Industry Contribution Analysis (ICA) is a method used to estimate the value of a sector or group of sectors in a region, at their current levels of production. While the focus of the analysis still looks at backward linkages, the purpose of this analysis differs from the standard economic impact analysis. ICA shows the relative extent and magnitude of the industry, event, or policy in the study area.
When considering the Indirect and Induced Effects of an impact analysis, we are looking at how industries in our region will respond to a change in the key industry or industries being modeled in our Events. Industry Contribution Analysis shifts this framework to see what industries and what level of production in these industries is being supported by the current activity of the target sector or sectors in the region of study. In other words, ICA looks at how a business or sector is linked to the current economy.
It is important to distinguish the differences between methodologies and verbiage between a typical Economic Impact Analysis and an Industry Contribution Analysis.
Impact is the term used to denote a change in the economic conditions of the regional economy. This could be a change that increases or decreases current production, employment, taxes, etc. The Impact Method is used when conducting an impact analysis.
Contribution is a term that is used to denote that the study is looking at how the current state of industry supports other businesses in the local economy.
Industry Contribution Analysis is a unique method which affects a constraint upon the Model by "removing" feedback linkages or buy backs to the Industry being analyzed. Typically, this method is used in conjunction with the IMPLAN Study Area Data because you are no longer looking at an individual firm, or a group of firms, but rather an entire Industry Sector. This method can also be used with single firms, but when it is, the results of this method should be considered conservative.
THE PURPOSE OF A CONSTRAINT:
Industry Contribution Analysis is used when we are interested in applying constraints to ensure that the Output of a Sector in the Total Results is not larger than the input value. Showing that the fruit farming industry supported more fruit farming employment than the total employment in fruit farming would not be methodologically sound or make any sense.
For a change in the economy, these additional rounds of Indirect and Induced purchasing make sense and are expected. In effect, we are saying "as a result of a change in production in Sector 4 - Fruit Farming, additional demand for more production of fruit farming is created and will stimulate additional payroll that will also increase demand for fruit farming." This is useful when we are looking at a new farm or expanded production within the study area.
These buy-backs become problematic however, when we are looking at how the sector in its "current" state supports other businesses in our local economy. If we are trying to determine what Sector 4 - Fruit Farming, not an individual firm, contributes to our local economy, we cannot have the Indirect and Induced Effects creating additional buybacks to itself in our analysis. By removing these buyback effects, we removing the overestimation that would occur.
SPECIAL CONSIDERATION OF FIRM LEVEL CONTRIBUTION:
Studies looking at how the current state of a single firm supports other businesses in the local economy would also be considered Industry Contribution Analysis, but the appropriateness of buybacks to the Sector the firm falls within can become more of a gray area. Should purchases to this Sector be restricted or left unrestricted as they would be in an Impact Analysis?
Looking at the contribution of a single firm that makes up one of many like firms in the region, additional rounds of Indirect and Induced purchasing may make sense. It would be reasonable to say "as a result of the current levels of production in a portion of Sector 4 - Fruit Farming, Sector 4 demands additional production of fruit farming, and will contribute to payroll to households that also demand fruit farming." Let’s take for example the contribution of an apple farmer that is the only apple farmer in a Region but not the only fruit farmer. The farmer that grows the apples would still buy oranges at the grocery store, but the farmer’s spending on his or her own apples would already be included in their current level of production as well as the current spending on the farmer’s apples by anyone else in the Region. This means some Indirect and Induced Effect on fruit farming would be appropriate, such as spending on oranges and other locally grown and consumed fruit besides apples. But there should be no Indirect or Induced Effects on fruit farming that stem from spending on apples. At this time there is only the option to fully allow for buybacks to the Sector as they would be estimated in an Impact Analysis, or to fully restrict the buybacks. Therefore, the greater the percent of total production for the sector that the single firm is responsible for, the less appropriate it is to allow for buybacks to the Sector.
When a study is estimating the effect of the existing state of a firm it is up to the analyst to determine whether or not it is appropriate to allow for the buybacks to the Sector, creating Indirect and Induced Effects to the Sector. A rule of thumb may be whether or not the firm makes up less than half of the production in the entire Sector it falls within. In either case, the results should be described using contribution analysis language, i.e. “contributes to”, “sustains”, “supports”. To allow for buybacks to the Sector the Impact Method should be used by modeling the Sector through one of the four Industry Event Types, but beware of overestimation. To restrict all buybacks to the Sector the Industry Contribution Analysis Event Type should be used, but beware of underestimation.
The good news is that now Industry Contribution Analysis is easier than ever. It requires only a few steps which will eliminate the industry buybacks. Let's say we want to see how fruit farming contributes to the national economy.
STEP 1 – SETTING UP THE EVENT
In our example, what we want to examine is the importance of fruit farming to the United States. This industry in IMPLAN is Sector 4 - Fruit Farming.
First, we create the region for US Total and enter the Impacts screen. We start defining our Event by giving the Event a title like “US Fruit Farming.” Under Type, we choose “Industry Contribution Analysis” and under Industry we choose “4 - Fruit Farming.”
Under the Value field, there are two choices. First, we can enter the dollar value of the sector that we want to model. This would be useful if we want to show the contribution of one large farm in our study area that we know has an output of $2 million. The other choice is a percent which is most useful when we want to model the contribution of the entire sector on the economy. In this example, the Value is set to 100% so that we can examine the contribution of all fruit farming across the nation.
The screen should look like this:
Now, we move our Event into the Group on the right side of the screen. Our Group will need to indicate the US Total as the Region. By default the Dollar Year will be the current year and the Data Year will be the most current data available in IMPLAN. These settings are appropriate for estimating the contribution of an entire Sector for the current year. Note that different years of data can be analyzed by manipulating the dollar year on the Events screen and these settings can be updated as appropriate. Now we are ready to run our analysis. For our example, let’s estimate the contribution of fruit farming in 2017 for the whole US.
STEP 2 – EXAMINE THE RESULTS
As always, the Results screen starts with a summary of the analysis. Here we can see that the direct employment in Sector 4 -Fruit Farming is 335,765, the Labor Income is $9.4 billion, the Value Added is $13.8 billion, and the Output is $23.9 billion. The total effect on the national economy is 586,806 jobs, $22.5 billion in Labor Income, $34.9 billion in Value Added, and $60.3 billion in Output.
From our Region Details screen, there is a descriptive picture of the entire economy. When examining the Industry Detail, we see the exact same Direct Employment, Labor Income, and Output shown in our Results of the fruit farming ICA. This is because we chose to model 100% of the Sector and maintained a consistent Dollar Year in our analysis Events and Results, which also matches the year of the data.
Moving to the Output tab, we can see that the Indirect and Induced effects for Sector 4 - Fruit Farming are zero. This means the model did not allow any buybacks from the sector to itself. The same is true on the other tabs for Employment as well as all the components of Value Added (Employee Compensation, Proprietor Income, Other Property Income, Taxes on Production & Imports, and a total for Value Added).
STEP 3 – THINKING THROUGH YOUR ANALYSIS
This method can also be done for just one business to see how perhaps one large farm contributes to a regional economy. Remember, this is done by inputting only the dollars of output or percent of the total sector represented by that farm on the Events page, while still using the Industry Contribution Analysis type. This is definitely the conservative approach when a firm is small in the region in comparison to the remainder of the sector.
Industry Contribution Analysis can also be done across multiple sectors, for example to show how all of agriculture fits into the economy of study. This is done by adding multiple Events as perhaps we also want to see vegetable farming or perhaps all agriculture sectors together. Each sector would be its own Event as an Industry Contribution Analysis so we would see one Event for Sector 4 - Fruit Farming, another for Sector 3 - Vegetable and Melon Farming, etc.
If you model each of these Contribution Events for each Sector within a single Group, this will treat the analysis as a Multi-Industry Contribution Analysis, such that the purchases from a Sector to itself are restricted AND the purchases from other Sectors to the modeled contributing Sector are also restricted. This would produce results that only include Direct Effects for the Sectors included in your multiple Industry Contribution Analysis Events. All Indirect and Induced Effects to these Sectors would be restricted from being generated. If the Industry Contribution Analysis Events for each Sector were modeled within individual Groups, then each Group will be treated as a single Contribution Analysis where only the purchases from each Sector to itself are restricted.
If you are performing an ICA on individual states and DC, and then the US total, the sum of the individual impacts will not match the national total. This is true for any derivation of smaller groups (congressional districts, zip codes, counties) and one larger area because each region has a unique commuter rate and trade flows so the sum of the parts will never be the same as the total. We recommend that you manually sum the totals from the smaller regions instead of using the results from the larger region if the you plan to present both sets of data in the same context.
Written June 26, 2019