How important is our local businesses from a Economic Standpoint?

Great Debates
1

I consider myself a capitalist, not in that I know loads about economics and business practices, but that I love the benefits of said capitalism, and my perception is that while it isn’t that fair in some regards (the exact extent of this fairness or lack thereof is debatable of course), I like it, a lot. Anyway, I have somewhat of a limited knowledge of economics (basic business and economic classes in school), but what seems a major trend is globalization.

So I like small businesses. I think for the most part they are a bit more expensive, but often offer services and customer service the larger chains lack. I shop at the bigger places as well, wal-mart, target, etc. But I prefer the smaller places. I love small restaurants, local music shops and non-chain computer places. I think more people should start their own business.

Anyway, while I love small business, I wonder, from an economics standpoint, if small businesses are better for the economy than larger businesses. Many small businesses don’t hire many employees and can’t afford great health plans where large businesses (most perhaps), do offer good benefits and can hire lots of people.

So my questions (and possible debate involved, which is why it is in GD) are threefold;

1.) Do several small businesses contribute more to the local economy than one large one?

2.) How much does that local economy affect the regional and national economy?

3.) Does the prevalence of the web help or hinder small businesses? (I mean in survival, rather than ability to compete with the big boys)

Like I said, my knowledge of economics is severely limited, and comes only from freshman level introductory classes (I.e not a business or economics major). I like small businesses (local or regional), and generally shop at them rather than big chain stuff. I am just curious as to whether small businesses are truly better for the economy, though I am not saying that is the only yardstick by which to measure them.

2

All I can tell you is that traditional small business can fit into smaller shops in downtown areas or even the traditional “main street” while large chains like Wal-Mart need a large swath of land on the edge of the city sometimes needing newly cleared land. That leaves previously built town and city centers crumbling. However, economics goes both ways so businesses may have to pay little rent if they decide to move back in.

My hometown in rural Louisiana has a single main street that is fast being deserted. Oddly enough, that is most of the story. It is so small, chains don’t even go there so there is nothing to complain about. People drive 40 plus miles to do shopping in a modern fashion. My gut feeling is that chains are better overall because they have economies of scale so, even the consumers benefit directly through lower prices. The fact is that most small shops always sucked by today’s standards. However, a few of them as good and that is what people remember. My current town has a picture perfect mainstreet with a thriving general store and everything. It was done the right way which is all consumers and economics really demand.

3

You need both. Some businesses have to be large because they are capital intensive. Automotive or steel production for example.

Large chain retail stores are also good for the economy because economies of scale allow them to offer more products at lower cost.

In spite of the romanticizing about small businesses, I can pretty much always trust that the service and selection at a Best Buy or Circuit City will be pretty much standardized. I went into a local computer store and I get this Ukrainian woman babbling nonsense at me. I have no idea if I this store will even allow me to return a product I buy there (assuming it works).

That said, there is a value to local businesses in that can meet niche markets that are not cost effective for the big chain stores. Your little mom & pop bookstore can’t compete head to head against Barnes & Nobel, but maybe if you only focused on rare books you might have a viable business. And local restaurants and coffee shops always give a neighboorhood some character.

4

Separate the ‘market’ into two things - common consumer goods and commodities, and niche products. Common consumer goods and commodities are generally more efficiently produced by large organizations. The trend towards large agri-business and away from the family farmer is the result of this. A guy on a tractor with a coop full of chickens and a field of cows just can’t hope to compete with modern big agriculture methods. And food products are things that we all need, and that generally don’t need a local business to provide the specific needs of a community (with exceptions). So you gain efficiency through big capital investment which allows for automation, assembly-line production, hub distribution, and all the rest. This may be ‘bad’ for the family farmer, but it’s good for everyone who eats food.

Likewise, it’s inefficient to split up commodity distribution into hundreds of tiny shipments to mom-and-pop grocers. It’s inefficient for 20 small stores in the same geographic region to stock the same food products. Wastage, shipping and handling costs, and excessive middlemen lower efficiency and drive up costs. Much better to have a few large stores that sell in volume, have all the inventory delivered to one place, eliminate the distribution wholesaler middleman, etc.

Where small businesses work is where there is a comparative advantage in being part of a local community and basing your business decisions on the specific needs of that community, or being in a special niche market that a large retailer can’t satisfy.

If you think about the commonality of products as plotted on a bell curve, the 2-standard deviation region in the center of the curve is the domain of large business, and the tail of the curve is the domain of small business. In the past, small business tried to do it all.

Another way small business can thrive is when they have some other kind of comparative advantage. For example, you tend to find more software development shops in college towns, because there is a bigger population of programmers and other technical people to choose from. These towns have a comparative advantage in skilled programmers. A town that has access to a cheap resource like power may find a comparative advantage that allows small, power-intensive businesses to thrive.

Another comparative advantage for a small business is proximity to a specific customer base. If 90% of the people work in a coal mine, a coal mine supply shop can respond effectively to the unique needs of the population which a large chain store couldn’t possibly
do.

One way to look at globalization as a big benefit is to think about the comparative advantage your region has, and how many people are not leveraging it because they are employed in businesses that have nothing to do with the advantages of the region but are there merely to serve the basic needs of everyone else. If you can leverage the efficiency of chain stores and have your community’s basic needs met more economically, not only do you improve the local economy, but you free up people to pursue other tasks in which they have an advantage.

Think about why communities form in the first place. If you look at a city on a map, ask yourself, “why is it there? What forces caused those people to congregate in that specific area?” It’s usually because that region offered some specific advantage that people could leverage to make a good living. Maybe it was located on a major waterway, so shipping goods in and out is cheap. Or it’s located in the heart of fertile farmland, or near rich veins of natural resources. The people are there exploiting those advantages. But a community needs supplies. Better to find people elsewhere who’s advantage is in making the supplies you need, so you can focus your local resources on the good stuff.