Contribution analysis is a modeling method used to estimate the value of a sector or group of sectors in a region at their current levels of production. Naturally, it is a valuable and useful tool for groups like industry associations and government entities that are evaluating the value of an industry to their community.
Agricultural and manufacturing stakeholders, in particular, are consistently focused on calculating economic contribution and demonstrating their sector’s value. The New York Apple Association supported one such study published in 2019 examining the economic contribution of the New York apple industry on the local area.
Our Marketing Design Director, Tim French, had the opportunity to speak with Todd M. Schmit Ph.D., Associate Professor at the Charles H. Dyson School of Applied Economics and Management at Cornell University, about his study Improving economic contribution analysis of local agricultural systems: Lessons from a study of the New York apple industry and how he sets the framework for producing industry contribution analyses.
Associate Professor, Cornell University
Todd's research focuses on improving agribusiness firm management and industry viability. His current research is centered on regional estimation of development opportunities for agri-based, biofuel, and food manufacturing industries. You read more on his Cornell Faculty Profile Page.
Tim French: You took the time in the report to qualify and define contribution analysis. What were the initial conversations like to determine what the study was attempting to discover?
Todd Schmit: So this started with the New York Apple Association, a commodity organization focused on improving the apple industry in New York, and they had come to me looking to do what they called an “impact analysis.” And I said, “No, it’s not really an impact analysis, but whatever!” I started with explaining the production function, that I think it is particularly important that you take the time at the farm-level to get a better handle on what the spending patterns are of farmers in the state.
I get these types of requests a lot, and I gave them this example from an industry in New York that had come with a similar request. They came and said ‘our industry is growing in the state, and we hired a consulting firm elsewhere to do an impact analysis for us years ago. We’d rather send our money to New York instead of somewhere else and send it to Cornell. Would you be interested in updating that study?’
I said, “Sure, I can put a budget together. Can you send me the prior study that was done?” They did, and I read it. Of course, there wasn’t enough documentation about what they did or IMPLAN, and it was clear that they did a whole bunch of double counting. It was obvious to me. So I go back to the foundation, and I’m like, “I can do a study for you, but I cannot follow the methodology that they used. In good faith, I cannot do that because I know it’s wrong. Actually, I don’t know enough of what they did to get to their numbers. I just know enough that I saw a lot of double counting. “I can do it,” I said, “But I can guarantee you that my total number, the ‘Big Bang,’ is going to be less than what it was 3 years ago even though the industry is growing.” It put the executive director in this really tough situation. You do it right, Todd’s way/the right way, then you end up with a number lower than 3 years ago, even though you know the industry is growing. How do you explain that to your stakeholders? So, he ended up not doing it.
TF: When you’re having those initial conversations and people might bring you a study that they want you to repeat, what kinds of questions could they or should they be asking on their own of a study to determine whether or not it was done with enough academic rigor to be trustworthy?
TS: They should ask questions about: Are you using IMPLAN? Do you consider the spending patterns that they compute sufficient for this type of analysis? Why or why not? You need to know enough to ask the right questions. Also to say, you want that clearly defined—what your assumptions are.
For example, There was an [agriculture] and food economic development summit in the southern tier region of New York state. I was asked to come and talk about targeting industries for development. And I used IMPLAN data—the 2017 New York data—because what I’ve come across is often times particularly politicians want easy metrics to follow to make decisions. I can’t tell you the number of times people say, “Give me the jobs multiplier for this industry in New York.” Then they say, “Well whatever has the biggest jobs multiplier is where we should invest tax-payer funded dollars.” I literally talked to them about how you interpret a multiplier.
I gave this example. In New York state, oil refining has a jobs multiplier of 16, and cheese manufacturing has a jobs multiplier of 6. So where should we invest taxpayer dollars? Somebody said, “Well clearly you should invest in oil refining!” I said, “One thing you have to remember is that jobs multiplier says for every direct job you create, you get 15 more.” And how labor intensive is oil refining? Not at all!
So I walked through the exercise. If you were going to support a million dollar expansion here or a million dollar expansion there, cheese manufacturing actually created more jobs in total—direct, indirect, and induced—with that same million dollars than oil refining.
TF: With all that in mind, how did it affect how you approached data collection for the apple study?
TS: I really wanted to do primary data collection, and I know that detailed financial data from farmers is incredibly difficult [to gain access to]. From past experience, I knew it would be hard. So, I actually proposed that I want to do 3 or 4 regional focus groups; invite 8, 10, 12 farmers to come in. I’d buy them lunch, and then we sit down and we go through jointly what a typical, representative spending pattern looks like. So in a day, I’m done. My team went and presented it, and the board went, “Ehh, I don’t know about those focus groups.” And I’m like, “Really?!” They said, “We want you to survey the farmers instead.” Then they said, “We don’t want you to do a mail survey or interview them. Just do it online.” If you think getting financial data from farmers in person is hard, ask them to put it all online and send it to you. The survey response was horrible. Even the ones that started to do the survey quit quickly or there were so few entries that it ended up being not even useful. I had to ask for an extension on the grant because that took months.
TF: That is a major setback. How did you advance from there?
TS: It all started with just a phone call, and I said, “To me what works well is, let’s sit down and talk about it as a board, as a group. What are the things that you are looking to get out of it?” Then for me, it’s always, “Yeah, we can do this quick and dirty, and use the IMPLAN estimates and just say they’re good enough.” In some cases they are, and in some cases, it depends on your budget because it costs money to go do all those activities. You gotta think about that. Walking through that process worked. In their case, it worked really well because they were writing a grant to a regional economic development agency for funds to do this project. In essence, this wasn’t really coming out of their pocketbook. So that helped. In that sense, resources were not a constraint. That worked really well, and I updated them very regularly. When presenting the results to the board, I had this PowerPoint slide that talks about how you walk through the process to consider. I don’t know if they got it all, but it showed that we were very thoughtful and comprehensive in walking through this process.
I think more often than not, the IMPLAN software and the IMPLAN data and the I/O models that are constructed are fantastic. I tell them, “If you want me to construct a detailed I/O model for New York state, that’s going to cost lots and lots of money.” I gotta get data from 500 industries about where they buy all their stuff. This is an incredible tool, and the good things about it is you can customize it to your particular situation.
TF: Beyond the framework and data source, what other elements require significant consideration?
TS: One, you need to be clear on the objectives of your study. What do you want to know? In some cases, it’s just the total impact: the total number of jobs that are supported, the total amount of labor income. What is it from the outcomes that you want and the purpose for which you’re going to use them? That is always my first.
The second is in thinking about your local area, whether it is a multi-county region, a state, a collection of states. What does your industry look like in your local area relative to areas outside of your area of interest? The more that those are different has implications for whether or not you want to try and go through a process of collecting your own data to update the IMPLAN estimates. I think I even made a point in the apple report, apple manufacturers are more generally fruit manufacturers. They’ll manufacture apples, grapes, and all sorts of kinds of fruit. The thing that really matters, in my opinion, is not so much the production function or spending pattern. The thing you have there is how much of those products that they buy are local versus non-local.
TF: The way that you packaged this for the apple association was very thorough. Does the entity for whom you’re doing the study affect how detailed you have to be in the way that you present your findings?
TS: Absolutely! That was kind of the part of the initial discussion, and those are questions that I asked them. From my expertise I’ll say, “Here’s what I’m concerned about or things that we might want to think about.” Originally, they would say, “We want you to do this impact assessment for the different regions in New York state.” And my first question is “Why do you want to know that?” So if Region 1 has twice the impact of Region 2, what are you going to do with that information? If it’s to say, we want to highlight our strongest production areas, okay. But I can also easily see if those impact levels or multiplier levels are different, which they will be, does that all of a sudden mean that the apple association is going to spend more time in a particular region or advocate for industry support for those types of things?
More often than not they have a very simple thought: Let me know what our total impact is. A lot of cases it’s so we can go use that to get grant monies or use that to get state or federal support from the government for industry enhancement. Then they say, “Oh, while you’re doing this, do it for the 7 regions.” So after that discussion, they were like, “It’s not important to do the 7 regions.” They just thought about it saying we have a map that shows 7 regions, and I said, “If you want, through the analysis, we can do a contribution analysis. I can get you those contribution multipliers, and if you want to know what the impact is in that region relative to that region then get the direct effects and use the state level multipliers.”
In my experience, people ask for these things because they want a number that they can talk about. They want to say, “This industry produces X amount of jobs.” or “Our total impact is X millions of dollars.” That’s what they want. I think it’s sort of the modeler’s role to say let’s break that out a little bit because that’s easy. Let’s talk more about the process to getting that number. Are there other things that you want to think about as part of the process? That’s a conversation I like to have.
TF: When you’re helping people understand the shape of something that has an economic footprint, how do you guide them through appreciating that you can say “New York state apples” but there-ain't-no-apples-trees-in-Central-Park kind of thing?
TS: Absolutely! But do firms in the apple industry source inputs from New York City? There’s a lot of manufacturing in an urban area. There can be some purchases for input materials. It could be sourcing labor. I don’t know, but it’s a difficult question because they are very focused on sort of political boundaries. I would say, “Think about an economic region in terms of labor, in terms of suppliers and stuff.” That makes more sense economically than looking at a very small politically-defined region. They’re usually pretty open to that, particularly if you explain to them why it matters and why it makes more sense. It’s a reasonable explanation to have.
TF: So it sounds like you’ve had to, out of necessity, become a really good interviewer. You avoid leading questions where they might infer that they might have a benefit if they answer a certain way or another. You have to lead the people with whom you’re working through the process of getting to what they’re asking before leaping to the possible result.
TS: I think that’s a great way to put it. Obviously as the academic, as the modeler, I could go in and say, “No no no. This is the way you need to do it.” But actually taking the time to allow them to fill in the blanks and get to that point makes for a much stronger relationship. And to be honest, sometimes when you’re asking those additional probing questions, you may end up at a place that is different than what I would imagine because they know more about the industry than I do.
It’s really easy sometimes that when you explain the concept of that ‘jobs multiplier is 4.’ We can go into the detailed multiplier effects in IMPLAN, and I can show you all of the industries that make that add up to 4. So you can see that this particular industry is really important to the impact your industry is having. They’re an important local input or service provider. Folks don’t necessarily think about that when they’re like, “I want the multiplier of 5.” But then I say, “Well how about this? Look at the contribution to that multiplier.” What are the main industries that contribute to it? The size of that multiplier reflects the strength of linkages to other industries that you have. That’s what it reflects. So what are the biggest contributors? I found that to actually be a really useful tool and reporting mechanism too. I don’t know if I had it in that paper, but it certainly was in the report to the apple industry. Look at the contribution of what those indirect effects are.
My purpose, I hope, as an academic and as an educator is to say, “Okay, but do you want to know anything else other than that number?”
WRAPPING IT UP
Contribution analysis allowed the team at Cornell to model a complete and accurate picture of the apple industry’s overall impact on New York’s economy. This intuitive method goes beyond merely jobs created or dollars generated to demonstrate all levels of economic contribution. These insights are beneficial regardless of your industry. If you would like to see contribution analysis in action, please join us for a webinar and Q&A on 20 June 2019 (click on the image below to register).