The Case for Locally Owned Businesses
A beautiful environment that promotes wellness, health, and increased social connections is certainly a place that many of us would want to live. However, at the end of the day, a city or a region without sustainable economic drivers will not grow or last over time. Michael Shuman, author of Small Mart Revolution, eloquently outlined his argument for how locally owned businesses can create that foundation.
The Impact of Local Business
“Local businesses generate 2-4 times the economic impact of non-local businesses.” That’s a strong fact, enough for anyone to take notice. However, as one of our guests pointed out, it is hard to rally to support locally owned businesses if you don’t understand why and how that economic impact occurs and the benefits to your own community.
Michael jumped right in explaining that local businesses have higher economic multipliers, “the more times a dollar careens through the economy, the faster it moves without leakage, the more income, wealth and jobs.” In other words, a dollar spent at a local business is more likely to stay local. The owners and employees of the businesses live and shop in the area, the business uses local business services (attorneys, accountants), and they advertise with local TV and radio.
Michael’s Proven Benefits of Local Businesses:
- Since local businesses are small in size, they promote smart growth and walkability.
- Because they buy and ship locally, local businesses have a lower carbon footprint.
- A community that surrounds areas with a higher percentage of local businesses often has higher civil society, lower crime, lower welfare and higher degrees of public participation.
- Environments that are friendly to local businesses attract entrepreneurs.
- Authenticity of local businesses promotes loyalty and can attract tourists.
“Asleep at the Wheel…”
Michael expressed his disappointment at those who are driving economic development policy and explained 6 tactics he believes can “change this paradigm” :
- PLANNING: Watch for where goods are being imported. Plug the leaks of importing food, energy, and finance.
- ENTREPRENEURSHIP TRAINING: Have an on-site incubator for local food businesses. Create mentorship programs, perhaps between retirees and local entrepreneurs.
- PARTNERSHIPS: Local businesses can be more competitive acting together. Create a purchasing co-op to buy goods needed to do business.
- REORGANIZE FINANCE: Securities laws have made it difficult for small investors to put money into local businesses. Create local stock issues around 20 new businesses being established.
- THINK LOCAL FIRST: A 5-10% shift towards local can make a huge economic development impact.
- POLICY-MAKING: “In Panama, the model can serve as a demonstration for promoting entrepreneurship and building a local economy.”
Current State:
Recent studies cited by Shuman:
- $50 billion per year is spent by state and local governments to support non-local businesses, putting local businesses at a competitive disadvantage.
- 95% of government funds that go towards tax abatements to attract businesses that promise jobs in a region are to non-local businesses, but many of these non-local businesses fall short of their promise to deliver jobs.
- Currently, 50% of the jobs in the U.S. are with locally owned businesses.
- Over the past 20 years, during the area of “globalization,” the percentage of the sector held by local business shrunk only 2% (which were mostly replaced by home-based businesses).
- In 1960, 1/3 of our household spending was on services and in 2000 it had increased to 2/3. This is great news for local businesses as services are inherently local.
- In 1900, an average of 40 cents of $1 of produce went to the farmer. Today, the average has been reduced to 7 cents. There are many models working today that bringing the dollars back local, such as local farmers’ markets and CSAs where money goes directly to the farmer.
The Case Against Locally Owned Businesses
Bigger, often non-local, companies can provide a more competitive product than smaller locally owned businesses because of their economies of scale. They make higher volumes of their product and are thus able to distribute certain production costs over larger number of units. Lower cost to make = Lower price for the consumer. Shuman argues that the “economies of scale” case focuses on the wrong issue and that “locally owned businesses are more competitive than people appreciate.” He feels confident that 98% of business categories can work small, they just need to shop around and find the right models to work from. (What industries are in that 2% that doesn’t? “The central monetary system, nuclear power plants, and missiles.”)
Large non-local businesses are increasing the efficiency of their production but the efficiency and cost of the their distribution is going down. Local systems can beat the inefficiency of the distribution systems of large businesses. There will be great local innovation on the distribution systems that will make local products more affordable (particularly heavy durable goods).
