The view has prevailed for the better part of the twentieth century that small firms do not perform an important role in Western economies. Official policies in many countries have favored large units of production because there were strong reasons to believe that large firms were superior to small firms in virtually every aspect of economic performance--productivity, technological progress, and job security and compensation. However, in the 1970s, evidence began to suggest that small firms in some countries were outperforming their larger counterparts. Perhaps the best example of this trend was in the steel industry, where new firms entered the market in the form of "mini-mills," and small-firm employment expanded, while many large companies shut down plants and reduced employment. Although no systematic evidence exists to determine unequivocally whether smaller units of production are as efficient as large firms or are, in fact, more efficient, some researchers have concluded that the accumulated evidence to date indicates that small firms are at least not burdened with an inherent size disadvantage.
Thus, an alternative view has emerged in the economics literature, arguing that small firms make several important contributions to industrial markets. First, small firms are often the source of the kind of innovative activity that leads to technological change. Small firms generate market turbulence that creates additional dimensions of competition, and they also promote international competition through newly created niches. Finally, small firms in recent years have generated the preponderant share of new jobs.
However, empirical knowledge about the relative roles of large and small firms is generally based upon anecdotal evidence and case studies, and such evidence has proved inadequate to answer major questions concerning the role of small firms across various industries and nations. An additional difficulty is that it is not obvious what criteria one should use to distinguish small firms from large ones. While a "small firm" is often defined as an enterprise with fewer than 500 employees, research studies of small firms use a wide variety of definitions.