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Government Programs Can Boost Small-Business Success

Howard Van Auken

Des Moines Register

June 3, 2006

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

According to the United States Labor Department, 212,704 jobs were eliminated in January 2006 up 32 percent from December 2005. Large companies continue to announce layoffs. Kraft Foods: 8,000 employees. Ford Motors: 30,000 employees. Lear Seating: 6,500 employees. Gateway computers: 2,250 employees.

Closer to home, Whirlpool Corp. announced May 10 that it would cut 4,500 jobs, close plants and consolidate offices. That announcement came 40 days after Whirlpool completed its acquisition of Newton-based Maytag Corp. a move that impacted about 1,800 active workers at the factory and headquarters.

What happens to people who lose their jobs? While some find other jobs, many start their own businesses. The government can play an important role in helping start these new businesses and improve the success rate of small firms. Research has shown that specific government programs that assist small firms provide a significant return on taxpayer dollars, and we need more of them given the recent employment picture.

Currently there are at least 15 million small firms in the United States (those with fewer than 500 employees), and as many as 1 million new firms launch each year. It's the push-pull concept in action: Some are pulled into starting a new business because of a wonderful opportunity, while others are pushed because of a disruption in their lives such as a layoff.

The importance of small firms in the United States is evident in that they create almost all new jobs and most innovations. Unfortunately, most new companies fail within a relatively short time: 50 percent are no longer in operation after three years. That number jumps to 80 percent after five years. Distressed or failed businesses result in significant personal stress for the owner, the loss of jobs and elimination of tax revenues.

Recent evidence suggests that business failures are increasing, and research indicates that a primary reason is a lack of business skills. Many business owners simply do not have the training or skills necessary to successfully operate a business. A recent study by fellow Iowa State Professor Rick Carter and me on small firm failures in Iowa suggests that improved business skills would help business owners stay in business.

Government-subsidized programs can provide important business skills in finance, marketing, accounting, human resources, legal issues and other areas. Government agencies also can provide important networking opportunities that lead to access to a wide range of useful professional contacts that can help develop business strategies, raise capital, manage risk and build organizational skills. The benefit to taxpayers is that these businesses create high-quality jobs and generate important tax revenues.

Perhaps the best example of this is in the development of new technology. This remains a competitive advantage for the U.S. economy, and businesses that introduce new technology are especially important in maintaining our economic competitiveness and producing jobs. But the process through which it is introduced is complex, expensive and time-consuming often seven to 10 years. Most owners of these companies are scientists trying to commercialize a newly discovered innovation and who have no business training. They may need the greatest amount of government assistance.

In the end, government-sponsored assistance programs are cost effective. That conclusion is supported by an independent study by James Chrisman of the University of Mississippi, who tracked progress of clients assisted by the Iowa Small Business Development Centers.

Such government-funded programs help save businesses, create jobs, generate tax revenues and contribute to economic development. They boost the small-firm success that is critical to U.S. economic vitality.

HOWARD VAN AUKEN is a professor of management in the College of Business at Iowa State University. He has published more than 50 papers on entrepreneurship and small business.