Supporting Local Businesses Strengthens Your Local Economy – The Local Multiplier Effect
- scopemarketinglabs
- Mar 4
- 3 min read
When people talk about supporting local businesses, the conversation usually focuses on buying products locally. But the real impact goes far beyond a single purchase.
Economists describe this phenomenon as the Local Multiplier Effect — the way money spent at locally owned businesses circulates through a community multiple times before eventually leaving the region.
For rural and regional communities, this effect can play a significant role in strengthening local economies, supporting jobs, and maintaining economic resilience.
What Is the Local Multiplier Effect?
The Local Multiplier Effect refers to how spending money at locally owned businesses generates additional economic activity within the same community.
When someone purchases from a local business, that business typically reinvests much of that revenue locally by:
Paying local employees
Hiring local trades and services
Purchasing supplies from nearby businesses
Spending profits within the community
Instead of money leaving the region immediately, it continues to circulate through other businesses and households.
What the Data Shows
Economic research consistently shows that locally owned businesses retain significantly more money in their communities than large national chains or online retailers.
Several widely cited studies have found:
Spending Location | Estimated Local Retention |
Local independent businesses | 60–70% |
National chain stores | 30–40% |
Large online retailers | Often less than 20% |
Research from Civic Economics and the Institute for Local Self-Reliance has also suggested that:
Every $1 spent at a local business can generate up to $1.80 in local economic activity.
This occurs because the same money is repeatedly spent between local businesses, employees, and service providers.
A Simple Example of the Local Multiplier Effect
To understand how the Local Multiplier Effect works in everyday life, consider a simple community example.
Joe’s Bakery - Wendy from the local florist buys a coffee and bread roll each morning from Joe.
Joe the baker - Because business is strong, Joe hires Bill from Moving Earth to excavate a new parking area.
Bill & June – Moving Earth - After finishing the job, they go out for dinner at Golden Dragon, the local Chinese restaurant, owned by Jinny.
Jinny – Golden Dragon - Jinny buys fresh flowers for the restaurant tables from Wendy’s florist.
A single regular purchase at Joe’s Bakery has now helped support four different local businesses. This is the Local Multiplier Effect in action.
Why Local Businesses Reinvest More Locally
Locally owned businesses are more likely to reinvest their income in the surrounding community.
Business owners who live and work locally often:
Employ people from the same area
Use nearby suppliers and service providers
Support local tradespeople and contractors
Contribute to community groups, clubs, and events
In contrast, large corporate retailers typically send a substantial portion of profits to headquarters outside the region.
This means less of that money remains circulating within the local economy.
Why the Local Multiplier Effect Matters in Regional Areas
In major metropolitan areas, economic activity is distributed across large populations and diverse industries. Regional communities often depend more heavily on the success of local businesses. The Local Multiplier Effect therefore becomes even more important in rural towns, where locally owned businesses help sustain:
Employment opportunities
Local supply chains
Small service providers
Community investment
When money continues circulating within a town or region, it helps build economic stability and long-term resilience.
Small Spending Decisions Can Have Large Economic Impact
The Local Multiplier Effect highlights how everyday purchasing decisions influence the strength of a community’s economy.
Spending locally is not simply about convenience or loyalty — it is part of a wider economic system that supports multiple businesses, workers, and services.
For regional communities especially, each dollar spent locally can contribute to a chain of economic activity that benefits the entire area.
Look out for my next few insights/blogs on ways to support local businesses, without spending a cent, especially if you cannot afford it.
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