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Small Business Digitalization Grows, and So Do Small Businesses

While the word “startup” may be associated with technology, its not just startups or Silicon Valley companies that use technology to power their businesses these days.

Use of digital tools—programs, software, or applications that run on a digital device—are common across most small businesses and have only become more so during the COVID-19 pandemic.

That’s just one of the findings from the Bipartisan Policy Center’s recent report, Small Businesses Go Digital: Benefits, Trends, and Barriers of Digitalization.

Drawing on survey data from small business owners and managers, the report finds widespread use of digital tools among small businesses.

Underneath that headline, however, there are meaningful differences in the tools small businesses use and their plans to invest in new digital tools based on the size of the small business—not to mention differences based on the race, gender, and geographic location of the small business owner.

More than 90%–of small businesses in the United States have fewer than 10 employees. These microbusinesses use digital tools at similar rates to small businesses with more employees for common business activities like taking payments, managing expenses, and accounting.

Differences in adoption of digital tools start to emerge as businesses add more employees and their operations become more complex. Businesses with more employees are more likely to use digital tools for more advanced business activities like monitoring key metrics or tracking inventory, than microbusinesses.

Microbusinesses also tend to be more conservative than larger firms in their adoption of digital tools. Just 15% of microbusinesses with fewer than 5 employees consider themselves early adopters of digital tools, compared to 35% of small businesses with 50-100 employees. This conservative approach to digital tool adoption, coupled with differing needs based on business size, may help explain why just 42% of businesses with 1-4 employees plan to adopt digital tools within the next year, compared to 80% of businesses with 50-100 employees.

Small business owners and managers in some parts of the country also take a more cautious approach than those in others. In Missouri (44%) and Iowa (45%), for example, of small business owners and managers, said they tend to be conservative with adopting new digital technology, compared to the national average of 31% and 29% in Maryland, for example.

While these are just some of the differences uncovered in the report, the trend toward greater levels of digitalization, or the conversion of business practices to digital tools, is clear and likely to continue to accelerate in the coming years as small business owners and managers realize the benefits of digital tools.

According to the BPC report, small businesses that use many digital tools were significantly more likely to report revenue growth in the past year.

 

Small business owners and managers cite other benefits from using digital tools, including their impact on lowering costs, being easy to use, and helping manage data—all of which contribute to small businesses being able to better compete against larger businesses. Research also points to increased productivity as another key benefit of adopting digital tools.

Small business owners and policymakers know that increasing productivity is key to growth and competitiveness—both at the micro level for the business and at the macro level for the American economy. So how can government help small businesses—especially the smallest small businesses—integrate digital tools into their businesses?

The report outlines four areas of policy that deserve consideration.

First, policymakers should assess the extent to which the infrastructure supports the use of digital tools, many of which require an internet connection. Recent surveys have found more than one million small businesses still lack adequate access to broadband. Greater adoption of digital tools requires policymakers to close these divides.

If the infrastructure supports the use of digital tools, policymakers should next assess whether small businesses are able to procure digital tools. BPC’s report identified cost and insufficient information as barriers small business owners and managers face to adopting digital tools. Addressing these and other barriers will help small businesses procure digital tools.

The use of digital tools requires workers with the skills and know-how to put those tools to use. Three-fourths of small business owners and managers surveyed said digital skills were important to their business. Finding workers with the digital skills needed, however, is not always easy. Policymakers can help by making sure workers are prepared for the digital economy.

Finally, small businesses exist in a complex and changing environment. Policymakers should assess whether data privacy, cybersecurity, or other issues may be preventing or discouraging small businesses from adopting digital tools.

Small businesses have received bipartisan support throughout the years, including recently when policymakers leapt into action to provide unprecedented aid and assistance during the pandemic. With the threat of COVID-19 subsiding, there’s now a bipartisan opportunity to continue supporting small businesses in a new way, by tackling the challenges associated with digitalization and helping secure the benefits that come from these tools.

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