Office of Advocacy--The Small Business Economy, 2004

226 Pages·2004·0.75 MB·English

2004
SMALL
The
BUSINESS
ECONOMY
A REPORT TO THE PRESIDENT
2004
SMALL
The
BUSINESS
ECONOMY
A REPORT TO THE PRESIDENT
United States Government Printing Offi ce
Washington: 2004
For sale by the Superintendent of Documents
Mail Stop: SSOP
U.S. Government Printing Offi ce
Washington, D.C. 20402
Dear Mr. President:
The Offi ce of Advocacy of the U.S. Small Business Admin is-
tration is pleased to present The Small Business Economy: A
Report to the President. In 2003, the overall economic indicators
improved as the recovery gained momentum. Small businesses
have led the way. However, continued strong growth requires an
environment that fosters more small business activity.
During a recent conference organized by the Offi ce of Advo-
cacy, Treasury Secretary John W. Snow noted that it is important
for government to create an environment where entrepreneur-
ship can thrive. Much of this year’s report focuses on regula-
tions. That is no accident. This offi ce enforces the Regulatory
Flexibility Act of 1980, as amended by the Small Business
Regulatory Enforcement Fairness Act of 1996. Moreover, your
Administration has been a supporter of reducing regulatory
burden for small businesses; and in August 2002, you signed
Executive Order 13272, recognizing that federal agencies need
to consider small fi rms when drafting new federal rules.
Two studies from the Offi ce of Advocacy highlight the dis-
advantages faced by many entrepreneurs when it comes to
government rules and regulations. First, in 2001, W. Mark
Crain and Thomas D. Hopkins found that small fi rms with
fewer than 20 employees pay nearly 60 percent more to com-
ply with federal regulations than their larger counterparts
with more than 500 employees. Small business owners often
lack the time and ability to monitor the mountain of new fed-
eral regulations that may affect them, and compliance often
means hiring a professional to act on their behalf. Second, we
know that home-based businesses are a sizable portion of the
U.S. economy, and yet regulations at all levels of government
hamper them, according to research by Henry Beale.
A Report to the President i
The Offi ce of Advocacy works diligently to ensure that small
business owners have a say in the federal regulatory process. In
fi scal year 2003, for instance, Advocacy’s involvement resulted
in more than $6.3 billion in regulatory cost savings for small
entities. Yet, this is only part of the picture. Small fi rms also face
regu latory burdens at the state level. In December 2002, the
Offi ce of Advocacy developed model legislation to encourage
states to adopt regulatory fl exibility initiatives. The result has
been a groundswell of support from governors and state legisla-
tors. Recognizing that small businesses can be engines of growth
and new jobs, several states have adopted this legislation or have
issued executive orders that recognize small business burdens in
the rulemaking process.
State leaders also recognize the importance of innovation to
economic growth. Advocacy research shows that new fi rms are
created around universities that devote more dollars to research
and development. Therefore, research institutions generating
new patents can enhance their local economies through “spin-
off” ventures. Earlier this year, Advocacy funded a conference
at Case Western Reserve University that explored government-
university partnerships that promote entrepreneurship, and
a paper from that conference discussing technology transfer
appears as Chapter 3 in this volume.
Finally, there were clear signs of macroeconomic improvement
in 2003, especially in the second half of the year. A growing eco-
nomy means that more small business owners will prosper. Through
your leadership, we will continue to focus on issues designed to
create an environment where entrepreneurship can fl ourish.
Thomas M. Sullivan Chad Moutray
Chief Counsel for Advocacy Chief Economist
ii The Small Business Economy
Acknowledgments
The Small Business Economy: A Report to the President was prepared
by the U.S. Small Business Administration, Offi ce of Advocacy.
The Chief Counsel for Advocacy is Thomas M. Sullivan; the
Deputy Chief Counsel is Shawne McGibbon. The Chief Eco-
nomist is Chad Moutray, the Director of Interagency Affairs is
Susan Howe, the Director of the Offi ce of Information is Jody
Wharton, and the Director of Regional Affairs is Viktoria Ziebarth.
The project was managed by Kathryn J. Tobias, senior editor.
Special thanks to Robert Kleinsteuber for editorial review. Specifi c
sections were written or prepared by the following staff:
Chapter 1 Brian Headd, Charles Ou, and Major Clark
Chapter 2 Henry Beale, of Microeconomic Applications, Inc.,
with Radwan Saade
Chapter 3 Scott Shane of Case Western University
Chapter 4 Carrol Barnes and Advocacy Offi ce
of Interagency Affairs
Chapter 5 Viktoria Ziebarth and Jaime Willis
Appendix A Brian Headd
Appendix B Chad Moutray
The Offi ce of Advocacy appreciates the interest of all who reviewed
the report. Thanks are also extended to Jodi Bloom, Kristen Argenio
and Jessica Snyder of DesignFarm and to the U.S. Government
Printing Offi ce for their assistance.
Acknowledgments iii
Contents
EXECUTIVE SUMMARY 1
CHAPTER 1 Small Business Trends, 2003 5
Small Business in the Economy of 2003 5
Small Business Financial Trends 12
Small Business Procurement 35
CHAPTER 2 Rules, Regulations, and
Home-based Businesses
53
Characteristics of Home-based Businesses 54
The Internal Revenue Service and its Effect
on Home-based Businesses 60
Zoning Ordinances 81
CHAPTER 3 Government Policies to Encourage
Economic Development through
Technology Transfer
103
University Spin-offs Enhance Economic Development 104
The Effect of Government Policies 107
Policy Implications 117
CHAPTER 4 Report on the Regulatory Flexibility Act
(RFA), FY 2003
125
Overview of the RFA 126
The Role of the Offi ce of Advocacy 137

Contents v
CHAPTER 5 Regulatory Flexibility Initiatives
in the States
151
The Model Legislation Initiative 152
The Model Legislation 155
Progress Report on the State Regulatory
Flexibility Initiatives 161
APPENDIX A Small Business Data 169
APPENDIX B Lessons from the Economic Research
Focus Groups
195
INDEX 209
vi The Small Business Economy
Executive Summary
In this third edition of The Small Business Economy, the Offi ce of Advocacy
reviews the economic environment for small businesses in the year 2003,
including the fi nancial and federal procurement marketplaces. New research
on the regulatory environment for home-based business and on govern-
ment policies to encourage technology transfer are the subjects of Chapters 2
and 3. Advocacy’s mandate to improve the regulatory environment for small
businesses generates an annual report on implementation of the Regulatory
Flexibility Act, included here as Chapter 4, and the results of a groundbreak-
ing Advocacy initiative to carry regulatory fl exibility successes to the state
level are summarized in Chapter 5. Appendices provide additional data on
small businesses, the results of Advocacy’s academic focus groups in 2003, and
additional information on Regulatory Flexibility Act implementation.
The Small Business Economy in 2003
The year 2003 was one of transition, as signs of economic recovery began to
appear in mid-year. Real gross domestic product increased at an annual rate of
8.2 percent in contrast to lower rates in the previous quarters. The number of
fi rms grew, and business bankruptcies declined. Corporate profi ts were up and
sole proprietorship income increased 6.2 percent. Trends in employment over
the 2002–2003 period indicated that small fi rms fared better in some indus-
tries than in others. This is in keeping with Joel Popkin’s research on historical
patterns that show, for example, service-producing fi rms in large and small
businesses experience similar changes in a downturn, while those in goods-
producing industries experience different effects based on fi rm size. A look
at this and other research on small businesses over the business cycle can help
shed some light on small business directions for 2004 and beyond.
Executive Summary 1
The fi nancial markets were on a track for supporting more growth in 2003,
as low interest rates spawned corporate bond issues and generated a wave of
mortgage refi nancings by households. Equity markets began to rally, although
this did not immediately translate into a stronger equity market for small
fi rms. Lending to small businesses by banks showed little growth over the June
2002 to June 2003 period of observation (based on data availability), but this
was expected, given that the economic pickup occurred later in the year. Bank
consolidations continued to affect the relative importance of banks of differ-
ent sizes in the small business loan market, with a steadily increasing share
concentrated in the larger banks. Questions about how banking concentration
will affect small business credit availability over the long term continue to be a
topic of study for policymakers.
The federal government increased contract dollars going to small businesses
in fi scal year 2003 from $89.4 billion to about $98 billion, including both
prime contracts and subcontracts. As in the past, about two-thirds of the dollars
in prime contracts over $25,000 were from the Department of Defense.
Increasing shares of small business contract dollars were in the categories of
supplies and equipment, and research and development. Minority-, women-,
and veteran-owned businesses all increased their shares of contract dollars.
The Regulatory Environment
for Home-based Businesses
Home-based businesses make up 53 percent of the small business population
and represent a broad range of U.S. industrial sectors. Some 60 percent are
in service industries, 16 percent in construction, 14 percent in retail trade,
and the rest are scattered across the manufacturing, fi nance, transportation
and communications, wholesale trade, and other industries that make up
the U.S. economy. Ninety-one percent report no paid employees. Although
home-based businesses are exempted from many industrial regulations, new
Advocacy-sponsored research fi nds they face particular regulatory hurdles in
two areas: Internal Revenue Service tax regulations at the federal level, and
zoning regulations at the local level. The study in Chapter 2 looks in detail at
the specifi c burdens of these regulations, identifying specifi c problems that are
especially burdensome to these very small businesses.
2 The Small Business Economy