The Multiplier Effect of Local Independent Business Ownership
By Jeff Milchen
Explaining the local economic multiplier effect or “local premium” is an essential component of effective "buy local" public education campaigns.
The multiplier effect is the boost to your local economy that results from locally-owned independent businesses, owners, and employees spending business revenue within the region. Typically, local independent businesses recirculate a much greater percentage of sales locally compared to absentee-owned businesses (or most locally-owned franchises*).
Total economic impact is determined by measuring three components -- the direct, indirect, and induced impacts.
- Direct impact is spending done by a business in the local economy to operate the business, including inventory, utilities, equipment and pay to employees.
- Indirect impact refers to the conventional multiplier that happens as dollars the local business spends at other area businesses re-circulate.
- Induced impact refers to the additional consumer spending that happens as employees, business owners and others spend their income in the local economy.
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The private research firm Civic Economics has executed the bulk of studies attempting to quantify the difference in local economic return between local independents and chain businesses. Their first such study (pdf), for the City of Austin, showed an independent book and music seller returned more than three times as much money to the local economy as a proposed Borders outlet would.
Those results have since been mirrored by more than more than one dozen other studies (ten summarized here), each showing a much greater local multiplier for spending at independent businesses than chains. These studies measured the direct and indirect impacts to determine the base level local economic activity of a purchase made at a chain and a local independent business.
The Institute for Local Self-Reliance conducted perhaps the simplest study of the local multiplier effect in several small Maine communities in 2003. It explored how much of a dollar spent at a local independent store is re-spent in the local area in the form of payroll, goods/services purchased from area businesses, profits spent locally by owners, and donations to area charities. The study found each $100 spent at local independents generated $45 of secondary local spending, compared to $14 for a big-box chain.
Civic Economics studies in Grand Rapids, MI, and Chicago expanded the exploration of the indirect impacts by including more business types (see discussion below) and added induced impacts, so the results are not directly comparable to most of their other studies or the ILSR's in Maine.
- Key Points
Civic Economics' Andersonville neighborhood (Chicago) study found a total impact of $.68 per $1 of spending at ten local independents, compared to $.43 projected for their chain competitors. Bear in mind this is a study of ten businesses in one neighborhood of one city (significant because businesses in smaller cities and towns may have less ability to locally source some necessary inputs).
Also, the projection of indirect and induced impacts does not mean that $.68 of each dollar spent at a local independent "stays" in the local economy, but that $.68 of additional local economic activity ultimately is generated after additional spending cycles. Citing the higher numbers without explaining they include impacts by entities other than the original business is misleading and undermines your credibility.
To gain respect and be seen as an authoritative voice within your community or constituency, guard your credibility zealously. Check your materials and ensure they convey verifiable, accurately worded information. We suggest sending people to Civic Economics.com and ILSR.org for summaries and links of most relevant economic studies in this realm. We urge you not to rely on any secondary sources or attributions. The New York Times published a false claim that 80% of money spent with local independents was re-spent locally. Subsequently, at least two other publications then attributed the claim to AMIBA! Verify claims by citing the original study or contact us for more general questions. We also are happy to provide high-resolution graphics on request.
In addition to being accurate, it's important to make your message memorable. The simple message that, "Multiple studies show locally-owned independent restaurants return twice as much per dollar of revenue to our local economy than chain restaurants. And independent retailers return more than three times as much money per dollar of sales than chain competitors," is a far more memorable phrase than talking in terms of percentages or comparing $.68 to $.43. It's also easily verifiable (include links to Civic Economics and this page).
Of course, you could add "and buying remotely creates almost no local benefit--just a few minutes work for a delivery person." You might also add for your outreach materials or interviews, "That adds up to a huge difference in creating local jobs and local wealth." Calculating the added local wealth that would be generated by a 10% shift to local independents is one tactic successfully employed by several communities.
Details on Study Variants
- Business Type
The size of the local premium varies depending on the type of business. This is where the San Francisco and Grand Rapids studies get interesting, because they work out the local multiplier for different business categories. Restaurants and service providers generate a large multiplier because they are labor-intensive and, therefore, more of each dollar of revenue goes to local payroll. Pharmacies, for example, generate a lower multiplier because so much of each sale goes to drug manufacturers. Most retailers, unless they source an exceptionally high percentage of their goods locally, also create a more modest multiplier than restaurants.
This is not to say restaurants are better for economic development than pharmacies. Pharmacies have sizable revenue and professional job opportunities, so it's great for the local economy. It's helpful to be aware of these differences because reporters sometimes ask why the local multipliers vary between studies. It's often because they are looking at a slightly different mix of businesses.
- Land Use
In 2009, Stay Local!, an AMIBA affiliate in New Orleans, commissioned Civic Economics to evaluate economic return per square foot of retail space used by both local merchants and Target Corporation. The local merchants studied generated twice as much sales activity per square foot and nearly quadrupled the local econmic return per square foot compared to projections for Target. See study (pdf).
- Quantifying Shifts in Spending
As for the overall impact on your local economy of shifting 10% of purchasing from non-local or asbentee-owned to locally owned businesses, you would need to know what the local multiplier is for each category of spending and what percentage of people's spending is in each category. (i.e., 20% goes to groceries and the grocery multiplier is 0.15; 5% goes to books and the local multiplier is 0.32; etc.)
Presumably, this is how Civic Economics arrived at the Grand Rapids figures for the impact of shifting 10% of all retail sales. The figure in that study works out to an average local multiplier of 0.16 across all retail categories.
Thanks to Stacy Mitchell of ILSR for assistance with this explanation. ILSR summarizes and links many relevant economic impact studies here. See also Civic Economics' Ten Years of Studies white paper, summarizing in greater depth many of the studies noted here.
*A Note on Franchises. Despite claims by countless franchisors (the companies that sell to a person wishing to operate a franchise--the franchisee), franchised businesses overall are no more likely to succeed than independent businesses and typically deliver a worse return on investment, as this article explains). In terms of local economic benefit, most franchises will fall in between local independents and chain competitors in the same business category.