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This article was originally published in Area Development during the 4th Quarter of 2021.
Congratulations. Your business is growing! Revenue is up, and you just launched a new product that is flying off the shelves. The only problem is you need to hire more people and you have no place to put them. You have hired a site selector, and they have found the perfect location — good access to interstates, labor, and everything else you could want. The only concern is the public. The community likes its small-town rural feel and is worried your project will change their lifestyle too much.
You need an economic impact study. Put simply, an economic impact study estimates the ripple impact of your expansion or relocation. In addition to your direct hires, jobs are created in the region when your firm purchases from local suppliers and your employees spend some of their income in the region. Measuring the full impact of your expansion on the region can help convince two key constituencies to support your project: government officials and the public.
Garnering Government and Public Support
Many projects need approval from government officials, who want to know that tax revenues from the expansion exceed additional costs for public services such as police and fire protection, teachers, and infrastructure. When you equip local and state officials with an unbiased assessment of your likely financial impact on the area, you provide them with evidence that your project helps the people they were elected or appointed to serve. A good economic impact study will demonstrate your commitment to helping local officials do their job and may create goodwill that will pay dividends for years to come.
An economic impact study also helps assure the public of the real benefits that will come to them from your project. If the everyday person understands the public services that the local government can now offer because of increased tax revenue, the naysayers will have a much harder time inciting opposition. That connection to enhanced services is a crucial part of the economic impact. The public needs to understand that new projects expand the local tax base, and this additional revenue can be used to hire new teachers, expand the broadband network, or construct new parks or libraries to improve the quality of life for everyone.
Measuring a Project’s Impact
A good study measures your project’s economic impact in four ways. First, it measures the direct impact of your project. The direct impact consists of the jobs, sales or output, and compensation directly created by your firm’s expansion. For a very simplified example, if Company X wants to open a new location that employs 20 people with an average annual salary of $60,000 and projected annual sales of $3 million, the estimated direct economic impact on the surrounding area equals $3 million, including $1.2 million in wages and salaries.
Second, an economic impact study measures the indirect impact of your project. The indirect impact consists of the jobs, sales or output, and compensation created by regional companies that supply goods and services to the new or newly expanded industry. Company X will need to buy desks, chairs, lighting, and countless other things to set up its new office and run its business. That will create demand that local companies can fill, and they should see growth as a result.
Third, an economic impact study measures the induced impact of your project. The induced impact consists of all the jobs, sales or output, and compensation that your employees and suppliers’ employees create when they spend their wages at local establishments. Every time one of Company X’s new employees eats out, goes to the grocery store, or takes in a movie, it counts toward the company’s induced impact.
Finally, an economic impact study identifies the fiscal impact of additional revenue collected by the local and state government. Sources of revenue include corporate and personal income taxes, property taxes, retail sales tax, and others. A credible study limits its expectations and does not reach too far to make the potential revenue as large as possible. Estimating the number of dogs per household and the ensuing dog license fees collected is a bit farfetched!
Of course, the simplified examples above understate the complexity of forecasting the future impact of a project. A business or a potential project can connect with the local communities in various ways. The closer the linkage with the local region, the bigger the economic impact will be. Economic impact studies rely on multipliers to represent such linkages. Multipliers are typically estimated taking into consideration the regional industry mix, supply capacity, economic diversity, wages, labor supply, and other factors.
Different types of industries vary with regard to their multipliers, which are used to identify the number of additional jobs created and sales generated. For example, a motor vehicle manufacturing plant in the Detroit-Warren-Dearborn, Michigan, metropolitan area has a total employment multiplier of 4.52 (1.00 from the direct impact, 2.32 from the indirect impact, and 1.20 from the induced impact). This means that an additional 3.52 jobs are created for every 1 new job at the motor vehicle plant. Manufacturing industries’ multipliers are generally larger because of all the supplies that are purchased in the manufacturing process.
On the other hand, offices of lawyers in the Detroit metro area have a much smaller employment multiplier of 1.64, in part because they purchase fewer supplies. However, because the compensation of lawyers is relatively high, the multiplier from the induced or household impact is 0.42 larger and an indirect impact of 0.22. The direct impact is 1.0.
Another consideration when producing economic impacts is that the multiplier will be larger when the region is larger because of the depth of the supply chain. If, for example, the economic impact was limited to Wayne County, Michigan, the multiplier would be smaller than for the entire Detroit metro area.
A Powerful Tool
While the examples above focus on manufacturing industries, economic impact studies are powerful tools that can be utilized by everyone in local communities to demonstrate their contributions to local economy. Holding a music festival, hosting a flower show, or building a walking trail — all of which enrich people’s lives — benefit local regions economically. In these cases, organizers can utilize economic impact studies to raise funds and gather public support.
The Union Cycliste Internationale (UCI) World Road Cycling Championships event held in Richmond, Virginia, in September 2015 is an example of how an event can benefit a region and economic development. This event, which occurred in the United States for only the second time in its history, brought an estimated 645,000 spectators from around the world and an estimated $23 million in economic impact on the Richmond metropolitan statistical area. Based on the exposure and visibility through national and international media attention, the region and state likely benefited well after the successful completion of the UCI Championships.