Locally Owned, Import-Substituting Businesses
By Michael H. Shuman & Doug Hoffer:
"A growing body of evidence suggests that the businesses most beneficial to a community economy are those that are locally owned and import-substituting.
- Local ownership means that working control of a company is held within a small geographic area.
- Import-substituting means that the company is focused first and foremost (though not
exclusively) on local markets."
"Local ownership turns out to matter for economic development in at least five ways:
• Locally owned businesses generally contribute more to the “economic multiplier” than nonlocal businesses – which translates into more income, wealth, jobs, and tax payments – because the former spend more money locally.
• While absentee-owned businesses increasingly move away to Mexico or China to secure a higher rates of return on investment, even if the consequent exit throws a U.S. community into an economic tailspin, locally owned businesses reliably stick around and produce wealth for many years, often many generations.
• Because local businesses tend to stay put, a community can raise labor and environmental standards with more confidence that these businesses will adapt rather than flee.
• A community made up of locally owned businesses is better equipped to promote smart growth, draw tourists, attract talented young people, and seed an entrepreneurial culture.
• Compared to economies rooted in a small number of absentee owned big enterprises, local-business economies appear to have greater social stability, lower levels of welfare, and more political participation."
The Multiplier vs. Leakage
"Every purchase triggers purchases by others within a community. For instance, a dollar spent on rent might be spent again by the property owners at the local grocer, who in turn pays an employee, who then buys a movie ticket. This phenomenon is what economists call “the multiplier.” The more times a dollar circulates within a defined geographic area and the faster it circulates without leaving that area, the more income, wealth, and jobs it creates. This basic concept in community economics highlights the importance of maximizing the numbers of dollars being spent locally and minimizing their “leakage.”
The importance of import-substitution for local prosperity
"Import substitution matters for economic prosperity as well. Every time a community imports a good or service that it could cost-effectively produce for itself, it “leaks” dollars and loses the critically important economic multipliers associated with them. Unnecessary imports – of foreign oil, for example – also subject a community to risks of major price hikes and disruptions outside local control. And they deny a community a diversified base of businesses and skills that are needed to take advantage of unknown (and unknowable) future opportunities in the global economy.
“Localization” turns out to be an important strategy for promoting the expansion of highwage, “high road” jobs. More traditional strategies for attracting these jobs from nonlocal enterprises have had disappointing results, because many of the promised jobs do not materialize or turn out to be temporary. Moreover, because nonlocal businesses spent less money locally than local businesses, they have lower multipliers and fail to raise wages in other sectors of the local economy. A recent study in San Francisco found, for example, that a 10 percent shift of residential spending on retail from nonlocal business would add to the city’s economy nearly 1,300 more jobs, $72 million more in wages, and $192 million more in annual output.
(A similar shift in spending the other way, from local to chain, would eliminate 1,300 jobs, shrink wages by $72 million, and reduce output by $192 million.)
Two clarifications about LOIS are important:
First, import-substitution does not mean cutting off a community from the global economy. To the contrary, as the late Jane Jacobs argued, an economic strategy of promoting import-substituting businesses turns out to be an effective way to develop export-oriented businesses. But instead of putting all of the community’s eggs in one export-oriented basket, this strategy aims to develop myriad small businesses, all grounded (initially at least) in local markets with many then becoming exporters.
Second, this perspective does not carry a moral judgment about non-LOIS businesses being bad or unproductive. To the contrary, many global, export-led companies are terrific at creating wealth and jobs. But dollar for dollar of sales, the typical LOIS business produces more benefits for a given region than the typical non-LOIS business, in part because local ownership anchors the business to the community and in part because of the multiplier effects.
LOIS businesses actually constitute the majority of the U.S. economy. According to the Small Business Administration, about half of the private sector’s output and jobs comes from small business. Add nonprofits and governmental sectors, and the “place-based economy” accounts for 58% of gross domestic product (GDP). This number is significantly higher in rural communities. The businesses in the place-based sectors, moreover, produce far more jobs, patents, and innovation than equivalent sized nonlocal businesses.
The main doubt economists express about LOIS concerns competitiveness. Are we not in an era when bigger businesses can better achieve economies of scale? In fact, in all but seven of the thousand-plus sectors of the North American Industrial Classification System (NAICS), there are more examples of competitive small-scale enterprise in each sector than large-scale enterprise. Put another way, the U.S. economy is full of models of small-scale success that can inform entrepreneurship activities in even very small communities. What’s missing is an economic-development strategy that these communities can use to identify, create, and nurture theses enterprises. Enter leakage analysis."
- Michael H. Shuman, The Small-Mart Revolution: How Local Businesses Are Beating the Global
Competition (San Francisco: Berrett-Koehler, 2006).
- Matt Cunningham & Dan Houston, The Civic
Economics of Retail (Austin: Civic Economics, 2007).