The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Note: This report is available in its entirety in the Portable Document Format (PDF).
Background and Key Findings
A thriving small business sector is an important national objective. So, too, is the development of healthy businesses owned by women and minorities. Currently, African Americans, Hispanic Americans, and women fall well short of achieving the business success that white men attain. Wide ethnic and gender gaps in self-employment demonstrate this trend. As of 2000, nearly 1 in 7 employed white men worked in their own business, as compared with about 1 in 18 employed African American men, 1 in 12 employed Hispanic men, and 1 in 14 employed women.1 Minorities and women are less likely to own businesses than are white males and the businesses they do own generate far lower sales (figure 1). Even among small business owners, minority- and women-owned enterprises (MWEs) are less likely to survive and prosper (Fairlie and Robb 2003).
Helping small businesses in general and MWEs in particular can promote economic growth and improve the relative economic position of minorities and women. To pursue these goals, the federal Small Business Administration offers loans and technical assistance, and federal and state governments engage in preferential contracting policies. These existing policies represent
a national commitment to creating and channeling contracts to MWEs. However, only limited resources have been devoted to helping these businesses achieve the high levels of productivity, profitability, and dynamism necessary for them to contribute significantly to economic and employment growth. Since public support may hinge on how well these businesses enhance growth and avoid becoming a drain on public resources, it is critical that policymakers understand what is helping and what is hindering small businesses and MWEs.
The effective use of computer technologies is one factor that may influence the business success of small firms and especially small MWEs. Past studies have found lower computer use among MWEs than among white-male-owned firms, though not for all uses (Bitler 2001). Numerous studies have examined the complex relationship between computer use and firm performance and productivity. While most studies point toward a positive impact of computer use on performance, others present conflicting results.2 In any event, no existing studies provide up-to-date evidence on the differences among small firms in computer use and the effects of such differences on firm performance.
This study aims at increasing our knowledge in this area by obtaining and analyzing new data to answer three key questions:
- What performance and productivity gains are achieved when small businesses and MWEs implement information technology? What are the potential economic benefits of improving MWEs' use of information technology?
- What are the factors that lead some MWEs to take great advantage of computer technologies and that lead others to utilize computers only in a limited way? What are the barriers to MWEs' adoption and effective use of technology? In particular, how significant are the impacts of constraints on capital, on knowledge of the technology and its possible role in improving businesses, and on the ability to train workers?
- Is there a gap in computer use that separates small MWEs and small, white-male-owned enterprises? Are MWEs falling behind in adopting and implementing information technologies for important business functions?
Answers to these questions can identify ways of helping MWEs and other small businesses become more productive and profitable. In particular, this study's review of actual use of computers, barriers to more effective use, and effects of computer use on business success can guide new public and private initiatives.
Computers are tools that can assist business adoption of modern management practices. Although businesses are diverse, they all participate in such tasks as paying workers and suppliers, accounting and tax reporting, and interacting with customers. Applying computers to these tasks is nearly universal in large businesses but not necessarily in small firms.
This study focuses on differences among small enterprises in the application of computers to administrative and core business activities, not simply on differences in the presence of computers. The study also reveals several findings about the use of computer technologies by small firms:
Performance and productivity gains
- Using computers for more business functions and/or more intensively for business functions raises the productivity and the profitability of small MWEs. Moving businesses from the bottom to the top third of computer users raises productivity by about 41 percent and profitability by 49 percent.
- Extrapolating the gains in value added per worker to all small MWEs in the nation suggests an increase in potential output of between $100 billion and $200 billion per year.
Factors driving technology use
- Computer intensity in small firms increases with the owner's education and personal involvement with technology, with the number of workers, with being in an industry that exhibits extensive use of computers, and with operating in national or regional markets and in multiple locations.
- The main barrier that modestly limited computer use was "having the skills to use computers a great deal in the business." Only about 20 percent of MWEs agreed that they could not afford computers or that they lacked the capital to purchase computers.
Gaps in technology use
- Most small firms use computer technologies for several business functions, especially accounting but also core work activities.
- Small MWEs show no tendency to use computers less than small firms owned by white men.
Note: This report is available in its entirety in the Portable Document Format (PDF).
1. Tabulations by the authors from the 1 percent sample of the 2000 Census yielded the following shares of employed workers working in businesses they owned: white males—13.4 percent, white females—7.9 percent, black males—5.5 percent, black females—3.4 percent, Hispanic males—8.2 percent, and Hispanic females—6.6 percent.
2. See, for example, Bitler (2001), Greenan and Mairesse (1996), and Black and Lynch (2000, 2001).
Acknowledgments
The authors thank the Microsoft Corporation for funding this study. The authors are also grateful to Jin Chon, Bey-Ling Sha, Gayle Cruise, and Nerea Alvarez for useful comments. Rob Santos and Julie Paasche of NuStats, Inc. helped design and carried out the telephone survey used in this study. Henry Chen and David Moskwitz provided excellent research assistance.
Latest Research
PDF
Print this page
