How Small Businesses Help the Economy

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How Small Businesses Help Economy

You hear it all the time from politicians and cable news talking heads: “Small business is the backbone of the U.S. economy.” And as a small business owner, you don’t really question it. Of course you’re the backbone of the economy!

This clever little cliché wasn’t just created to give people election-year talking points. It speaks to how small businesses have the greatest impact on the U.S. economy, and why we all should be supporting them. Though economies of scale often mean chains can do it cheaper, the money people spend at a small business does far more than it does at a chain. And from job creation to innovation to stopping brain drain, their impact can’t be understated.

They Create the Most Jobs

Let’s start with the obvious: Small businesses employ local people. Some might argue that large corporations and multinationals have a larger effect, but that’s entirely untrue. Small businesses represent 99.7 percent of all businesses in the U.S. And while nearly three-fourths of those are sole proprietorships, the remainder still account for most new jobs created over the past 20 years. From 1993-2013, small firms (those with under 500 employees) accounted for 63 percent of new jobs created in the U.S. Just before the great recession, from 2005-2008, that figure was even larger with 81.4 percent of all new jobs in the country coming from small business.

They’re Innovators

According to the SBA “among high patenting firms (15 patents or more in a four-year period), small businesses produced 16 times more patents per employee than large patenting firms.” So while Apple and Google might make huge news with their high-tech innovations, most of the world-shaping new stuff is coming from small business.

There are several reasons for this. First, small businesses tend to attract more entrepreneurial and innovative thinkers. Those who want less corporate structure and more freedom are drawn to smaller firms where they’re more likely to innovate. Also, in smaller firms more voices can be heard. So, an employee with a great idea can bring it straight to the CEO, rather than going through 14 levels of approval. Less red tape means more innovation, and ultimately more patents.

They Support Other Local Businesses

“Locally sourced” has become such a buzzword now that it seems we’re not far from construction firms bragging about their “quarry to job site re-bar.” And while big restaurants might try to buy from local farmers, past that the impact of big chain stores on local small businesses in minimal. If Nordstrom needs an accountant, they’ve got plenty on staff. If Facebook needs legal help, they’ve got lawyers. But small businesses? They have to shop local.

With everything from landscaping to electrical, legal and accounting to copywriting and social media, small businesses outsource a lot. When a local small business is successful, its success spreads among other local businesses, which is ultimately far more beneficial for the community.

They Keep More Money in the Area

In addition to supporting other businesses, the economic activity small business creates also outweighs larger competitors. According to the American Independent Business Alliance, “independent retailers return more than three times as much money per dollars of sales than chains.” This is due to what’s known as the multiplier effect.

Essentially, the multiplier effect factors in three impacts of a small business:

The direct impact, which is the money that business spends in the community on things like payroll, supplies, outsourced services and other costs.

The indirect impact, which is the money pumped into the economy by the people with whom a small business spends money.

The induced impact, which is the increase in overall spending, as everyone in the community tends to have more money.

The most notable case study of the multiplier effect came from Andersonville, a Chicago neighborhood where it was found every dollar spent at a local small business created about 68 cents in additional economic activity. Large chain businesses, however, produced only 43 cents. So while shopping at a big chain isn’t exactly hurting the local economy, it doesn’t have near the impact.

The tax revenue collected from locally-owned businesses also stays in the area, so the impact on local government is better as well.

They Create Better, Smarter Communities

Small businesses look to grow, and as they do they plan to hire more people. According to a recent study from the Wall Street Journal and Vistage, 54 percent of small business owners plan to hire in the next year. If that number holds across the board, people living in areas with high concentrations of small business have reason to stay in the community. Cities where creative, innovative people typically leave for better opportunities can benefit from promoting small business.

Similarly, small businesses create more walkable, convenient neighborhoods where people don’t have to drive as much for resources. This creates smarter growth, better communities, and generally-improved quality of life.

So, yes, sometimes shopping at a small business does cost a little more than it might at a big chain. And sometimes it might be a little less convenient. But in terms of having an impact on the daily lives of a community, the economic activity and employment created by small businesses can’t be matched. So perhaps people can see the small added time and expense as their contribution to the greater good.


Matt Meltzer

Matt Meltzer is a professor of business communication at the University of Miami. He is a veteran of the United States Marine Corps and holds a bachelors degree in business administration from UM, as well as a Masters of Mass Communication from the University of Florida.

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