Local Small Businesses Best for Growth

Many communities throw their support to recruiting outside businesses. But a new study reveals that short-term employment gains should never overrule the long-term economic growth that locally-owned startups provide.

The research demonstrates once again the importance of local businesses to rural community economic growth. Does Local Firm Ownership Matter? by Stephan Goetz and David Fleming found that locally-owned businesses of less than 100 employees had a positive relationship with county per capita income growth, while non-locally owned large businesses (over 100 employees) had a negative impact.

Larger, non-locally owned businesses, including big box retailers, are assumed to provide economic benefits to communities, when in fact economic opportunities offered by such businesses come at a cost. The larger, non-locally owned businesses may provide opportunities for jobs, but they “do so at the cost of reduced local economic growth, as measured by income.”

One reason smaller, locally-owned businesses are optimal for community economic growth is because they do not outsource many necessary businesses services. Larger businesses owned by non-local corporations tend to do things like accounting and purchasing themselves, while smaller, locally- owned businesses retain such services in the community. Locally-owned businesses initiate a practice of churning income within a community that multiplies several times.

Local small businesses also kick off innovation and productivity in the community. According to the study,“(t)his is really a story about start-ups.” In a statement of support for the long-term effects of small, local businesses the report found that local economic development efforts are often off-track. While many communities throw their support to recruiting outside businesses, “the lesson” to communities is that short-term employment gains should never overrule the long-term economic growth that locally-owned start-ups provide.

This study is an important contribution to economic development policy, especially in rural communities that depend so much on locally-owned small businesses. This study summarizes the policy message behind initiatives such as the Rural Microentrepreneur Assistance Program and other local, state and federal initiatives that create jobs and economic growth by providing capital and assistance to new and expanding small businesses.

At a time when the nation is concerned about jobs and economic growth, federal and state policymakers would do well to heed the messages about how to make community economies grow. Goetz summarizes the findings of the study well for rural communities: “We can’t look outside of the community for our economic salvation. The best strategy is to help people start new businesses … and help them grow and be successful.”

The report was published by the Northeast Regional Center for Rural Development of Penn State University and may be found here.

If you have comments or questions, contact me, Jon Bailey, at jonb@cfra.org or call 402.687.2103 ext. 1013.

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