Small, Locally-Owned Businesses Create Higher Economic Growth Rates than Big, Outside Firms

A new report from Pennsylvania State University finds that counties with more small (between 10 and 99 employees), locally-owned businesses have higher rates of economic growth than those without. At the same time, counties with large, out-of-state-owned businesses have slower growth. This is a very interesting report for places like Appalachia, where governments have historically spent more effort and resources on courting outside industries than nurturing entrepreneurship. And it rings especially true on the heels of the news that a call center in Perry County, KY is laying off 150 employees.

The Daily Yonder has the details:

Small, Local Businesses Speed Income Growth

It does matter whether a business is locally owned.

Researchers at Pennsylvania State University have found that counties with more small, locally owned businesses have stronger economic growth than communities with larger businesses owned by outsiders. "Local ownership matters in important ways," said economist Stephan Goetz who was co-author of the study with David Fleming, a Penn State graduate student. "Smaller, locally owned businesses, it turns out, provide higher, long-term economic growth."

Larger firms owned by people outside a county depress growth, the researchers found.

Goetz and Fleming looked to see if per capita income growth in counties was affected by the size and ownership of local businesses. The two studied U.S. counties during the period from 2000 to 2007.

The effect of having locally-owned, small firms (with between 10 and 99 employees) on a county's economy was significant. There was a strong, positive relationship between the presence of smaller, locally-owned firms and faster growth in incomes.

The presence of larger firms owned by those outside the county had the opposite impact. Those counties had slower growth in incomes. Goetz and Fleming found that this impact extended to big box retail stores, such as Walmart and Home Depot.

"Although these types of (larger, non-local) firms may offer opportunities for jobs, as well as job growth over time, they do so at the cost of reduced local economic growth, as measured by income," Goetz and Fleming wrote. "Small-sized firms owned by residents are optimal if the policy objective is to maximize income growth rates." 

One of the reasons locally owned firms are better for county economies than big box stores and larger, out-of-town corporations is that these larger firms outsource many services that the smaller companies buy within the community, Goetz explained. They use local accountants and wholesalers while big firms do this work themselves.

Small businesses and local start-ups not only buy locally, but they tend to spur innovation and productivity within the county.

"This is really a story about start-ups," said 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 start-ups do."

Goetz said his findings might provide a better strategy for local economic development officials. Encouraging local businesses would be better for growth than recruiting larger firms from outside the county.

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

Goetz is the director of the Northeast Regional Center for Rural Development. The Goetz and Fleming research appears in the Economic Development Quarterly. http://edq.sagepub.com/content/early/2011/04/28/0891242411407312