The Role of Microenterprises in Economic Growth :

In this study I examine the role of microenterprises (firms with between one and four employees) in Wisconsin economic growth. Using a panel of Wisconsin counties from 1977 to 1997 I estimate an expanded Carlino-Mills type model of growth. Results suggest that nearly 50 percent of all businesses in Wisconsin are microenterprises and this share is relatively stable over time. Results also indicate that a higher percentage of businesses classified as microenterprises tend to be associated with counties with lower population levels, slower population growth, but higher levels of employment and income growth. Results also vary by type of industry. These results suggest that care must be taken when promoting microenterprises as a major engine of economic growth: results vary by measure of economic growth as well as type of industry. Introduction The role of small businesses, often referred to as microenterprises, plays in economic growth and development has been widely debated in the academic and public policy literature. Some recent studies documenting the economic importance of microenterprises to local economies suggest that they should be included in any comprehensive economic development plan (Muske and Woods 2004; Muske, et al 2007; Atasoy, et al 2006; Deller and McConnon (forthcoming)). From a policy perspective local economic development practitioners are looking for applied research that will help them allocate their limited resources in the most effective manner. The overall intent of this applied research project is to provide background descriptive information on microenterprises in Wisconsin and insights into the relationship between microenterprises and subsequent growth using data from Wisconsin counties. Birch’s (1979) argument that microenterprises are particularly important in generating job growth has renewed interest in the idea of Schumpeter’s (1942 and 1961) innovative entrepreneur in the economic growth process. Coupled with the observation that there has been an extraordinary escalation in the number of small and medium size establishments nationwide, there has been a renewed interest in the promotion of small firms as an economic development strategy (Aquilina, Klump and Pietrobelli 2006). Although the work of Birch has been widely challenged, (e.g., Brown, Hamilton and Medoff 1990; Dunne, Roberts and Samuelson 1989) it has served as the foundation for what some have called the second wave of economic development policy (Acs 1999; Eisinger 1988 and 1995; Shaffer, Deller and Marcouiller 2006). This policy approach is aimed at creating new small businesses, as well as retaining and expanding existing small firms. From a practical perspective this policy approach runs into political opposition at the local level (Eisinger 1995). Because of the political pressures of short-term election cycles elected officials expect