All of our communities focus their attention on “business development.” That focus is on new business start-ups, business attraction (recruitment), and retention of existing businesses. To succeed at business development, there is analysis that can be conducted to understand what a business (existing, future or potentially lost) means to the community, and a region, in terms of jobs, income, and revenues.

By definition, economic impact analysis is a method of calculating the economic affects associated with a change in economic activity. Those measuring economic impact use models or create their own model to assist in calculating these effects of economic activity. These models rely on local, state and national employment data sets which identify economic linkages between each and every business type. Chamber Fayetteville has access to impact models to study these effects of business on our entire HAMMRC region.

Measuring economic impact

Like other measures of socio-economic relationships, economic impact analysis is not an exact science, though when properly performed will provide the best estimate of activity. Most commonly, economic developers use impact studies to measure the economic contribution existing businesses provide to their communities. Hypothetically, an existing industry employing 25 people along with their benefits and the spending of their salaries, as well as the spending of the industry itself, generates other economic activity in the community and beyond. This is what we refer to as the multiplier effect, where those 25 direct jobs are really responsible for fostering a number of other jobs in the area in everything from construction to manufacturing, retail/service, transportation, finance, and even government and others.

Because economic impact works in reverse too, it is critical that we do everything in our power to keep our existing industry and businesses in our communities. The loss of that same industry employing 25 people will also be realized in the other sectors of the local and regional economy.

Economic developers also use impact analysis when attracting new business to estimate the economic effects of a prospective business at both the local and regional level. You can bet that the State economic development agency has calculated the impact of a company they are recruiting.

In Arkansas and Oklahoma communities, the main revenue sources are property and sales taxes. Most property and sales tax collections are gathered where the employees live and spend their money (which may not be where they work).

Multiplier effects are regional

The impact of a new employer is measurable everyday when employees take their paychecks home to where they live, pay their taxes, and spend their income. How successful will communities be in capturing regional impact of business locations and existing operations? Ask yourselves, where do people (as our workforce) choose to live? And where do they choose to spend their money?

• Factors impacting the location of “people” include schools, housing, healthcare, retail offerings, and others.   

• Many factors impact where people choose to spend their money, including product availability, selection, price, convenience, shopping hours, and shopping experience

Multiplier effect: What it is and is not

All business is not the same when it comes to multipliers and economic effects. Companies that build a product in a community and sell it outside of the area bring new money into the area as a result. That model generally has a larger multiplier effect on the region. Other businesses, such as retail and service, generally have a smaller effect though are critical as they move money around the economy through local transactions. An exception to this is in the tourism industry, where retail and service activity is bringing new money into the area by capturing tourists’ spending.

Multipliers are calculated for employment, income and output (which is the local equivalent of gross domestic product). If our company employing 25 people is responsible for creating an additional 20 people in the area economy, they would have a multiplier of 1.8 (total employment of 45 divided by direct employment of 25). Though multipliers greater than 3.0 exist, they are rare.

Don’t confuse the multiplier with the turnover of dollars in your local economy. Multipliers can be innocently misrepresented by organizations as the number of transactions in the local economy the money from an initial business transaction goes through (which can be as high as 10 times) before it leaves the community. This is not a multiplier of 10, but rather 10 rounds of turnover. There may or may not be any relationship between multipliers and turnover. In fact, the turnover of dollars in an economy is more associated with retail leakage than anything else.

Where do I get help?

Economic impact analysis is arguably critical to successful business retention and development in our communities. A comprehensive impact analysis requires a model and specific data.  Some economic development organizations have models to use (as we do), but many generally pay third party providers (consultants, universities, etc.) to do this work.  This is a service we offer to HAMMRC members at no cost upon request.  For more information on how we can assist you with economic impact assessments, please contact our office.