Keeping profits at home: A study of firm ownership and the geographical concentration of capital gains in the United States

Abstract

Approximately 39% of American wealth exists in the form of private ownership in firms. Surprisingly, the existing economic geography literature offers us little insight into where the owners of this vast wealth reside relative to the firms they own, nor of the potentially important economic implications of this unknown geographical proximity. This comparative case study utilizes a unique dataset to examine three mid-size American manufacturing firms with varied ownership structures. It finds that the employee-owned firm and family-owned firm concentrate firm-created wealth in local communities to a greater degree than the publicly traded firm. Building on this empirical evidence, the paper then uses both Endogenous and Keynesian growth theory to argue that this concentration can feasibly lead to local economic growth through subsequent local reinvestment of that wealth. This theoretical insight is important because it offers a new perspective on the multifaceted debate concerning which firms should receive incentives from local policymakers. Results imply that public policy requiring local ownership as a condition of incentives is in the long-term economic interest of local residents. This pilot work contributes to the existing academic literature by justifying subsequent studies on the economic geography of firm ownership and by establishing methodological precedent on the subject.

Keywords

capital gains employee ownership geography of firm ownership local economic development ownership map

Introduction

At the very center of local economic development are firms and the people who comprise them. Together they form the engine that drives economic progress. State and local governments aim to provide sparks to this engine for the collective benefit of their constituents by crafting policies that help firms create wealth. These include support of entrepreneurship and active retention of firms from within their jurisdictions, along with incentives to attract mobile firms currently outside (Bartik, 2003; Pike et al., 2017). These common policies are not without cost, as local governments in the United States incur approximately 2–4 billion USD in direct expenditures and offer an additional 10 billion USD in tax incentives seeking local economic development each year (Bartik, 2003).

Thus, a multifaceted debate has formed around which sorts of firms yield the most economic benefits to a local area per public dollar spent. This paper contributes to this on-going policy discussion from the perspective of firm ownership and its related investment of wealth within local communities, in pursuit of actionable clarity on the matter.

This paper first aims to empirically test the theoretical assumption that firm ownership type influences the geographical flow of wealth that firms create by quantifying the distance between the residence of firm owners and the nearest firm site. Second, the paper aims to clarify the theoretical relationship between firm ownership type and local economic development in the United States with its quantified evidence. To reach these aims, this study utilizes a unique dataset of sensitive firm information to engage with a pair of related research questions by conducting a comparative case study of three otherwise-similar U.S. industrial manufacturing firms with varied ownership structures (family-owned, publicly traded, and employee-owned):

Does firm ownership type influence the geographical concentration of capital gains?

Do differentiated spatial concentrations of firm-created wealth support an evidence-based theoretical link between firm ownership type and local economic development?

This study’s primary hypothesis is that employee-owned firms can feasibly boost local economic development through increased reinvestment of firm profits because their owners live locally and are numerous. Results support the assumption that firm ownership type markedly influences the geographic flow of firm profits to owners through the mechanism of capital gains. This empirical finding allows for evaluation of the theoretical impacts of this concentration of wealth on local economies. The primary implication of this theory for public policy is that employee-owned and family-owned firms may promote local economic growth more than publicly owned firms because they concentrate wealth through their relatively local ownership. Consequently, they warrant further consideration for incentives from local and state policymakers.

Thus, this paper contributes to the existing literature in several ways. First, it provides initial empirical evidence in support of the assumed relationship between ownership type and the geographic concentration of firm-created wealth. Second, it establishes a method of quantitatively defining distances of capital gain flows in space. Third, it identifies the geography of firm ownership as a theoretical consideration in the policy debate concerning which firms deserve incentives from local communities. Finally, it proposes that the geography of firm ownership can reasonably be expected to influence local economic development, warranting additional studies on the topic.

The geography of firm ownership

Firm ownership in America

Owning a firm can take a variety of different forms, and firms may be owned completely by a single individual or in tiny bits by a multitude of shareholders. To own a firm is to possess all rights to control the legal entity and its assets, other than those rights explicitly defined in other legal contracts (Grossman and Hart, 1986). These rights to control are distinct from control itself (Berle and Means, 1932). A significant portion of the literature on firm ownership focuses on the separation of ownership from control that arises when firm owners are not the ones who manage the firm (originating with Berle and Means, 1932), even though this is perhaps mitigated in some cases by owners’ election of Boards of Directors (Ertimur et al., 2010). Further discussion of the principal–agent relationships between firm owners and the management hired to exercise day-to-day control over firm assets is primarily a literature of governance over assets rather than ownership per se, putting it beyond the scope of this ownership study (see Sappington, 1991 for an overview).

Firm owners are important because they are the ones who directly benefit the most when firms are profitable. Edward Wolff (2016) gives us an updated look at the average wealth portfolio of U.S. households as of 2013, derived from data collected in the Federal Reserve’s triennial Survey of Consumer Finances. Since most U.S. firm wealth is held by already-wealthy Americans (Wolff, 2016), returns from ownership can generally perpetuate the stark wealth inequality between U.S. households (Piketty, 2014). Yet, even though some 39% of American household wealth is kept in the form of firm ownership (estimated from Wolff, 2016 in All Households column of Table 1), the spatial relationship between the residence of owners of this vast wealth and their business assets is unclear, as are any potential economic consequences for local communities.

Table 1.

Composition of U.S. household wealth in 2013 by wealth class.^a

Wealth component	All households	Top 1 percent	Next 19% percent	Next three quintiles
Real estate ownership^b	38.7%	25.5%	36.7%	65.6%
Firm ownership^c	39.0%	50.0%	27.4%	8.0%
All other assets	22.3%	24.5%	35.9%	26.4%
Total	100.0%	100.0%	100.0%	100.0%

Source: Derived from Wolff (2016: 33, 35).

^a%s are percent of value of total household wealth.

^bPrincipal residence + other real estate.

^cAll stocks owned + unincorporated business equity.

Table 2.

Comparison of selected firms.

Firm attributes	Family, Inc.	Traded, Inc.	Employee, Inc.
Type of ownership	Family-owned	Publicly traded	Employee-owned
Industry	Manufacturing	Manufacturing	Manufacturing
Nation of headquarters	USA	USA	USA
Year founded	1987	1963	1962
Approximate value of equity (USD)	Unknown	124,000,000	66,000,000
Number of owners	5	47	898
Number of employees	260	796	911
Approximate annual revenue (USD)	70,000,000	148,000,000	255,000,000
HQ distance from nearest city >500,000	12 miles	30 miles	30 miles

Capital gains

One important benefit of owning a firm is that it can bring about financial rewards. Income from capital is non-labor income derived from the ownership of wealth, manifesting as rent, interest, dividends, royalties, and capital gains (Piketty, 2014). Arguably, the most important of these is capital gains (Blasi et al., 2014). Capital gains are the appreciation in value of assets owned over time (Merriam-Webster, 2018). They function to build wealth. Indeed, these gains accounted for 77% of U.S. household wealth increases from 1962 to 1983 (Greenwood and Wolff, 1992). For example, if you buy one share of corporate stock at $10 per share and then the value of that share increases to $25 per share, you have accumulated $15 of income from capital in the form of a capital gain. In this way, having more initial capital affords wealthy households the opportunity to boost income and accumulate ownership of additional capital at a faster rate than households with less capital (Piketty, 2014), consistent with recent increases in U.S. wealth inequality (see Piketty, 2014; Saez and Zucman, 2016; U.S. Congressional Budget Office, 2016; Wolff, 2016). When firms are profitable, capital gains are distributed to firm owners roughly according to proportionate ownership in the firm (Buchele et al., 2010). This study traces this predictable flow of wealth from its origins in firms to its destination with firm owners to help explain how firms contribute to wealth accumulation in space.

Wealth concentration and economic growth theory

The accumulation of wealth (i.e. capital) is important to local economic development because it can lead to economic growth in the area of accumulation, according to these prominent growth theories.

Supply-led economic growth theories, such as Neoclassical Growth (Solow, 1956) and Endogenous Growth (Romer, 1986), consider capital a primary input to economic growth. These theories are often articulated by variations of the Cobb–Douglas production function (Cobb and Douglas, 1928): Y=AL^αK^β, where A = productivity multiplier, L = labor, and K = capital. All else equal, increased capital inputs should lead a local area to increased economic growth. If firm investments, one form of capital, accumulate in a particular place, these theories would predict a subsequent increase in local economic growth (Borensztein et al., 1998).

Demand-led Keynesian economic growth theory is also applicable to subnational regions (Pike et al., 2017) and it reaches a similar prediction. It conceptualizes a region’s GDP as the sum of the region’s consumption (C), private investment (I), government spending (G), and trade balance (exports (X) minus imports (M)), expressed as: Y = C + I + G + (X−M) (Pike et al., 2017). If firm-created wealth is concentrated within a region and is subsequently invested into a local firm (I) or is spent locally like labor income (C), Keynesian growth theory would predict a subsequent increase in economic growth, all else equal.

Which firms are best for local communities?

Many state and local policymakers look to economic growth as a primary indicator of the economic well-being of their communities (Pike et al., 2017). Because firms can contribute significantly to economic growth through a variety of vectors, subnational policymakers are naturally interested in spending a portion of their limited resources supporting firms that will contribute the most economic benefits to their constituents (Bartik, 2003). Thus, a diverse literature can be used to distinguish which types of firms are most deserving of support from local policymakers.

These studies vary substantially in their approach to classifying firms for this evaluation. Considering firm size, both small and medium-size enterprises (Audretsch, 2015) and large multinational firms (Crescenzi et al., 2014) have, under different circumstances, brought substantial economic benefits to local communities. Emphasizing firm age, support for entrepreneurs is often justified on the Schumpeterian importance of creating new firms or on their local hiring bias (Edmiston, 2007). Conversely, established firms can provide employment stability that is difficult for young firms to replicate (Bernard et al., 2010). Other studies have suggested that social enterprises (Eversole et al., 2013), firms in industries compatible with local clusters (Porter, 2000), firms likely to respond to incentives (Bartik, 2003), foreign firms willing to share know-how with local workers (Borensztein et al., 1998), or high-technology firms (Malecki, 1984) are particularly beneficial for local areas. The location of firm control has also been surveyed, indicating mixed evidence on the local impact of national chains on local communities compared to locally controlled firms (Bonanno and Goetz, 2012). Together, these numerous perspectives underscore the complexity facing subnational policymakers when deciding which sort of firms to support with their limited budgets. They also indicate a need for more empirical clarity, which may be provided by a focus on new perspectives.

The economic influence of the geography of firm owner residences on local communities is a relatively understudied perspective. Michie and Lobao (2012) suggest that locally owned firms consider local interests more than non-locals, benefiting local economies, but they fail to quantify the spatial relationship between the owners and their firms. Fleming and Goetz (2011) claim that the number of small, locally owned firms is positively associated with economic growth, while Rupasingha (2017) finds inconclusive results using similar variables. Kolko and Neumark (2010) claim that local areas containing the headquarters of locally owned firms exhibit enhanced resistance to economic shocks. However, the claims of Kolko and Neumark (2010), Fleming and Goetz (2011), and Rupasingha (2017) are undermined by their use of the location of firm headquarters as a proxy for the residence of firm owners, making them inquiries into the geography of firm control, not ownership. Hirst (1994) theorizes that employee ownership can decrease the likelihood of firms relocating, fixing their investment in local communities. Investigating this theory, Wills (1998) finds that employee ownership is not a guarantee of fixing firm investments in place, but it can improve relations with local communities, making it more likely over time. The assumption built into this case study and the theory itself is that employee-owners live and firms operate within the same local community. To investigate the concentration of firm-created wealth via capital gains in space, addressing this assumption and quantifying the relationship between firm establishments and their owners are essential. Relatedly, a more specific methodological focus on ownership itself, along with quantifiable proximity data, would help clarify if firms with different ownership structures have different impacts on local economies.

The existing literature indicates that firms concentrating the wealth they create within a local community can create conditions conducive to economic growth in that community. Since firms often distribute this created wealth via ownership-based capital gains, a spatial understanding of the proximity between firm owners and their firms is required to assess the impact of this wealth flow on local communities. Existing studies lack quantification of this proximity and often fail to focus on ownership itself, limiting their ability to inform public policy. Thus, studies with a new focus on the geography of firm ownership are warranted in the field.

Methodology

This comparative case study of three American firms in a specialized manufacturing sector aims to:

Empirically test the assumption that firm ownership type influences the geographical concentration of capital gains

Explore building an evidence-based theoretical framework connecting firm ownership type to local economic development.

A comparative case study approach to realizing these aims entails “systematic comparison of two or more cases obtained from empirical examination of a real-world happening within its natural context” (Kaarbo and Beasley, 1999: 372). Since neither an experiment (because the variables can’t be directly manipulated) nor a broad-based statistical survey (because the data are sensitive and difficult to obtain) is feasible, the comparative case study method is the most appropriate type of research strategy for this project.

This study both tests and builds theory (Dul and Hak, 2008). By quantifying the distance between the residence of each firm owner and the nearest firm establishment, I empirically test the theoretical hypothesis that firm ownership type influences the spatial distribution of firm-created wealth. I then used the resulting evidence to clarify the theoretical relationship between the geography of firm ownership and local economic development.

Firm ownership types

Firm ownership type was the variable-of-interest in this study. The variable was classified into three categories based on the identity of firm owners, together representing the vast majority of American firms. Family-owned businesses are defined as those with ownership concentrated in an individual or small group of people who often play an active role in managing the firm and generally intend to pass ownership to the next generation of their kin (Astrachan and Shanker, 2003; Bhide, 1993; Carney, 2005; Fox et al., 1996). A majority of the most valuable American firms are publicly traded firms, defined here as firms whose ownership is available for sale on the NYSE or NASDAQ stock exchanges. Employee-owned firms are defined in this study as non-public firms with an Employee Stock Ownership Plan (ESOP), whereby a broad spectrum of employees accumulate ownership as an employment benefit (Kruse et al., 2010). Of the estimated six million American firms with paid employees (U.S. Small Business Administration, 2018), approximately 5000 (0.08%) are publicly traded (Ernst & Young, 2007) and 6286 (0.10%) are employee-owned (National Center for Employee Ownership, 2019), while the vast majority (99.82%) of firms are family-owned.

Data

A unique dataset focused on the location of firm owners was compiled to carry out this study. This was necessary because the residential location of firm owners is not published by firms, is not public information, and is sometimes confused with the location of firm headquarters. These practical difficulties have likely contributed to the limited and flawed prior research on the subject. Thus, the primary data collection strategy employed in this study was to contact individual firms directly, initially leveraging professional acquaintances. Data scarcity was a considerable challenge, with a survey of 60 employee-owned firms yielding sufficient information from three firms competing in varied industries. Considering this limited success, only six family-owned firms of comparable size, age, and geography within those three industries were identified and phoned. One family-owned firm supplied sufficient data, so collection efforts were again refocused on the industry of this participating firm. A publicly traded firm of comparable size, age, and geography within this industry was identified and contacted via email. I was kindly rebuffed, so two publicly traded firms of lesser comparability in the industry were identified and emailed. I was again rebuffed by one and ignored by the other, so key corporate ownership information of the most comparable publicly traded firm was collected from Bureau Van Dijk’s ORBIS database. Ultimately, this strategy yielded sufficient information for a comparative case study within a single industrial manufacturing sector.

The most important pieces of information collected were the residential location of firm owners, the location of firm facilities, the percentage of ownership held by each owner, and the total number of owners. The employee-owned firm provided the residential location of firm owners, the percentage of ownership held by each owner, and the total number of owners through direct contact with an employee-owner of the firm. I obtained the location of firm establishments from the firm’s official website. An owner of the family-owned firm provided the residential location of all five firm owners, each owner’s shareholding proportion, and the total number of owners through a semi-structured interview conducted by telephone. Locations of the family-owned firm’s facilities were obtained from the firm’s official website. Contact with the publicly traded firm was especially problematic, so the identity and number of firm owners along with each owner’s shareholding proportion was obtained using the ORBIS database (Bureau Van Dijk, 2018). The 47 owners listed in the database were those holding more than 0.1% ownership in the firm, deviating slightly from the total number of 68 total owners listed in the firm’s 2017 annual report. Forty-three of the firm’s 47 owners were investment banks or financial firms, whose locations were readily available on their respective official websites. I obtained the location of the family-owned firm’s establishments from the firm’s official website. Collectively, the lack of a database containing complete information and the fragmented nature of the data necessitated that it come from a variety of sources. Nevertheless, the dataset compiled here represents the best information available on the subject, making it suitable for this comparative case study.

Importantly, the location of firm owners is sensitive information, and as such, was gathered in the form of ZIP codes (U.S. postal codes). ZIP codes were chosen both to protect the identity of owners and to promote participation in the study, while also being unlikely to materially affect the results compared to the counterfactual of specific street addresses.

Case selection

The aim was to select firms that were usefully comparable, save for ownership type. The purpose was to isolate the impact of ownership type on the distance between the primary residence of owners and firm locations. As such, the three firms are all headquartered in the United States, employ between 250 and 950 people, are headquartered within 30 miles of a city with a population greater than 500,000 people, participate in the same industrial manufacturing sector (four-digit NAICS level), and have been in business for at least 30 years (Table 2). These similarities sought to control for any potential effect of national jurisdiction, firm size, urbanity, industry, and firm life cycle, respectively, on the geography of firm ownership. This study assumes that the specific urban spatial structures of the cities and regional economies involved are not impactful on results. This is justified on the grounds that all three firm headquarters lie in outskirts of their respective headquarter cities, measurements are made to nearest firm establishment (not just to headquarters), establishments lie in more than one region for Traded, Inc. and Employee, Inc., and that results are consistent across multiple radii of measurement that transcend any single city. Importantly, participating firms had to be willing and able to provide sufficient locational information about their owners. This non-random selection constitutes some selection bias, but the realities of data scarcity dictated that it be accepted. No three firms in the marketplace are exact matches in terms of size, proximity to nearest urban center, legal context, and life cycle, but reasonable steps were taken here in selecting firms that are usefully comparable for evaluating the distance between firms and firm owners.

Data limitations

While gathering unpublished data can allow for new insights, it also presents some challenging realities. The most constraining limitation was the scarcity of information available about the location of firm owners. Despite guarantees of confidentiality, only 5 of 69 contacted firms provided the ZIP codes of their owners. This was sometimes due to information not being easily available, but it is suspected most firms who declined ultimately decided that it wasn’t worth the risk of charitably supplying sensitive information to an unfamiliar researcher offering little in return. J. Michael Keeling, President of The ESOP Association in Washington, D.C., shared this sentiment, commenting, “We have many companies say ‘no’ (to participating in research projects) even when presented with promises and evidence that the company will not be identifiable by (direct or) indirect methods” (personal communication, 28 March 2018).

Aside from limited availability, most data are provided by firms themselves. While self-reported information cannot be verified by other sources, the ESOP firm’s (Employee, Inc.) data were consistent with two other data-providing ESOP firms from other industries, providing a degree of validity assurance. Since ownership is often for sale and can be dynamic, another limitation is the static focus on firm ownership as of late 2017 or early 2018. Since this study is the first of its kind, allowing the scope to include multiple years would unnecessarily complicate the already-challenging collection of data. Therefore, changes in the geography of ownership over time are left for subsequent projects.

A final limitation worth mentioning involves the comparison of the location of owners of publicly traded firms to those of family-owned or employee-owned ones. ZIP codes collected from the family-owned firm (Family, Inc.) and the employee-owned firm (Employee, Inc.) belong to individuals. However, the owners of the publicly traded firm (Traded, Inc.), identified by the ORBIS database, are financial firms, save for two individuals. Thus, this study stays consistent in its definition of ownership by considering the ZIP codes of these financial firms, but acknowledges that an apples-to-apples comparison of the ultimate beneficiaries of ownership is not possible here. Four small minority owners (total 1.76% ownership) of Traded, Inc. are based outside of the United States. I excluded these outliers to remove their skewing effect on results. While these limitations prevent, to a degree, this study from conclusively claiming that its assertions apply broadly, they do allow for production of valid empirical results to substantiate development of testable explanations from observations within the available data.

Ethics

Firms participated in this study voluntarily, with information provided by agents of those firms who gave their informed consent to its use for academic purposes. Participants were also promised that every effort would be made to ensure their anonymity, which necessitates the use of ambiguous terms like “manufacturing” rather than a specific industry or NAICS code, “Family, Inc.” rather than the firm name, rounded revenue figures rather than precise ones, and the absence of specific cities and ZIP codes. Keeping this promise introduces a restriction on identifiable details that prevents an explicitly narrative style common to case study research.

Data processing

The primary calculated metric for comparison is straight-line distance (in miles) between the primary residence of each firm owner and the nearest firm establishment. Straight-line distance was chosen over driving or road distance because it is the measure with fewer variables. Local traffic and transport connectivity affect driving/road distance but using straight-line distance avoids these variables. Considering the distance between each owner and their nearest firm establishment is justified on the assumption that the nearest establishment is the most likely one for owners to visit or otherwise interact with the firm, whether employee or not. Furthermore, all three firms have establishments in multiple locations, implying that they create wealth in multiple local communities. Firm owners living in a particular ZIP code are assumed to reside at the geographic center of that ZIP code for measurement purposes, since precise street addresses of owners were not available. This assumption is similar to the use of ZIP codes by Ivkovic and Weisbenner (2005) when they calculated distances between individual investors and firm headquarters.

The key empirical evidence was derived in six major steps using the ArcMap component of Esri’s ArcGIS software. First, the “Feature-to-Point” tool was applied to U.S. Census Bureau 5-digit ZIP code map files to estimate each owner’s geographic coordinates with the appropriate ZIP code center points. These owner coordinates were then mapped alongside their corresponding firm establishment coordinates.Third, I calculated straight-line distances with the “Near” tool. Joining these downloaded proximities with each owner’s shareholding proportion allowed me to estimate the concentration of capital gains created by each firm for evaluation within multiple radii. Finally, firm establishment coordinates were all reset to (0,0) and uploaded again to ArcMap, alongside proximity data, to display this spatial relationship graphically. The result is a hub-and-spoke “ownership map,” showing aggregate firm ownership geographies in an intuitive and comparable manner.

Findings

This study finds differentiated concentrations of ownership between the three firms across multiple geographic radii (Table 3). Visual representations of the location of owners relative to the nearest firm establishment are displayed in Figures 1 to 3, in the form of an “ownership map” for each firm. These maps are configured in a way that all owners are distributed around a single point representing all firm establishments, showing the aggregate geographic concentration of their ownership. Distributions of capital gains (estimated with ownership shares) in space are shown in the form of histograms in Figures 4 to 6. Each histogram also features a Pareto line representing the cumulative concentration of capital gains within each radius.

Table 3.

Summary findings by firm.

Firm attributes	Family, Inc.	Traded, Inc.	Employee, Inc.
Type of ownership	Family-owned	Publicly traded	Employee-owned
Number of owners	5	47	898
Number of firm establishments	3	12	11
Mean distance (miles) between owners and nearest establishment	5.53	204.92	28.93
Median distance (miles) between owners and nearest establishment	3.08	122.39	9.04
Percent of shares held within 20 miles of a firm establishment	100.0%	23.0%	79.4%
Percent of shares held within 40 miles of a firm establishment	100.0%	35.6%	91.4%
Percent of shares held within 80 miles of a firm establishment	100.0%	39.4%	91.7%
Percent of shares held within 160 miles of a firm establishment	100.0%	71.3%	91.9%
Percent of shares held within 250 miles of a firm establishment	100.0%	86.2%	94.7%
Percent of shares held within 500 miles of a firm establishment	100.0%	91.6%	99.5%
Percent of shares held within United States	100.0%	98.2%	100.0%

Figure 1.

Family, Inc. ownership map.

Figure 2.

Traded, Inc. ownership map.

Figure 3.

Employee, Inc. ownership map.

Figure 4.

Family, Inc. capital gains distribution.

Figure 5.

Traded, Inc. capital gains distribution.

Figure 6.

Employee, Inc. capital gains distribution.

Analysis and discussion

This section combines the study’s findings and relevant theories introduced above to answer its research questions, and then to discuss the related policy implications of those answers. Table 4 summarizes the research questions and answers in this study and what follows is a more-detailed discussion of each one, in turn. While the implications of these answers are grounded in the results of this comparative case study, and are therefore substantive, they should naturally be interpreted with caution, due to the limited scope of this initial work. Overall, this study reasons that observed differences in firm ownership geography patterns are best explained by variation of firm ownership type, resulting in corresponding deviation of firm ownership benefits to local residents.

Table 4.

Summary of research questions and answers.

	Question	Answer	Implication
1	Does firm ownership type influence the geographical concentration of capital gains?	These results suggest that it does. The employee-owned firm and the family-owned firm concentrated capital gains to a markedly greater degree than the publicly traded firm.	These quantified results allow for an evidenced-based evaluation of the impact of this varied wealth flow on local economies.
2	Do differentiated spatial concentrations of firm-created wealth support an evidence-based theoretical link between firm ownership type and local economic development?	Yes. Quantified spatial concentrations of firm-created wealth empirically connect firm ownership type to the theory that a geographical concentration of firm-created wealth can lead to local economic growth.	Local policymakers should consider the potential benefits of firms that concentrate wealth they create within their jurisdictions.

Does firm ownership type influence the geographical concentration of capital gains?

Quantification of the distances between owner and firm establishment, combined with the shareholding proportion of each owner allowed me to compare the flows of capital gains across types of ownership. Since ownership shares imply coinciding capital gains distributions (Buchele et al., 2010), they are used to infer capital gain flows in space. This notion of firm-generated wealth residing with owners is the essence of the economic geography of firm ownership. The radii listed in Table 3 are admittedly arbitrary, since “local” is a naturally subjective and relative concept. However, the concentration of ownership shares held within them is markedly higher for the employee-owned firm, at nearly 3.5 times that of the publicly traded firm at the 20 mile radius and remaining above 2 times through the 80 mile radius. All five owners of the family-owned firm lived within 20 miles of a firm establishment. This indicates dissimilar geographical communities of owners amongst these cases. The publicly traded firm’s geographical community of owners is spread across a wide swath of the country. These owners are not equivalent to the local population of people, and policymakers should correspondingly not assume their best interests are aligned with those of local people. In comparison, it seems that the owners of the employee-owned firm and the family-owned firm are more equivalent to the local population.

This is, to my knowledge, the first study to quantify and map the flow of firm-created capital gains in space, making it the initial empirical evidence on the subject. However, the results are not surprising. Most publicly traded firms in the United States are owned by investment banks or other financial management firms via mutual funds (Peetz et al., 2013), and this is true of the studied publicly traded firm, with these institutional investors owning an estimated 88% of Traded, Inc. Individual investors usually don’t own publicly traded companies, but instead own shares in investment-bank managed mutual funds (Davis, 2008; Peetz et al., 2013; Rosenthal and Austin, 2016). Since these investment banks are concentrated in national financial centers like New York City, Boston, and San Francisco, it is not surprising that firm-created wealth flows to them from afar. Correspondingly, it is predictable that most employees will likely live close to where they work, explaining the observed local concentrations of wealth about Employee, Inc. establishments, which are 96% owned by its employees.

This study innovates by combining a unique dataset of sensitive locational data with its use of ownership shares to define the flow of capital gains. This procedure makes it feasible to accumulate clear evidence on the relationship between firm ownership type and the geographic concentration of firm wealth. While consistent with expectations, the results of this comparative case study provide initial empirical support for the claim that firm ownership type influences the concentration of firm-created wealth in space. Importantly, the quantification of this relationship makes it possible to further investigate its potential impacts on local economies.

Do differentiated spatial concentrations of firm-created wealth support an evidence-based theoretical link between firm ownership type and local economic development?

The concentration of wealth is of definitional importance to local economic development, defined as “increases” (Bartik, 2003: 1) in a “local economy’s capacity to create wealth for local residents” (Bartik, 2003: 1; Kane and Sand, 1988: 4). Since this study’s empirical results suggest that employee-owned and family-owned firms concentrate the wealth they create locally due, at least in part, to their respective ownership structures, it has become possible to build upon the theory that employee-ownership of firms can be a mechanism to fix existing capital investments in place, proposed by Hirst (1994) and partially supported by Wills (1998), in a meaningful way. Thus, this study uses the inherent local nature of consumption and investment by local firm owners, alongside its quantified results, to clarify the theoretical relationship between firm ownership type and local economic development.

When firms are profitable (i.e. appreciate in value/generate wealth), wealth in the form of capital gains or perhaps dividends flow to firm owners (Piketty, 2014). If owners are distant, the associated economic benefits leave the local area. This is a wasted opportunity for local residents. Instead, if less locally created wealth leaves the local area, it may accumulate and contribute to the economic development of local areas about the firms that create it, benefiting residents beyond firm owners. This claim is justified through the mechanism of the subsequent local reinvestment of firm profits by owners, using the mainstream supply-based and demand-based economic growth models introduced above.

According to the Cobb–Douglas production model, increased capital inputs from firms should lead a local area to increased economic growth. When wealth is concentrated with local residents, that wealth can feasibly become a local capital input if it is subsequently reinvested into a local firm through entrepreneurship or through a stock exchange by those local residents. Since most new companies start within the home region of entrepreneurs (Dahl and Sorenson, 2012), it is feasible that a portion of firm wealth could be converted into additional local firm capital through entrepreneurship by those resident owners. Congruently, individual investors who purchase stock ownership in publicly traded firms without an intermediary mutual fund or investment bank display bias toward investing in locally headquartered firms (Ivkovic and Weisbenner, 2005). Both investment actions raise the likelihood of local economic growth for the community involved, according to Endogenous Growth theory.

However, it is unlikely that all firm wealth collected by local residents will be invested back into firms. Some of it is likely to be spent instead. From a demand-side economic growth perspective, Keynesian growth theory considers local consumption to be an essential component of an area’s income (Pike et al., 2017). It predicts that an increase in local consumption will lead to an increase in local economic growth, all else equal. If local residents have more wealth to spend and they spend it locally, local economic growth is the expected outcome, driven by the increase in consumption and by subsequent Keynesian multipliers (Pike et al., 2017). Most household consumption is inherently local. Based on an estimated weighted average of the major components of U.S. household consumption in 2017 (U.S. Department of Labor, 2018b), about 71% of spending is likely to occur nearby a family’s residence. This estimate includes 100% of expenditures on housing, food at home, education, and personal care products, plus 50% of expenditures on food away from home, transportation, healthcare, entertainment, and apparel, divided by total expenditures (less those on pensions and Social Security). However, some firm-created wealth may not become liquid until about retirement age, since firm wealth can sometimes accumulate within retirement accounts like 401(k)s and ESOP trusts. Importantly, most Americans don’t move their place of residence when they accumulate enough wealth to retire (Brandon, 2014; Robaton, 2015). Only 6% of U.S. residents over 60 years old moved domicile during 2008–2012, and those who did seldom moved outside of the county of their previous residence (Brandon, 2014). This means that wealth concentrated and subsequently spent, is likely spent locally, even though the timeline of that spending may be long-term.

Thus, while the precise timing and magnitude of the reinvestment vectors that support local economic growth remain unclear, substantial reinvestment in the local economy is a reasonable expectation of wealth concentrating locally. Given that such reinvestment should lead to subsequent local economic growth, the theoretical and empirical evidence indicates that the geography of firm ownership structures can feasibly influence local economic development, as proposed in Figure 7.

Figure 7.

A theory on the economic geography of firm ownership.

Through its relatively broad and equitable distribution of ownership wealth, the employee-owned firm in this study seems to make local reinvestment more secure. The employee-owned firm is owned by 898 individuals, of which 407 made less than the average annual wage of $50,260 for all American workers (U.S. Department of Labor, 2018a). This group collectively owned 18% of Employee Inc. The number of shares held by individual owners was highly correlated (.89) with years of company service, indicating financial rewards according to efforts demonstrated by that service, one definition of economic equity (Albert and Hahnel, 1991). Assuming equal gains and a lower-than-average marginal propensity to consume for wealthy households (Fisher et al., 2019), 898 average-wealth consumers would likely consume more than five high-wealth consumers. In this case, employee-ownership provides a more just distribution of capital gains and may reasonably be expected to boost future local consumption and perhaps local entrepreneurial potential by enriching 898 people instead of 5 people.

The family-owned firm in this study geographically concentrated capital gains to a greater degree than the employee-owned company. Yet, the entirety of wealth created flowed to two parents and three adult children of a single family. The firm was founded in 1987 by the parents, reorganizing a previous firm. Starting a business can be financially risky, and capital gains accruing to the entrepreneur parents can be seen as compensation for being successful in the face of such risk (Carter, 2011). Ownership held by the three children, while common to family businesses (Carney, 2005) and with no offence or reflection on capacity, is probably not as easily justified on the basis of equity at the local community level.

Both Family, Inc. and Employee, Inc. owners are largely collocated with firm establishments. The collocation of firm establishments and owners can theoretically influence a firm’s strategic decisions, especially when owners are directly involved in making those decisions. In particular, national and international organizations must decide whether to expand, reduce, continue, or discontinue business operations in a community with national and international considerations, like corporate-level short-term financial targets, in mind (Michie and Lobao, 2012). Firms with local owners may downplay these wider considerations, placing the long-term interest of local residents in relatively higher regard (Michie and Lobao, 2012). In firms with geographically dispersed operations, the number of cities with establishments may outnumber owner households, ensuring geographic separation at some establishments. Since family-owned firms have fewer owners than employee-owned firms, ownership collocation and the corresponding consideration of geographically diverse local interests in strategic firm decisions seem more likely in employee-owned firms.

While firm employees are likely to live within commuting distance of a firm establishment, owners of family-owned firms, especially if not engaged in day-to-day management of the firm, are not as geographically bound to firm establishments. The possibility of firm owners relocating outside their local community presents an associated risk of them taking most of their wealth with them. In our case, five individuals comprising three households own Family, Inc., with 70% of ownership shares residing within a single household. Conversely, 898 individuals in an unknown number of households own Employee, Inc., with the largest individual shareholder owning 1.09% of the firm. Should local firm owners move, their intercity migration transports wealth away from the city where it was created. Relative to family ownership, broad-based employee ownership reduces firm-created wealth flight risk to local communities through diversification because their owners are more numerous and their ownership is more dispersed amongst shareholders.

Ultimately, the practical goal of discussing the theoretical link between firm ownership type and local economic development is to someday reasonably predict the geographic radius of firms’ wealth creation to inform public policy interventions and to inform citizens about where the economic benefits of profitable firms go when they contribute to them with their labor or purchases.

What are the public policy implications for local policymakers?

While the specific findings of this comparative case study are simply too narrow to warrant generalizations about the whole population of U.S. firms, thoughtful local policymakers should be cognizant that the ownership structure of local firms may have an influence on the economic well-being of their constituents. This perspective adds to the multifaceted discussion concerning which firms deserve to receive the budget-constrained support and incentives that local governments offer local firms. Firm ownership type should be considered alongside orthodox considerations like firm size, firm age, location of firm headquarters, industry, likelihood to respond to incentives, and training offers to local workers when designing public policy. This new dimension is potentially impactful, considering local governments in the United States offer 2–4 billion USD in direct expenditures and an additional 10 billion USD in tax incentives seeking local economic development each year (Bartik, 2003). Certainly, deciding which local firms to support in pursuit of local economic development is an important decision for local policymakers that warrants a broad perspective. However, ownership, as a universal firm characteristic with limited substantive variants, is a consideration that can likely work in complement with other considerations and can provide additional clarity in making this complex decision.

Since “fixing capital in place through relations of ownership is an obvious route to sustaining long-term investment in local production, reproduction, and community life” (Wills, 1998: 80), requiring that public support or incentives from local government be contingent upon sharing ownership with local residents seems to be in the best interest of those residents. Such ownership-sharing requirements are not unheard of in the public policy realm, as China has long required foreign investors to form joint ventures with domestic firms as a condition of entry into certain industries (Greubel, 2018; Jiang et al., 2018). Renewable energy firms in Denmark are required to offer at least 20% of ownership shares in new projects for sale to residents living within a 4.5 kilometer (2.8 miles) radius of the establishment (Curtin et al., 2018). In the United States, community development corporations may offer ownership shares to local residents at discounted rates or provide loans to locally owned firms (Imbroscio, 2013). For example, Cleveland’s Evergreen Cooperative Initiative provides financial support for local employee-owned firms to enhance the city’s economic development through the building of local wealth (Evergreen Cooperative Corporation, 2016; Imbroscio, 2013). Another idea is to offer an incentive for local ownership being commensurate with local firm employment. For example, a firm that employs 20% of their workforce within a particular city would be expected to be at least 20% owned by city residents to qualify for an ownership-based incentive from the city’s government. Thus, public policy may feasibly contribute to the economic well-being of local residents through encouraging local firm ownership.

There is some concern that non-local investors may choose to invest elsewhere in the presence of policies that favor local residents, but local ownership requirements are not necessarily an obstacle to firm performance (Makino and Beamish, 1998). Additionally, local investors may have limited access to investment capital in some cases (Curtin et al., 2018), constraining the effectiveness of policies aiming to induce such investments. Despite these limitations, the results of this study indicate that ownership-based incentives can be helpful for communities seeking local economic growth and possessing a long-term perspective, since wealth can take time to accumulate and to subsequently be reinvested.

Concluding remarks

This comparative case study of three American manufacturing firms first set out to empirically test the assumption that firm ownership type influences the geographical concentration of capital gains. It finds noticeable variation in the percentage of capital gains concentrated within multiple geographical radii between the studied firm ownership types. The family-owned firm concentrated 100% of their capital gains within 20 miles of the firm’s establishments, while the employee-owned firm concentrated 79% of theirs within 20 miles and 92% within 80 miles. In contrast, the publicly traded firm concentrated 23% of their capital gains within 20 miles of the firm’s establishments and 39% within 80 miles. Noticeable disparities remained present through the 500 mile radius measure. Derived from a unique dataset, these results represent the best available evidence on the subject at present. They affirm the assumption that firm ownership type influences the geographical concentration of capital gains in this case. Specifically, the evidence suggests that profitable family-owned firms and employee-owned firms are better than publicly traded firms at retaining the wealth they create within the local communities they create it in.

Applying these results, the study next aimed to explore building an evidence-based theory connecting firm ownership type to local economic development. This is a logical extension since building the wealth of local residents is of definitional importance to local economic development (Bartik, 2003). Mainstream economic growth theories predict local economic growth if wealth accumulates in a particular local area and is subsequently reinvested into that local economy via investment in firms or consumer spending. There is evidence that entrepreneurship (Dahl and Sorenson, 2012), consumer spending (U.S. Department of Labor, 2018b), and, to a lesser degree, individual stock investing (Ivkovic and Weisbenner, 2005) are inherently local phenomena. Furthermore, most Americans don’t move their residence after accumulating enough wealth to retire (Brandon, 2014; Robaton, 2015). Together, these indicate substantial reinvestment in the local economy is a reasonable expectation of wealth concentrating locally. Pairing this insight with existing employee-ownership theory, this study argues that employee-owned firms, along with family-owned ones, are potential drivers of local economic growth through the geography of their respective ownership structures. The experiences of this study’s three firms indicate that employee-owned firms, through enriching more families than family-owned firms, probably further boost local consumption and, perhaps, entrepreneurial reinvestment. Together, this theoretical and empirical evidence supports the idea that the geography of firm ownership structures can influence local economic development.

This theoretical insight provides a new perspective and enhanced clarity to subnational policymakers in the United States considering which firms they should incentivize to maximize economic benefits for their constituents. Specifically, results imply that requiring locally operating firms to share a portion of their ownership with local residents as a condition of receiving public incentives is in the long-term economic interests of local residents at-large.

Future studies should focus on collecting data that allows for statistical regressions and controls. Specifically, future works should include large-n studies able to differentiate the effects of firm size and industry from ownership type on the geography of firm ownership more clearly than was possible in this comparative case study. Additionally, insights into the location of indirect shareholders, like individual mutual fund holders, of publicly traded firms would be a worthy contribution, allowing a comparable mapping of the ultimate financial beneficiaries of firm ownership. Clarifying the timing and magnitude of the reinvestment of firm wealth in local economies could make it more feasible to evaluate the importance of firm ownership type relative to the numerous other considerations (e.g. local employment/firm size, occupations, and industry) local policymakers balance when deciding which local firms to incentivize with public policy.

While no economic panacea, the influence of firms’ geographic ownership structures on local economic development should be taken more seriously than it has been to date by both academics and subnational policymakers. Academic investigation into the geography of firm ownership, despite its methodological challenges, may help unlock important evidence-based insights into the feasibility of incentivizing local firm ownership to stimulate local economic development.

Footnotes

Acknowledgements

I give my sincere thanks to the anonymous participants in this research project, whose impressive professional stories extend far beyond the limited scope of this project. I also thank Dr. Neil Lee at the London School of Economics and Political Science and the OEOC staff at Kent State University for their kind support. Finally, I am truly appreciative of the helpful comments received from three anonymous referees. I am solely responsible for any remaining errors or omissions.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Mark S Mygrant

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