ICA: Introduction to Industry Contribution Analysis

INTRODUCTION

Industry Contribution Analysis (ICA) is a method used to estimate the value of an Industry or group of Industries 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.

DETAILED INFORMATION

This methodology is based on the work of Miller & Blair (2009). They discuss the Hypothetical Extraction approach which looks at how an industry would change (increase or decrease) if another industry were suddenly removed from the economy.

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 Industry or Industries in the region of study.  In other words, ICA looks at how a business or Industry 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. 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 Industry 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 Industry 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 Industry in its "current" state supports other businesses in our local economy. If we are trying to determine what Industry 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 Industry the firm falls within can become more of a gray area. Should purchases to this Industry 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 Industry 4 - Fruit Farming, Industry 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 Industry 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 Industry that the single firm is responsible for, the less appropriate it is to allow for buybacks to the Industry.  

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 Industry, creating Indirect and Induced Effects to the Industry. A rule of thumb may be whether or not the firm makes up less than half of the production in the entire Industry it falls within. In either case, the results should be described using contribution analysis language whenever you are estimate the effect of any existing production, i.e. “contributes to”, “sustains”, “supports”. To allow for buybacks to the Industry the Impact Method should be used by modeling the Industry through one of the four Industry Event Types, but beware of overestimation. To restrict all buybacks to the Industry the Industry Contribution Analysis Event Type should be used, but beware of underestimation. 

THE PROCESS

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 Industry 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 Industry 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 Industry 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. Data Year is the year of the dataset that you are utilizing in the analysis of a given Group. When setting the Event Value to a percentage, the Group's Dollar Year is ignored because the Event Value is being pulled from the Region Details. The Dollar Year in this case is inherently the Data Year.  In Results, use the Dollar Year filter to view the dollar value effects inflated/deflated to a specified Dollar Year.

For our example, let’s estimate the contribution of fruit farming in 2018 for the whole US. 

Multi-Industry Contribution

Industry Contribution Analysis can also be done across multiple Industries, 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 Industries together.  Each Industry would be its own Event as an Industry Contribution Analysis so we would see one Event for Industry 4 - Fruit Farming, another for Industry 3 - Vegetable and Melon Farming, etc.

If you model each of these Contribution Events for each Industry within a single Group, this will treat the analysis as a Multi-Industry Contribution Analysis, such that the purchases from an Industry to itself are restricted AND the purchases from other Industries to the modeled contributing Industry are also restricted. This would produce results that only include Direct Effects for the Industries included in your multiple Industry Contribution Analysis Events. All Indirect and Induced Effects to these Industries would be restricted from being generated. If the Industry Contribution Analysis Events for each Industry were modeled within individual Groups, then each Group will be treated as a single Contribution Analysis where only the purchases from each Industry to itself are restricted. 

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 Industry 4 -Fruit Farming is 167,665, the Labor Income is $6.7 billion, the Value Added is $11.6 billion, and the Output is $19.8 billion.  The total effect on the national economy is 357,417 jobs, $17 billion in Labor Income, $28 billion in Value Added, and $49.8 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 Industry 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 Industry 4 - Fruit Farming are zero.  This means the model did not allow any buybacks from the Industry 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).
USEFUL TIP

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 you plan to present both sets of data in the same context.

 

CASE STUDY

A $2.1B Apples to Apples Contribution Analysis in New York State 

 

WEBINARS

Industry and Multi-Industry Contribution Analysis: A Primer, How-To Guide, and Best Practices 

Link & Learn: Industry Contribution Analysis

 

RELATED TOPICS

Video describing the distinction between impact analysis and contribution analysis

 

CITATION

Miller, R.E. and P.D. Blair. (2009). Input-Output Analysis: Foundations and Extensions, Second Edition. New York: Cambridge University Press.

 

Written June 26, 2019 

Updated September 25, 2023