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Small Business is Good for Local Economies; Big Business is Not, Researchers Say

Business News Daily Editor
Business News Daily Editor

Which is better for a local economy, bigger firms or smaller companies?

  • Small businesses have created a rise in local economies, with many people starting their own businesses.
  • From Etsy shops to Facebook business profiles, people have more access to generating their own income.
  • Previously, a great majority of the population relied on big businesses for employment. Luckily, according to Penn State economists, small business is great for local economies.

According the U.S. Small Business Administration, small businesses generated 44% of the United States' economic activity from 1998 to 2014. While it is not quite half of the activity, think about how small these businesses are in comparison to the large Fortune 500 companies.

Despite the fact that Walmart employs a full 1% of the U.S. population, it's small, locally owned businesses that have the most positive economic impact on communities, according to 2016 research from Penn State economists.

"Small, locally owned businesses and startups tend to generate higher incomes for people in a community than big, non-local firms, which can actually depress local economies," said Stephan Goetz, Ph.D., professor of agricultural and regional economics at Penn State and director of the Northeast Regional Center for Rural Development.

Goetz's research identifies small business as standalone firms with 10-99 employees owned by residents or businesses with headquarters in the same state. Not only are small businesses good for the economy, Goetz contends that big business is bad for the economy. In fact, the presence of large firms that employ more than 500 workers and that are headquartered in other states was associated with slower economic growth, according Goetz.

This is because big box and large corporations have internal systems for services such as accounting, legal, supply and maintenance that are not necessarily based within the county or state, the research said.

Now that we understand how big business is actually harming the economy, let's focus on how small business might be helpful. Here are four specific ways small business economically contributes to the population.

Job creation

The first way is through job creation. While this might seem obvious, it is incredibly important. Businesses with less than 500 employees added 1.4 million new jobs in the first nine months of 2014 alone.

Innovation

According to Goetz, small businesses and startups provide more than just jobs for community members. They also can 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.

When people have ways to let their ideas come to life, they do it. If people lacked an opportunity to make money with their invention or see that their idea would help people, why would they pursue it? Starting a small business contributes innovative ideas not just to a community, but to an entire civilization.

Opportunities for individuals

While there are shifting demographics about CEOs of underrepresented minorities for large companies, small businesses allow people to become their own boss. This helps people not have to worry about interviews, resumes or cover letters, and simply gives them the freedom to create their own income. When more people create their own businesses, others can follow in their footsteps. The idea of creating opportunities is also incredibly beneficial to smaller communities. If there are not a large amount of businesses in an area, how can people get jobs? People can create their own.

Support for larger businesses

The final distinct way that small business contributes to the greater economy is through creating hubs for large businesses. For example, large corporations need to move their product everywhere. Having a smaller company warehouse their product in one state and create the raw materials in another place can be mutually beneficial. Large companies have a stake in the local area, and the community has access to more jobs.

Goetz said a better strategy to promote economic growth may be encouraging local businesses rather than recruiting large outside firms.

"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."

Image Credit: scyther5 / Getty Images
Business News Daily Editor
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