I am pleased to submit to the Congress my third annual report on the state of small business. The year 1983 was an excellent year for the economy in general, and especially for small business. At last, we are succeeding in establishing economic conditions which recognize and promote the vital role small business performs in our economy. And small business has responded with record business formation, employment, and activity.

Small business optimism and faith in the future have been demonstrated not only in polls and surveys, but in the economic record this report details. In the first three quarters of 1983 new business starts were up 13 percent from the same period in 1982. There was a significant decline in business bankruptcies in 1983 -- over 10 percent. The strengthening of the recovery is seen in more recent figures -- in the last half of 1983 business bankruptcies were 30 percent lower than during the last half of 1982.

Income from partnerships and proprietorships -- which comprise most small business -- increased in 1983 by 18 percent over the previous year. In addition, as the report details, the opportunity for business ownership and activity is reaching great numbers of minorities, women and other members of our society. To encourage that activity among women entrepreneurs, I have directed the Small Business Administration (SBA) to begin a National Initiatives Program. This series of regional conferences is designed to provide managerial and technical assistance to women business owners and women entrepreneurs.

The reason for the success of small business in 1983 is no mystery. The economy reflects the growing confidence of private sector decisionmakers to invest capital and take risks. Business decisions can be made more confidently with an inflation rate of 4 percent instead of 12 percent. Small business, which relies more heavily on borrowed capital, is better off with prime interest rates at 11 percent rather than 21 percent. And small business has done far more than most to provide employment for members of our work force. During 1983 total employment increased by four million jobs. Small business contributed significantly to this growth, continuing the strong trend shown during 1981 and 1982, when small business contributed 2.6 million new jobs to the economy.

This Administration's goal has been to achieve stable and favorable economic conditions, and in 1983 we came a long way toward reaching that goal. We are promoting a number of specific Government policies that have a major, favorable impact on small business. It has been my desire to ensure that, whenever possible, our policies reflect the importance of small business to the economy as a whole.

The cuts in individual and estate taxes in 1983 are part of our efforts. These important changes in the tax law directly benefit the more than 85 percent of small businesses that pay taxes through the personal income tax returns of their owners. Tax policies that sustain the cash flow of small firms will continue to be a major goal of this Administration. More reasonable and understandable tax regulations are important and necessary policy goals for small business. In this regard, the action of the Internal Revenue Service to withdraw its proposed rule and reexamine the issue of classifying small business investments as debt or equity is notable.

Progress in relieving small firms of unnecessary regulation and paperwork continued in 1983. Many Federal agencies developed a positive working relationship with small business. Regulation, when it is necessary, is increasingly achieved with a maximum of flexibility and common sense and a minimum of extraneous costs and burdens. The Task Force on Regulatory Relief has established the momentum and the Office of Management and Budget (OMB) is continuing the effort. Agencies are utilizing the Regulatory Flexibility Act to scrutinize new and old rules for their effect on small business.

The OMB and the SBA's Office of Advocacy have continued to work with agencies to achieve better regulation for small business. Together they have managed to cut 300 million hours of Federally imposed paperwork burden. Hearings held by SBA on small business paperwork confirm that this is significant progress, but that we must redouble our efforts to attack those forms which still vex and confuse small business owners. The opportunity this Nation offers for individual entrepreneurial effort ought not to be diminished by outdated or overzealous regulation.

Many small businesses recognize that the Government can be an important customer. Annual Federal purchases of goods and services, excluding employee compensation, represent approximately 20 percent of Federal expenditures. It has been my consistent conviction that the taxpayer and the Government are well served by strong small business participation in the procurement process. We need to utilize the wealth of technological capability, experience, and efficiency present in the small business sector. To this end, we have significantly increased the amount of Federal purchases from small and minority businesses. In addition, to further open the procurement process to small business in 1983, I signed the Commerce Business Daily Act (Public Law 98 - 72) which requires Federal agencies to allow longer periods for responses to bid requests.

The first year of the Small Business Innovation and Research (SBIR) program demonstrated the critical role played by small research and development companies. The SBIR program resulted in ten Federal agencies making over 800 research awards to small firms. The $40 million committed in 1983 will expand to $120 million in 1984, creating new opportunities for small business and increasing Federal agencies' utilization of small business' technological expertise. In an important related development, the SBA, the Department of Justice, and the Federal Trade Commission approved the first joint research and development company for small firms under Section 9 (d) and 11 of the SBA Act.

Small business progress in 1983 -- whether in terms of new business starts, creation of new jobs, efficient sales to the Government, or new innovations -- cannot be sustained without continued, favorable Federal policies toward small businesses. We intend to act on upcoming issues to ensure that our Nation's policies continue to be favorable to small business.

First and foremost, we must preserve the individual tax cuts and tax indexing enacted over the past three years. It would be unwise to roll back the progress small business has made as a result of these 1981 reforms.

We must take other actions to maintain a healthy economy. We need to ensure that Federal activities are as efficient and cost effective as possible. We will vigorously implement policies against unfair competition with the private sector from the Government or other tax-advantaged sectors of the economy.

The procurement process must continue to be simplified and made more accessible to small firms, especially in the important area of spare parts for Government and military purchases. The major Federal procurement agencies have committed to reduce procurement paperwork by 10 percent in Fiscal Year 1984. I intend to pursue policies that ensure that necessary procurement by the Government results in wise and effective use of our tax dollars.

There are several specific areas of business where we look forward to positive Congressional action in 1984. This Administration recognizes the spirit and capabilities of small and minority businesses in its support of Federal Enterprise Zones and urges Congressional action on this important issue.

The potential liability of many small manufacturers and distributors in product liability tort actions governed by a myriad of state laws is of continuing concern. Simple reform of this legally complicated area is needed. The Congress should recognize problems that affect small manufacturers and enact a fair bill reforming product liability.

The condition of our Nation's immigration laws is a matter of national concern and specific concern to the small business community. Legislation on this issue is in the Congress and has been carefully debated by many participants, including representatives of the small business community. Enactment of legislation would immediately provide significant predictability and reform of a difficult national issue.

The Equal Access to Justice Act should be reauthorized. This law provides an important tool for the small business faced with unjust Government action. From my perspective, there is an equally important influence upon potentially overzealous regulatory agencies which have an impact upon small business. The statute needs improvement, however, and we will work with the Congress to produce legislation which resolves unanswered questions regarding the scope of the law.

The necessity to keep our national leadership role in technological development is a responsibility shared by small and large business. This Administration has proposed legislation which would clarify and ease the procedure for firms to form joint research and development companies. Enactment of this legislation will be an important step to increase our technological development through use of the best minds and resources in capable firms of all sizes.

We should be mindful of the important role played by small business in our Nation as employer of many of our citizens, as job creator, and as innovator. Our job in Government is to continue to create an economic environment where creativity and hard work pay dividends. With the improved conditions in 1983, small business has adapted and thrived. There is every reason to feel confident that this prosperity will continue.

Ronald Reagan

The White House,

March 19, 1984.

Note: The report is entitled ``The State of Small Business: A Report of the President, Transmitted to the Congress, March 1984'' (Government Printing Office, 485 pages).