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To ignite economy, local beats global

PENN STATE (US) — To generate income, communities should think outside the big box of large corporations and concentrate on small, locally owned businesses and startups.

“Local ownership matters in important ways,” says Stephan Goetz, professor of agricultural and regional economics at Penn State. “Smaller, locally owned businesses, it turns out, provide higher, long-term economic growth.”

The ability of small businesses to enhance economic growth in communities, regardless of the community’s population size and density, is statistically significant, Goetz says.

Small local businesses are defined as standalone firms with 10 to 99 employees owned by residents or businesses with headquarters in the same state.

The presence of large firms that employ more than 500 workers and that are headquartered in other states was associated with slower economic growth. They have internal systems for services such as accounting, legal, supply, and maintenance that are not necessarily based within the county or state.

In addition to outsourcing services that were once provided by community businesses, nonlocal large companies may displace more entrepreneurial small firms.

Small businesses and startups provide more than just jobs for community members, Goetz says. They also improve innovation and productivity on a local level and use other businesses in the community such as accounting and wholesalers, while larger businesses develop their own infrastructure.

For the study, published in the journal Economic Development Quarterly, researchers studied data from the Edward Lowe Foundation on the economic growth and residence status of business owners in 2,953 U.S. urban and rural counties.

“This is really a story about startups,” says Goetz. “Many communities try to bring in outside firms and large factories, but the lesson is that while there may be short-term employment gains with recruiting larger businesses, they don’t trigger long-term economic growth like startups do.”

The economic benefit of locally owned businesses appears to diminish as the firm grows. Medium-sized and large-sized businesses owned by residents are not associated with faster economic growth in later years.

“We can’t look outside of the community for our economic salvation.” Goetz says. “The best strategy is to help people start new businesses and firms locally and help them grow and be successful.”

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4 Comments

  1. Dr. O'

    One stumbling block for using local small business is that these organizations are not often unionized. Unions prefer to use their workers regardless of the benefits to the community. If it does not benefit the union it is not considered useful. The stimulus package was directed at large unionized businesses while ignoring small businesses partly because of the influence of unions. The effect of the stimulus has so far been economic problems on a massive scale without benefit to the nation.

  2. Jay Samios

    As a co-owner of a start up, I can tell you this is true. We source much of the goods and services needed to run our fledgeling business locally, and are actually creating jobs in our community. I can see that changing as we grow and need to scale up and choose efficiency. Not sure what the answer is to that – except possibly expanding in cells/networks rather than with a central mega-base of perations from which everything stems. Is anyone exploring this?

  3. Greg Marshall

    Jay, I’m not completely committed to the idea. As your startup grows, you may bring some services into the company. In turn, totally new things may be outsourced because of the growth.

    For example, you may bring your bookkeeping in-house, but bring on a third-party accountant to do some oversite. Maybe website development comes in-house, but you hire a procurement agency to deal with inventory and shipping.

    I think as a startup grows, there will always be tasks that are outsourced to local businesses because it will be either less expensive or it will allow the company to stay focused on core tasks.

  4. Wii U

    I agree. And they need to stop taxing the hell out of small business too!

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