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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