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Impact of the Local Multiplier Effect

18 April 2023

Supporting local business has long been recognized as the key factor in driving economic growth and community development. Studies consistently show that when consumers spend their money at local businesses, the benefits multiply and have a compounding effect on the local economy. This compounding phenomenon is known as the "local multiplier effect," and can have a significant impact on small communities, leading to increased jobs, higher income levels, and overall economic vitality. Let's take a closer look at how the local multiplier effect works, supported by studies and results.


The local multiplier effect refers to the idea that when consumers spend money at a local business, that money circulates within the local economy creating a chain reaction of economic activity. This occurs because local businesses are more likely to purchase goods and services from other local businesses, thereby keeping money within the community and stimulating additional economic transactions. As a result, the initial dollar spent at a local business can "multiply" having a ripple effect on the local economy, which generates more income and creates a vital cycle of economic growth.


Several studies have provided evidence of the local multiplier effect and its positive impact on local economies. For instance, a study conducted by Civic Economics, a consulting firm specializing in analyzing the economic impact of local businesses, found that in the United States, local retailers recirculate 48% of their revenue back into the local economy, compared to only 14% for chain retailers. This 300% or 3 to 1 increase was supported in a similar study conducted by the Institute for Local Self-Reliance. They found that independent businesses in Austin, Texas recirculate 45% of their revenue within the local economy, compared to only 14% for large chain stores. These two studies demonstrate that local businesses are more likely to reinvest their profits back into the community, which can result in a multiplier effect stimulating further economic activity.


The local multiplier effect also has a significant impact on job creation. Local businesses are more labor-intensive compared to large chain stores, as they often require more human resources to operate. A study conducted by the U.S. Small Business Administration found that small businesses, including local retailers, create two out of every three net new jobs in the United States. Moreover, a study conducted by the American Independent Business Alliance found that for every $100 spent at a local business, on average, $68 stays in the local economy in the form of wages paid to local employees. This indicates that supporting local businesses not only contributes to job creation but also helps to sustain and improve local income levels.


Furthermore, the local multiplier effect can lead to increased tax revenue for local governments, which can be used to fund essential public services such as roads, parks, and infrastructure. Local businesses generate tax revenue through various channels, including sales tax, property tax, and payroll tax. A study conducted by the Andersonville Study of Retail Economics, which analyzed the impact of local businesses in Chicago, found that local retailers generate 70% more local economic impact per square foot compared to chain retailers primarily due to their higher contribution to property taxes. This suggests that supporting local businesses can have a positive effect on local government revenue, enabling them to invest in community development and enhance the overall quality of life for residents.


The local multiplier effect also fosters community engagement and social cohesion. Local businesses are often deeply embedded in the fabric of the community, owned and operated by local residents who are invested in the well-being of the community. They are more likely to support local initiatives, participate in community events, and contribute to local causes. For example, local businesses may sponsor local sports teams, donate to local charities, or engage in other philanthropic activities. These contributions help to build a sense of community pride, strengthen social ties, and promote a vibrant and cohesive community culture.


John Newby is a nationally recognized Columnist, Speaker, & Publisher. He consults with Chambers, Communities, Business & Media. His “Building Main Street, not Wall Street,” column appears in 60+ newspapers and media outlets. As founder of Truly-Local, he assists chambers, communities, media, and businesses in creating synergies that build vibrant communities. He can be reached at: John@Truly-Local.org.