Networking: Not Just for Big Business

By Jessica Lipnack and Jeffrey Stamps

Networking! This may be the biggest buzzword in business today. In fact, it's so big that it even needs other buzzwords - virtual corporations, strategic alliances - do to all the work required of it.

Oddly, though, these terms are usually confined in the United States to the activities of large companies. Few people discuss networking - various forms of organizational collaboration - for small businesses. This is doubly odd because the Clinton Administration, viewing small business as the engine of economic growth, has put it at the top of the economic agenda.

Nonetheless, networking can work wonders for small businesses and, as the president suspects, for the economy as well. The best proof for this proposition comes from Denmark.

In the 1980's, Denmark's economy looked like ours today: high unemployment and frightening trade imbalances. But, beginning in 1989, the Danish Government offered financial aid to groups of three or more small companies, usually in the same or related industries, that are willing to develop ideas on how they could work together. The response was great. Within just 18 months, 3,500 small companies - one-third the nation's total enterprises - formed networks.

The results were not long coming. In 1991, Denmark reversed its negative balance of trade with Germany for the first time in 32 years. And in 1992, Denmark enjoyed the world's highest positive trade balance per capita, outpacing even Japan. Other factors, such as an industrial modernization program, helped Denmark's economic resurgence, but Danish economists say the small-business networks played an important role.

In turning to these networks, Denmark was inspired by the Emilia-Romagna region of northern Italy. In the 1970's, this region had an impoverished small-crafts economy. It soon linked its many tiny crafts manufacturers and, in a few years, unemployment dropped from 20 percent to near zero. Once Italy's fourth-poorest region, Emilia-Romagna became its second wealthiest.

How do these small-business networks transform faltering companies, and countries, into success stories? By sharing resources and expertise, seeking joint financing, bargaining collectively with suppliers, entering export markets together and collaborating in other ways, small-business networks can gain economies of scale and many other large-company advantages.

These facts are not unknown in the United States. In Minnesota, for instance, a coalition of small metal fabricators saves members up to 50 percent of the cost of supplies. And in New York, 30 furniture designers and manufacturers have joined forces to increase exports.

But these and other efforts are embryonic, and the reason is clear: small-business networks do not spring up easily. One reason is that the independent spirit of entrepreneurs makes cooperation difficult. In Emilia-Romagna, it was the medieval guild tradition; in Denmark it was the Viking spirit; in the United States, it was the Yankee independence, Southern pride and cowboy self-reliance.

Another issue, antitrust, is always a potential problem when competitors cooperate. But it is less a problem when competitors cooperate. But it is less a problem for small companies than for large ones, and we know of no antitrust cases involving small-company networks.

A much bigger obstacle is money. Someone must pay to get the ball rolling, and small enterprises have little extra time or money to spend on hoped-for, future economies of scale. But, on the other hand, large amounts aren't needed. Denmark, with a $100 billion economy, spent only $50 million on networking over three years.

The United States must follow Denmark's example. With encouragement and modest outlays, the Clinton Administration can overcome the independent spirit and money shortages that are the main obstacles to small-business networking. The result will help small business - and the nation.