Why Small Businesses Are Good for Local Economies

Small businesses’ economic impact

Small businesses are an important economic engine for both local communities and the national economy. 

A widely cited 2019 report from the U.S. Small Business Administration found that small businesses generated 44% of all economic activity in the country. That same year, small businesses created two-thirds of all jobs in the U.S. In a post-pandemic world, small businesses have been the backbone of economic recovery and job growth.

“Small, locally owned businesses and startups tend to generate higher incomes for people in a community than big, nonlocal firms, which can actually depress local economies,” said Stephan Goetz, professor of agricultural and regional economics at Penn State and director of the Northeast Regional Center for Rural Development, in a statement published alongside the research.

Goetz said his research shows that small businesses directly benefit local economies – much more so than large businesses. This is because big box and large corporations have internal systems for services such as accounting, legal, supply and maintenance that are not necessarily based within the county or state. Small businesses, on the other hand, have to outsource these functions and usually do so to professionals within their local or regional communities – professionals who are likely to spend that money in the same community.

How small businesses benefit local economies

Small business has long been seen as a boon to local economies, but why is that? Small businesses help boost a community’s broader economy in several concrete ways that bigger businesses cannot.

Here are three ways small businesses contribute to the economy.

Job creation

The first way small businesses impact the economy is through job creation. While this might seem obvious, it is incredibly important. According to the SBA, small businesses created a net 12.9 million new jobs in the last 25 years, which accounts for roughly 66% of all jobs created in that span. In the same period, large businesses only added a net 6.7 million jobs, the SBA reports.

Small business job creation was pivotal in the wake of the COVID-19 pandemic as well. According to the SBA, during the first two quarters of 2020, at the start of the pandemic, 9.1 million jobs were lost. In the following four quarters, through Q2 of 2021, small businesses created 5.5 million jobs, a 60% recovery from the pandemic-era decline. 

Innovation

Small businesses and startups provide more than just jobs for community members. More local small businesses means new ways of thinking and fresh perspectives, almost like an entrepreneur mindset. For large businesses, trying fundamentally new approaches can be akin to turning a battleship, while it is relatively simple for small businesses to reinvent themselves.

Small businesses are generally more nimble than large businesses, with tighter-knit teams and simple communication channels. This enables them to quickly pivot and change their operations in major ways with minimal investment. As a result, early-stage entrepreneurs can act as laboratories of innovation, testing new ways of doing things and seeing if any of them pay off. And when they do, it can put the local community on the map.

Opportunities for individuals

During the COVID-19 pandemic, many workers who hoped to develop their careers with their current employer were subject to layoffs. They might have been in good standing with their employer, possibly even in line for a promotion, but economic headwinds saw their jobs disappear nearly overnight. Many chose to start their own businesses and become their own boss to weather the storm. In 2021 alone, Americans created 5.4 million new businesses, the most in a single year by more than 20%, according to a report released by the White House.

When a local community has a robust network of small businesses, it creates opportunities for other individuals in town as well. As opposed to larger companies which have systematic hiring processes including resumes, cover letters, and internal reviews, small businesses are more likely to hire as much on personal merit as professional experience. This grants opportunities to hard workers who may become top employees even if they don’t have the most comprehensive experience in the field.

In addition, when small businesses flourish, so does demand for local professional services like accountants, real-estate agents, lawyers and marketers. Small business owners are more likely to do business with professionals they know and trust, rather than farm out their work to a large national or multinational firm. That creates opportunities for professional service startups in a local community. As small businesses themselves, the emergence of these professional services compounds the local economic growth spurred on by small businesses.

What is the definition of a small business?

The SBA’s definition of a small business is a company that employs fewer than 500 people. This may vary depending on the industry a business operates within. Nearly 80% of small businesses have no employees at all. Of the roughly 31.7 million small businesses in the U.S., only about 6 million have paid employees. The remaining 25.7 million are non-employer firms.

Why small businesses are critical for economic growth

Though small businesses represent a considerable portion of the total U.S. economy, they are often forgotten by American leaders and consumers. Small businesses rarely make headlines in a way that highlights their economic impact, whereas news about large firms that highlights their size and impact abounds. Still, American small businesses create nearly two-thirds of American jobs and generate nearly half of the country’s economic output.

Given the impact that small businesses have on the broader American economy, it’s critical to create a healthy environment for small businesses to operate. While larger firms’ economic impacts are more widely recognized, leaders shouldn’t give unfair advantages to a small number of businesses when small companies (even solopreneurs) account for a considerable portion of total economic output.