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OPINION: Impact of the local multiplier effect

by By John Newby Building Main Street, not Wall Street | April 27, 2023 at 4:00 a.m.

Supporting local businesses has long been recognized as a key factor in economic growth and community development. Studies consistently show that when consumers spend their money at local businesses, the benefits multiply and have a compounding effect on the local economy. This compounding phenomenon is known as the "local multiplier effect" and can have a significant impact on small communities, leading to increased jobs, higher income levels, and overall economic vitality.

Let's closely examine how the local multiplier effect works, supported by studies and results.

The local multiplier effect refers to the idea that when consumers spend money at a local business, that money circulates within the local economy, creating a chain reaction of economic activity. This occurs because local businesses are more likely to purchase goods and services from other local businesses, thereby keeping money within the community and stimulating additional economic transactions. As a result, the initial dollar spent at a local business can "multiply," having a ripple effect on the local economy, generating more income and creating a vital cycle of economic growth.

Several studies have provided evidence of the local multiplier effect and its positive impact on local economies. For instance, a study conducted by Civic Economics, a consulting firm specializing in analyzing the economic impact of local businesses, found that in the United States, local retailers recirculate 48% of their revenue back into the local economy, compared to only 14% for chain retailers. This 300% or 3 to 1 increase was supported in a similar study by the Institute for Local Self-Reliance. They found that independent businesses in Austin, Texas, recirculate 45% of their revenue within the local economy, compared to only 14% for large chain stores. These two studies demonstrate that local businesses are more likely to reinvest their profits back into the community, which can result in a multiplier effect stimulating further economic activity.

The local multiplier effect also has a significant impact on job creation. Local businesses are more labor-intensive than large chain stores, as they often require more human resources. A U.S. Small Business Administration study found that small businesses, including local retailers, create two out of every three net new jobs in the United States. Moreover, a study by the American Independent Business Alliance found that for every $100 spent at a local business, on average, $68 stays in the local economy as wages paid to local employees. This indicates that supporting local businesses contributes to job creation and helps sustain and improve local income levels.

Furthermore, the local multiplier effect can lead to increased tax revenue for local governments, which can be used to fund essential public services such as roads, parks and infrastructure. Local businesses generate tax revenue through various channels, including sales, property, and payroll taxes. A study conducted by the Andersonville Study of Retail Economics analyzed the impact of local businesses in Chicago. It found that local retailers generate 70% more local economic impact per square foot than chain retailers primarily due to their higher contribution to property taxes. This suggests that supporting local businesses can positively affect local government revenue, enabling it to invest in community development and enhance residents' overall quality of life.

The local multiplier effect also fosters community engagement and social cohesion. Local businesses are often deeply embedded in the fabric of the community, owned and operated by residents who are invested in the community's well-being. They are more likely to support local initiatives, participate in community events, and contribute to local causes. For example, local businesses may sponsor local sports teams, donate to local charities, or engage in other philanthropic activities. These contributions help build community pride, strengthen social ties, and promote a vibrant and cohesive community culture.

John Newby is a nationally recognized columnist, speaker and publisher. He consults with chambers, communities, businesses and media. His "Building Main Street, not Wall Street" column appears in 60-plus newspapers and media outlets. As founder of Truly-Local, he assists chambers, communities, media, and businesses in creating synergies that build vibrant communities. He can be reached at [email protected].

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