Good local businesses?

I realize I'm probably undermining my point by writing so much on this, but I just wanted to drive this home with a couple more examples--then I'll be gone all day so you'll have plenty of time to get a break from me!

In all scenarios, let's assume the outside investor reinvests nothing back into the community.

1) No outside investment takes place. Local consumers spend $100 a year and the local merchant gains $100 a year. Break even.

2) Outside investor can't earn anymore than the local guy, so he just buys the business for $1,000, and extracts all the profits going forward. The local guy takes the $1,000 and buys an index fund yielding 10%. Thus, the community spends $100 a year but the local merchant earns $100 on his investment (ignoring compounding). The same numbers would apply if, say, the local merchant opened up a business in another neighborhood and extracted all the profits.

3) Instead of buying stock, the local merchant opens up a new business identical to his original, at a cost of $1,000 that is paid to another local individual. Now, consumers are paying $200 a year. But the merchant is getting $100 a year from his business, and the 2nd local individual can invest the $1,000 he got in that index fund, or a business elsewhere, earning $100 a year. Again, break even.

4) The investor opens up a competing business at an initial cost of $1,000, paid to a local landlord, and gets $100 a year in profit. As a result of the competition, the local merchant goes under. Local consumers pay out $100/yr, and the local landlord can invest and earn $100/yr. Break even.

5) The investor opens a non-competing business next door at an initial cost of $2,000, that yields $200/yr profit and doesn't effect the local guy. Consumers pay out $200/yr, and the recipient of the initial investment gains $200/yr. Break even.

No matter how you run the numbers, you get the same result. You can add all kinds of complexity--leases instead of purchases, taking into account the revenues and the cost of goods sold instead of just the profits, compounded interest, opportunity cost, various risk measures of the different investments (stocks, bonds, businesses, etc.), and you will get the same result. Now, if the outside investor reinvests a SINGLE dollar, the community will realize a net gain. Furthermore, if the new business attracts consumers from outside the area, other local businesses may benefit as well (this scenario is highly likely).

You may have noticed that the biggest realizable gain to the community comes in the scenario where the investor pays a large sum up front, expecting large profits, and then fails to make those profits. Thus the locals get the upfront money but don't spend anything into the investor's pockets. Similarly, the community seems to lose out if the investor gets a bargain in the upfront deal but then makes big bucks in the long run. But in the end it all balances out--if the investor goes bust then others will not follow and so the potential gains to the community will go unrealized. On the other hand if the outside investor earns excess profits beyond what he paid for, this will entice lots of other investors, raising the value of the assets currently owned by the locals.

OK, I'm off and so will spare you any further lectures. I'm sure you will have decisively proven me wrong by the time I get back. See ya!

Alex, you know you just made my day. I had a long ass day today and was wondering if anyone actually looked through this diatribe of mine, and also fearing I might return to see all kinds of insults or worse, incorrect arguments, hurled in my direction. I'm therefore delighted to see that someone was actually interested in all of this stuff.

As far as directing you to a site with greater clarity, I'll see what I can do (am a bit too tired right now). Give me some time and I'll get back to you or pm you.

Ha! I'm on the edge of my seat.