A Final Thought on Baumol et al

Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity by William J. Baumol, Robert E. Litan and Carl J. Schramm has been the subject of a couple of previous postings. I want to make a final comment on the book, or more explicitly about the section on small and medium enterprises (SMEs) in Chapter 7.

The authors are concerned especially with technologically innovative enterprises and make a probably correct point that some policies to promote SMEs, such as those proposed by the European Union, will not stimulate the development of the new enterprises that will eventually become large and important through their innovation (as did Google, Amazon, and eBay).

They do recognize that producing large numbers of micro, small and medium size enterprises may help generate employment and alleviate poverty. (Not bad objectives in themselves). In the U.S. minority small business programs have been used in an effort to allow minorities that have been held back by prejudice and discrimination to become entrepreneurial. Perhaps it unfair (given that the Baumol et. al. chapter is about Europe and Japan) to note that SME programs are especially important in developing nations that don't have many indigenous large enterprises, and have huge needs for goods and services that can be met by SMEs. Indeed, I would miss Mom and Pop stores, local barber shops, individually owned restaurants and other small enterprises were they not available.

But the specific thought that I had was that in some cases clusters of SMEs can have important benefits in creating high valued products competitive in international markets, and thus be a relatively important element in a country's development strategy, even if not especially innovative technologically. I am thinking of the Italian or French fashion industries, or Taxco silver from Mexico, or indeed the people who revolutionized American music when "Moon-June" songs went out of style. By making products much like the competition, by much the same kinds of processes, that the consumer sees as higher in quality clusters of SMEs can be a growth industry with international competitiveness.