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2 Community and Economic Development Bulletin How Will a Development Project Affect the Local Economy? The first question in assessing whether a development project is worthy of some amount of public investment is, What economic benefits will the project create for the community? These benefits are most often measured in terms of employment, income, and output (business rev- enues or sales). In 2006 Google announced it would build a $600 million data center in Lenoir (Caldwell County), N.C. This project provides a useful illustration for how to assess and interpret the esti- mated economic effects of a new business location. Google is expected to employ 210 workers at the facility itself. While these 210 jobs will be directly supported by the day-to-day operations of the new facility, the North Carolina Department of Commerce estimates that Google will cre- ate atotal of 582 jobs statewide.l If Google is directly supporting only 210 workers, how can the total employment expected to come from the new facility be nearly 600? Economic Impact Analysis the primary quantitative technique used to estimate the economic benefits of a proposed devel- opment project is economic impact analysis. Economic impact analysis estimates how changes in economic activity, such as a new business locating in a communit}; will affect the wider local or regional economy. If the prospective business requires a new facility to be built, the construc- tion phase of the project will create a stimulus effect locally that can be captured in an economic impact analysis. Once a new facility is operational, a business such as Google will spend money directly on certain items, including (1) payroll, (2) service contracts with local vendors, and (3) local pur- chases of supplies and equipment. When a business makes such direct expenditures, it sets in motion a series of additional spending flows throughout various sectors of the local economy. For example, the purchase of goods and services from local suppliers supports the hiring of workers at those firms and enables those firms to purchase additional inputs from their suppli- ers situated further down the supply chain. In addition, the company's employees earn salaries and wages, some of which they will spend on local goods and services in a wide variety of indus- tries. That spending helps support workers in those industries who also will spend portions of their incomes locally, and so on. Using this logic, a typical economic impact analysis estimates the total impact of a change in economic activityZ as the sum of effects on three different levels. Direct effects are the initial changes in employment, income, or output that trigger the first round of spending (e.g., the value of a firm's initial change in payroll or production). Indirect effects are the changes in employment, income, or output in subsequent rounds of re-spending that arise through purchases from local supplier industries (inter-industry purchases). Induced effects are created evhen payrolls increase and workers in affected industry sectors spend more on local goods and services (household spending effect}. 1. TIZe estimates produced by the N.C. Department of Commerce are measures of statewide impact, but many of these jobs will be created in the larger region surrounding Caldwell County. 2. A change in economic activity can be an expansion or a contraction. For example, an expansion might involve new business investment while a contraction can result from a sales decline, plant closing, or other reduction in business spending. 17 ©2010 School of Government. The University of North Carolina at Chapel Hill