The enormous economic impact of small business

 

 

Tonight, I am going to talk about the role of small business. It’s a bit like extolling the virtues of motherhood. We all have to beware of preaching to the converted! So I am going to take a slightly different tack.

First I will review the perception of small business. We have a problem here and it is important to understand its causes.

Then I will suggest to you that the role of small business is far greater than even the small business community suspects. That’s because small businesses have a sense of place, they are part of the community. Acquiring this commitment to roots, developing a sense of belonging is one of the major challenges facing business in general in the 1990s.

Finally, I will not tell you how to solve our image problem. Time and integrity will solve it. If there’s one thing people in small business understand, it’s maintaining self-confidence and pushing ahead while everyone else thinks we’ll never make it.

 

The perception of small business

If you listen to the words of our opinion leaders, you would never believe that small business has an image problem.

There is one proposition that almost every politician in this land can be counted on to endorse, with all the enthusiasm that he or she can muster. It is that, in these days of accelerating change and other clichés, small business is vital to the economy. This statement doesn’t even raise any eyebrows any more. It has slipped into the realms of conventional wisdom, repeated without thought. To say otherwise would be like questioning the usefulness of governments, or unemployment insurance or old age security. But ask those same politicians in private what they really think, and you will discover that almost all of them don’t really know why small business is important – other than the obvious fact that there are a lot of them and the owners all have a vote. To tell the truth, politicians find small business intensely boring. As a portfolio in cabinet it is, at best, a stepping stone to better jobs.

A friend of mine is a producer for the CBC’s The Journal and he summed it up well. “Once a year,” he said to me when I told him what I did for a living, “they all trot out their little tributes about the great job that small business is doing then we all forget it for a year.” He added, in terms I won’t quote verbatim, that he could not understand how anyone would ever want to spend any time at all thinking about business, especially small business. There are so many more interesting things to do – such as create a film on the orphans in Romania. That’s the CBC for you.

People in business tend to believe that it’s just the media, off on its own wilderness hike once again, proclaiming their half-truths to a gullible audience. Businesspeople know better. We know that we are the ones who really occupy centre stage in the political arena. All you have to do is listen to the rhetoric of politics. It is mostly all about the economy these days. And when we are diverted with a good dose of something like Meech Lake and its off-spring, the cry soon goes up to put all that nonsense on the back burner while we deal with the more pressing issues of the economy.

But we are wrong. What we business people don’t always understand is that the public and the politicians who represent them really do not say what they feel. They are not interested in business. They are interested in salary increases, in interest rates, in consumer prices and a number of other assorted outcomes of business. Things that have a direct impact on their daily lives. But they are not even remotely interested in how it all hangs together. They are not remotely interested in why interest rates or the exchange rate are where they are. Free trade for most Canadians is about jobs and patriotism, it has nothing to do with competitiveness or the emergence of a global economy.

About the closest the ordinary citizen comes to appreciating the role of business is the daily horse race of the major economic indicators. The Canadian dollar stakes. Ladies and gentlemen, it’s up one one-hundredth of a cent today. Not much, it’s true, but by golly, it’s up and we’re catching the Americans fast. The unemployment rate is another great symbol to breed despair, and to generate a good wave of hatred for the government, which is inevitably deemed to be obviously incompetent, whatever its stripes.

But this is not business. Who knows about the agony and the ecstasy of a new product; the setbacks; the creativity and the superhuman efforts? The human drama? The nail-biting risks? Only us, the people who are already in business.

Let me tell you about Rod Bryden:

He grew up on a farm near Bayfield, Cape Tormentine, here in New Brunswick. He started out in business in 1974 with nothing. By the end of 1981, he was worth $80 million. Three months later, he was worth -$70 million.

His product was software – but not custom software, where you get paid by the hour. He developed Proprietary Application Software, which means you develop a product that can be applied to any business, then you go out and sell it. He described his experience when he started to sell his software: “Then you open the door. Oh Shit, no customers.”

He put in another $10 million and persuaded a few other investors (and a bank or two) to put in $35 million. He rebuilt his product and made a go of it. By 1986, he had dug his company out of debt, although he was personally deep in debt.

In 1989, his annual sales were $1.5 billion, his personal debt was more than $½ billion and his net worth was “a few million” and building nicely. Then his software company, Systemhouse Ltd., ran into a few glitches, which hit his shares on the stock market hard. As these shares were the collateral for his personal debt, it meant that the collateral for his debt sank below the amount of the loan. It was a temporary problem, but his biggest shareholder BCE, wasn’t prepared to wait and they pulled the plug. He was bust.

This display of arbitrary ignorance was less than a flea bite at BCE. Big businesses are so obviously powerful that people expect them to behave this way. When a company – or anyone, really – wields a lot of power, people understand the power and don’t get bent out of shape by it – even when many of them love to hate it. Politicians come at corporate power a little differently. They like the power because power means money and big businesses contribute a lot of money to political campaigns.

But this should not be allowed to obscure the central truth. Most Canadians aren’t interested in big businesses for their overall contribution to the economy. They are interested primarily if it touches their job. So each big business has a lot of people interested in it, even if only for their power to bestow wealth or the wilderness. They are drawn only to their power.

Which brings me to small businesses. Far fewer people feel the pull of their power, so they just don’t rank. They are not even in the same ball game. A $50,000 investment to create six jobs won’t make the front page of the Times and Transcript. But a $100 million investment to create a new steel mill will remind every voter in the region that their representative is working hard to secure their future employment.

Even this does not tell the whole story. From a politician’s perspective, the people who run the steel mill are fun to talk with because they are interested in politics. Big businesses are very political. It’s just not the same thing talking to the local fish packer who does $5 million a year and who has just bought a new processing line. He doesn’t have time to think about the nuances of the manipulation of public perceptions, so it’s hard for politicians to relate to him. It’s difficult for politicians to get excited about small business. The same goes for the media. The same, unfortunately, goes for the people who run big businesses. They see small firms as being too messy. In their eyes, they are tacky operations. They cut corners. They are cheap. They don’t have people who can bring intellectual clarity to, for example, the refinement of techniques to gauge consumer interest in a product.

It is a strange phenomenon, when you think about it. It is, after all, well known now that about 80% of all the new jobs created in the 1980s were in small businesses. That’s big potatoes. So why is that so boring? The answer lies partly in what I’ve been saying – the lack of perceived glamour in small businesses. But it also lies in a very human responses to our environment:

People in big organizations cannot identify with small firms. It’s easy to identify with a big firm, because everyone knows its products. It’s easy to identify with individuals, because we are individuals ourselves. It’s easy to identify with associations, because they stand for something that can be clearly described. But how do people identify with small businesses? They are in every type of business known to humanity. They are every possible size. They are every age, every colour, every race, creed and sex. It’s impossible to identify with them – unless you have owned a small business yourself. And that excludes too many people, unfortunately.

This is why, despite all the pronouncements of the importance of small business to the economy, small firms still rank next to road repair on the priority lists of governments and big businesses. Necessary, but not a primary cause of insomnia.

The top executives of banks, for example, simply cannot afford to spend much time thinking about their hundreds of thousands of small clients. They love to tell us how deeply they care about their small clients, of course. And they do, but only as a group. Small businesses are a big chunk of business for banks. But bankers have to preserve the integrity of their shareholders’ capital, so they have to keep the cost of servicing their small clients comfortably below the revenues they earn from them. They cannot allow too many firms to be given individual treatment. Small firms must understand that it is sometimes necessary for our bankers to be cruel in order to be kind. They have no choice but to pull the plug sometimes. Spare the plug and spoil the firm.

Now, I must make it clear that some of my best friends are bankers! And I even agree with them that far too many small firms lack the financial discipline to run their businesses competently. But why should they feel the need to lump all small businesses into one big amorphous category? Why should they expect all small businesses to be run according to the sometimes-dubious textbook? Why would they expect entrepreneurs to be any more perfect than they are themselves?

This question is important, because entrepreneurs are really the soldiers of change. They are the people who test limits, who stretch resources, and who fill in the niches that are missed by others. They are the glue that holds our communities together. They are not faceless businesses. They fail often, they learn and they grow. They are dynamic, constantly evolving, dying and reviving. They are a national resource that should be nurtured by all the other players in the economy.

The solution to this problem of ignorant or negative perceptions of small businesses will not be found in government or in big business. It will be found only in entrepreneurs themselves and their associations. There are some small businesses that are boring or teetering on the edge of bankruptcy, but they are not the majority. Not by a long chalk. If only people could be taught to see small businesses for what they really are: they vehicles for incredibly human adventures that forge some remarkable characters as they are hammered into shape. If only they could see small businesses as the means of self-expression for expanding human beings who have to pay for their mistakes as they learn their craft.

I learned a lot from Walter Oster. He left school at 16. His Dad was not impressed and told him: “If you quit school, you start working tomorrow.” So he did. He joined Frankel Steel running off blueprints – about as low as you could go in the company. But he soon got himself a job as a draftsman, then he moved into sales and, at 22, he was the top salesman in structural steel.

A few years later, he figured that he was giving so much advice to contractors, he could do just as good a job himself. So he formed Osin Construction on the side, still keeping his job at Frankel. When Osin was bidding for a contract against Frankel’s customers, Oster’s boss didn’t like the conflict of interest even though Oster recused himself: “What makes you think we’ll supply you?” he asked Oster. “What makes you think you’ll get the business?” Oster replied.

Oster went on to own a slew of businesses, almost all successful.

There are hundreds of thousands of entrepreneurs like Oster. The problem is the bankers, the big businesses and governments notice small businesses only when something goes wrong. They do not see them when they succeed, because the small firms don’t need their help then. In fact successful small firms try to keep out of the limelight in case Revenue Canada gets interested in them. Just as bankers learn their craft as they rise through the ranks, so entrepreneurs learn theirs as they progress through one or more businesses.

I mention this twisted perception of small business first, because it’s important to understand the danger of being content with the parroting of the pious support for small firms from our politicians and our big-business executives.

The pre-eminence of small firms in the process of job creation may even have harmed small firms in the long-run, because it has given the politicians and big businesspeople an excuse to stop thinking about the real role of small businesses in the economy. That role is the integration of economic development into the context of social development. Small firms are community oriented. They have a sense of place. They give the lives of individuals and communities a meaning that is consistent with and strengthens all the other aspects of their lives.

I will talk about these roles in three main categories:

The BUSINESS role – how small firms improve business practices in our economy.

  • The DEVELOPMENT role – how small firms develop community commitment, provide greater stability of employment and use local resources (not for political reasons, but because they are most accessible).
  • The HUMAN role – the attention to individuality, the climate for personal growth. They engage with women and corporate refugees, to name just two.

 

The business role of small business

The importance of the business role of small firms is much misunderstood. There is no shortage of clichés, of course. We all know that small firms are more flexible, that they adapt better and that they are innovative when they have to be. This sounds terrific, but what does it mean? For most people, it means that small firms are important at the periphery, and big firms are what make the world go round.

 

Big and small firms need each other

The truth is, of course, that big and small firms are equally important. Small firms cannot prosper without the anchors of big firms. But, now as never before, big firms need small firms to perform much of the pioneering work they need to implement their strategies. Small firms sniff out product and market innovations. Even more important, big firms need the example of small firms to make their own organizations more responsive. The buzz word in big firms over the past half dozen years has been entrepreneurial. They understand the need to become more innovative and to be lean and mean. And they turn to entrepreneurs for inspiration.

But there’s a strange incongruity here. Big employers have embraced entrepreneurship, while denying the importance of entrepreneurs. They have therefore had to enlarge the definition of entrepreneurship to include anyone who is innovative. Entrepreneurship, they say, exists in governments, in non-profit organizations and in big firms. The word has come to mean the ability to be opportunistic and to utilize scarce resources in achieving one’s full potential.

There is great danger in separating the process of entrepreneurship from its roots. There are applications in big firms, but it is important to remember that entrepreneurship works best when it is being performed by entrepreneurs.

Few people illustrate this as well as Michael Cowpland. He burst onto the Canadian scene when he founded Mitel with Terry Matthews. He was a poster boy for entrepreneurial flexibility then. He worked out his business plan on the back of an envelope and the two partners grew the company to sales of $350 million. Then, in his own words, he took his eye off the ball. Mitel dug itself into a deep hole and was taken over by British Telecom.

From the moment he went on his own, he ran like a hare, dodging bullets and leaping over high fences. He started with laser printers, then he refined the product to produce “dumb” laser printers that functioned with multiple PCs. That didn’t turn out well, so he leapt into desktop publishing, which took him into large storage disks. These two didn’t take off as he expected either, but the next one did – Corel Draw, which now has sales of about $50 million.

Mike told me once, in another context: “Always throw out your first attempt at a product when you start a new company – but never tell the employees. Only the top guy must know the product they’re all busting a gut for will almost certainly be canned in its entirety.”

 

Small firms are more innovative

By far the best description I have read of innovation in large organizations is a book written by Rosabeth Kanter’s called The Change Masters. It is long and dense, but it captures the process of innovation in organizations brilliantly. Kanter comes up with a structure that she believes will make big businesses entrepreneurial and innovative – and she may be right, but it will demand such a massive change in their culture that it is hard to see how it will ever come to pass. Here’s how she describes the big organization’s view of entrepreneurship:

“The entrepreneurial spirit producing innovation is a willingness to move beyond received wisdom, to combine ideas from unconnected sources, to embrace change as an opportunity to test limits.

“Entrepreneurs – and entrepreneurial organizations – always operate at the edge of their competence, focusing more of their resources and attention on what they do not yet know than on controlling what they already know. They measure themselves not by the standards of the past (how far they have come) but by visions of the future (how far they have yet to go). And they do not allow the past to serve as a restraint on the future; the mere fact that something has not worked in the past does not mean that it cannot be made to work in the future. And the mere fact that something has worked in the past does not mean that it should remain.”

So far, so good. That describes entrepreneurial behaviour rather well. Then she describes what kind of environment these putative entrepreneurs in large organizations need if they are to function effectively. She describes two basic types of large organizations –  segmentalists and integrators. We might call them, in every-day language, departmentalized and cohesive matrix operations. In her words:

“Integrative thinking needs team-oriented, co-operative environments in which innovation flourishes. Segmentalism compartmentalizes actions, events and problems, keeping each piece isolated from the others. Companies with segmentalist approaches find it difficult to handle change. In searching for the right compartment in which to isolate the problem, they let the past – the existing structure – dominate the future. … In integrative firms, they aggregate problems into larger problems, so as to recreate a unity that provides more insight into required action – enabling a creative leap of insight that redefines a problem.

“Segmentalists reward their people for doing the last job, they don’t bet on their capacity for doing the next one. Innovative companies promote people before they’re ready. The most important reward to many corporate entrepreneurs is when they get the go-ahead for their project.

“Under segmentalism, change is a threat. Security is derived from control, and loss of control is the supreme threat. Today, those in the corporate driver’s seat must sometimes feel they are being asked to share the steering wheel while the vehicle is skidding on icy roads.”

Does that ring any bells?

She devotes quite a bit of space to the valiant attempts at innovation in segmentalist companies, most particularly General Motors. The obstacles, she explains, are awesome. And attempts to overcome them rarely succeed.

So what does she propose as a solution?

She recommends the creation of a second management structure within the organization – a structure for change, parallel to and connected with the company’s ongoing structure for doing business. She elaborates:

“The first step is building a steering committee to guide this structure for change. This group can look for and reward innovations that already exist – the departures from tradition that suggest new options – as well as stimulate and encourage other innovations. It can set broad guidelines that give direction to action, channelling the entrepreneurial instincts of innovators in productive directions. And it can decide whether and how to change the way ongoing activities are handled.

Please bear with the corporatese; I won’t take long!

“Then the new approach can cascade downward. Teamwork to guide the parallel organization at the top can be matched by similar teams at the head of each major operation, serving integrative functions on more local levels. …

“The important elements to be managed by the steering committee include:

  • encouragement of a culture of pride
  • enlarged access to the tools of power for innovative problem solving
  • improvement in lateral communication
  • reduction of unnecessary layers of hierarchy
  • increased and earlier information about company plans.

“Instead of continuing to think that they can run an organization from the top, effective leaders will be those who know how to take advantage of the capacity of those below.”

We are talking here about a massive retooling of a corporate culture. A revolution that rejects practically everything that executives have grown up with. It can be done, but most existing big firms won’t do it this decade.

That’s why small businesses will continue to be so important in the business world. They will innovate, they will turn on a dime. They will often miss business success, but their innovations will live on.

One entrepreneur who did this in spades and kept pace with the meteoric rise of his company is Helmut Eppich, in Vancouver. He learned the craft of a tool and die maker and started his own business with $9,000 of capital. As he grew the business, he found he couldn’t keep track and the off-the-shelf cost control systems were too expensive, so he built his own. It soon turned into a data processing system. “I just love systems,” he said.

He consulted the experts, who told him a prototype would cost $1.8 million; he did it for $135,000. Pretty soon his system was doing everything but make the coffee – inventory control, time clock, scheduling, bar code readers and on and on. He spun it off as a separate company – Epic Data – that now has sales of $30 million, mostly in the U.S. But it took him 10 years of constant innovation and $20 million cash to become profitable.

And he did everything by going back to school whenever he found he didn’t have the necessary knowledge. “It would not stop gripping me,” he told me, rhyming off a long list of technologies he mastered – everything from digital theory to logic, from electronic cicuits to chips and from power supply to pricing.

Lockheed said it had the best system in the world, better than IBM.

 

The development role of small business

There is overwhelming evidence that small businesses are the most effective tools of economic development. Yet the extraordinary reality of economic development policies is that almost all our development efforts are aimed at big businesses.

In the report on the activities of Enterprise Cape Breton released last week, it was noted that 88% of the development agency’s funds went to projects with a price tag of more than $1 million. The success rate of these projects was 29%. For projects with price tags of $100,000 to $1 million, the success rate was 55%. For projects with price tags of less than $100,000, the success rate was 72%.

There are hundreds of comparable studies and cases to support this conclusion. But it is goes beyond even this. Even the successful big companies in development initiatives are less solid than small businesses.

The Upjohn Institute for Employment Research in Kalamazoo, Michigan, has released some interesting studies that are as applicable in Canada as they are in the U.S. I will come back to this institute again later on, but the study that is relevant at this point is that:

 

Foreign-owned plants are more likely to close

Branch plants are more likely to be closed than locally owned or controlled operations.

This is obvious to anyone who has watched plant closures in Canada, especially in Ontario, where there is an epidemic of U.S. subsidiaries closing their doors. Forever. But the same is true everywhere, including the Atlantic provinces, where head office may be in Toronto or in the U.S., but the effect is the same.

The reason is simple. Branch plants are useful only as long as they are cash cows or there is some other artificial reason for keeping the plants open (such as tariffs or requirements under a contract with a local government). A corporation invariably opens a branch plant with high hopes and good intentions, but sooner or later, every one of them hits turbulent weather and, when they do, they have no choice but to focus on their core operations. That means closing branch plants. There is no malice in this. There are only executives responding to economic incentives and imperatives.

It’s a bit different when the branch plant is digging minerals out of the ground or felling trees. They can’t move that operation out of a province. But we should all beware of the branch plant mentality that allows these corporations to exploit natural resources without due regard for the long-term economic interests of the community which owns the resources. By that I mean maximising the benefit of those resources in terms of value added to them by local workers.

There is no shortage of economists who can explain in excruciating detail why it is impractical to demand that natural resources be processed in the local community. And they’re right. If the owner is not local. But if the owner is local, the resources are likely to be processed locally because that is most practical for the owner.

And when I say local, I mean local. Toronto is not local in the Atlantic provinces. Halifax is not local in Newfoundland. Halifax may not even be local in Cape Breton, depending on the business. Being local is defined by the sense of community. When we say “we”, who do we include in that definition?

I don’t want to imply that we should do away with branch plants. Quite the contrary. They are valuable employers and they bring valuable services to our communities. But we cannot rely on them the same way we can rely on local small businesses. They are predictable, to a degree, when the local community has a hold on them. The mining and forestry companies I mentioned are one example. Branch plants in the retail business or in the sales departments of big businesses are also secure, because you can’t move the customer to head office. So not all branch plants are fickle. But governments should not expect them to place the community’s interests at the top of their priority lists.

None of us have the right to demand altruism from people with whom we do business. They have their own problems, to which they have to respond. And throwing grants and subsidies at branch plants in danger of being closed is almost always useless, according to the Upjohn Institute. They merely prolong the agony. The main reasons for closing plants are seldom excessive wages or labour relations – these were well known when the plant was opened. The reasons for closing are varied and peculiar to that business or company. And close they will. Sooner or later.

In the ten years to 1988, 14% of the big firms that existed at the beginning of the decade in the Atlantic provinces closed down. Big firms are defined as those employing more than 500 people nationally. The average employment in these firms in the Atlantic region is about 200, so it’s clear they are mostly branch plants. They were replaced by smaller firms which grew into big firms, but still, the number of big employers in the region was almost exactly the same in 1988 as it was in 1979.

Meanwhile, the number of small firms had increased, over the same period of ten years, by more than 50% ­– 50,000 in 1979 and 75,000 in 1988.

In terms of employment, the big employers and the small employers in the private sector each accounted for about 190,000 workers in 1979. By 1988, these big employers had just less than 200,000 people working for them – an increase of 4% over 1979. The small firms – those that employ fewer than 100 people – had more than 250,000 people working for them, an increase of 33% over 1979.

These impressive numbers are after the statistics for the big employers have been boosted by all the small firms that have grown into big firms.

The Atlantic region is now a small-business region, where substantially more people work for small employers than big employers in the private sector. These firms may turn over more quickly than big firms. They go out of business at an alarming rate, in fact. But in aggregate, they are growing and they are growing stronger.

Most important, they are not going to leave the region, because they live here.

And they are going to give local people a chance to rise to challenges, because they know them.

One of my favourite community entrepreneurs is Johnny Lombardi. He is the highest profile Italian in the large Italian community in Toronto. But he can’t speak Italian. When he was in the army, he was the translator for Italian soldiers. “I could empathise so much, I could figure out what they were trying to say,” he said.

He started CHIN radio and TV which broadcasts now in 32 languages. On Labour Day every year, he hosts a picnic on Toronto Island for 250,000 people. And he still lives a few hundred yards from his office, both in the heart of Italian Toronto.

 

The human role of small business

I’d like to tell you about Ramona Beauchamp.  She was a model early on and lived hand to mouth until a tragedy befell her. She had german measles when she was pregnant and her child was born a vegetable. Everyone told her to put the child in an institution but she refused. She found ways to get through to her and she taught her until she was able to function independently.

“Through Lisa I learned how to teach,” she said. “And I learned how to fight.  Before that I went along with the breeze.  When I wasn’t aggressive, she paid for it.”

Teaching is now her business – kids and corporations. She teaches kids self-confidence through acting, ballet, TV interviews or any other technique that works. For corporations, “I identify the problems.  Often it’s an attitude problem  or they need to be motivated.  Then I bring in the best people to solve that problem. I sift through all the crap.”

“It’s boring being safe,” she says. “There’s a bowl of fruit in the middle of the table – you have to try them all. How do you know what you want to do if you don’t try it?”

 

Developing human resources

One of the least-understood aspects of small firms is that they are probably the best available vehicle for developing the human resources of a region or community. The conventional wisdom these days is that modern economies have to train their workers, especially displaced workers. The elaborate training facilities offered to German and Japanese workers are held up as ideals we should all be pursuing. Now, these training facilities are excellent, there is no doubt about that, but the key lies not in the training facilities themselves, but in the system that funnels workers into the right courses and finds them appropriate jobs when they come out.

In this country, we haven’t devoted much thought to that. We have got as far as discussing the importance – and difficulty – of picking the right courses in a labour market that changes very rapidly. But we haven’t progressed beyond the assertion that the private sector and organized labour should have the major say in these decisions.

That’s big business and big labour. The trouble is they won’t do much better than big government, because our big organizations find it difficult to deal with individuality. This is not a criticism. It is an observed fact. Big organizations need systems and so people have to fit into their systems. To ask systems to fit the people is to allow control to slip away. That’s the subject of another whole speech.

When we talk about identifying training needs for displaced workers, we are trying to put the cart before the horse. We are trying to train workers and then find them jobs. What we should do is find them the right jobs first. Then let them direct their own training needs, with full support from their employers.

This conclusion is powerfully supported by another study performed by the Upjohn Institute for Employment research, which I quoted earlier on this evening. This study found that:

The most valuable training we can offer our workers is helping them to find the job to which they are most suited.

One of the most pervasive signs of a bureaucracy is the proliferation of square pegs in round holes. This not necessarily because of bad hiring, although that is often the case. [I should mention, as an aside, that it’s a foolish person who claims to be able to hire the right people for the available jobs. It’s a wild guessing game if the truth be known.]

No, the square pegs aren’t there because they were bad hires. If this were the case there would be a great many more square pegs. The problem lies in the unavoidable fact that people change after they have been hired. They develop and grow. Their needs change and they want to take on different challenges. Unfortunately, the systems of big bureaucracies find it extremely difficult to cope with these changing needs, so the ones who escape this trap are the ones who know how to work the system. The others end up as square pegs in round holes, forced to deal with the trauma of choosing between quitting a secure job and putting up with a less-than-perfect job.

One of the advantages of small firms is that they cannot tolerate square pegs. Owners of small firms soon know if an employee is not happy, if only because they need every single employee operating at full capacity. They cannot afford disaffected workers for long. So even though they have a much narrower variety of jobs to offer, they will move those employees into different jobs or let them go. It’s never this perfect in practice, of course. Many small businesses complain they can’t find good help. But fewer now than before. Small businesses owners now understand better that the help is a reflection of their own management. All this makes for a more volatile workforce in small firms, but it’s also a more committed and more productive workforce.

The key is to ensure that as many people as possible are holding down jobs that they like. If they like their jobs, they will work hard and they will work effectively. They will also develop the necessary skills, either through on-the-job training or through external courses and diplomas. This conclusion has immense ramifications for the way we run our economies. It puts the emphasis on self-help. If we help people find self-respect through useful employment, they will want to improve their own skills. And they will.

Other studies have found that small firms make the a very big contribution to skills training, but almost entirely through informal on-the-job training. Unfortunately, that training is rarely measured because it is unmeasurable. It is, however, highly effective, because it relates directly to the needs of the marketplace. The trouble with so many structured training programs is that the market for skills changes between the time people embark on a training course and the time they graduate.

All these studies point in the same direction. Small firms are better adapted to helping people help themselves. They are the source of new jobs and their approach to hiring and training is best suited to the employment of displaced or disadvantaged workers. Small firms are, in short, the best vehicle for developing the human resources of this or any other region.