A new study published in the Harvard Business Review shows government support of small firms ends up being a drain on the economy.

The authors show that government loan guarantees for small businesses have the effect of depressing income growth, according to a study of 3,035 U.S. counties from 1980—2009. Shockingly, study found small firms tend NOT to be engines of growth. 

Here’s My Two Cents: The interconnections between small and large businesses within a regional economy are mind numbingly complicated. On an emotional level growing small businesses always seems like a good idea, but the largest economic engines of a region are it’s large businesses. Large business are the ones exporting goods and services outside the region. The cash generated from those export flows into the local economy via their employee’s paychecks and the services and products large companies buy locally. During my 12 years on the Federal Reserve’s Economic Round Table of Chicago we debated this issue regularly. Most economist I worked with would agree with the Harvard study.

Bottom Line: Talk to a small business owner and they’ll tell you their customer base is made up of the employees of large local companies. As you may have guessed,  I’m not a big hit at cocktail parties. 🙂

Contact HBR to read the study: http://www.nber.org/papers/w20543.pdf