The Multiplier Effect of Local Independent Business Ownership
American Independent Business Alliance
Measuring the impact of social procurement is obviously important. Whilst stories, intuition and outputs are enough for some to engage with social procurement, policy makers and government require more evidence. Due to the diversity of social procurement approaches, benefits and industries there is no universality in how and where the impact of social procurement has been measured. This web article and the subsequent two reviews capture some of the body of evidence that has been developed in support of social procurement as well as demonstrating how social value differs for different approaches.
The ‘buy local’ movement has become a powerful force in informing the community about the value created through the purchase of goods and services through locally owned businesses as opposed to through multinational businesses. The Local Multiplier or LM3 impact measurement tool has been used extensively to capture the added value of buying local. It captures the total economic impact of spending a dollar with a local business as compared to an absentee owned business.
Total economic impact is determined by measuring three components: the direct, indirect, and induced impacts, further defined here:
• Direct impact is spending done by a business in the local economy to operate the business, including inventory, utilities, equipment and pay to employees.
• Indirect impact refers to the conventional multiplier that happens as dollars the local business spends at other area businesses re-circulate.
• Induced impact refers to the additional consumer spending that happens as employees, business owners and others spend their income in the local economy.
The simplest study undertaken by the Institute for Local Self Reliance explored how much of a dollar spent at a local independent store is re-spent in the local area in the form of payroll, goods/services purchased from area businesses, profits spent locally by owners, and donations to area charities. The study found each $100 spent at local independents generated $45 of secondary local spending, compared to $14 for a big-box chain (three times the multiplier).
The more labour intensive, the greater the multiplier as there is a greater component of the cost that will be spent in the local community, as opposed to retailer selling product sourced elsewhere.
The research is robust and has been replicated in many different countries, industries and population densities with similar outcomes. We know that ‘buy local’ can generate economic benefits and there are procurers in Australia such as the City of Gold Coast Council (GCCC) that are embracing this approach in order to address high levels of local unemployment. GCCC has also recognised that there may be costs attached to this due to reduced competition, but they see the benefits outweighing the costs and exclude non-local businesses for contracts under $200,000 ($250 million spend) and attach local weighting to contracts over $200,000.
There is enormous untapped potential for ‘buy local’ in addressing declining economies or place-based disadvantage in Australia. Government procurement legislation differs between states, the Victorian Industry Participation Policy, for example enables this approach as a vehicle for ensuring high levels of local labour content in contracts. We are seeing similar thinking in the revitalisation of Geelong, Western Sydney and Elizabeth in South Australia.