Firm Size, Finance, and Investment

T here is something in our national consciousness that looks fondly upon the small firm. This affection for small business is not entirely unwarranted. Small firms account for an important part of economic activity.1 A vast majority of all businesses in the United States are small; over 90 percent have fewer than 20 employees. Small firms accounted for between 40 and 50 percent of GNP and over 60 percent of net job growth in the 1980s.2 Such figures have drawn considerable attention in recent discussions of attempts to ease securities and bank regulation or to promote other policies concerning the financing of small firms. This long-standing affection has at times generated significant public policy. Much of our antitrust policy was arguably generated more by a general mistrust of bigness and desire to protect small business than by a concern for the inefficiencies of monopoly pricing. Recently, much attention has been paid to the plight of the small firm in raising capital in the face of recently strengthened bank regulation. Indeed, it seems that a necessary part of the debate over any proposed public policy action, from health care to tax policy, is the question of how it will affect small firms.