The Local Multiplier Effect: Latest Research

One of the most powerful concepts in local economic development is the local multiplier effect, which quantifies how spending money at local businesses amplifies economic activity in the community. While the idea has been around for decades, recent research has provided more precise estimates and deepened our understanding of how the multiplier varies by context. Here we present current insights from studies (including peer-reviewed research and analyses by Civic Economics and others):

Economists define the local multiplier as the ratio of total local economic impact to the initial amount of local spending. If a $1 purchase locally ultimately generates $2 of total local output (including all respending), the multiplier is 2.0. Classic studies in the 2000s (e.g., by Civic Economics) found multipliers in the range of 2 to 4 for local independent businesses, meaning each $1 spent locally creates $2–$4 in total impact, whereas spending that same $1 at a non-local business yields a much lower multiplier (often close to 1, meaning almost no re-circulation)newslj.comnewslj.com.

Recent analyses continue to support these findings. A review of multiple studies concluded that the multiplier for local spending typically ranges from 3 to 7 in magnitudenewslj.com. In other words, each dollar spent at a local business can generate an additional $2 to $6 in secondary local economic activity as it ripples through wages, purchases, and taxes. The higher end of that range (multipliers above 5) usually occur in scenarios where the local supply chain is very robust or where induced effects (household spending from new earnings) are strong. For example, an economic impact study in Portland, Maine (cited earlier) implied a multiplier over 7 when modeling a modest shift of spending to local businessesnewslj.comnewslj.com. More commonly, documented multipliers for local retail are around 2.5 to 4.0. Civic Economics’ studies in many cities found roughly $0.45 to $0.68 of additional local economic output per $1 spent at local firms, versus only about $0.14 additional when spent at chainsamiba.netamiba.net. Put differently, locally spent money has 3-5 times the economic impact of money spent at non-local businesses.

Several peer-reviewed studies have validated the multiplier effect in various contexts. A 2020 study in the Journal of Retailing and Consumer Services focusing on UK convenience stores noted that locally owned stores have significant impacts on local economies and communities, beyond what traditional analyses capturestirlingretail.com. While that study emphasized social impacts, it reinforced that the presence of independents boosts local retention of spending. Another study by the New Economics Foundation (NEF) in London found that a £10 purchase at a farmers’ market resulted in about £25 total local spending (multiplier ~2.5), compared to roughly £14 from £10 spent at a supermarket (multiplier ~1.4)newslj.comnewslj.com – a vivid demonstration in the food sector.

Why do independent businesses have higher multipliers? The underlying causes have been quantified: local businesses spend more on local labor, often pay somewhat better wages per sales dollar, and crucially, they procure goods and services locally to a greater degree (from local accountants, printers, wholesalers, farms, etc.)ilsr.org. They also keep profits local – owners live in town and spend their profits or invest them locally – and donate more to local charities as mentioned. Chain stores by contrast have significant “leakages”: they rely on out-of-region supply chains (inventory purchased from national distributors), use corporate services (marketing, IT, legal) from headquarters, pay royalties or franchise fees out of state, and send profits to distant shareholders or parent companies. Additionally, a portion of every dollar spent at, say, a big-box retailer immediately leaves in the form of sourcing goods from elsewhere and corporate overhead allocations. Thus, only a small fraction (often 10–20%) of a dollar at a chain stays local (mostly through the paychecks of local employees and maybe some local utilities and rent)ilsr.org. With local independents, a much larger fraction (often 45–60%) stays local on first pass, and then a portion of that is respent again locally, and so on, yielding the multiplier effect.

It’s also been observed that multipliers vary by business type. Local restaurants and services usually have higher multipliers than local retail shopsnewslj.com. This is because restaurants spend a large share of revenue on local payroll (chefs, servers) and often on local food inputs, whereas retailers must spend a large share on wholesale inventory (which often leaves the area). For example, the Salt Lake City study found a striking 79% recirculation for local restaurants vs. 52% for local retailersilsr.org, reflecting those structural differences. Nonetheless, even local retailers far outperformed chain retailers (52% vs 14% in that case)ilsr.org. Services (like local banks, insurance agencies, or print shops) can have high local retention if they source primarily local labor. A local credit union, for instance, keeps interest earnings in the community in the form of dividends to local members and charity, whereas a nationally-owned bank extracts interest payments to corporate.

Community size and self-sufficiency also affect multipliers. A highly self-contained local economy (like a large city or a region with diverse industries) can circulate money longer internally before it leaks out. In contrast, a small village that must import many goods and services will have more leakage. That said, even small Idaho communities benefit from residents spending locally at whatever businesses do exist, rather than ordering online or driving to chain stores in the nearest city, because a portion of that spending will cycle through local hands (employing neighbors, etc.) instead of 0% staying local. If a needed product isn’t available locally and must be imported, encouraging a local store to procure and sell it still keeps the retail margin local rather than having the entire expenditure leak out.

To illustrate the multiplier in a tangible way: imagine a consumer spends $100 at a locally owned Boise bookstore. The bookstore might pay $65 of that for wholesale books from a distributor (most of that leaves the local economy), but the remaining $35 goes to local wages, rent to a local property owner, accounting services from a local CPA, etc. Those local recipients then re-spend a portion of that $35 in Boise – the employees spend their pay at local grocery stores, the landlord hires a local plumber, and the CPA buys local office supplies. If, say, $20 of the $35 is respent locally, that $20 in turn goes to other local wages and purchases (the grocery store pays its local staff, the plumber spends on local goods, etc.), maybe $10 of it gets respent locally a third time, and so on. Theoretically, this continues until the amounts become very small. In this simple illustration, the initial $100 generated maybe $35 + $20 + $10 + ... ≈ $65 of additional local spending across several rounds – a multiplier of 1.65x. In practice, detailed input-output models are used to calculate these effects for different sectors. The key takeaway: every additional round of local re-spending is value that would be lost if the initial purchase was non-local. So, the multiplier is a measure of lost opportunity when money leaks out.

Recent updates to multiplier research also emphasize qualitative multipliers – the idea that local spending multiplies not just dollars but also community connections (as discussed). There’s an interplay: the more robust the network of local suppliers and services, the higher the economic multiplier. This suggests a strategic approach for communities: by developing local supply chains (e.g., encouraging local food processing, local manufacturing of inputs), they can boost the multiplier over time. For instance, if Idaho encourages more local production of goods that retailers stock, the next time a study is done perhaps 60% stays local instead of 50%.

In summary, the latest research reaffirms the local multiplier effect with even more evidence: numerous studies across different regions and industries consistently show 2x to 4x greater local economic impact for money spent at independents versus chainsamiba.netamiba.net. For policymakers and educators, this is a compelling quantitative foundation for “buy local” initiatives. It shifts the narrative from feel-good anecdote to hard economics: choosing a local vendor can be seen as a form of community investment that yields a measurable return in jobs and income. Idaho’s economic developers can leverage this research to estimate the opportunity cost of retail leakage (e.g., how many jobs are lost when residents spend on Amazon instead of local stores) and to make the case for supporting local business programs as an economic development strategy on par with business attraction. Next, we turn to examining small businesses through the lens of broader economic metrics often used in big-business recruitment.