Small Firms' Choice of Business Strategies*

According to the standard industrial organization paradigm, firms employ numerous business strategies such as product development, marketing, research, and innovation to gain a competitive advantage over their rivals. Empirical work on firm strategies has focused largely on research and development (R&D) among large publicly-traded manufacturing firms [10]. Two recent developments have increased interest in the choice of business strategies by small firms. First, a growing body of evidence suggests that, after several decades of decline, the employment share of small firms has been increasing through the 1970s and 1980s [16]. With the greater awareness of small firms' contribution to job creation, researchers and policy-makers are increasingly focusing on the sources of small business growth [6]. Second, economic development programs across the U.S. are focusing on small businesses for promoting regional growth [17]. Success of such programs requires a better understanding of factors influencing small firms' choice of business strategies. Business strategies adopted by small firms are likely to be different from business strategies adopted by large firms due to factors such as economies of scale and differences in organizational structure. Studies have shown that small firms engage in small scale R&D work although they may not have a formal R&D department [13]. This informal R&D may include a greater reliance on the acquisition of technical knowledge and the adoption of new production technologies from external sources such as trade publications, scientific journals, and government agencies [14]. Moreover, small firm strategies may be sector-specific. For example, wholesale and retail sector firms may stress quality and attractiveness of their products for higher sales growth while financial sector firms may stress planning. While small firms adopt diverse business strategies to gain competitiveness, little empirical evidence is available on factors affecting the choice of these strategies. Evidence on the determinants of knowledge acquisition and product innovation is available [14], but determinants of many other strategies such as planning and quality have not been examined. The purpose of this paper is to present empirical evidence on the choice of business strategies