High-Impact Firms Fuel Employment, Economic Growth

MBA (6/30/2008 ) Palaparty, Vijay
High-impact firms, those exhibiting strong sales and employment growth, account for nearly all employment and revenue growth in the economy, based on a report form the Office of Advocacy of the U.S. Small Business Administration.
The report, High-Impact Firms: Gazelles Revisited, defines high-impact firms as those whose sales at least doubled over a four-year period and which have an employment growth quantifier of two or more—an absolute change in employment multiplied by the percent change.

“While high-impact firms make up about 5 percent of firms with employees, their effects are huge,” said Brian Headd, economist at the Office of Advocacy. “Surprisingly, the study shows that these firms are on average around 25 years old, they are not predominantly high-tech and they exist in every region of the country.”

Between 2002 and 2006, the report revealed that there were 376,605 high-impact firms in the U.S. The number increased from a level of 299,973 between 1998 and 2002 and 352,114 between 1994 and 1998.

The report said that the average high-impact firm is not a new startup and is around 25 years old. “These firms exist for a long time before they make a significant impact on the economy,” it said.

High-impact firms also create jobs in small firms, accounting for 58 percent of jobs in a 12-year period, the report said. Small firms, with fewer than 500 employees, created about half the jobs and large firms with more than 500 employees created the other half between 1994 and 2002, but not between 2002 and 2006.

“Low-impact firms do not grow on average,” said Zoltan Acs, professor at George Mason University, Fairfax, Va., and co-author of the report. Furthermore, it said that nearly all the job losses in the economy over any of the period studies can be attributed to low-impact firms with more than 500 employees.

The report also found that high-impact firms are in all geographic regions. It found the share of high-impact firms in most jurisdictions varying between 2 percent and 3 percent of all firms.

In terms of early characteristics of high-impact firms, fewer than 3 percent of the small high-impact firms came into being in the previous four-year period, the report said. As the firm size increases, that rate doubles to more than 6 percent. As far as later-stage characteristics, 3 percent of firms went out of business.

“The data suggest that local economic development officials would benefit from recognizing the value of cultivating high-growth firms versus trying to increase entrepreneurship overall or trying to attract relocating companies when utilizing their resources,” Acs said.