Small Business

*Stacy Mitchell is a co-director of ILSR and directs our Independent Business Initiative.

Special thanks to Ron Knox, Zach Freed, and Kennedy Smith.

Fighting Monopoly Power:
Small Business

Small, independent businesses are the lifeblood of a dynamic and equitable economy. Yet, across most industries, small businesses have been rapidly disappearing. At the same time, the rate of new businesses opening their doors has fallen sharply.

This is disastrous not only for small business owners, but also working people and communities. The decline of small business is fueling inequality by cutting off a long-standing pathway to the middle class, eliminating a crucial source of new jobs, and further concentrating wealth in the hands of the few. The impact has been especially hard on communities of color, immigrants, and people in rural areas, for whom starting a business has been a means of overcoming other economic barriers and building wealth. As locally owned businesses disappear, communities of all kinds are losing their sense of social connectedness and collective agency.

We’ve been taught to believe that when a local grocer, independent pharmacy, or small manufacturer goes under, it’s because it was too small and inefficient to compete with the large corporations that dominate the economy. But mounting evidence shows that small businesses often outperform their bigger competitors, providing better services, higher-quality products, and even lower prices. They’re also a crucial source of innovation and provide distinct benefits within their industries that big corporations don’t.¹ The real reason they’ve lost out is not because they failed to compete, but because decades of misguided public policy have tilted the scales in favor of corporate concentration and monopoly power.

The pandemic has laid bare these realities. On the one hand, small businesses have shown themselves to be remarkably resilient, quickly pivoting their operations to meet the needs of the moment. At the same time, millions are at risk of going under² and their vulnerability has brought into stark relief the deeper forces working against them. Obstacles to success in normal times — a consolidated banking system that withholds credit, a financier-driven real estate market that drives up rents, the predatory fees charged by digital gatekeepers like Amazon and Uber Eats — have become lethal in the context of Covid-19, which has compelled many businesses to restrict their operations and get by on a small fraction of their normal revenue. So far, the federal response has been to provide trillions of dollars in support to large corporations, while leaving small businesses to scramble for limited, hard-to-use relief loans.

The crisis should prompt us to rethink the policies that have spurred consolidation and undermined independent businesses. While federal action is essential to fully rectify this uneven playing field, states and cities have potent policy tools for checking corporate power and sparking a new wave of entrepreneurship and small business development.

No Longer a Nation of Entrepreneurs and Shopkeepers

Forty years ago, most industries were comprised of a robust mix of businesses of different sizes, including some large firms and a multitude of small ones. This diversity was a legacy of the anti-monopoly policies of the New Deal, which, beginning in the 1930s and for several decades following, ensured that markets remained fair and open to small businesses. While Main Street business districts were weakened by suburbanization in the 1950s and 1960s, which gave rise to malls and chain stores, for the most part, the U.S. remained a nation of entrepreneurs and shopkeepers. Someone with a breakthrough invention or simply a desire to meet the needs of their neighborhood could start a business with a reasonable chance of success. To be sure, this was more true for white men than for people of color and women, who were excluded from many New Deal benefits. But even so, these groups still reaped some gains from its policies. For example, there were more Black-owned businesses in the 1970s than there are now.³

Today, the picture is very different. Nearly every industry has become highly concentrated.⁴ Small, independent businesses are increasingly few and far between. In 1982, for example, small retailers (under 100 employees) accounted for more than half of U.S. retail spending. By 2017, their share had fallen to one-quarter. Over the same period, their numbers fell from 1.2 million to 600,000.

The emergence of the Internet once promised to tip the scales back in favor of small businesses by giving them access to a vast world of new customers and opportunities. Instead, the Internet has become controlled by a handful of powerful gatekeepers.

In the last decade alone, we’ve lost about 65,000 small retailers, even as the population and economy have grown considerably. Similar losses have occurred in other sectors: we’ve seen a net decline of 98,000 small construction firms and 37,000 small manufacturers (again, defined as under 100 employees). The number of small independent dry cleaners, copy shops, art galleries, funeral homes, and bars all fell over the last ten years.⁵

These losses represent the combined effects of both the closure of existing small businesses and a troubling decrease in the formation of new businesses. Although startups are integral to Americans’ self-image as a nation, concentrated corporate power and policies that favor big firms have made the economy increasingly inhospitable to the creation of new businesses.⁶ Since 1980, the number of new ventures launched each year has fallen by nearly two-thirds.⁷

Today, a cadre of powerful corporations control much of the American economy. The four largest supermarket chains — Walmart, Kroger, Albertson’s (which operates Safeway, Jewel Osco, Vons, and others), and Ahold Delhaize (parent of Giant, Food Lion, Stop & Shop, and others) — have expanded their combined share of the country’s retail grocery market from about 15 percent in 1992 to nearly 45 percent in 2016.⁸ Walmart alone accounts for one of four dollars that Americans spend on groceries. In 43 metropolitan areas and 160 micropolitan markets, it captures 50 percent or more of grocery sales. In 38 of these regions, including populous metros such as Amarillo, Tex., and Bismark, N.D., its share is 70 percent or more.⁹

One corporation, Anheuser-Busch InBev, produces 40 percent of the beer we drink and, together with MillerCoors and Constellation, controls a staggering three-quarters of the U.S. beer market.¹⁰ More than 80 percent of prescription drugs are sold by a handful of chains and mail order pharmacies, led by CVS, which captures one-quarter of the market.¹¹ Since 2012, the number of CVS locations has multiplied from about 7,500 to nearly 10,000 and its prescription sales have soared by more than 50 percent. Meanwhile, two firms — Whirlpool, which owns Maytag and Amana, and Haier, which owns GE, Hoover, and Hotpoint — dominate appliance manufacturing. The production of wide range of other goods, from candy, to coffins, to contact lens, is similarly concentrated.

The emergence of the Internet once promised to tip the scales back in favor of small businesses by giving them access to a vast world of new customers and opportunities. Instead, the Internet has become controlled by a handful of powerful gatekeepers. Amazon captures more than half of online product search and shopping traffic. This sweeping dominance has compelled many small product-makers and retailers to sell their goods on its platform, putting their businesses at the mercy of Amazon’s surveillance, predatory tactics, and high fees.¹² It hasn’t gone well: only 11 percent of small firms selling in the Amazon marketplace say the experience has been successful; the rest are losing money.¹³

As local retailers disappear, small publishers, designers, manufacturers, and other creators are losing crucial channels for distributing their goods and introducing new products to consumers. People browsing in independent bookstores, for example, “discover” new books they’d like to read at about three times the rate they do while shopping for books on Amazon.¹⁴ Similarly, much of the innovation in the toy sector originates with small domestic manufacturers, which in turn depend heavily on independent toy stores to help their products find an audience. Or take the case of the many small food companies that have launched in response to the “eat local” movement. These startups often struggle to grow beyond sales at farmers markets because local grocery stores, which can efficiently source from small producers, have been supplanted by big retailers that are scaled to interface with national and global supply chains.

The Policies That Drove Us Here

We’ve been conditioned to believe that small businesses are disappearing because they’re not as capable or efficient as their big competitors. But a closer look suggests otherwise. In many sectors, small businesses deliver distinct market benefits and outperform their bigger rivals in key ways. Their decline has much more to do with monopoly power and an array of policies that put them at a disadvantage.

Take the beer industry, for example. Craft brewers have revolutionized beer drinking in America, introducing flavors and styles that have become wildly popular, while also bringing jobs and vitality to their communities. But independent brewers are often unable to grow beyond a very small level of sales because, in many states, beer distribution is controlled by Anheuser-Busch InBev and MillerCoors. These two giants, each the result of a dizzying series of mergers, have used their control over distribution to block independent brewers from gaining access to bar taps and supermarket shelves. Instead, they’re filling these outlets with their own “craft” brands to give drinkers the illusion of choice under the umbrella of monopoly.¹⁵

In many sectors, small businesses deliver distinct market benefits and outperform their bigger rivals in key ways. Their decline has much more to do with monopoly power and an array of policies that put them at a disadvantage.

Or consider independent pharmacies. They provide lower prescription prices, superior health care, and better service.¹⁶ And yet they’re losing market share. The problem has to do with giant, vertically integrated corporations, including CVS Health, which not only compete with independent pharmacies but also control how much they’re reimbursed by insurers. CVS has been steering customers to its own pharmacies by cutting reimbursement rates to independents and forcing many out of business.¹⁷ Because of these tactics, a growing number of rural communities and Black neighborhoods in cities are becoming “pharmacy deserts,” leaving residents without the ability to pick up a prescription or consult with a pharmacist.¹⁸

These kinds of market power abuses have become commonplace because of a radical change in the philosophy underpinning antitrust enforcement. In the 1980s, influenced by the theories of scholars associated with the University of Chicago, policymakers decided that antitrust would no longer be “concerned with fairness to smaller competitors,” as William Baxter, Ronald Reagan’s choice to run the Antitrust Division at the Department of Justice, said in 1981.¹⁹ The new goal of antitrust would be an “an exclusive concern with economic efficiency.” Because big corporations were assumed to be more efficient, the government began to embrace mergers and give large companies wide leeway to flex their market power. Many liberals joined with conservatives in championing these ideas. Reagan’s approach to antitrust was continued under both Bill Clinton and Barack Obama.

As a consequence, monopolistic corporations have been able to crush their smaller competitors using tactics that would have once generated antitrust scrutiny. Amazon, for example, owes its dominance in part to a long history of engaging in predatory pricing. Backed by Wall Street, Amazon has sold entire categories of goods, including books and shoes, at a loss until smaller competitors, lacking the financial backing to sustain similar losses, folded up shop.²⁰ Similarly, Walmart fueled its breakneck growth in the 1990s and 2000s by bullying suppliers into giving it deep discounts while charging its smaller competitors higher prices.²¹

Meanwhile, the government routinely greenlights mergers that directly harm small businesses. Last year, for example, the Federal Trade Commission allowed Staples to buy one of only two wholesalers that supply independent office products dealers. These small firms, which number in the hundreds and account for about one-quarter of the market, now face a precarious future even though they offer lower prices than Staples and even Amazon.²²

The upending of antitrust is only one part of the story, though. This same deference to and preference for big corporations spread to other areas of policymaking and across every level of government. State and federal tax laws, for example, put small businesses at a significant financial disadvantage. A neighborhood hardware store cannot stash profits in a Delaware shell company to escape paying state corporate income taxes. Nor can it undertake a foreign “inversion” to skirt its federal obligations. But large corporations exploit such loopholes and, through their lobbyists, even help devise them. The result is that many small businesses are paying much higher effective tax rates than Amazon and other big corporations.“Effective Federal Income Tax Rate Faced by Small Businesses Varies by Legal Form of Organization,” U.S. Small Business Administration, April 2, 2009.

On top of this, states and cities are spending an estimated $65 billion to $90 billion a year on economic development incentives, tax breaks, and other subsidies — more than triple what they were spending 30 years ago.²³ Nearly all of these funds go to large corporations. A 2015 study of incentives in 14 states found that “big businesses overall were awarded 90 percent of the dollars from the programs analyzed, indicating a profound bias against small businesses.”²⁴ More than half of Amazon’s distribution centers, for example, have been built with the help of public dollars.²⁵

Still another reason small businesses are struggling is that our banking policies have starved them of financing. Credit is essential to starting a business, and it plays a pivotal ongoing role by smoothing out ebbs in cash flow and supplying the capital to expand when opportunities arise. But credit has become harder to obtain because of changes Congress made to our banking laws in the 1990s (see the Banking section). These changes fostered consolidation, leading to the loss of thousands of community banks, which have long been the main providers of loans to small businesses.²⁶ As a result, many small businesses, especially those owned by people of color, have been starved of capital or forced to turn to high-cost online lenders.²⁷

Even local land use policies have worked to the disadvantage of small businesses. Research has found that dense, walkable, mixed-used neighborhoods, with their varied mix of buildings and spaces, are more conducive to small businesses than sprawling auto-oriented development.²⁸ But instead of creating more of these kinds of places, most state and local governments have mandated a built environment that’s designed for big chains. Cities have zoned huge tracts of land for large-scale retail development with little regard for whether there was sufficient demand for these projects or how they might affect established business districts. In the 1990s and 2000s, Walmart and other chains exploited these policies by flooding regions with an excess of new retail space, a move designed to capsize smaller competitors and dominate markets. It worked. Today, the U.S. is littered with desolate downtowns and neighborhood business districts turned to wastelands.

The Broader Impacts

As small businesses shrink and disappear, many dimensions of American life are suffering — from the dynamism of our economy, to the well-being of our neighborhoods, to the ability of people to realize their dreams.

Small firms play a crucial role in innovation. Research has shown that industries populated by small businesses generate new products and processes at a faster clip than those consisting of a few large companies.²⁹

The social fabric of a community is tightly coupled with the health of its independent businesses.

The decline of small businesses is one of the main reasons that incomes have stagnated for everyone but the very rich. This is partly because starting a business used to be a way to join the middle class and help your family and community build wealth. It’s also related to the pivotal role that small businesses play in creating jobs. Businesses just starting out — those in their first few years of life — are responsible for virtually all the net growth in jobs.³⁰ By creating demand for labor, these young businesses help to push up wages. As industries have become concentrated, there’s been less competition for workers, which is one reason wages for low- and middle-income Americans have hardly grown in decades. Other research has shown that communities that have retained a larger proportion of small businesses have experienced faster income growth and lower poverty rates.³¹

As a few corporations have grown to dominate, opportunity has become concentrated in a handful of places, leaving much of the rest of the country behind. Many rural communities have lost their local businesses and are struggling with poverty and despair. Cities like St Louis and Cincinnati have lost both small businesses and the mid-sized companies that once called these cities home but have since been swallowed up by mergers. Within these cities, Black and Latino neighborhoods especially are suffering from a lack of services as basic as local grocery stores and pharmacies. Instead, they are overrun by Dollar General and Family Dollar stores, some 10,000 of which have opened over the last decade, their growth both a symptom of economic distress and a cause of it.³²

The effects are not only economic. The social fabric of a community is tightly coupled with the health of its independent businesses. Research has shown that communities with a larger share of local businesses have stronger social ties, higher levels of civic engagement, and better success solving problems.³³

How States and Cities Can Fight Back

To reverse the tide of corporate concentration and create the conditions in which small independent businesses can take root and grow, policymakers need to focus on five objectives:

• Stop dominant corporations from using their market power to harm small competitors.
• Close corporate tax loopholes and make business taxes fair and equitable.
• Reconfigure the financial system to deliver more capital to small businesses.
• Redirect public subsidies away from big corporations and into investments that support entrepreneurship broadly.
• Create a built environment that’s conducive to small-scale enterprises.

The following are specific policy prescriptions that track and loosely follow the order of the objectives above.

Aggressively Enforce Fair Trade and Antitrust Laws

Most states have their own laws prohibiting unfair competition and the abuse of monopoly power. Some mirror federal antitrust statutes, while others go further. State attorneys general also have the authority to enforce federal antitrust laws. States can play a critical role in investigating dominant corporations, protecting competition, and ensuring fair markets for small businesses. Ohio Attorney General David Yost, for example, has led an effort to block Pharmacy Benefit Managers (PBMs) from crushing independent pharmacies and exploiting the state’s Medicaid program, including filed a lawsuit and calling for changes to state law.³⁴ Eleven states recently persuaded the Department of Justice to investigate the Big Four meatpackers for squeezing cattle ranchers.³⁵ California’s attorney general has reportedly opened an antitrust investigation into Amazon’s treatment of the small businesses that sell on its platform. Most state attorneys general, however, have very limited resources. States should significantly expand these budgets in light of today’s extreme levels of concentration and rampant market power abuses.

Support Local Pharmacies by Reining in PBM Abuse

States can block PBMs like CVS Health from abusing their market power by requiring transparency in pricing and contract terms, adopting any-willing-provider rules, and revising the terms of their Medicaid contracts with PBMs, among other measures. Beyond regulating PBMs, states can follow North Dakota’s lead and allow only licensed pharmacists to own a pharmacy. As a result of this law, pharmacies are numerous and widespread in the state, virtually all are locally owned, and North Dakota boasts some of the lowest drug prices in the country. See the Pharmacy section.

Cap Restaurant Delivery App Fees

Three app-based meal delivery companies — DoorDash, Grubhub, and Uber Eats — control 90 percent of market nationally. They charge restaurants enormous fees for their services, typically 20 to 35 percent of the meal cost, and routinely engage in a variety of other predatory tactics, including setting up fake websites to prevent customers from dealing with the restaurant directly. To safeguard local restaurants, more than a dozen major cities have set limits on the percentages that meal delivery apps can charge, often at 15 percent of an order’s total cost.

Ban Non-Compete Clauses in Employment Contracts

More than one-quarter of all private-sector workers, including many low-wage workers in industries such as fast food, are handcuffed by non-compete clauses. These clauses prevent employees from taking a better job at a company in the same field. They also harm small businesses in two ways. First, non-competes make it harder to find qualified employees. And second, these clauses stop would-be entrepreneurs from leaving their employer to strike out on their own in the same industry.³⁶

State lawmakers should ban non-compete clauses. Only three states currently do: California, Oklahoma, and North Dakota. Even so, enforcement is spotty. States should strictly enforce these bans, including through a private right of action (the ability of private parties, such as injured workers, to bring a lawsuit).³⁷

Ensure State Corporate Income Tax Policies Treat Large and Small Businesses Equitably

Many states also have tax loopholes that allow multi-state companies to shield much of their income from state taxes by transferring their in-state revenue as a payment — typically for rent or use of trademark — to a subsidiary in another state or country that doesn’t tax income. Independent businesses can’t game the system this way and instead often end up paying a higher effective tax rate than their more powerful rivals.

States can close these loopholes by requiring multi-state corporations to report their combined revenue from all of their related subsidiaries before determining what portion is taxable in that state. This “combined reporting” keeps large companies honest about their tax obligations, levels the competitive playing field for independent businesses, and generates public revenue. Today, 28 states and Washington, D.C., have adopted combined reporting.

Close the Dark Store Tax Loophole

States should adopt legislation clarifying how property tax assessors determine the value of big-box stores. Over the last few years, retailers such as Walmart and Home Depot have exploited a grey area of state law to slash the property taxes they pay on thousands of their stores, basing their new assessments on the so-called “dark store” theory that their properties would be nearly worthless if they were empty. This has deprived local governments of billions of dollars in revenue and forced local businesses and residents to pay higher taxes to maintain services. States can remedy this with a simple legislative fix that clarifies that modern retail buildings should be valued based on their current operations and not on a theoretical future in which they are derelict.³⁸

Expand Access to Capital

Small, community banks are the lenders that most often support local business by providing access to affordable capital businesses need to start and grow. Expanding the local banking system can help enable new and growing businesses, create jobs, and support community development. For more, see the Banking section.

Finance Local Grocers and Safeguard Their Viability

Many small towns and urban neighborhoods have become “food deserts,” meaning they lack grocery stores. This problem has many causes, though corporate consolidation is a common root. As big supermarket chains have grown to dominate food retailing, they’ve “redlined” neighborhoods that are low-income and/or predominantly Black or Latinx. At the same time, locally owned grocery stores and aspiring entrepreneurs seeking to serve these communities have struggled to obtain loans to start and grow.³⁹

Compounding these problems, dollar store chains have moved aggressively into many of these neighborhoods. Dollar General and Family Dollar sell a limited selection of packaged foods and, backed by Wall Street, have been blanketing neighborhoods with dozens of outlets. Both of these tactics undermine competing grocery stores, which bear the higher costs of offering fresh foods and employing more people.⁴⁰

To date, states and cities have primarily approached the problem of food deserts by offering tax incentives to the big chains. This strategy has largely failed, because it doesn’t alter the location imperatives of these retailers. A more effective approach involves providing loans to new and existing local businesses operated by people who are already part of the community. The Pennsylvania Fresh Food Financing Initiative, for example, financed 88 grocery stores in underserved urban and rural communities between 2004 and 2010. Almost all were independent, locally owned businesses. In Tennessee, a state-backed “rural opportunity fund” extended loan capital to 345 local businesses in distressed communities that had otherwise struggled to obtain credit, creating or retaining more than 4,000 jobs.⁴¹

At the same time, cities and states should adopt limits on the proliferation of dollar stores, as Tulsa, Okla., and Birmingham, Ala., have done, and strictly enforce fair trade and antitrust laws to prevent Walmart and other big food chains from using anticompetitive tactics, such as predatory pricing, to crush smaller grocers.

Make It Easy to Form Cooperatives, Including Investment Cooperatives

Real estate investment cooperatives allow community members to invest in otherwise underused spaces, creating a pathway to incubate and support local businesses. Cooperatives provide multiple benefits by allowing people to collectively own and control neighborhood commercial spaces and reap the gains when property values rise, and by providing local businesses with stable and affordable places to operate. In Minneapolis, for example, the North East Investment Cooperative (NEIC) has redeveloped several derelict buildings into vibrant spaces housing local businesses. The co-op has thousands of members who have capitalized it with investments of $1,000 each.⁴²

NEIC exists because of a Minnesota state law that permits cooperatives to raise capital directly from their members without having to register as a securities offering. While many states exempt cooperatives from securities regulations, most only exempt agricultural or electric cooperatives. States can and should broaden these exemptions to include real estate investment cooperatives. States should also consider seeding these co-ops with startup capital, which could be vested as memberships held by low-income residents.

Stop Subsidizing Big Corporations & Reorient Economic Development Programs

States can level the playing field for local businesses by adopting strict limits on the use of tax incentives and other subsidies, both at the state level and by local governments. Tax increment financing programs in most states, for example, have strayed far from their original aims and are in need of reforms, such as a clear definition of “blight” to ensure that they’re used only in truly struggling neighborhoods and provisions to block these giveaways from flowing to large,  well-resourced corporations.

In general, states can redirect these dollars to fund public goods that will benefit the economy broadly, such as high-speed fiber networks and higher education. Direct assistance to businesses should be provided only through carefully targeted programs that support local entrepreneurship. Some cities, including Grand Rapids, Mich. and Portland, Ore., have made growing locally owned businesses a focus of their economic development programs. In Portland, for example, the city has several initiatives to accelerate the growth of small businesses, with a particular focus on those owned by people of color.

Prioritize Local Businesses in Public Procurement

State and local governments have significant power over where they spend their money. They can enact procurement policies that steer more spending to local, independent businesses and avoid sending public dollars to monopolistic and extractive corporations.

On the municipal level, San Diego has a robust local purchasing policy. Under the city’s Small Local Business Enterprise Program, multiple city contracts are set aside for small businesses. In 2016, the program directed $87.9 million in construction, architectural, and engineering contracts to 503 small, local firms. In Cleveland, the city has used a number of procurement policies and programs to increase the share of its annual $147 million procurement budget that’s being contracted to local and small, or local and minority- or female-owned businesses, to 39 percent. And in Phoenix, a database of local independent vendors has helped the city increase its spending with small businesses by more than $2 million.⁴³

City and state leaders should pay particular attention to Amazon’s attempts to take over local and state procurement contracts, a strategy the corporation is employing to both capture public dollars and further its strategy of compelling small competitors to sell on its platform. Several cities, including Pittsburgh and Phoenix, have rejected Amazon as a supplier.

Establish a Competitively Priced High-Speed Broadband Network

Access to affordable high-speed broadband can help spur small business creation and help existing independent businesses grow. However, many areas of the country are served only by powerful broadband monopolists that offer poor service at high prices. More information about how states can support municipal broadband and other policies can be found in our Broadband section.

Use Planning and Land Use Policies to Keep Dominant Corporations in Check

State and local land use policies offer potent, though underutilized, tools for structuring the economy of a community or region, especially its retail sector. These policies can be used to both prevent dominant corporations from gaining outsized power in the local market and — as we detail in the next two bullet points — create a built environment that’s more conducive to small business development.

In Vermont, for example, a statewide land use law called Act 250 requires large development projects to undergo an impact review. Only projects deemed to be economically beneficial to the community, region, and state are approved. Because of Act 250, Vermont has far fewer big-box stores per capita than any other state. Residents can still shop at Walmart and Target, but these retailers do not overwhelm the retail sector the way they do elsewhere. One result is that Vermont has more small businesses per capita than any other state.⁴⁴

Similar policies can be adopted at the city level.  Some communities require that, before they issue permits for new commercial development, an analysis is conducted to determine whether there’s enough unmet market demand to support the new space without displacing sales in existing commercial corridors.

Cities can also use land use policies to more directly curb corporate power. As noted above, about a dozen cities have adopted ordinances that block the dollar chains from opening stores that are less than a mile or two apart from one another. Some communities have banned large-format retailers, requiring chains like Walmart to open smaller stores instead. Still others, including San Francisco, have placed limits on all “formula” businesses, or chains.

Create a Built Environment Conducive to Small Businesses

Dense, walkable neighborhoods that feature a mix of uses and buildings, both in big cities and in the downtown corridors of small towns, have multiple public benefits. The connectivity they provide allows for interaction and a heightened sense of community. These neighborhoods are also more hospitable to small businesses. One study found that streets with a combination of small, old, and new buildings have a smaller proportion of chain retailers and restaurants than areas with new, bigger buildings, and they also have a significantly higher proportion of new startups, as well as more businesses owned by women and people of color.⁴⁵

States and cities can adopt land use and zoning policies that mandate dense, multi-use development, preserve historic buildings, and create the mixture of smaller spaces that fosters local entrepreneurship and community-scaled businesses.

Adopt Inclusionary Zoning for Small Businesses

In many cities, the commercial space in older buildings is small, varied, and well-suited in both character and cost to a range of independent businesses. The commercial space in new and redeveloped buildings, however, is often large, uniform, and designed for national chains.

Set-asides offer cities an effective way to address this. This tool works by requiring developers and property owners to reserve, or “set aside,” space for locally owned businesses in projects that are above a certain size, are located in particular neighborhoods, or meet other criteria. Cities can require developers to dedicate a portion of ground-floor retail to spaces that are small, or to spaces that must be offered as commercial condominiums. This first option increases the supply of the smaller spaces that tend to be hospitable to local businesses. The second option enables businesses to own their spaces, which creates stability and safeguards against rising rents. Cities can also require that a portion of the space be offered at below-market rate rents or through percentage rent agreements, under which the amount of rent can’t exceed a certain percentage of a business’s sales. Set-aside policies can apply to both new development and major redevelop projects.

Phoenix has taken a related approach through its adaptive reuse program, which pairs would-be entrepreneurs with vacant space in historic buildings and provides grants and other support to facilitate the adaptation of the space for a new use.