The goals of ARC investments are not just to create jobs and income, but also to improve economic competitiveness, self-sufficiency, and entrepreneurial vitality in areas of need. Thus, this report attempts to measure the extent to which the local project areas are fostering economic diversification, economic vitality, and entrepreneurial success.

These measures are included as a baseline for comparison, rather than as a direct reflection of project impacts or consequences. In some cases, job growth or diversification analyses clearly reflect high job creation resulting from an ARC investment (e.g., Greenville-Spartanburg sewer project). In other cases, an assessment of economic vitality and entrepreneurial success can demonstrate the need for the services offered by business incubators, or the actual impact of an incubator (e.g., Bradford, PA incubator). By and large, though, the analyses of conditions in project areas should be viewed as context for the projects themselves and a guide to current development needs —not as a direct reflection of sample projects themselves.

Table 6.1 Growth & Entrepreneurial Vitality Measures

*CBP: U.S. Census Bureau's County Business Patterns

A set of economic analyses was developed for the project counties and, in some cases, larger impact areas. The analyses were developed from two different sources and cover widely varying time frames and widely varying measures. Growth and diversification analyses were developed for each project impact area, as defined by local interviewees, for the years 1990-96 using the Census Bureau's County Business Patterns. ^[i]

The several vitality analyses were developed with a variety of private-sector credit reporting databases, and cover the reporting years 1996-99. ^[ii]

Because projects in the database were initiated and completed over a ten-year period, and because projects have widely divergent maturity periods and impact missions, the real value of the economic and vitality analyses is the view they offer not of project impacts themselves but of the areas in which the projects were developed. For this reason, the aggregate analysis of economic and vitality measures is relatively brief, but the numbers developed for local areas may assist in the development of strengths and weakness at all local levels.

The categories of economic data analysis are summarized in Table 6.1. Since all but one of the analyzed projects were in distressed or transitional counties, vitality trends are likely lower than for the Region as a whole. On the other hand, economic development project applications naturally appeared to be received mainly from areas that perceived opportunity; thus, areas with the lowest levels of vitality may also have been excluded from project investments and thus the analysis.

6.1 Growth Analysis

The growth analysis measures job growth in each project area in 1990-96, and is developed in two different forms. In order to give an absolute indication of growth, job growth is described as a percentage of 1990 totals. Second, the job growth percentage for each project area was benchmarked against the corresponding U.S. job growth rate where U.S. equals 100. That is to say, project areas with growth superior to that of the United States scored over 100, while underperforming areas scored below 100.

As shown by Table 6.2, 42 of the 76 project areas had job growth rates superior to U.S. job growth patterns for the years 1990-96. Of these, 25 also performed better than U.S. trends in both the firm retention and job replenishment categories.

While the sample size makes regional comparisons difficult, it's worth noting that a cluster of project areas in the mid-Atlantic ARC states of Pennsylvania, New York, Maryland, and Virginia reflected far lower 1990-96 growth patterns than the overall sample. In general, a higher proportion of rural areas in the database indicated better-performing job growth patterns than did those in metro areas.

Project areas performing above the U.S. average included ten counties designated as distressed at the point of project initiation. (Note that the job growth rate measures the percentage of absolute growth, so a distressed county with a relatively high growth rate could have serious problems and still evidence high relative growth.)

Table 6.2 Project Area Growth Patterns (1990-96)

Five of these counties have currently moved to "transitional" designations. Projects in these counties all began in 1995 or earlier, so these project impacts may have had time to mature in time to be reflected in the 1996 County Business Patterns data. Of the counties that began with distress designations and registered higher-than-average growth rates, nine also showed overall retention rates over 100.  Five of these counties—Gilmer, GA; Grainger TN; Lincoln and Rockcastle, KY; and Wayne, WV—also reflected job replenishment rates higher than the U.S. average (see the explanation of job replenishment in Section 6.3).

Also noteworthy are the truly impressive growth rates of the 19 project areas that  claimed more than twice the national job growth rate in the 1990-96 period. Ten of these areas were in the southern states of Alabama, Georgia, and Mississippi. Thirteen of these areas were rural, while only six were the beneficiaries of metropolitan spillover, with three of these in Alabama.

6.2 Area Growth and Relative Project Impacts

In order to assess the relative impact of ARC investments, the direct job impacts of projects in the sample were compared with the total net job growth of primary impact counties 1990-96. Although time frame discrepancies between the net job growth measurement period and various projects make this an imperfect measure, nonetheless it is a reasonable yardstick of relative impact.

Sixty-five of the seventy-six project counties qualified for this assessment. Counties with only non-economic development water and sewer projects were excluded. Four categories of relative impact were established:

Table 6.3 Relative Impacts: Area Growth and Direct Project Jobs

Highest relative impact was registered in counties where projects stimulated more than 100 direct jobs and accounted for more than 10 percent of total job growth as reflected in the 1990-96 measurement. Thirty-four counties reached both thresholds.

A second tier of high impact was indicated for 11 counties where direct project jobs did not reach 100 percent but where the achieved totals accounted for more than 10 percent of net 1990-96 job growth.

Another 12 project counties reflected more than 100 direct jobs from ARC investments, but direct job totals were less than 10 percent of net county job growth in 1990-96.

The relative impacts were considered most modest in those eight counties that were less than "100 jobs created" and less than the "10 percent net growth" threshold attributable to ARC projects.

In sum, the relative impacts of investments in primary project counties are significant in both depth and breadth. Forty-nine percent of the counties examined met both "high impact" thresholds. Job impacts exceeded 10 percent of net job growth in 69 percent of the counties examined, and exceeded 100 direct jobs in 68 percent.

The same measurements, when applied to total (direct and indirect) jobs generated by projects, are even more impressive. Fifty-two counties (80 percent of those examined) show project impacts greater than 10 percent of net job growth. Forty-four (68 percent) met both the net growth and total jobs thresholds.

Geographic Variation of Growth

•   Naturally, there are individual stories behind each of these relative impact measures. Some reflect exactly what appears at face value: large projects with major impacts on both robust regions (Spartanburg-Greenville, SC) as well as those that are more modest in size and growth experience (e.g., McKean, PA).
  
  
• Ten of the measured counties experienced negative net job growth during the 1990-96 measurement period, making ARC projects all the more significant in terms of regional impact. These counties were Buchanan, VA; Chautauqua, NY; Choctaw, MS; Cortland, NY; Dickenson, VA; Itawamba, MS; Luzerne, PA; Scott, VA; Union, MS; and Venango, PA.
  
  
• Projects in relatively large metropolitan environments created significant numbers of jobs but by their nature did not reflect a 10 percent impact on the project county. Incubator projects in Erie, PA, and Birmingham, AL (Jefferson County) fell into this category. In others, even projects generating fewer than 100 jobs exerted a major impact on counties with small projects (Forest, PA; Dickenson, VA) and, in some cases, in larger counties with relatively stagnant growth (Cambria, PA).

6.3 Economic Vitality

Each segment of the four economic vitality analyses was developed through a variation of the "firm life" methodology. A more detailed description of the methodology can be found in Appendix D.

Four measures were included in the vitality analysis:

• Entrepreneurial Activity, as measured by a comparison of start-up rates across the United States with rates in each project area. The results of each local area were compared with U.S. results where U.S. equals 100.
  
  
• Entrepreneurial Survival rates were developed for each project area. The percentage of surviving young firms in each area was then benchmarked against U.S. patterns where U.S. equals 100. Together with the entrepreneurial activity rate, the resulting entrepreneurial survival rate creates a quantifiable measure of entrepreneurial vitality in each project area.
  
  
• Firm Retention Rate supplements the entrepreneurial survival rate and tracks all firms across the United States and within each project area in the 1996-99 period.
  
  
• Job Replenishment Analysis compares the number of jobs lost by failed firms in the firm retention analysis with those added by survivors over the same period. The replenishment rate serves as an important supplement to the firm retention rate, which can reflect high scores in areas with relatively stagnant economies, as well as those that have more robust economic conditions. In general, high retention and replenishment rates signal economic vibrancy even in areas that are not business migration leaders or "hot spots" for start-up activity.

Findings. Generally, the vitality analysis identified entrepreneurship as the clearest need in most project counties. Of the seventy-six project areas, only six met or exceeded U.S. start-up rates of activity for the years 1996-99, including only one county classified as rural. Two of the higher performing areas were in Alabama; the others were in West Virginia, Tennessee, and Mississippi.

Nineteen of the twenty counties in the sample currently designated as distressed counties reflected start-up activity rates below the U.S. average of 100.

Of even greater concern, 61 of the 76 project areas indicated start-up rates at least 10 percent below national patterns (scoring 90 or less). Mississippi counties in the sample scored remarkably well in this analysis. Moreover, survival rates of young firms  (0-3 years in operation as of 1996) were somewhat better than overall rates; 28 project areas had start-up activity rating less than 91 and young firm survival rates that were lower than the U.S. average. By themselves, high entrepreneurial survival rates may not be as impressive as they first seem; when coupled with low start-up activity and overall growth, higher survival rates may merely reflect a lack of competition.

In this regard, 33 project areas reflected job growth (1990-96) below U.S. averages and lower-than-average start-up activity rates. Of these areas, 19 also had job replenishment rates lower than the U.S. average. All four of the Virginia project counties as well as four of Pennsylvania's eight project areas appear in this higher risk category.

Table 6.4 Project Area Entrepreneurial Patterns (1996-99)

The prevalence of a low level of entrepreneurial activity in project areas strongly suggests a need for an increased focus on start-up assistance. Indeed, these findings highlight the important contribution of the relatively small number of incubator projects in stimulating entrepreneurial activity. Areas such as McKean and Erie, PA, which have recognized their gaps in start-up activity and actively used ARC resources to target start-up efforts, should be applauded. Other areas that have exhibited very strong growth patterns largely because of business in-migration and activity surrounding the location of branch plant sites should also be encouraged to add focus on entrepreneurialism, which can serve as an offset to future surprises from absentee-owned firms.

The overwhelming majority of project areas demonstrated higher-than-average firm retention rates for the period 1996-99. However, the firm retention measure can by itself be deceiving, in some cases masking high start-up "churn" levels and in others a generally stagnant economy. Thus, a better look at the vitality of existing businesses in the area can be developed by screening areas with high retention for high replenishment rates as well. This screening reduces to 50 percent the number of areas with above-average performance. Rural Virginia project areas again stand out as a weak spot. Overall performance is reasonably matched in both metro and rural, distressed and non-distressed areas.

Table 6.5 Project Area Business Retention (1996-99)

The relatively positive rates of job growth, firm retention and the vitality of existing firms may be a pleasant surprise for observers of the Region. However, while the overall news is good, there are causes for concern. Indeed, 33 project areas registered below-average scores in both entrepreneurial activity and job replenishment. This "at risk" group, which contains only seven FY2000 distressed areas, combines low growth among existing firms with low start-up activity—a combination that calls for attention.

Individual growth and vitality scores for each primary project area are available electronically in a separate Access database.

Summary

In sum, four important points can be discerned from the overall trends reflected in the economic analyses:

• ARC investments demonstrate very significant impacts on local project areas relative to overall growth patterns. Of 65 areas for which measures could be developed, 34 project investments yielded both 100 direct jobs and 10 percent of all net job growth in the primary impact area between 1990 and 1996. Another 11 counties can attribute to ARC investments fewer than 100 jobs but more than 10 percent of all net job growth in the sample.
  
  
• Perhaps as important for the future, entrepreneurial activity rates are generally very low and in need of serious, concentrated attention.
  
  
• While diversification is an important ingredient of regional vitality, job growth patterns in the project areas were most positive among those areas that began with large manufacturing sectors and then maintained their manufacturing base (and often diversified within them). A reasonable conclusion points to the continued importance of nurturing and diversifying within the Region's manufacturing sector.
  
  
• Basic retention rates are positive, but retention rates coupled with the significant job replenishment indicator suggest a low level of growth among existing firms in many areas. These findings merit additional policy consideration.

Notes

^[i] 17 Economic growth patterns were measured for all primary impact counties for the years 1990-96 regardless of the actual completion date of the project or projects within them.

^{[ii] 18}Because of inevitable and varied lags in business reporting, it is more accurate to say that the vitality analyses cover a three-year period ranging from 1995- to 1999. Original attempts to perform the vitality analyses from earlier periods were discarded because of concerns regarding data integrity.