What do large business take away from the market?
Innovation is often more difficult to will in larger bureaucratic companies. Corporations don’t need to invest in research and development or innovation when they’re already leading the market and have no competition. Innovation can be a disruption to their already well established brands and market leadership. To address competition, large companies commonly buy out smaller competitors to defend their industry leadership. This practice draws investors to these large companies because they offer less investment risk than small businesses. This potential source of capital funding often helps them grow even larger!
Two examples of companies that took these concepts to the extreme, creating non-competitive industries, are Rockefeller Standard Oil and AT&T. Initially Rockefeller was an innovator, creating a cleaner and more efficient way of refining oil in 1882. He took over 90% of the oil and gas industry by vertically integrating the industry and forced competitors out of business (History, 2014). Standard Oil and AT&T developed the most advanced oil transportation system and telephone system in the world. Massive amounts of capital were needed to build innovation and infrastructure, and the government assumed that an organized, unified business would be the most efficient way.
For some time, the government agreed these two companies were beneficial monopolies. However these all-powerful companies became a threat to competitors, consumers, and the economy, and inhibited further innovation in the market. When one company services the whole industry, i.e. no competitors, it can fix the prices to whatever they want. Powerful companies like this can lead to higher prices, poor working conditions, and inferior products. In 1890, Congress passed the Sherman Antitrust Act as a response to strong public protest of Standard Oil (History, 2014). This legislation protects the economy and small business by banning monopolies that fix prices and inhibit competition and international trade.
How do small businesses add value to the economy?
It’s clear that small businesses compete by pushing innovation in the market, but the economic value of small business is still a surprise to most people. This is probably true because most of us shop at Wal-Mart and other chain stores. It’s probably also true because opening a small business seems so risky. Are there studies that support how small businesses help the economy? What characteristics enable them to achieve amazing economic feats and add other forms of value to the economy?
Nine studies from 2003 to 2013 published by many different reputable sources show evidence that locally owned businesses return more revenue back to the local economy than national chains (Mitchell, 2013). In a 2012 study, Civic Economics analyzed data from fifteen local retailers, seven local restaurants, four retail chains, and three restaurant chains in Salt Lake City. As seen in figure 3 and 4, local retail returns 52% of revenue and local restaurants 79% to the local economy, while retail chains return only 14% and restaurant chains 30% (Civic Economics, 2012). Another study by Civic Economics in British Columbia showed similar results. A 2011 study by Maine Center for Economic Policy found that local business returns 58% of revenue to the local economy, while chain stores return 33% (Martin et al, 2011). If residents spent 10% more at local businesses, it would generate $127 million in local economic activity and 874 new jobs (Martin et al, 2011)!
Small businesses benefit local economy more because they spend more on local labor, goods, and services, while chain revenue escapes up the corporate ladder. Local business keeps money in the local economy, supporting a variety of other businesses and jobs. This is, in my opinion, the best argument for getting others to appreciate and support small business!
Unfortunately local independent retailers are diminishing. Retail businesses with 10 or fewer employees declined by one-fifth from 1982-2002 (Mitchell, 2008). According to the British Columbia study, independent retail sales fell 5% from 2003 to 2010 (Civic Economics, 2013). A 2012 study found that businesses in close proximity to a new Wal-Mart store have a 40% chance of closing, decreasing 6% for every mile away (Davis et al, 2012). 300 full-time jobs were lost in the span of the study, equal to Wal-Mart jobs added (Davis et al, 2012).
Chain stores decrease the number of available jobs. The University of California, Cornell University, and Clark University published the “most sophisticated national analysis to date of Wal-Mart’s impact on retail employment and wages” in 2008 (Mitchell, 2013). The study concluded that Wal-mart jobs replace 1.4 local retail jobs, and each new store takes away an average of $1.2 million of county-wide retail payroll (Neumark et al, 2008).
Small businesses pay their employees more. A 2011 study by Economic Development Quarterly, found that counties with higher density of local businesses had greater per capita income growth between 2000 and 2007 (Fleming et al, 2011). Income was negatively affected by the more chain businesses present (Fleming et al, 2011). UC Berkley published a study in 2007 that concludes for every new Wal-Mart opened, the average county retail wage is reduced between 0.5 and 0.9% and cumulative earnings of retail workers by 1.5% (Dube et al, 2007). According to a 2005 study by the Brennan Center for Justice, Wal-Mart employees earn 20% less than average retail. The national average of retail employees covered by their employers’ insurance plans is 68%, however only 46% of Wal-Mart employees are covered because of high out-of-pocket costs (Bernhardt et al, 2005).
Chain retail and restaurant employees don’t earn enough to live and rely more on public assistance, creating a tax burden for state and federal taxpayers. A 2013 study from the state of Massachusetts showed that of the top 50 companies with the most employees enrolled in Medicaid and other public health insurance, about half are retail and restaurant chains. Wal-Mart is third on the list, with one-fifth of its 4,327 employees relying on state health care assistance, costing taxpayers $14.6 million per annually (Commonwealth of Massachusetts, 2013). Target ranks fourth; and other retailers like CVS, Shaw’s, Home Depot, May Department Stores, Sears, Kohl’s, Walgreens, Lowe’s, Best Buy, and Whole Foods are on the lists. (Commonwealth of Massachusetts, 2013).
The average Wal-Mart employee requires about $3,000 per year in public assistance; equal to $4.2 billion annually from taxpayers (Democratic staff of the U.S. House Committee on Education and the Workforce, 2013). To cover these costs Wal-Mart would have to use one-quarter of its profits, or raise US prices by 1-2 percent! (Democratic staff of the U.S. House Committee on Education and the Workforce, 2013)
The poverty rate increases when the number of small businesses decrease. A 2006 study found that counties with more Wal-Marts in 1987 had higher poverty rates in 1999, than counties that started with fewer or no Wal-Marts previous (Goetz et al, 2006 (1)). There are several possible causes for this: loss of better paying jobs, loss of jobs in general, and loss of social capital.
Small business tax supports the local economy, while chains find ways to get around taxes and receive subsidies. A 2007 study revealed in local property tax records that Wal-Mart systematically seeks to minimize tax payments that support public schools and other local government services (Mattera et al, 2007). A 2008 study revealed 26 states allow retailers to keep a portion of the sales taxes, and 13 of these states have no cap. These states lose over $1 billion to chain stores (Mattera et al, 2008).
Many studies show that chain stores cost taxpayers more than they produce in revenue. They require more public services (road maintenance, police, etc.) than tax revenue generated. A 2002 study in Barnstable, Massachusetts showed that chain retail generates a net annual tax deficit of $468 per 1,000 square feet, shopping centers a $314 per 1,000 square feet, and fast-food $5,168 per 1,000 square feet (Tischler & Associates, July 2002). However small business retailers had a net annual positive return of $326 per 1,000 square feet (Tischler & Associates, July 2002). In a 1998 study 2.8 million square feet of new commercial and industrial development was added in Concord, New Hampshire over a 12 year period. Tax revenue dropped 19% over this time (RKG Associates, 1998).
A 2011 study, in the metropolitan St. Louis region, found virtually no economic gain after diverting $5.8 billion in public tax dollars (over a span of 20 years) to subsidize private development (East-West Gateway Council of Governments, 2011). 80% of subsidies went towards chain retail and malls in wealthy suburbs. Retail jobs only slightly increased, and there was no increase in retail sales. Within ten years, more than 600 small retailers (under 10 employees) closed, and municipalities faced budget deficits, lay-offs and service cuts between 2000 and 2007 (East-West Gateway Council of Governments, 2011). A 2010 study showed that taxpayer-subsidized Bass Pro Shops fail to deliver on promises. One in Harrisburg, PA, produced only one-third of the jobs promised (Stecker et al, 2010).
In what other ways do small businesses support local community?
Small businesses are a part of the social community. A 2011 study states counties with lively small-business divisions have lower mortality rates and pervasiveness of obesity and diabetes, compared to others dominated by chain stores (Blanchard et al, 2011). Small businesses help support the community after disaster. According to a 2007 study, half of locally owned businesses reopened one month after Hurricane Katrina, compared to one-quarter of chains (Campanella et al, 2007). 75% of the residual locally owned businesses reopened after 15 months, compared to 59% of chains. These locally owned businesses were active in the recovery of neighborhoods by providing goods and services, as well as community gathering spots for residents (Campanella et al, 2007).
Communities with small businesses are more socially united. A 2006 study found that communities without Wal-Marts had more non-profit and social capital generating associations, like churches, political organizations, and business groups, per capita than those that had Wal-Marts (Goetz et al, 2006 (2)). Two 2006 studies found that Wal-Mart’s presence decreased civic participation and is related to lower voter attendance in the 2000 presidential election (Goetz et al, 2006(2) and Blanchard et al, 2006). Residents are less likely keep up with and participate in local affairs, engage in reform or protest activities as communities with largely local small businesses (Blanchard et al, 2006). This decline in social capital is likely due to the lack of a downtown community.
In a 2003 Consumer Reports study it was stated that independent drugstores beat all other pharmacies in customer service, offering health services, filling prescriptions quickly, supplying uncommon drugs, and obtaining out-of-stock medications within 24 hours. Their prices were lower than chain pharmacies, but higher than at mass merchandisers and online companies (Consumer Reports, October 2003).
According to a 1991 study by Oregon State University, businesses with less than 100 employees gave an average of $789 per employee, compared to $334 per employee from businesses with more than 500 employees (Frishkoff, 1991).
Small businesses benefit the economy in many different ways. They provide more jobs and higher salaries than chain stores. They also support local economy and unite the community, as opposed to chain stores which literally degrade the towns they occupy. They are the character of our towns and cities. Local business can’t exist without community support, and communities can’t exist without the local businesses which serve them.
So instead of going out on Black Friday, and buying things that you probably don’t need, support your local economy.
Shop locally, please.
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