirchhoff explains why small business is crucial to the economy

Subject: Bruce Kirchhoff is a professor of entrepreneurship at New Jersey Institute of Technology”s School of Industrial Management in Newark. In Inc. magazine”s recent special issue, “The State of Small Business 1995,” Kirchhoff was among 16 people profiled in the section, “Who”s Who in Small-Business Research.” Kirchhoff is also the former chief economist for the Small Business Administration and author of “Entrepreneurship and Dynamic Capitalism,” which was published in 1994.

BUSINESS: What is small-business research?

Kirchhoff: Small-business research is almost a misnomer. It”s really hard to identify what a small business is. Small business is a group of citizens in the U.S. that is quite large. The concept of identifying this group and using it as a research direction originates with Congress. Congress is very sensitive to voting blocs, and this is a voting bloc it wants to reach. For a long time, we”ve talked about small business as though it”s some kind of unique entity within our society. In fact, the small-business culture of our society is very heterogeneous. Many small businesses are like corporations, while others are more like family businesses. They have so many dimensions to their character that it”s really an artifact to talk about a small-business sector. Research on small businesses means that you divide all businesses in the country by some arbitrary definition of large to small, and you study the small ones. Almost 20 years ago, the then chief counsel for advocacy pushed through the definition of small business as being a company with fewer than 500 employees. Very few serious researchers use that definition because it”s too large. Businesses really take on a different character when they pass 20 employees. My view is that businesses with less than 100 employees remain small businesses. Anything above that begins to take on the character of a corporation.

BUSINESS: What”s the premise of your book “Entrepreneurship and Dynamic Capitalism?”

Kirchhoff: First and foremost, the U.S. is not focusing on small business as an economic contribution to our society. The real focus should be on new business formations and their growth. The major source of new employment within small firms is with new businesses, not existing businesses that suddenly decide to grow. Not all new businesses that are formed grow, although we do know that over half of the new businesses that are formed will still be here eight years from now. Roughly 10% to 15% of those will have significant growth. This growth will contribute substantial shares of employment growth. One piece of research that is the culmination of the entire book is a study of all the businesses in the U.S. that were formed in 1977 and 1978. A fellow researcher and I studied those for six years. At the end of those years, just the new businesses formed in those two years created 20% of all the new jobs in the U.S. for six years. Without them, employment growth would have been reduced by a significant amount. There would have been 4% less employment in 1986 just because of those businesses formed in two years. If you consider that typical unemployment in the U.S. is 5%, those businesses formed in two years were making the difference between a recession and expansion in the economy in 1986. Until we get the government to recognize that new businesses are driving economic growth in the U.S., it will continue to make decisions that place barriers in the way of business formation and growth.

BUSINESS: There is talk in Washington, D.C. that the Small Business Administration may be abolished. Do you think that will happen?

Kirchhoff: I have very close ties in Washington. SBA is very firmly in all of the budget recommendations. In Clinton”s view, the SBA is going to survive. It will have a reduced budget. The SBA was set up by Congress to give each member of the House of Representatives the ability to reach into his district with some good news for a large segment of the population. It would be very difficult for Congress to let go of this political tool. The SBA will probably never be eliminated.

BUSINESS: Are the many layoffs at large corporations these days driving the rise in entrepreneurship?

Kirchhoff: Nobody knows if layoffs are creating more entrepreneurs. We suspect that may be a motivating factor. The fact that large corporations are laying off employees today is not new. Industries go through these cycles. The ship-building industry expanded in the first half of the century and then declined. The steel industry expanded, grew in the 1950s, and then began a decline. Right now computer manufacturers are having the same trouble. Suddenly the American public has become aware that job security in a large corporation isn”t what they thought it was. Perhaps the best source of employment security is yourself: develop your own skills, invest your own money in your future and make a life for yourself. We know that people who are terminated from a job will often go into self employment to support themselves. It”s especially popular these days. With that comes a new view of society that says being your own business owner is okay. It”s not considered to be as socially degrading as it was 25 or 30 years ago. Today we hopefully have a proliferation of people starting their own businesses. In six to eight years, they will have a significant impact on the economy.

BUSINESS: How successful are these companies?

Kirchhoff: The success rate of these corporations is very difficult to measure. A lot of times people will remain self-employed until someone comes along and offers them a job. Then they self-terminate their so-called small business at no cost to themselves or anyone else. You can”t call this a failure-they just cease being self-employed. The best estimates we have show that about 18% to 20% of the businesses that terminate themselves in one year are actually failures. That”s when we define a failure as a business that terminates with losses to creditors.

BUSINESS: There is a school of research that says it is large companies, not small ones, that are really creating new jobs. What do you think of its arguments?

Kirchhoff: The statistical research that underlies this argument that large businesses are actually creating the new jobs is good, but the interpretation of those statistics is outrageous. It”s hard to believe a researcher could stand up and make that claim and publish the data in the New York Times. Now we have this great debate. I can prove that his data shows the same phenomena that my data shows-small business is creating the most new jobs.

BUSINESS: Has the face of the entrepreneur changed over the years?

Kirchhoff: Women are the fastest-growing area of new-business formation. Also, a wider segment of the population is starting businesses. We are generating statistics that say that starting your own business isn”t such a big risk. You”ve got the skills. You can define your work for yourself. People who have been resistant to taking such a huge risk are recognizing that the risk is not so great. I think that”s very good for our society.