BUSINESS ASSISTANCE
Sherman & Chappell (1998) focused on the effectiveness of business incubators. They convened and surveyed three focus groups of incubator managers, stakeholders and incubator graduate firms, and employed additional methodological techniques. Their results indicated that business incubators can be an effective economic development tool and have the potential for positive impact on the community through job creation and help for new business survival and growth.
Nevertheless, in a response article to the Sherman and Chappell conclusion, Bearse (1998) criticized the methodology employed, stressing that 40 of the 50 incubators analyzed still had not been able to break even. Bearse asserted that the research had failed to deliver, or help others to produce, valid performance evaluations, performance benchmarking results and management information that can help incubators attain financial self-sustainability.
Case studies have also been employed in order to evaluate the economic and fiscal impacts of business incubators. In general, these studies measured impacts by examining such factors as jobs created by incubator tenants and graduates, product innovation, number of new business starts, success rates of incubator firms, and location in the incubator service area after graduation.
Job creation per incubator firm was found to be relatively small-fewer than 10 employees-but tended to increase over time. Some suggest that incubators are best viewed as a long-term economic development strategy, keeping in mind both short- and long-run impacts. (Markley & McNamara, 1995).
Markely & McNamara conducted a case study of the efficacy of a business incubator in the center of a small metropolitan area. They concluded that incubators were effective in generating jobs and income, especially by creating linkages with firms inside and outside the local economy over the long run. Thus, research using both case studies and surveys has produced mixed results regarding the effectiveness of business incubators as economic development tools.
The New York Manufacturing Extension Partnership (MEP) was established to help small and medium-sized manufacturers in the state compete more effectively by providing a range of services to assist in modernization. Evaluators of New York's MEP relied on quasi-experimental design to compare the performance of MEP clients with that of similar, non-participating companies. They found that, on average, participating companies changed important business and manufacturing processes, improved manufacturing performance and increased value added.
They estimate significant public sector benefits including an additional $30 to $110 million of value-added income. This represents a net benefit to the state economy, since all costs incurred in implementing the changes were captured in the calculations. They also estimated that between 510 and 1,920 jobs were created in a two-year period. A cost-benefit analysis was not conducted. (Oldsman & Heye n.d.)
Pennsylvania's Industrial Resource Centers (IRC) program was established to help small- and medium-sized manufactures upgrade business practices and modernize their production capabilities to spur economic growth in the state. IRC staff helps companies assess their overall and specific business operations, identify areas for improvement, define a course of action and marshal resources required to make the needed changes.
Evaluation based on a comparison of participating companies and similar non-participating companies demonstrated that IRC clients increased labor productivity and contributed to an increase in gross state product. Researchers estimated that the program was directly responsible for $120 million in additional state revenue and the return on state investment was 22 to 1 (Nexus Associates 1999).
Jarmin (1999) analyzed data from eight manufacturing extension centers in two states to evaluate the impact of services on productivity. He compared growth in productivity among firms that received services between 1987 and 1992 to that of a control group that did not receive services. He found that clients experienced between 3.4 and 16 percent more growth in labor productivity than non-clients.
Feldman and Kelley (2002) examined the role played by state programs in the development of technology pioneering firms (defined as new companies formed to commercialize new technologies). Their work relied on in-depth case studies of four companies that were award winners in the highly selective competitions of the Advanced Technology Program of the National Institute for Standards and Technology.
Feldman and Kelley identified three types of programs that states use to augment the capabilities of new companies. They include university-based, technology-assistance programs (technology transfer programs, applied research grants and facilities and access to resources); financial assistance programs (public venture capital funds and matching funds for federal research grants); and business assistance programs (incubation facilities and assistance in developing business plans).
The researchers found that the companies studied were successful in obtaining funding from public and private sources and in developing a technology of proven valuable to other organizations. State programs were instrumental to their success. All the companies relied on the resources of universities and received subsidies from the states to help support their research activities. States also made equity investments directly in the firms. Feldman and Kelley contend that the financial return on these investments may provide important benefits to the state. They suggest that focusing on employment gains is a shortsighted method to measure success.
Pennsylvania created the Ben Franklin Partnership (BPF) to promote technological innovation. A program evaluation included in-depth case studies, client-reported impacts and estimates of value added, employment and tax revenues generated by the program.
The case studies indicated that BFP played a critical role in the early stages of company development by supplying financing and technical expertise. The program produced an estimated 21,800 additional jobs in client firms over a seven-year period, jobs that paid an annual salary approximately 45 percent higher than the average salary statewide.
Evaluators also estimated that the program led to the creation of an additional 24,500 jobs with non-client firms due to ripple effects. The boost to the Pennsylvania economy was calculated to be $2.9 billion over seven years. The rate of return was $14 dollars for every $1 of public investment and the state collected an additional $168 million in tax revenues. Overall, evaluators determined that clients developed new products, built management teams, established production capacity, identified new markets and increased their sales and profitability as a result of the program (Nexus Associates n.d.).
Ohio's seven Edison Centers are located throughout the state. Each center offers different services directed at industries of particular strength in their region. Austrian and Wolf (1999) studied 1,527 projects undertaken by the Edison Centers to assess their economic impact. They found that participating firms realized cost savings of $296.9 million and increased sales by $708.8 million during the 1994-1998-study period. They estimated centers created 4,628 jobs per year in Ohio and disposable income increased by $195 million annually. In addition, an average of $262 million in goods and services were produced as a result of the centers' activities.
The Economic Development Administration (U.S. Department of Commerce) administers the Trade Adjustment Assistance (TAA) program, designed to assist manufacturing firms adversely affected by increased international trade. The program pays for technical assistance to firms that have experienced declining sales and employment due to competition from imported goods. Assistance may include plant layout, management information systems, human resources and marketing and promotion.
An evaluation conducted by the Urban Institute (1998) compared changes in employment and sales for companies assisted by TAA Centers to changes for companies that were determined eligible for assistance, but declined to participate in the program. They found that assisted companies had higher survival rates than unassisted companies (83.8 percent versus 70.7 percent); had added employees (4.2 percent, on average) while unassisted companies showed employment losses (5.3 percent); and experienced stronger sales growth (33.9 percent) than unassisted companies (16.2 percent).
Researchers estimated that $87 in sales was generated for each dollar invested through the program. The differences in sales, employment and survival were attributed to six factors: 1) a fairly extensive package of assistance, implemented at low cost to the firm; 2) the willingness of firms to "select-into" the program by investing time and money in their own recovery; the efforts of TAA Center directors to target firms that, although declining, remain strong enough to benefit from aid; 3) emphasis on a complete and unbiased "diagnostic" of firm strengths and weakness; 4) reliance on private consultants selected through a competitive and project-specific approach to ensure a good fit between firm needs and provider response; 5) strong company interest in full cooperation during implementation because it put up cash and was involved in joint selection of the consultants with the TAA Center; and 6) flexibility for companies to sequence implementation tasks consistent with their own needs and ability to use staff rather than the providers' timetable for training courses or staff availability
Despite the successes, the researchers also noted several areas of concern: 1) few firms eligible for assistance actually receive it; 2) not all trade-impacted firms are eligible for assistance; 3) a substantial backlog in delivering technical assistance; 4) 55 percent of TAA funding covers the cost of technical assistance to firms (while much of the remaining portion covers costs associated with the elaborate process of determining eligibility); 5) a time lag in getting assistance to firms; 6) cost share and fee policies across TAA Centers are inconsistent; and 7) TAA Centers tend not to leverage other business assistance services.
The evaluators made six recommendations to address these issues: 1) modify the program to make it more effective, but allow it to remain as a stand-alone (oppose efforts for program consolidation); 2) eliminate or improve the certification process (eligibility determination); 3) improve the diagnostic process; 4) achieve better leverage of technical assistance; 5) improve the quality of program evaluations (of individual TAA centers); and 6) streamline the national program management
Keys to successful incentive and business assistance programs
To help ensure accountability, Ledebur & Woodward (1990) suggest that provisions of incentive packages be tied to financial recourse should a firm fail to meet negotiated performance standards. They cite several examples of firms that received generous incentives and soon thereafter shut down or scaled back operations.
They also offer development officials a list of steps they can take should a firm not comply with an agreement. Among the steps are recalibrating subsidy schedules in light of weak or strong performance, reclaiming all or part of a subsidy and penalizing firms by collecting the original unpaid taxes along with interest charges.
Included in guidelines urged by Waits & Heffernon (1994) are: incentives linked to quality jobs and advancement opportunities; encouraging recipient companies to fill a certain percentage of new jobs with local people; linking incentives to company investments in technology and human resource development; encouraging companies to offer health care insurance for all employees; insisting that strong environmental management and compliance records be kept; targeting companies important to key clusters, and analyzing the costs and benefits of all incentives packages to ensure the best decision possible.
Friedmand (1994) points out that incentives may be structured to further the goals of public policy. For instance, "linked deposit" programs entail depositing funds in banks that commit to lending money at a favorable rate to small businesses, high-tech companies, minority- and woman-owned firms and other targeted companies.
Firms that bring energy-efficient technologies to market, for example, would be given preference for incentives under such a philosophy. These are just a few examples of new ideas that have come from the research. The literature abounds with creative ideas, strategies and principles for making incentives work as economic development tools.
Bartik points to the valuable role public agencies can have in assisting businesses by making information available. He says: "Government information provision programs will be most effective when they complement rather than substitute for privately-produced information. Obviously there is much private production of information to businesses from consultants and other sources. Government information provision should include the basic information that is least likely to be optimally provided by the private sector" (Bartik 1990).
Bartik also recognizes that situations come up when government agencies simply have better access to information, such as tax rates, regulations and public services. In these cases, it is certainly appropriate for the public sector to assist business by supplying needed information.