Buying Local: How It Boosts the Economy

By Judith D. Schwartz Thursday, June 11, 2009

TIME MAGAZINE

In recent decades, policy across the country has privileged the biggest corporations. Yet a growing body of research is proving something that many people already know: small-scale, locally owned businesses create communities that are more prosperous, entrepreneurial, connected, and generally better off across a wide range of metrics. Here’s a roundup of the important findings that are putting numbers to the harms of bigness and the benefits of local ownership, and that policymakers can use to craft better laws, business owners can use to rally support, and people can use to organize their communities.

For ease of use, we’ve organized these studies into the following categories, although they do not all fit neatly into one category. For additional studies specifically on big-box retail, see our Big-Box Toolkit. See also the book Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America’s Independent Businesses for a look at the far-reaching impacts of large retail chains and the advantages that accrue to communities that opt for locally owned, independent businesses instead.

  • Start-Ups These studies find that as the economy has become dominated by fewer and larger companies, there’s been a sharp decline in the formation of new businesses.

  • Inequality These studies find that the increasing size of corporations is driving inequality, while local and dispersed business ownership strengthens the middle class.

  • Economic Returns These studies find that local businesses recirculate a greater share of every dollar in the local economy, as they create locally owned supply chains and invest in their employees.

  • Jobs These studies show that locally owned businesses employ more people per unit of sales, and retain more employees during economic downturns, while big-box retailers decrease the number of retail jobs in a region.

  • For ease of use, we’ve organized these studies into the following categories, although they do not all fit neatly into one category. For additional studies specifically on big-box retail, see our Big-Box Toolkit. See also the book Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America’s Independent Businesses for a look at the far-reaching impacts of large retail chains and the advantages that accrue to communities that opt for locally owned, independent businesses instead.

  • Start-Ups These studies find that as the economy has become dominated by fewer and larger companies, there’s been a sharp decline in the formation of new businesses.

  • Inequality These studies find that the increasing size of corporations is driving inequality, while local and dispersed business ownership strengthens the middle class.

  • Economic Returns These studies find that local businesses recirculate a greater share of every dollar in the local economy, as they create locally owned supply chains and invest in their employees.

  • Jobs These studies show that locally owned businesses employ more people per unit of sales, and retain more employees during economic downturns, while big-box retailers decrease the number of retail jobs in a region.

  • Wages and Benefits These studies show that locally owned businesses are linked to higher income growth and lower levels of poverty, while big-box retailers, particularly Walmart, depress wages and benefits for retail employees. Studies in this section also quantify the costs of these big companies’ low wages to state healthcare programs and other forms of public assistance.

  • Social and Civic Well-Being These studies find that a community’s level of social capital, civic engagement, and well-being is positively related to the share of its economy held by local businesses, while the presence of mega-retailers like Walmart undermines social capital and civic participation.

  • Public Subsidies These studies document the massive public subsidies that overwhelmingly favor big businesses and have financed their expansion, and how this subsidized development has failed to produce real economic benefits for communities.

  • Taxes Building on the studies included in the previous category, “Public Subsidies,” these studies examine the differing impacts of locally owned businesses and big-box retailers on public finances. They find that large retailers systemically tilt the playing field in their favor by skirting their tax obligations, as well as that locally owned enterprises generate more tax revenue for cities, with less cost, than sprawling big-box shopping centers.

  • Existing Businesses These studies demonstrate how big-box retailers have significant negative effects on the number and vitality of nearby local businesses, in that they both lead to a loss of existing businesses, and contrary to the claims big-box retailers themselves often make, do not serve as a catalyst for new growth.

  • Consumers & Prices These studies find that chains are not always a bargain.

  • 1. START-UPS These studies find that as the economy has become dominated by fewer and larger companies, there’s been a sharp decline in the formation of new businesses that fuel economic growth.

  • “Declining Business Dynamism in the United States: A Look at States and Metros.” Ian Hathaway and Robert E. Litan, The Brookings Institution, May 2014.

  • Though start-ups occupy a large place in the U.S.’s present tech-fueled imagination, new business formation has in fact been in steady decline. This study from researchers at the Brookings Institution and Ennsyte Economics quantifies this decline, finding that during the three decades between 1978 and 2011, the share of firms less than one year old fell by nearly half. This slump has accelerated in recent years in what the authors term a “precipitous drop” since 2006, which they call “noteworthy and disturbing.” In fact, the authors find, “the number of business deaths now exceed business births for the first time in the 30-plus year history of our data.” The study determines that this trend isn’t geographically isolated, and that business dynamism has declined in all 50 states and in all but a handful of more than 360 U.S. metropolitan areas.

  • “The Importance of Young Firms for Economic Growth.” Jason Wiens and Chris Jackson, Entrepreneurship Policy Digest, Kauffman Foundation, Sept. 14, 2015.

  • This brief, which is a roundup of recent research, underlines the reasons why the decline in new business formation is so troubling. As the authors explain, young firms are the major contributor of new jobs. “New businesses account for nearly all net new job creation and almost 20 percent of gross job creation,” they write, adding, “companies less than one year old have created an average of 1.5 million jobs per year over the past three decades.” They link to several recent papers, such as two 2013 studies titled “How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size,” and “Who Creates Jobs? Small Versus Large Versus Young,” that delve deeper into the economic and statistical analysis behind these findings.

  • 2. INEQUALITY These studies find that the increasing size of corporations is driving inequality, while local and dispersed business ownership strengthens the middle class.

  • “Wage Inequality and Firm Growth.” Holger M. Mueller, Paige P. Ouimet, and Elena Simintzi, LIS Working Paper 632, March 2015.

  • This paper finds that much of the dramatic increase in income inequality over the last two decades may be owed to consolidation in the economy and the growing market power of a small number of very large firms. Large firms pay higher wages on average than small firms do, but there’s significant variation across different types of workers, the authors find. At large firms, low- and medium-skilled employees earn about the same or a little less than their counterparts at small firms, while high-skilled employees are paid significantly more than similar positions at smaller companies. In other words, the gap between the best-paid workers and everyone else is much greater at big corporations than it is at small and medium-sized businesses. Using data from 1981 to 2010 on wages and the size of firms in 15 countries, the authors find a strong relationship between growth in the average firm size and rising levels of income inequality, particularly in the U.S. and U.K. They also find that in counties, such as Sweden and Denmark, where average firm size has stayed the same or declined, income inequality has grown much less. The paper concludes: “Our results suggest that part of what may be perceived as a global trend toward more wage inequality may be driven by an increase in employment by the largest firms in the economy.”

  • “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality” [PDF]. Jason Furman and Peter Orszag, Oct. 2015.

  • This paper explores the possibility that a major factor driving economic inequality is corporate consolidation — the growing market share of a few big companies. The authors present data showing that a small number of firms now earn “super-normal” returns of roughly ten times the median return for all firms. This is up significantly since the mid-1990s, when the most successful companies earned about three times the median return. These “super-normal” returns, the authors suggest, could be the result of growing monopoly power that allows a few dominant firms to extract economic “rents,” or more income than they would earn in a truly competitive market. While the authors emphasize that their paper is not conclusive, they note that this hypothesis is consistent with data showing that much of the rise in inequality is due to an increasing disparity in how much workers, especially those at the top, earn at different firms in the same industry. That is, companies with super-normal returns are distributing to both their shareholders and their top-level employees, helping to expand wage inequality.

  • 3. ECONOMIC RETURNS These studies find that local businesses recirculate a greater share of every dollar in the local economy, as they create locally owned supply chains and invest in their employees.

  • “Independent BC: Small Business and the British Columbia Economy” [PDF]. Civic Economics, Feb. 2013.

  • Commissioned by the British Columbia division of the Canadian Union of Public Employees, this study analyzes the economic impact and market share of the province’s independent retailers and restaurants. With regard to economic impact, the study finds that, for every $1,000,000 in sales, independent retail stores generate $450,000 in local economic activity, compared to just $170,000 for chains. Among restaurants, the figures are $650,000 for independents and $300,000 for chains. Across both sectors, this translates into about 2.6 times as many local jobs created when spending is directed to independent businesses instead of chains. The study concludes that a shift of just 10 percent of the market from chains to independents would produce 31,000 jobs paying $940 million in annual wages to BC workers. With regard to market share, the study finds that while BC’s independent retailers captured just over half of all retail sales as recently as 2003, they have since lost ground. By 2010, independents accounted for 45 percent of BC’s overall retail sales and only 34 percent of the market with automobile and gasoline sales excluded. Although BC has a reputation for innovative planning initiatives, on this measure it lags the rest of Canada, where independents account for 42 percent of retail spending. Among restaurants, BC’s independent sector accounts for 72 percent of full-service dining and 19 percent of limited-service dining.

  • “Indie Impact Study Series: Salt Lake City, Utah” [PDF]. Civic Economics, Aug. 2012.

  • In this study, Civic Economics analyzed data from fifteen independent retailers and seven independent restaurants, all located in Salt Lake City, and compared their local economic impact with four national retail chains (Barnes & Noble, Home Depot, Office Max, and Target) and three national restaurant chains (Darden, McDonald’s, and P.F. Chang’s). The study found that the local retailers return a total of 52 percent of their revenue to the local economy, compared to just 14 percent for the national chain retailers. Similarly, the local restaurants recirculate an average of 79 percent of their revenue locally, compared to 30 percent for the chain eateries. What accounts for the difference? In a handy graphic, Civic Economics shows the breakdown. Independent businesses spend more on local labor, goods procured locally for resale, and services from local providers. This means a much larger share of the money spent at a locally owned store stays in the local economy, supporting a variety of other businesses and jobs.

  • “Going Local: Quantifying the Economic Impacts of Buying from Locally Owned Businesses in Portland, Maine.” Garrett Martin and Amar Patel, Maine Center for Economic Policy, Dec. 2011.

  • On a dollar-for-dollar basis, the local economic impact of independently owned businesses is significantly greater than that of national chains, this study concludes. Analyzing data collected from 28 locally owned retail businesses in Portland, Maine, along with corporate filings for a representative national chain, the researchers found that every $100 spent at locally owned businesses contributes an additional $58 to the local economy. By comparison, $100 spent at a chain store in Portland yields just $33 in local economic impact. The study concludes that, if residents of the region were to shift 10 percent of their spending from chains to locally owned businesses, it would generate $127 million in additional local economic activity and 874 new jobs.

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Key Studies: Why Local Matters

Written by Stacy Mitchell Updated onDec 22, 2011The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/key-studies-why-local-matters/

Last update: Jan. 8, 2016

"Buy Local"—you see the decal in the store window, the sign at the farmer's market, the bright, cheerful logos for Local First Arizona, Think Boise First, Our Milwaukee, and homegrown versions across the states. The apparent message is "let's-support-local-business", a kind of community boosterism. But buying close to home may be more than a feel-good, it's-worth-paying-more-for-local matter. A number of researchers and organizations are taking a closer look at how money flows, and what they're finding shows the profound economic impact of keeping money in town—and how the fate of many communities around the nation and the world increasingly depend on it.

 

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