Australian small business following the US sector down – but can also learn from the US response

BlueNotes recently revealed thats there has been a 30 per cent decrease in the number of start-ups in Australia in the last three years, from 342,753 in the 2010 financial year to 239,229 in 2013. That’s pretty big news. Add to that a decline in operating firms, and a big red flag should be waving.

The news got me thinking: given most economies are made up of around 95 per cent of small businesses, is this peculiar to Australia? How is this going to affect job creation, given that these small businesses employ more than 50 per cent of the population? And does anyone care if an essential part of the Australian fabric appears to be unravelling?

"Australia ain’t America. But we do inherit some of its trends a few years down the track."
Amanda Gome, Former head of digital and social media, ANZ

But a recent report from Harvard Business School reveals it’s not just us: the same thing is happening in the US. America is experiencing an alarming trend of lower job creation and higher business exits.

There is, though, one big difference: the US recognises it must do something about it. There, this issue is starting to get the attention it deserves. Small business is a part of America’s national identity as an entrepreneurial nation.

Michael Porter, professor at Harvard Business School, in an interview with Fortunemagazine, says the school’s fiscal 2014 survey on competitiveness queried thousands of alumni to get a sense of what is holding the economy back. A lot of what he has to say about small business in the US is relevant to Australia.

Interestingly, the survey defines competitiveness as two things: the environment in which US firms can win in the marketplace; and in a way that allows income and the standard of living of the average citizen to go up.

Porter, the leading global authority on competitive strategy and economic development of nations and states, says the big finding from the report is that it’s not the difference between the high skill citizen and average citizen that’s diverging, it’s the difference between large and small business. 

Small business has been declining as a force for job creation in the US since before the financial crisis and there is less small business formation, Porter says.

He says small business is disproportionately affected by high regulatory costs, legal costs, deteriorating infrastructure and high corporate taxes (the US corporate tax rate is 40 per cent, compared with 30 per cent in Australia and an OECD average of 24.1 per cent).

Porter says small business in the US is much more pessimistic about the business environment than larger firms and calls small business the canary in the coal mine because large businesses have the ability to look overseas for better opportunities.

Porter says the great shock of the survey was businesses would go to any length to avoid hiring full time staff - including outsourcing and automation - due to high regulatory and compliance costs, high taxes and healthcare (the latter not such a concern at least in Australia.)

Australia ain’t America. But we inherit some of its trends a few years down the track. Mature countries go to great lengths to introduce compliance and regulation to protect its citizens and interests. And it has long been acknowledged this has a disproportionate effect on small business. But maybe there is a tipping point where it just becomes too hard, too costly and too exhausting to run a small business and we start to see a long term shrinking of this vital sector.

As such, we stand warned. Australia needs to do similar work on structural competitiveness, with a focus on small business, and consider what it means for job creation and the tax base if start-up numbers continue to decline and businesses to exit.

What does it mean for the companies that sell to small business? And most importantly, what might turn the tide?

Certainly, Porter’s observation that regulation and compliance are taking its toll on small business is relevant to Australian businesses. And Australian businesses certainly were not helped by this week’s announcement that the government has retrospectively abolished tax breaks, which will mean thousands of small businesses will have to repay tax refunds.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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