One challenge of estimating the economic impact of an EB-5 project is calculating potential indirect and induced effects in the local economy. In this arena, economic multipliers are a way of quantifying the total effects of an economic stimulus, in this case the EB-5 project, across all economic levels in the employment area. While the initial investment and project, for example, the operation of a restaurant, creates a direct effect in the form of jobs created, it also has indirect and induced effects, which are detailed below.
Local Economic Impact – Indirect and Induced Jobs
Indirect effects refer to the economic impact within local industries. For example, the operation of the restaurant mentioned above may require the purchasing of materials from local companies. Induced effects refer to the economic impact of any spending of labor income associated with the project. For example, a contractor hired to make improvements to the restaurant may spend part of his or her income in the local economy, creating an induced economic impact.
The economic multiplier of a project represents all indirect and induced economic activity created by that project within the employment area. This figure is calculated based on the amount spent locally for the project as well as payments to local employees. As such, the multiplier is unique for each project and can vary by industry and region. For example, a regional employment area may have a smaller multiplier than a state employment area for the reason that employees may spend more throughout a state than in one region. Multipliers may also vary based on regional and industry wage standards.
Within the EB-5 market, economic multipliers are based on a figure known as the response coefficient, referring to the number of jobs created per dollar of investment. This is in contrast to a multiplier based on the number of jobs created per direct job. The response coefficient is calculated by summing all economic inputs spurred by the initial stimulus of the direct investment, as illustrated below.
In the case of the EB-5 restaurant project mentioned above, the total investment is $2 million, which creates 25 jobs. If the project is located in a targeted employment area (TEA), two EB-5 investors can invest $900,000 each. If not, one investor can invest $1.8 million, with the remaining $200,000 contributed from other sources.
Part of the $2 million investment goes toward purchasing materials from local suppliers, generating additional jobs in the first round of indirect effects. Part of the investment is also used to pay employees. While a portion of this goes toward taxes and another portion may leave the employment area, some of this amount will be spent locally and will generate additional jobs in the first round of induced effects.
Second rounds of indirect and induced effects follow, as well: The materials purchased in the first round include appliances from a local manufacturer, which must itself purchase material locally to fulfill the order and thereby creates additional indirect jobs. Similarly, an employee who purchases household goods from a local grocer also creates additional jobs.
Subsequent rounds are accounted for using this logic, with each round growing smaller as money goes toward taxes, savings, and extra-regional spending. The total economic impact of a project based on each dollar of investment yields the multiplier for that project, which can be used to calculate indirect and induced jobs toward the required total of 10 full-time jobs per investor under the EB-5 program.
Multipliers are calculated based on several economic models, chief among which are Impact Analysis for Planning (IMPLAN), Regional Economic Models Inc. (REMI), and Regional Input–Output Modeling System (RIMS-II). Each provides multipliers for economic impact assessment by region, but investors and regional centers in the EB-5 program must keep in mind that these estimates include not only full-time but also seasonal and part-time jobs. Each project can use a unique multiplier based on these models to calculate its economic impact in the employment region.
Basic Job Calculation
For the example restaurant above, if the employment multiplier in the region for that industry is 12.5 and the total direct investment was $5 million, then the total economic impact estimate would be 12.5 * 5 (million) = 62.5 jobs.
As is the case with all calculations submitted as part of an economic impact report, investors and regional centers must work with financial and legal representatives familiar with the requirements of the EB-5 program to ensure the business has the potential to create the required number of jobs as well as to ensure investors are provided with accurate information about the viability of a new commercial enterprise. The United States Citizenship and Immigration Services (USCIS) evaluates any figures provided carefully, and thus all financial projections must be based on sound information so as to ensure a smooth visa adjudication process for investors.
