Hello,

In this quick post, I will be giving a quick overview into a subject that has interested me for quite some time now - small businesses. It is an informal note on why small businesses are interesting and some notes on research on small businesses.

My interest in small businesses started when I came across the concept of Entrepreneurship through Acquisition(ETA) [1]. As the name suggests, it is the idea of buying your way through entrepreneurship instead of starting a company. Starting a company involves identifying an idea, a market gap, getting the idea vetted, building that product / service and then selling them to create a profitable customer base and so on. Whereas in ETA, the initial hassle of starting up is bypassed because the product / service is present, the business that is bought typically has a stable customer base with exploitable growth potential - the focus now can be on operating / managing and growing that business. Typically, a small business with certain favorable characteristics is identified, necessary due diligence is conducted and bought & the buyer becomes the CEO / manager / operator of the company. If this idea interests you, I recommend you to read the book HBR Guide to - Buying A Small Business[3] by Harvard professors Rick Ruback and Royce Yudkoff to get a holistic understanding of ETA. The professors have a podcast Think Big Buy Small[3] as well. If you want to look at ETA from a more academic stand point, you must look at the works of Prof. A. J. Wasserstein[4] from the Yale School of Management.

Coming back to the the subject of small businesses, the first step in ETA involves searching for a suitable small business and conducting necessary due diligence, and ensuring the business is a good candidate. There are a number of characteristics one looks for in a small business during evaluation. From On the Nature of Economic Characteristics[5] by Prof. Wasserstein, the below are a few favorable characteristics.

  1. High industry growth rate is present.
  2. The industry competes in a sizable and fragmented market.
  3. An exit path for a strategic buyer is present.

These factors are quite intuitive, in the sense that one can understand quite easily why a small business with these characteristics is a good target.

While understanding these factors better, I got interested more in how any general small business functions, the kind of strategy needed to operate one, the kind of environment it operates in, what is its role in the economy, what kind of policy is necessary, the risks involved and so on - essentially a 360-degree view into the idea of small business. I think there are broadly two ways of approaching the subject of small businesses: One from a purely management standpoint, where you look at their management practices, the strategy needed to run a small business, evaluation of the internal and external environment of a small business, the second is from a policy standpoint which should be made such that a favorable environment is created for running these small businesses. This is a spectrum and a typical research effort can cover one or more of these aspects of small business. For example, this [6] is an interesting paper on the coir industry of a particular district in Tamil Nadu, that covers its production and market dynamics. At the same time, this paper[7] talks about the challenges faced by SMEs in Japan.

Before moving forward, let us look at a few formal definitions of small businesses. In India, a small business is refered to as an MSME (Micro, Small and Medium Enterprise) [22].

  1. Micro Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 2.5 crore and Annual Turnover not more than Rs. 10 crore
  2. Small Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 25 crore and Annual Turnover not more than Rs. 100 crore
  3. Medium Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 125 crore and Annual Turnover not more than Rs. 500 crore

In the USA, the definition is not as simple and the firm has to satisfy a number standards to be classified as a small business. The US SBA [23] offers a list of standards and also a size standards tool that tells if a business is small or not.

MSMEs / small businesses play an integral role in a nation’s economy. For example, according to the MSME Annual report of 2024-2025[9] and [10], the MSME sector is the second larger employer after Agriculture, it employs a total of 24 crore people, it contributes to ~36% of total manufacturing output, 45% of total exports from India and contributes to ~30% of India’s total GDP (as of 2022-23). MSMEs operate in a very volatile and dynamic enrivonment, for example, 30% of the surveyed firms reported more than a 50% drop in revenue during the COVID-19 lockdowns [8], section 4 in this paper [11] gives a detailed view into what small businesses did during the lockdowns. In response, the government rolled out relief policy to support MSMEs [11, Section 2]. Along with relief policy, there is a certain policy that is implemented to favor the growth of MSMEs [12], for example, there are a number of schemes to safeguard export-oriented firms in India [12, page 194], there are several industry-specific schemes as well to name a few. At the same time, the ones with diversified supply chains, firms that exports goods, which have higher digital adoption have been able to manage such vulnerable situations better demonstrating the importance of sound business strategy [8, 11]. This was a very superficial attempt to show both the management / business strategy side as well as environment and policy side of small businesses.

Delving deeper into the policy/environment side of small businesses, I would urge you to check out this paper [13] which talks about MSMEs being a strategic asset for the Indian economy, what all factors are to be taken into account when policy is being designed by different policy stakeholders (central/state ministries, financial institutions and so on). NITI Aayog recently published a detailed text [14] discussing in length about MSMEs in India and strategy to enhance their competitiveness, this is a more detailed text that discusses in detail most of the factors outlined in [13]. This is just policy pertaining to India, one will find policy related to every nation, and there are a lot of good reports on policy at the world level (several trade agreements, tariffs and taxes etc.,).

Now onto the management/business strategy side of small businesses. I was exposed to business strategy through different case studies, most of them were related to big established businesses - Walmart, Microsoft, Google, Ford, BMW and so on. Unfortunately, I did not take any course that focused explicitly on small businesses (like Entrepreneurship etc.,). The good old article that helped me get a glimpse of the differences between small and big businesses is the HBR article “A Small Business is Not a Little Big Business” [15] by John Welsh and Jerry White. The article discusses the interesting concept of resource poverty that is a key distinguisher between large and small firms and special financial management is necessary to work with the unique problems posed in small businesses. There is good amount of literature on this, one other interesting article is “The Five Stages of Small Business Growth” [20]. Adding to that, I think only Harvard offers a specialized course on “Financial Management of Smaller Firms” [16] although it is not open for everyone. A book that delves deeper into the management side of small businesses is “The Management of Small and Medium Enterprises” [18]. It discusses broadly all aspects of typical small businesses - strategic planning and mangement, human resource management, innovation management and functioning of entrepreneurial teams. This book focuses on the small businesses in the West (mostly EU) and contain a lot of interesting case studies. Two other good sources I found were (which are very vast in nature) are the Journal of Small Business Management [19], along with the “Routledge Library Editions: Small Business” [21] which has a host of books on several aspects of small businesses.

These are some places one can start reading about small businesses from either policy or management standpoint. One interesting publication I read that is at an intersection of management and policy is an NBER working paper “What Small Businesses do?” [17] which studies several small businesses and various aspects of them and see the implications they have on policy. This paper has some seriously interesting findings, that often go against the traditional notion of entrepreneurship and small businesses. Attacting below the abstract for anyone who is interested.

In this paper, we show that most small business owners are very different from the entrepreneurs that economic models and policy makers often have in mind. Using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.

There are a couple of other ways to approach the subject of small businesses. Small businesses can be seen as a vehicle that can be used to uplift people and communities, provide them with a sustainable livelihood. In the Indian context, there are a large number of examples on how small businesses have helped in empowerment of rural people, women and tribal communities [24, 25]. Small businesses also play an important role in achieving a nation’s sustainability goals [26, 27].

These are a few approaches to study small businesses. Sound policy and management principles for small businesses can have massive impact on the people and economy of that nation - that makes it an interesting subject to delve into. A good starting point for me is the management of small businesses, sheerly owing to the familiarly of concepts, and therefore I plan to write about the same in near future. But by now it should be clear that management/strategy is inseparable from policy/environment in the case of small businesses, so I believe a good side effect is that I get an opportunity to understand the other side as well along the way.

Thank you for reading. Take care.

Cheers!
Adwaith

References

  1. Entrerpreneurship through Acquisition: https://hbr.org/2017/01/buying-your-way-into-entrepreneurship
  2. HBR Guide to Buying a Small Business: https://www.amazon.in/HBR-Guide-Buying-Small-Business-ebook/dp/B01KP33K4Y
  3. Think Big Buy Small podcast: https://www.hbs.edu/news/podcasts/think-big-buy-small
  4. Prof. A. J. Wasserstein’s profile: https://som.yale.edu/faculty-research/faculty-directory/aj-wasserstein
  5. On the nature of Economic Characteristics - Selection criteria to consider when acquiring a Business: https://som.yale.edu/sites/default/files/2025-04/On%20the%20Nature%20of%20Economic%20Characteristics.pdf
  6. Economic Empowerment through Coir Industry: https://www.jebi-academic.org/index.php/jebi/article/download/116/46
  7. Strategic Insights into the Challenges facing Japan’s Small and Medium-sized Enterprises: https://drive.google.com/file/d/1APKucrjBhytMYvyLK1UiWQmryCdh5icQ/view?usp=sharing
  8. A Study of the challenges of the Indian MSME Sector: https://drive.google.com/file/d/1cWnjcLOp5GMbnU6c2z6wXPWoYZcdluN4/view?usp=sharing
  9. MSME Annual Report of 2024-2025, India: https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-2024-25-ENGLISH.pdf
  10. Press Release: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2142170&reg=3&lang=2
  11. The impact of COVID-19 containment lockdowns on MSMEs in India and resilience of exporting firms: https://pmc.ncbi.nlm.nih.gov/articles/PMC10106832/
  12. MSME Schemes, Government of India: https://msme.gov.in/sites/default/files/MSME_Schemes_English_0.pdf
  13. Strategic Action Plan of Ministry of Micro, Small and Medium Enterprises: https://msme.gov.in/sites/default/files/MSME-Strategic-Action-Plan.pdf
  14. Enhancing MSMEs Competitiveness in India: https://niti.gov.in/sites/default/files/2025-05/Enhancing_Competitiveness_of_MSMEs_in_India.pdf
  15. https://drive.google.com/file/d/1jiuLu8jYMu4bvGgLE4d7pft0HqWTkMbz/view?usp=sharing
  16. Financial Management of Smaller Firms: https://www.hbs.edu/coursecatalog/1452.html
  17. What do Small Businesses do? by Eric Hurst and Benjamin Wild Pugsley: https://www.nber.org/system/files/working_papers/w17041/w17041.pdf
  18. The Management of Small and Medium Businesses: https://nibmehub.com/opac-service/pdf/read/The%20management%20of%20small%20and%20medium%20enterprises.pdf
  19. Journal of Small Business Management: https://www.tandfonline.com/journals/ujbm20
  20. The Five Stages of Small Business Growth: https://www.hayekcollege.com/sites/default/files/ebooks/The_Five_Stages_Of_Small_Business_Growth.pdf
  21. Routledge Library Editions: Small Business: https://www.routledge.com/Routledge-Library-Editions-Small-Business/book-series/RLESB
  22. Formal definition of an MSME: https://msme.gov.in/know-about-msme
  23. US SBA: https://www.sba.gov/
  24. Micro-entrepreneurship Development in the Handloom Industry: An empirical analysis among the tribal women of Assam: https://doi.org/10.1177/0973005218754437
  25. Gender, technology and innovation: The role of women in Indian micro, small and medium enterprises: https://www.inderscienceonline.com/doi/abs/10.1504/WREMSD.2022.123766
  26. How do small businesses pursue sustainability? The role of collective agency for integrating planned and emergent strategy making: https://onlinelibrary.wiley.com/doi/pdf/10.1002/bse.2808
  27. How MSMEs can come up with localised solutions towards sustainability: https://www.iimb.ac.in/sites/default/files/2025-12/How-MSME-localised-solutions-towards-sustainability.pdf