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STATEMENT

Of the Honorable Nydia M. Velázquez, Ranking Member

Committee on Small Business

“Large and Small Businesses: How Partnerships Can Promote Job Growth”

March 28, 2012

America’s nearly 30 million small businesses are central to the economy.  Representing 99.7 percent of all employers and paying nearly 50 percent of total private payroll, it is clear that as small businesses go, so goes the country.  For many, this success is at least in part due to the symbiotic relationship they enjoy with their larger counterparts.   During today’s hearing will we examine this and seek to better understand the effect that firm size has on the competitive landscape.

Together, large and small businesses form a collaborative ecosystem that enables our economy to thrive. Research completed by witnesses testifying today show that small businesses make up the vast and flexible supplier network that multinational companies rely on for goods and services.  In fact, these corporations buy an estimated $1.52 trillion annually from small firms, which is about 12.3 percent of their total sales. 

This is because small firms are able to efficiently design and deliver custom-made products that are essential components in everything from cell phones to airplanes.  Without them, large companies would have to move these processes in-house, which is both inefficient and costly.

Perhaps nowhere is this interdependence --- which is the focus of this hearing --- more evident than in the federal procurement marketplace.  Total subcontracting dollars now eclipses $200 billion – with small businesses receiving more than one-third of these dollars.  Over the last 15 years, several initiatives have supported this, including the mentor-protégé programs currently operating across federal agencies and the BusinessLinc program, which was so successful under the Clinton administration.  As a result, large companies are able to develop their supplier base, while small businesses obtain key experience that will enable them to grow stronger in the future. 

While today’s hearing is primarily being held to show the benefits of this cooperation, the truth is that large companies often enjoy many advantages that small businesses do not.  This is due to the many structural benefits that come with having greater market power, including more influence over pricing and advantages in the capital and labor markets. Larger companies are often able to control the relationship with small firms, leading small suppliers to provide accommodations to larger corporations. This absence of negotiating influence makes it more expensive for small companies to purchase the goods and services they need to remain competitive.

For this reason, small businesses spend more on developing strategic relationships and building trust with their customers. These expenditures can often make up a greater share of their total costs than they do for larger companies.  Not only do these higher expenses impact the firm, but their small scale of operations creates an inherent disadvantage when compares to the often immeasurable resources of a large corporation.

Beyond their lack of equal bargaining power, small businesses face other obstacles in their quest for success.  Even as the economy recovers, insufficient access to capital remains their number one challenge.  Since peaking at $712 billion in the second quarter of 2008, small business lending has declined by $113 billion. Conversely, large businesses have actually seen an expansion in lending since the middle of 2010. It is clear small businesses have been disproportionately affected by credit tightening while large firms have emerged relatively unscathed.

Tax policy is another area creating disparity between small and large businesses, as corporations often have dedicated tax teams to keep abreast of new policies and regulations.  Small firms, on the other hand, spend more time and money simply preparing tax returns.  According to a report issued by the SBA Office of Advocacy, the cost of tax compliance is 67 percent higher in small firms than in large firms.

Varying tax rates for income, disparities in treatment in fringe benefits like health care, and differing pension plans only compounds these challenges. Beyond creating a competitive disadvantage, these discrepancies can make it more difficult for small businesses to retain and attract employees.

Finally, it is also important to note that large companies are illegally taking federal contracting opportunities away from their smaller counterparts.  In several cases, large businesses have used a small business front company to win contracts through small business set-asides.  Such abuses not only impair the integrity of the procurement system overall, but divert money away from true small businesses.

All of these issues, from tax treatment to access to capital to government contracts, are critical to the relationship between large and small businesses.  While there is little doubt that these companies can and do work in a collaborative manner, the reality is that it is often due to the costly concessions made by small businesses.

During today’s hearing, we will explore this complex relationship and the many benefits and challenges that come with it.  Ensuring that small businesses can continue to flourish without the seemingly inescapable exploitation that comes with it is crucial.  Doing so will not only result in a more robust small business sector, but a brighter economic recovery for the nation.

Thank you and I yield back.