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Investment Zones: who benefits?

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With initial bids due today, I have used this week’s blog series to set out some of the decisions facing local and national government as they negotiate over Investment Zones. My first blog made the case that ‘everyone’ should be submitting an expression of interest: IZs offer big tax breaks, funded by central government, in exchange for planning relaxations that are yet to be defined. Yesterday’s blog started on the trickier task of thinking through two core issues – deadweight and displacement – that will need careful consideration as part of the negotiations. This third, and final blog (for now) highlights some other issues that places should think about as they develop their proposals.

Investment Zones and substitution

Substitution occurs when new jobs created in supported firms are offset by job losses in other firms. For example, a new supermarket in an IZ might create new jobs but put smaller shops nearby out of businesses. Substitution is a risk when firms in the IZ compete with existing firms (outside the IZ) for the same customers. At a national level, there’s not much to distinguish between deadweight, displacement and substitution for firms that serve local and national markets: shuffling round jobs within a local area – via displacement or substitution – is essentially deadweight from a national perspective. The only way to avoid this kind of substitution at the national level is to use the IZ to attract firms that serve export markets.

As with displacement, local areas should care about local substitution because it means generating jobs and investment in the zone comes at a cost of lower investment and employment for neighbouring areas. Making sure the IZ supports firms that mainly serve national or international markets is the key to avoiding this kind of local substitution. As in yesterday’s blog, Regional Selective Assistance serves as a useful exemplar – to receive RSA, firms had to demonstrate that they mainly served national or international markets. Local areas may be able to do something along these lines, if they have good local information, for example, on what’s going on in larger firms located in the zone. But the fact that IZs will offer support to all firms in the zone limits the scope to reduce substitution by avoiding subsidising firms that serve local markets.

Substitution can also happen within firms if they operate from multiple sites – some in the zone and some outside. Again, it’s not obvious what areas can do to avoid this kind of substitution – other than be aware of the structure of larger multi-site firms that might locate in the zone and whether this has implication for job losses elsewhere in the local area.

Investment Zones and leakage

Leakage occurs when effects of a policy are seen beyond the individuals or organisations targeted by the policy. It’s a slightly tricky concept when applied to area-based policies because two major sources of leakage to the wider area – in the form of displacement and substitution – are discussed separately. While areas will want to minimise these two kinds of leakage, they arguably want to maximise a third kind of leakage – the ‘multiplier effect’ on investment and employment outside the zone. Multiplier effects occur when new jobs in the zone create demand for products and services supplied by local firms outside the zone, thus creating growth. Our toolkit on multipliers explains the issues and provides multipliers that can be used to estimate the additional effects. One crucial caveat here is that any multipliers should be applied to the net jobs created by the zone – that is new jobs in the zone minus deadweight and jobs lost outside the zone to displacement and substitution.

Who benefits from Investment Zones

Three further issues require careful consideration, relating to who benefits from the zones. First, it’s important to understand who takes any new jobs. Studies of the UK Local Enterprise Growth Initiative and Single Regeneration Budget find some evidence of positive effects on the number of jobs within supported areas, but no effect on local unemployment. The wider evidence on IZ-type zones in the US suggests that local hiring requirements may increase the employment effects for local residents. However, nothing in the current guidance suggests that these kind of requirements will form part of the IZ package. Local areas can get some idea of where the employment benefits are likely to be felt by thinking about the type of jobs being created in the zone, the commuting accessibility of the zone and the residential location of suitably qualified workers.

Second, it’s important to recognise that a lot of the benefits from IZs could go to owners of capital (business owners), rather than labour (employees). After all, some of the incentives directly apply to capital, not employment. Again, there’s not much local areas can do about this other than think about the ownership structure and the capital intensity of firms that are likely to locate in the zone.

Finally, don’t assume that all the benefits of IZs go to either workers or firms. In areas where land supply is limited, tax breaks will tend to be ‘capitalised’ into higher land prices. This means potentially big gains to landowners. Again, there’s not much local areas can do about this, but they should think about the ownership structure of any land that is part of the IZ area.

Other, other issues

I haven’t discussed the planning side of IZs because the guidance is currently too vague to say anything concrete – but all the discussions I’ve had with local areas suggest that this will be a crucial consideration. I’m also sure that I’ve missed some other issues (for example, I’m not sure how the Government plans to avoid ‘gaming’ by multi-site firms to maximise tax advantages). If you have further thoughts or evidence, please do get in touch.