The Benefits of Locally Owned Businesses

by BALLE

An expanding body of literature suggests that locally owned businesses contribute significantly greater benefits than do their absentee-owned counterparts. Here’s an overview of the case, with key studies listed below each:

  1. Higher Multipliers– Because of their community relationships, local businesses spend more of their money locally, which pumps up the local economic multiplier—the foundation for local income, wealth, and jobs. No study has been located yet that shows that a local business spends less locally than an equivalent nonlocal business.
    • Civic Economicshas done a series of studies – in Austin, Andersonville (Chicago), San Francisco, Grand Rapids, and Phoenix – showing the relatively stronger multiplier impacts of locally owned business.
    • The Institute for Local Self-Reliance has shown the relatively high rate at which money leaks out of absentee-owned fast-food restaurants. Two thirds of McDonald’s revenue leaks out of a community. David Morris,The New City-States (Washington, DC: Institute f or Local Self-Reliance, 1982), p. 6. Christopher Gunn and Hazel Dayton Gunn found that 77% of a typical McDonald’s “social surplus” leaves a community. Reclaiming Capital: Democratic Initiatives and Community Control (Ithaca, NY: Cornell University Press, 1991);
    • Gbenga Ajilore has calculated that the economic impact of a local bookstore is more than four times greater than that of a typical Barnes & Noble, “Toledo-Lucas County Merchant Study,” monograph (Toledo, OH: Urban Affairs Center, 21 June 2004).
    • Justin Sachs, inThe Money Trail (London: New Economics Foundation, 2002) (spelling out a multiplier methodology used by communities throughout the United Kingdom, and documenting case studies showing how local businesses double or triple the economic impact of nonlocal competitors.
    • Stacy Mitchell and colleagues in Maine found substantially greater economic impacts from local versus chain stores. The Economic Impact of Locally Owned Businesses vs. Chains: A Case Study in Midcoast Maine,” monograph (Institute for Local Self-Reliance and Friends of Midcoast Maine, September 2003).
  2. More Reliable– Locally owned businesses rarely move, and their proprietors are not inclined to move to Mexico or Malaysia to get a higher rate of return from their business. This means that they are much more reliable generators of wealth, income, and jobs. Around the country, economic developers have offered millions of dollars of incentives to attract or retain nonlocal business, and by and large these deals have been huge losers. Not because these industries didn’t have great performance on paper, including the promise of high wages. But because they stayed for a couple of years, took the incentives, and then vanished.
    • Example: There are hundreds of empty Wal-Marts across the country, many of whose parking lots continue to cause environmental problems from runoff and the like, that stand as testaments to the economic developers who thought they could lure the box stores for a long-term commitment.
    • For a comprehensive review of how and why incentives don’t work, see: Alan Peters and Peter Fisher, “The Failures of Economic Development Incentives,”Journal of the American Planning Association, 70, no. 1 (Winter 2004): 28.
    • An investigative report about the cost effectiveness of tax abatements in Lane County, Oregon, calculated the cost to the community in lost taxes was about $23,800 per job for nonlocal firms and $2,100 per job for the local firms. The nonlocal jobs were more than ten times more expensive, because the absentee-owned firms were so unreliable. On a net jobs basis (after the big departures), nonlocal jobs were 33 times more expensive. Sherri Buri McDonald and Christian Wihtol, “Small Businesses: The Success Story,”The Register-Guard, 10 August 2003.
  3. Greater Stability– The comings and goings of large, nonlocal business create enormous stresses, especially on a small community’s economy. A local-business economy is essentially an insurance policy against these stresses.
    • Example: In the Katahdin Region of Maine, the shutdown of a paper mill in 2002 (the parent company sought to move operations to a lower-wage area) created a regional unemployment rate of 40% over the next year. That kind of catastrophe is far less likely in a community economy built primarily around local businesses with no plans for moving to China.
    • Example: The data from the Edward Lowe Foundation’sYour Economy site shows that nonlocal companies have generally shed jobs over the past decade while local companies have produced them.
  4. More Accountable– The relative immobility of local businesses means they are relatively more accountable to local regulation. Globe-trotting businesses often challenge local regulations and threaten to leave if their objections are not heeded, whereas local businesses tend to adapt rather than flee.
    • Example: Regulation of the chicken industry in Maryland has been virtually impossible because the producers, Tyson and Perdue, are continually threatening to move to “business friendly” jurisdictions like Arkansas and Mississippi. This same problem also afflicts economic development that seeks higher wages through nonlocal industry. Yes, they may pay better, but they often fight higher labor standards for all business.
  5. Less Vulnerability –Because locally owned businesses tend to buy locally, they foster self-reliance in a community and help inoculate the economy against global surprises totally outside local control.
    • Example: The importation of oil, which many observers link with terrorism and economic instability, which could be largely eliminated through the cost-effective implementation of local energy efficiency and renewable resources over the next generation.
    • Example: Importing food leaves a community vulnerable to imported pollution, micro-organisms, and pests from less responsible farmers elsewhere in the world.
  6. Smart Growth– Locally owned business is a natural promoter of “smart growth” or anti-sprawl policies. Smart growth means redesigning a community so that residents can walk or ride bikes from home to school, from work to the grocery store. It means scrapping old zoning laws and promoting multiple uses—residential, commercial, clean industrial, educational, civic—in existing spaces, because it’s better to fully use the town center than to build subdivisions on green spaces on the periphery. Because local businesses tend to be small, they can fit more easily inside homes or on the ground floor of apartment buildings. Because they focus primarily on local markets, local businesses place a high premium on being easily accessible by local residents.
  7. Greater Identity– Part of what makes any community great is how well it preserves its unique culture, foods, ecology, architecture, history, music, and art. Local businesses celebrate these features, while nonlocals steamroll them with retail monocultures. Outsider-owned firms take what they can from local assets and move on. It’s the homegrown entrepreneurs whose time horizon extends even beyond their grandchildren and who have a vested interest in growing these assets. And it’s the local firms who are most inclined to serve local tastes with specific microbrews and clothing lines. Austin’s small business network employs the slogan “Keep Austin Weird,” because it’s “weirdness” that attracts tourists, engages locals in their culture, draws talented newcomers, and keeps young people hanging around.
  8. More Entrepreneurship– Chris Gibbons, founder of the economic gardening movement, argues that local businesses focusing on innovation is one of the most dynamic catalysts for local prosperity. Businesses involved in community production, many of which are globally owned factories, are among the worst.
  9. Greater Creativity– Richard Florida’s arguments about the importance of a “creative class” for economic success also tend to support locally owned businesses. Florida argues that among the key inducements for a creative class to move to and stay in a community are its civic culture, its intellectual bent, its diversity, and its sense of self—all attributes that are clearly enhanced in a local-business economy. A local-business economy seeks to celebrate its own culture, not to import mass culture through boring chain restaurants and Cineplexes. It seeks to have more residents engaged as entrepreneurs and fewer as worker bees for a Honda plant. Myriad ideas and elements of a culture can best emerge through myriad homegrown enterprises.
  10. Greater Social Well Being– Communities dominated by local small business tend to have better social performance.
    • In 1946 two noted social scientists, C. Wright Mills and Melville Ulmer, compared communities dominated by at least one large manufacturer versus those with many small businesses. They found that small business communities “provided for their residents a considerably more balanced economic life than did big business cities” and that “the general level of civic welfare was appreciably higher.” C. Wright Mills and Melville Ulmer, “Small Business and Civic Welfare,” in Report of the Smaller War Plants Corporation to the Special Committee to Study Problems of American Small Business, Document 135. U.S. Senate, 79th Congress, 2nd session, February 13. (Washington, DC: U.S. Government Printing Office, 1946)
    • The late Thomas Lyson, a professor of rural sociology at Cornell University, updated this study by looking at 226 manufacturing-dependent counties in the United States. He concluded that these communities are “vulnerable to greater inequality, lower levels of welfare, and increased rates of social disruption than localities where the economy is more diversified.” Thomas A. Lyson, “Big Business and Community Welfare: Revisiting A Classic Study,” monograph (Cornell University Department of Rural Sociology, Ithaca, NY, 2001): 3.
  11. Greater Political Participation– Studies of voting behavior suggest that the longer residents live in a community, the more likely they are to vote and participate in civic affairs, and that economically diverse communities have higher participation rates in local politics.
    • Harvard political scientist Robert Putnam has identified the long-term relationships in stable communities as facilitating the kinds of civic institutions—schools, churches, charities, fraternal leagues, business clubs—that are essential for economic success. SeeMaking Democracy Work (Princeton: Princeton University Press, 1993).
    • One group of scholars recently concluded after reviewing the social science literature: “[T]he degree to which the economic underpinnings of local communities can be stabilized—or not—will be inextricably linked with the quality of American democracy in the coming century.” See Thad Williamson, David Imbroscio, and Gar Alperovitz,Making A Place for Community: Local Democracy in a Global Era (New York: Routledge, 2003), 8. An economy with many long-term homegrown businesses is more likely to contribute to such stability than the boom-and-bust economy created by place-hopping corporations.