Every EB-5 investment creates a multifaceted economic impact. While jobs created directly are easy to count, indirect and induced economic effects on the community are not as straight forward. By using economic multipliers, economists are able to assign numerical values to an EB-5 project’s expected economic effects on its surrounding area.
Indirect and Induced Economic Impact
As an example, suppose an EB-5 investment is made to open a new restaurant. Besides creating jobs when it hires employees, the restaurant will need to purchase supplies and ingredients from nearby businesses. The jobs those businesses create to meet the demands of the restaurant are its indirect impact.
When the restaurant and its suppliers pay employees, such as a contractor hired to remodel the restaurant, the employees spend their wages in the community, creating a need for more jobs in other businesses. This is an example of induced effects.
A project’s economic multiplier summarizes the total indirect and induced economic activity it creates in its community. The multiplier is based on local expenditures to complete the project and salaries for its employees, so it depends on the project’s location and industry and is specific to each project. For example, a furniture manufacturing company will have a larger economic multiplier than our restaurant because the manufacturing industry catalyzes greater economic effects than the service industry. Employment area and wage standards are also factors that affect multipliers.
How Multipliers Are Calculated
The most common models used to calculate EB-5 economic impact are Regional Economic Models Inc. (REMI), Impact Analysis for Planning (IMPLAN), and Regional Input-Output Modeling System (RIMS II). These models furnish multipliers that investors and regional centers can use to calculate the impact of their projects by region. Investors should note that the models’ estimates include part-time and seasonal jobs, which can’t be counted toward the EB-5 job creation requirement.
Adding the economic inputs caused by the direct investment gives the number of jobs created for each dollar invested, the response coefficient. EB-5 economic multipliers are derived from this figure rather than from the number of jobs created for each direct job.
Practical Application
To illustrate these principles, we’ll refer to our restaurant example. Let’s say the initial investment is $1.5 million and it creates 25 direct jobs.
At the first level of indirect effects, more jobs are created when some of the investment is used to buy supplies from other businesses in the community. The second level of indirect effects happens when that supplier, such as an appliance manufacturer, buys materials from other local businesses to complete the order, creating more indirect jobs.
At the first level of induced effects, the restaurant pays its employees. A portion of their wages is spent in the local community, for example, at the neighborhood grocery, resulting in further job creation. At the second level, the grocery store’s new employees spend their pay elsewhere in the community. For instance, they may buy home improvement supplies at a hardware store that must hire more employees to fill the increased demand for its goods and services.
At each level, the indirect and induced effects become smaller as part of the money is used to pay taxes, spent outside the employment area, or saved, but some of its spent within the community. Every dollar spent locally counts toward the project’s EB-5 economic impact multiplier and is used to calculate the number of jobs created to fulfill the EB-5 program’s requirement of 10 full-time jobs per investor.
In our restaurant example, if $5 million were invested and the industry’s regional employment multiplier is 12.5, the EB-5 economic impact would be estimated at 12.5 * 5(million) = 62.5 jobs.
Since U.S. Citizenship and Immigration Services (USCIS) thoroughly examines the economic reports that accompany investor petitions, it’s crucial for investors and regional centers to consult with experienced immigration attorneys and financial professionals to ensure that risks are minimized and that business plans and financial forecasting are reliable.
For more details about EB-5 economic multipliers and EB-5 economic impact, ask a question at EB5 Economistor give us a call at (800) 775-1988.