Is it better for a community when its residents shop only at locally owned businesses?

PROS:

"The Multiplier Effect.” When you shop locally-owned businesses, money will stay in the community 3 times longer! Local businesses and artists tend to buy from local suppliers and hire service providers such as printers, accountants, lawyers. This means more jobs in the community.

The more times one dollar circulates within a community the wealthier the community becomes. The reverse is also true, the fewer times a dollar is spent locally, the poorer the community becomes. If one chooses to shop at a large discount retail chain, one must realize that as their dollar is exported from their community, the velocity of the currency in their community is slowing down just that much, making everyone in their community a little less well off for it. What is short-term good for individuals may be long-term bad for the community (including those individuals).

Locally owned businesses provide an important social benefit. When local proprietors know their customers personally, they have more latitude and willingness to allow their customers to buy “on credit.” Chain department stores have less flexibility, and require either cash sales or commercial credit card accounts.

One of the more subtle happenings with local businesses is their profits are frequently stored in a local bank that uses those profits to loan to others in the community. This in turn generates more capital flow for the community.

Shopkeepers trained to give better customer service learn how to create a competitive inventory and competitive prices, etc. Entrepreneurship needs to be systemic in order for major change to occur.

Locally based employers are also

1. more stable about staying in the same location
2. more likely to contribute to local nonprofits and universities
3. more likely to contribute to the special character of "place.”

1. the multipliers from its own population,
2. those from outside its population,
3. extra dollars that go for taxes that are needed to maintain services (even though businesses are gone),
4. bodies in the downtown area that make the community a community,
5. tradition.

Pooling the purchasing power of local vendors would reduce supply chain costs.

Some main street stores can find a higher value niche providing specialty products and services with which a larger chain store can't compete.

The wealth of the community is not increased by subsidizing real estate or other incentives for a chain retail store that is too big to fail.

CONS:

When the consumer has choices, s/he is best able to draw upon the best value in goods and services. Buying local usually costs more, and choices tend to be limited. The money saved when purchases are made from a lower-cost, more competitive market can be channeled to higher valued uses and supports businesses activities that are competitive. More competition and more choices lead to higher standards of living.

Local residents may be encouraged to shop locally, but things might be cheaper in nearby urban areas. Local consumers may not mind the extra travel costs because they enjoy the trip to neighboring cities.

Wealth depends on trade. Exporting what you do best brings new purchasing power into the community and the community becomes wealthier. Moving dollars around the community passes around the purchasing power, but does not increase wealth.

Even merchandise that is sold in locally owned businesses is probably not made locally. However, the labor in the local shop is local, as is the labor in a larger chain store in a smaller community. So whether an item is purchased from locally owned business or from larger chain stores, the dollar is still divided between cost of merchandise (and sent outside the community) and cost of labor (which remains within the community). If an item is purchased for a lower price (at the larger chain store), the savings also stays in the community. Less of each dollar spent is exported outside the community.

"Buy local" certainly doesn't make sense in every case -- trade with other areas that are more efficient due to climate, location, special skills, etc. can help both economies flourish.

"Buy local" is a campaign sometimes used to protect inefficient businesses at a cost to consumers or taxpayers. If something could be bought for less, the extra dollars could be spent elsewhere, and that is the benefit of buying out of state, overseas, etc. to get more value for the dollar.

OTHER THINGS TO KEEP IN MIND:

Some direct and indirect subsidies impair local wealth. Some businesses may avoid Municipal property tax by locating outside municipal boundaries, or tax breaks, or below-cost (even free) infrastructure, and welfare costs for below-poverty wages. Because local elected officials focus narrowly on sales-tax revenues and consumer popularity, they subsidize the loss of jobs and local businesses.

When you build a home in a community, you are capturing national and international investment in the secondary mortgage market for that town's economy since about 60% or more of the construction cost will be paid in local, good wages...so say $60-200,000 vs. paying 20% retail margins on store inventory, say $1.00-$10.00...in other words, retail just doesn't generate much wealth or spin-off activity for anyone, it just affects the cost of living and satisfaction with living in that community.

Manufacturing Jobs = Small Town Prosperity. Manufacturers are the backbone of many small towns. Manufacturing jobs have traditionally paid well and supported other businesses in the community. A study done by the Illinois Chamber of Commerce (What 100 New Jobs Mean to a Community, 1993) shows that 100 new manufacturing jobs in a community lead to:

• 415 more jobs
• $12,700.00 more personal income per year
• $5,000,000 more bank deposits
• Seven additional retail establishments
• $7,700,000 more retail sales
• $540,000 increased tax revenue
• $2,000,000 more service receipts

1. the type of multiplier being considered (e.g, employment and income multipliers are different concepts),
2. the geographic scope being considered (generally the larger the area, the fewer leakages…hence, a higher multiplier),
3. the extent of local backward linkages,
4. the propensity of the labor force employed in a local industry to live and spend locally, etc.

Suggested Resources:

"Plugging the Leaks," the New Economics Foundation - www.pluggingtheleaks.org

AMIBA - the American Independent Business Alliance - www.amiba.net www.amiba.net

www.oaklandunwrapped.org/support/theory.html

www.oaklandunwrapped.org/support/economy.html#multiplier

The Institute for Local Self-Reliance - www.newrules.org/retail/purchasing.html

Understanding Local Economic Development by Emil Malizia and Edward Feser

Bhide, Amar, "How Entrepreneurs Craft Stategies That Work," Harvard Business Review on Entrepreneurship Harvard Business School Staff, Zenas Block, Ian C. MacMillan, William A. Sahlman, Gregory L. Summe, 1999

Collapse: How Societies Choose to Fail or Succeed - Jared Diamond