The New York Times

August 25, 2005

Technology Levels the Business Playing Field


ACCORDING to the Small Business Administration, "small businesses represent 99.7 percent of all firms, they create more than half of the private nonfarm gross domestic product, and they create 60 to 80 percent of the net new jobs."

When we think about the economic impact of information technology, the first companies to spring to mind are the industry giants like Amazon, eBay, Google and Yahoo. But the biggest impact on the economy may well show up in small and medium-size enterprises.

The reason is that information technology is a great leveler. As computers get cheaper, more powerful and more connected, technologies that were only available to the Wal-Marts of the world become available to the small fry.

Think about the lowly cash register. There was a big innovation in the 1880's, when manufacturers added a bell that sounded when the money drawer opened, so owners would know when someone had access to the cash. But after that, the technology barely changed for almost a century.

The big chains like Wal-Mart could use satellite networks and mainframe computers to track purchases, manage inventory and record customer behavior. But the little retailer had to do with the old mechanical registers, scrolling through the paper tape in the evening by hand and punching numbers into an adding machine to balance his books.

Then along came the personal computer. By the late 1980's cash registers had become just another computer application. They could add up receipts, compare sales with inventory, create order lists - in short, they could do just about everything that the big chains could do. In the 1990's, cash registers became networked, allowing the small stores to download records in a form suitable for spreadsheet analysis and accounting software.

These intelligent cash registers allowed small companies to adopt business models that had previously been available only to large enterprises. Equipped with a scanner, a cash register could be used to verify the sale of each item, allowing companies to share data on revenue with the supplier. Some ice cream manufacturers effectively contract for space for a freezer in a store and share the revenue from purchases each time a sale is made.

Even the success of the big Internet companies rests, in large part, on the fact that they provide advertising and sales platforms for small enterprises. EBay, Amazon, Google and Yahoo all make it possible for small businesses to reach national, and even global, markets, that were previously inaccessible.

The Internet has not just affected the selling side of small businesses; it is also having a big impact on the production side. I met recently with two Silicon Valley entrepreneurs. One, Rashmi Sinha, told me her software company had six employees: two in the United States and four in New Delhi. The other, Cosimo Spera, started a company to develop applications and services for mobile phones; his company has five employees in the United States, eight in Spain and two in Italy.

Both of these micro-multinational companies work pretty much the same way, using e-mail, Web pages, voice-over-Internet phone services and other Internet technology to coordinate their far-flung operations. "Just think," said Ms. Sinha, "my little six-person operation is now a global business."

American workers complain about big businesses sending jobs offshore to India and China. Economists say that the benefits from international trade outweigh the costs, which is great as long as you are not one of the costs.

But offshore work means something quite different to the micro-multinationals. These companies simply would not exist without access to foreign labor. If they succeed, they will certainly hire more American workers as they grow.

The internationalization of small and medium-size enterprises has got to be a big plus for the American economy. It allows the small players to have access to labor markets that only the big boys could afford a few years ago.

It is no surprise that many of these small, high-tech, international entrepreneurs are foreign-born. They have the contacts, the connections and that most critical ingredient, the ambition, to assemble the pieces needed to start a business.

It is almost impossible for an entrepreneur to put a foreign development team together without some strong connections on the ground. Even large multinationals have found out that outsourcing is not the panacea it was proclaimed to be. Paradoxically, it is easier for the micro-multinationals to deal with the inconvenience of outsourcing than it is for the big international corporations. Entrepreneurs are willing to do things that big international corporations will not do - like staying up until 11 p.m. and using cheap voice-over-Internet technology rather than expensive international telephone service.

Constant supervision, constant communication and constant coordination are necessary to make small business grow. But it is just these things - the ability to supervise, communicate, and coordinate at a distance - that have become so much cheaper in the last 20 years. Big enterprises were the first to reap the benefits of this technological progress. But the impact of information technology on small and medium-size enterprises may yet turn out to have the most impact on the economy.

Hal R. Varian is a professor of business, economics and information management at the University of California, Berkeley.