Locally Owned: Do Local Business Ownership and Size Matter ...

Community and Economic Development Discussion Paper

No. 01-13 ? August 2013

Locally Owned:

Do Local Business Ownership and Size Matter for Local Economic Well-being?

Anil Rupasingha, PhD Federal Reserve Bank of Atlanta Community and Economic Development Department

Federal Reserve Bank of Atlanta Community and Economic Development Department 1000 Peachtree Street, N.E. Atlanta, GA 30309-4470

The Federal Reserve Bank of Atlanta's Community and Economic Development Discussion Paper Series addresses emerging and critical issues in community development. Our goal is to provide information on topics that will be useful to the many actors involved in community development--governments, nonprofits, financial institutions, and beneficiaries. commdev/

No. 01-13 ? August 2013

Locally Owned: Do Local Business Ownership and Size Matter for Local Economic Well-being?

Abstract: The concept of "economic gardening"--supporting locally owned businesses over nonlocally owned businesses and small businesses over large ones--has gained traction as a means of economic development since the 1980s. However, there is no definitive evidence for or against this prolocal business view. Therefore, I am using a rich U.S. county-level data set to obtain a statistical characterization of the relationship between local-based entrepreneurship and county economic performance for the period 2000?2009. I investigate the importance of the size of locally based businesses relative to all businesses in a county measured by the share of employment by local businesses in total employment. I also disaggregate employment by local businesses based on the establishment size. My results provide evidence that local entrepreneurship matters for local economic performance and smaller local businesses are more important than larger local businesses for local economic performance.

JEL Classification: O18, R11 Key words: local ownership, small business, firm size, income growth, employment growth, poverty, rural

About the Author: Anil Rupasingha is a research adviser and economist in the community and economic development (CED) group at the Federal Reserve Bank of Atlanta. His major fields of study are microbusiness and small business, entrepreneurship, self-employment, regional income growth and poverty, internal migration, and social capital. Prior to joining the Atlanta Fed in 2011, Rupasingha was a faculty member in the Department of Agricultural Economics at New Mexico State University, and prior to that in the Department of Economics at American University of Sharjah in the United Arab Emirates, a senior research associate in the Northeast Regional Center for Rural Development at Pennsylvania State University, and a postdoctoral fellow in TVA rural studies at the University of Kentucky.

He has published his research in various journals, including American Journal of Agricultural Economics, Annals of Regional Science, Economic Development Quarterly, Journal of Economic Behavior and Organization, Papers in Regional Science, and Review of Agricultural Economics. A native of Sri Lanka, Rupasingha received a BA in economics from the University of Peradeniya (Sri Lanka). He earned his PhD in agricultural economics at Texas A&M University.

Acknowledgments: I am indebted to Chris Cunningham, Michael Fritsch, Stephan Goetz, Todd Greene, Karen Leone de Nie, and Urvi Neelakantan for helpful comments. An earlier version of this paper was presented at the 58th Annual North American Regional Science Association Meetings, held in Miami, Florida, in November 2011. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Comments to the author are welcome at anil.rupasingha@atl..

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Federal Reserve Bank of Atlanta Community and Economic Development Discussion Paper Series ? No. 01-13

Introduction

In most counties in the U.S., the percent of workers employed by locally- or resident-owned businesses outweigh the percent of workers employed by nonresident-owned businesses. But this number varies widely among counties (see Figures 1 and 2). For example, the share of employment in resident businesses varies from 10.7 percent in Loving County, Texas to 87.2 percent in Franklin County, Texas in 2007. The share of employment in nonresident businesses varies from zero percent in 24 counties across the nation to 85 percent in Tunica County, Mississippi. This spatial variation is ideal for assessing whether such variation explains the inter-county variation in economic well-being. The objective of this paper is twofold: (1) to assess if locally-owned businesses improve local economic performance, and (2) to I investigate whether the size of the locally-owned businesses affects local economic well-being. I Figure 1. Spatial variation of workers employed by resident businesses, 2007

Source: Author's calculation using NETS Database, Edward Lowe Foundation

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Federal Reserve Bank of Atlanta Community and Economic Development Discussion Paper Series ? No. 01-13

Figure 2. Spatial variation of workers employed by nonresident businesses, 2007

Source: Author's calculation using NETS Database, Edward Lowe Foundation

Historically, the most popular local economic development approach was to attract businesses from outside a particular municipality, state or region, which was commonly known as industrial recruitment or "smokestack chasing." State and local policy makers have been giving numerous incentives including tax subsidies, low-rent land, and job training subsidies to attract existing firms from elsewhere. This includes relocation of existing plants or expansion of existing firms. These incentive policies resulted in fierce competition among states to attract various big plants and large employers to respective states. For example (see Rork, 2005, for more details), General Motors received offers consisting of tax breaks and cash subsidies from over 35 different states before choosing to locate its Saturn plant in Tennessee (1985). Toyota received such incentives from over 30 states before settling one of its plants in Kentucky (1985). Similar competitions took place before BMW settled in South Carolina and when Alabama successfully lured Mercedes-Benz (1990s).

This economic development strategy of industrial recruitment presents several challenges and limitations, especially in terms of a local area's ability to sustain economic activity. One main problem with industrial recruitment is that policy makers had little influence over if or when the recruited establishments wanted to leave. A case in point is labor intensive companies such as call centers.1 The policy of industrial recruitment may also have led to a tax competition between states that led to a "race

1 Call centers are kind of "foot-loose" businesses due to less capital intensive nature and less intensive labor skill requirements. It is easier for them to relocate to an alternative location that offers attractive incentives once the incentive structure in the current location is exhausted.

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Federal Reserve Bank of Atlanta Community and Economic Development Discussion Paper Series ? No. 01-13

to the bottom."2 Furthermore, local small businesses, or mom-and-pop stores, face stiff competition from big firms locating in local communities. On a more positive note, as a companion activity to recruiting particular plants, some states took steps to improve general business climate in their respective states using different fiscal incentives to create an environment beneficial to all firms in the state.

However, approaches to local economic development have evolved in the recent past and economic development based on local entrepreneurship is increasingly gaining traction in the research, policy, and practice spheres. This approach is a subset of the broader concept of sustainable development and more generally known as "development from below" or "bottom-up development" (Coffey and Polese, 1984) or more recently as "economic gardening" (Barrios and Barrios, 2004). The idea is that directing economic development resources to support local businesses over outside businesses and local small businesses over big businesses will be beneficial for the local community in number of ways. One concern is that outside corporations will be less environmentally sensitive to local communities. Outside firms are also subject to global economic outlook and therefore more amenable to relocation in other areas than local businesses. Also by favoring local businesses, local communities are more likely to keep the economic and political power within the local community (Barrios and Barrios, 2004). The development of local entrepreneurship can lead to a diversified economic structure that will protect the local economy from being overly dependent on one firm or establishment, or one industry. The result of local entrepreneurship, it may be presumed, is increased trade within the local economy, greater export of goods and services out of the local economy, and improved quality of life. The idea of locally-owned business development is especially favorable for economically distressed rural areas when it is difficult for these communities to attract outside businesses.

Pro-local business supporters also argue that more local businesses enhance healthy competition due to the fact that most local businesses are smaller scale operations, increase efficiency, and increase entrepreneurship in local communities. Kolko and Neumark (2010) argue that locallyowned firms are more likely to internalize the costs of job loss to communities by not relocating and closing. There may be other considerations such as "...loyalty toward the headquarters' hometown or a desire for better public relations in the headquarters' hometown, perhaps for political reasons" (Kolko and Neumark, 2010, p. 103). In addition to these, Kolko and Neumark (2010) point out other specific economic arguments such as small businesses start-up opportunities for local residents, preserving businesses in downtown and cultural districts, economic multiplier effects by local businesses spending more in local communities, local innovation and long-term economic stability in localities. To take advantage of all these benefits, many local, state and federal governments are initiating numerous policy approaches to promote locally grown businesses. Numerous localities have enacted policies favoring locally-owned businesses such as implementing restrictions on formula businesses, store size cap, local purchasing programs, and set asides for local retail (Kolko and Neumark, 2010). But these arguments are not without criticisms. For example, some argue that businesses coming from outside to a locality have been around for a while, are more stable, and may bring higher quality jobs compared to jobs coming from locally-based firms.

There is no definitive evidence for or against the pro-local business view. For example, numerous papers (discussed below) suggest that local economic performance in general and employment growth in

2 The phrase "race to the bottom" is commonly used in regional studies literature to convey the behavior of states that compete with one another by lowering taxes and reducing environmental regulations to attract businesses, which often reduces public revenues for infrastructure, education, and healthcare, for example, and strains environmental conditions.

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