Thursday, October 20, 2011

Study finds locally owned businesses are better for communities; keep money at home

Locally-owned businesses with fewer than 100 employees have a positive relationship to economic growth but large, non-local businesses have a negative correlation to with it, according to a study from the Northeast Regional Center for Rural Development at Penn State. Researchers found that community economic development efforts are often "off-track" because they invest in bringing outside businesses into an area rather than in local start-ups.

Jon Bailey of the Center for Rural Affairs writes that locally owned businesses are better for economic development because they don't outsource their operations in the way larger businesses tend to do. Bailey says in-sourcing keeps money in a community and it multiplies several times, building the local economy from within. Small businesses also bring innovation and productivity to the community. According to the study, this brings a focus to local start-ups, on which many rural communities depend.

Unfortunately, local businesses often have a hard time obtaining capital with which to start, said Al Cross of the Institute for Rural Journalism and Community Issues. "Local banks ownership and policies can mean a lot," Cross said. "Most loan-making decisions are no longer made in rural areas because of the consolidation of banks." Often, locally-owned banks are under-capitalized or they can be overly conservative, leaving local start-ups with no way to generate capital or get a loan, Cross said.

Bailey says the study should be a lesson to communities about long-term economic growth that locally-owned businesses can provide. This should make local leaders understand that attracting non-local businesses that normally provide short-term employment should not be their main focus. The study makes clear the importance of initiatives that provide capital and assistance to local businesses, he says. One of the study authors, Stephen Goetz, sums it up another way: "We can't look outside of the community for our economic salvation. The best strategy is to help people start new businesses and help them grow and be successful." To read the complete study, click here.

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