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To Grow Economies with Small Businesses, Think Local

Vendor at Times Square in New York (A. Kotok)

(A. Kotok)

Economists at Pennsylvania State University have found that small, locally owned businesses and start-ups tend to generate higher incomes for people in a community. Stephan Goetz and graduate student David Fleming from the Northeast Regional Center for Rural Development at Penn State published their findings in the August issue of the journal Economic Development Quarterly (paid subscription required).

Goetz and Fleming studied data collected by the Edward Lowe Foundation on the economic growth and residence status of business owners in 2,953 U.S. counties, covering both rural and urban counties. They defined small local businesses as standalone firms with 10 to 99 employees, owned by residents or businesses with headquarters in the same state.

The researchers used economic growth models that controlled for relevant economic factors to reveal a positive relationship between the density of locally owned firms and per capita income growth. But that association worked only for those smaller, locally-owned enterprises with 10 to 99 employees. And this stronger association occurred in both urban and rural counties.

In fact, higher densities of larger, non-local companies — those with more than 500 workers and not locally owned — were associated with slower economic growth. One reason, say the authors, is that the large, non-local companies, such as big-box retailers, and service providers such as call centers, are more likely to base their headquarters functions with job opportunities elsewhere. These functions include professional-level positions such as accounting, legal, or logistics.

Smaller and start-up businesses provide more than jobs, say Goetz and Fleming. They also can improve innovation and productivity on a local level and use the services of other businesses in the community such as accounting and wholesalers, while larger businesses tend to develop their own infrastructures.

Read more: New U.S. Start Ups Rise in 2010: That’s the Good News

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