Audrey E. Kindlon [1]

Small businesses contribute to the U.S. economy by bringing growth and innovation and by being more adaptable to changes in the economy. Although extensive research has been done on small businesses—sometimes defined as fewer than 250 or 500 employees—very little is known about the smallest businesses, or microbusinesses.[2] This InfoBrief provides new information on microbusinesses and their research and development activities, strategies, and drivers of competitiveness.

Microbusinesses are defined in this InfoBrief as businesses with one to four employees.[3] According to the U.S. Census Bureau, microbusinesses made up more than one-half (56%) of all U.S. employer businesses in 2016.[4] In the same year, microbusinesses performed $4.8 billion of R&D in the United States (table 1), while businesses with five or more employees provide the vast majority ($375 billion) of R&D expenditures in the United States.[5] However, the smaller the business, the higher the R&D intensity, that is, the proportion of total sales that is dedicated to R&D (Anderson and Kindlon 2019).

Data for this InfoBrief are from the Microbusiness R&D and Innovation Survey (BRDI-M), developed and cosponsored by the National Center for Science and Engineering Statistics within the National Science Foundation and by the U.S. Census Bureau. Data from selected industries are highlighted in this InfoBrief. The BRDI-M survey was conducted only once. In the future, R&D data from microbusinesses will be collected by the Annual Business Survey (ABS).[6] Since 2016 was the first and only year the BRDI-M was conducted, some unknown measurement error is expected.

Characteristics of Microbusiness R&D Performance

By Industry

Microbusiness R&D is highly concentrated within a few industries. In 2016, R&D performance by microbusinesses in the United States was approximately $4.8 billion (table 1). Of this total, nonmanufacturing businesses reported $4.3 billion in R&D expenditures (89% overall). Nearly three-quarters (74%) of all microbusiness R&D expenditures are incurred by microbusinesses classified as professional, scientific, and technical services (North American Industry Classification System [NAICS] code 54). This contrasts with larger businesses of five or more employees, where 67% of R&D expenditures are incurred by manufacturing industries and where professional, scientific, and technical services make up just 10% of all R&D expenditures.[5]

By Type

More than one-half (53%) of microbusiness R&D expenditures in 2016 was spent on development, 38% on applied research, and 8% on basic research. Nearly identical proportions were reported by businesses in manufacturing and nonmanufacturing industries. This differs somewhat from businesses with five or more employees, where 77% of R&D was spent on development, 16% on applied research, and 7% on basic research.[5] Microbusinesses classified within the social sciences and humanities R&D industry (NAICS 541720) spent 57% of their R&D expenditures on applied research.

By Source of Funds

Most (78%) of the funding for R&D performance by microbusinesses was from the companies' own funds, whereas 8% each came from other U.S. companies or from federal, state, or local governments combined (table 2). Almost one-half (49%) of all government funding ($197 million of $406 million) for microbusiness R&D went to companies in the scientific R&D industry group (NAICS 5417). This government funding accounted for 22% of the funds for R&D that these businesses received.

By State

Microbusiness R&D is concentrated within a small number of states. Five states (California, New York, Texas, Massachusetts, and Florida) accounted for nearly one-half (49%) of all R&D performance by microbusinesses in 2016 (table 3). California accounted for 25% of the microbusiness R&D. In each state, microbusinesses R&D is mostly self-funded, as opposed to being paid for by others.

Total Employment and R&D Employees

Over one-half (56%) of R&D expenditures are used to pay for salaries, wages, and benefits; 10% is used for equipment; and 5% is for software purchases and licenses (table 4). The remaining 30% of R&D costs are for other expenses. Additional information is available in the data tables—see https://ncses.nsf.gov/pubs/nsf19323.

A small number of microbusinesses can be considered R&D businesses (that is, R&D-performing businesses). Among the R&D businesses, 51% of all workers[7]—including owners (both those who receive a W-2 and those who do not), employees, contractors, and unpaid workers—work on R&D (table 5). Because microbusinesses have so few employees, and most likely few workers, this is to be somewhat expected. For example, if one worker in a two-person company or two workers in a four-person company are working on R&D, that is 50% of the company. Of the about 106,000 R&D workers in microbusinesses, 89% work in the nonmanufacturing industries.

Microbusinesses and Business Strategies

When microbusinesses were asked what gives them a competitive advantage over other companies, they reported that quality is more important than low prices. Nearly 9 of 10 (88%) say that their reputation is very important in gaining a competitive advantage, and 85% say that quality of their goods or services is very important (table 6). Over one-half (53%) said that the convenience that their microbusiness offers is very important, whereas one-half (50%) said that the uniqueness of their goods and services is very important. One-quarter (25%) of microbusiness say that low prices are very important.

Developing a good or service that will improve the current customer's experience was reported to be very important by 42% of microbusinesses. Nearly an identical percentage (41%) reported that updating or improving their existing goods and services was very important to their future success. Providing individualized goods or services (32%) or developing goods or services that will save customers money (30%) was determined to be very important to almost one-third of microbusinesses. However, having a business strategic plan in writing was very important to only 13% of microbusinesses. Partnerships were not considered as important to microbusinesses' future success—13% said partnerships with other businesses were very important, and only 3% said partnerships with universities were very important.

Survey Information and Data Availability

In this InfoBrief, expenditures are expressed in current U.S. dollars and are not adjusted for inflation. For BRDI-M, a microbusiness is defined as a business organization located in the United States, either U.S. owned or a U.S. affiliate of a foreign parent company, with at least one establishment under common ownership or control, and with one to four employees. The survey was administered to companies regardless of whether they were known to have R&D activity. BRDI-M collected detailed statistics from businesses on domestic R&D expenditures, R&D employees, intellectual property, business strategies, and innovation activities.

The sample for BRDI-M was selected to represent all for-profit businesses that have at least 1 but fewer than 10 paid employees in the United States. These businesses must also have at least one establishment that is in business during the survey year, be in the United States, and be classified in certain industries based on the 2012 NAICS. The survey sample focused on industries where it is expected that companies perform R&D in the United States. Only data on microbusinesses (those with one to four employees) are presented in this InfoBrief. The statistics from the survey are based on a sample, and as such, they are subject to both sampling and non-sampling errors (see technical notes in the data tables at https://ncses.nsf.gov/pubs/nsf19323).

For 2016, a total of 199,991 companies were sampled to represent the population of 3,460,816 companies. The response rate for the 2016 BRDI-M was 77%.

The full set of data tables from this survey will be available in the report Microbusiness R&D and Innovation: 2016. Additional tables with relative standard errors and imputation rates from the 2016 survey are available from the author.

Note that the 2016 cycle of BRDI-M is the only time this survey will be administered. ABS, co-sponsored by NCSES and Census, will produce statistics for 2017 and beyond. In addition to R&D, the ABS will collect data on innovation and intellectual property.

Notes

[1] Audrey Kindlon, Research and Development Statistics Program, National Center for Science and Engineering Statistics, National Science Foundation, 2415 Eisenhower Avenue, Suite W14200, Alexandria, VA 22314 (akindlon@nsf.gov; 703-292-2332).

[2] Anderson G, Kindlon A. 2019. Indicators of R&D in Small Businesses: Data from the 2009–15 Business R&D and Innovation Survey. InfoBrief NSF 19-316. Alexandria, VA: National Center for Science and Engineering Statistics, National Science Foundation. Available at https://www.nsf.gov/statistics/2019/nsf19316/.

[3] The Business R&D and Innovation Survey (BRDIS) refers to businesses with five to nine employees as microbusinesses, but in this InfoBrief, microbusinesses are defined exclusively as businesses with one to four employees.

[4] U.S. Census Bureau, Business Dynamic Statistics. Firm Characteristics Data Tables. Retrieved from https://www.census.gov/ces/dataproducts/bds/data_firm2016.html. Accessed February 2019.

[5] Wolfe R. 2018. Businesses Spent $375 Billion on R&D Performance in the United States in 2016. InfoBrief 18-312. Alexandria, VA: National Center for Science and Engineering Statistics, National Science Foundation. Available at https://www.nsf.gov/statistics/2018/nsf18312/.

[6] The ABS, first fielded in 2018, is the primary source of information on R&D expenditures for businesses with one to nine employees. The ABS also collects data related to innovation, intellectual property, technology, and business owner characteristics from those businesses with one or more employees. For additional information on the ABS, please see https://www.nsf.gov/statistics/srvyabs/.

[7] A distinction must be made between workers, which includes owners who do not receive a W-2, contractors, and unpaid workers, and employees. Microbusinesses have between one and four employees, but they may have more workers.