Economic development practitioners offer help to companies in mitigating their risks through financial incentives, but measuring the success of these efforts focuses on the community benefits that result from the company investment. Traditionally, policymakers and practitioners measured the success of incentives through two key indicators:
- the number of jobs created, or
- the amount of private dollars invested/leveraged.
As the economy and community priorities change, however, the community may demand different types of benefits from their incentive investments. For instance, states and regions are increasingly incorporating alternative metrics into performance agreements that reflect a desire to create better paying jobs or direct fiscal benefits (e.g., future tax payments) to the state or region.
Economic developers need to identify the most appropriate performance measures for the activities underway, including those beyond traditional job creation and investment leverage ratios. In this section, the focus is on whether the community is using the “right” incentives to influence business behavior and then whether the community is receiving a return worthy of the investment being made.
These strategies are comprised of several activities, each of which should be measured differently. The most common success metrics are tied to the number of companies engaged in the negotiation process and the relative benefit generated based on the amount of incentives offered. The figure below illustrates how different outputs are tied to different financial incentive approaches.
FDI Incentives and Most Common Metrics
Outcome metrics reflect broader policy goals and should improve based on the results from the activities (even if the improvements are often so small that they are difficult to discern).
Desired Business Incentive Outcomes for FDI:
• Total new-to-region FDI (value and number of deals).
• Total investment by international investors (value and number of deals).
• Value of Mergers & Acquisitions involving international firms (number and value of deals).
• Benchmark value of increased FDI to regional economy (e.g., GDP).
Output Success Indicators
Metrics benchmark performance and drive improvements in the activities that a community undertakes. The following are the most common output metrics used to measure results for key categories of activities. Practitioners may use these as a starting point to guide the selection of metrics that matter for their efforts.
Assess Incentives Outputs:
Selection of preferred FDI incentive policy goals
Benchmarked Return on Investment expected from incentive investments:
(1) an economic benefit ratio OR
(2) cost-benefit ratio
Negotiate Incentives Outputs:
- Total number and value of performance agreements with firms
- Proportion of performance agreements that meet pre-determined ROI thresholds
- Total economic and fiscal benefits expected as a ratio of investment made from currently active performance agreements.
Manage Incentives Outputs:
- Reported impacts
- Number of successfully completed and closed out performance agreements each year.
Sunset Dates for Incentives Help Trigger Evaluations
Oregon is one of several states that sunset their incentive programs. In 2009, the state established sunset dates so that tax credits with similar goals would end at the same time. These sunset dates triggered program evaluations of the programs with similar goals to allow lawmakers an opportunity to compare how well they worked together and independently.
Checklists and Guides
Center for Regional Economic Competitiveness, Legal Guide to Administrative Data Sharing for Economic and Workforce Development (2018). This guide (pp. 2-16) provides answers to frequently asked questions (FAQs) on data sharing for economic and workforce development.
Center for Regional Economic Competitiveness, Redefining Economic Development Performance Indicators for a Field in Transition (2017). This publication (pp. 5-14) provides a framework for practitioners to select the appropriate performance metrics in measuring project implementation.
Center for Regional Economic Competitiveness, State Data Sharing Initiative Web Toolkit (2018). This toolkit provides model language for data confidentiality laws and data sharing agreements among state agencies. This tool also highlights state legislation that governs the use of state wage and corporate tax records.
OECD Principles for Enhancing Transparency and Governance of Tax Incentives for Investment in Developing Countries (2013). This document (pp. 1-5) lists guiding principles for improving government transparency in reporting on tax incentive program performance.
Pew Charitable Trusts, Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth (2012). This document (pp. 4-11) offers criteria for states to recognize effective evaluation of tax incentive programs.
Smart Incentives, New Research Highlights Ways to Increase Impact and Limit Cost of Business incentives (2018). This posting provides guidance to governments for analyzing incentive options.
United Nations, The Framework for Assessing Tax Incentives: Cost Benefit Analysis Approach (2015). This document (pp. 8-15) provides a framework for assessing tax incentives using a cost/benefit analysis approach.