Area Based Initiatives

Area based initiatives can have positive impacts on employment and regional GDP, but displacement is a concern when it comes to Enterprise Zone policy.

Why area based initiatives

Area based initiatives (ABIs) are policy initiatives aimed at tightly defined geographical areas, and provide a package of support aimed at improving economic, social or environmental outcomes within the zone. ABIs are very popular in many countries, as a tool for trying to tackle concentrated social or economic deprivation, especially in areas experiencing long term decline. We have produced two reports looking at EU Programmes and Enterprise Zones.

EU Programmes

The first report looks at the impact of EU Cohesion Policy, especially Structural Funds spending, which involves a broad range of interventions.

EU Structural Funds are designed to improve economic outcomes in programme areas. These interventions may target firms, households or the physical environment of the area itself. Some policies tend to focus on only one of these dimensions, others may target multiple dimensions. The policy mix varies, but typically includes some or all of tax breaks, wage subsidies, reduced regulation or improved physical / transport / communications infrastructure. Many EU programmes operate at large scales, target whole regions, operate across multiple member states and offer a broader package of support, as we detail further below.

The evaluations we consider look at the overall effect of EU support on area outcomes. Given the lack of any information on the breakdown of expenditure by type of spend (firm support, infrastructure, etc.) it is not possible to consider differences in effectiveness across spending types or to say much about how any positive effects come about. This has implications for the evaluation of current broad-based policy initiatives in England, such as Growth Deals and Devolution Deals.

In contrast to subsidies for firms, some ABIs target the characteristics and skills of households (e.g. to improve education or labour market participation). Generally speaking, we do not cover these kind of schemes. That said, a number of the schemes we consider involve a component of support for households. As with many programmes, the boundary lines are sometimes fuzzy, but our focus is on schemes that tend to support businesses either directly or indirectly. For similar reasons, we do not cover schemes that specifically target improvements to the built environment. Although, again, some of the area based schemes we consider will involve an element of expenditure that does this.

A number of the EU schemes that we consider will involve a substantial component of infrastructure investment alongside economic incentives. Our previous reviews on broadband and transport investment discuss the likely effects of such investments. We have included these ‘broad’ schemes because they have a specific-area focus. Unfortunately, as we do not know the specific policy mix involved, it is hard to draw detailed conclusions on how we might improve policy effectiveness. Indeed, for these evaluations one of our key messages concerns the difficulties of evaluating overall effectiveness, and the need to develop specific item-by-item strategies to evaluate each component of the package appropriately. This will also have implications for current discussions around the evaluation of City Deals and Devolution Deals.

Enterprise Zones and other ABIs 

The second report looks at the impact of Enterprise Zones and other economic area based initiatives (such as Regional Selective Assistance). These interventions may target firms, households or the physical environment of the area itself. Some policies tend to focus on only one of these dimensions, others may target multiple dimensions. The policy mix varies, but typically includes some or all of tax breaks, wage subsidies, reduced regulation or improved physical / transport / communications infrastructure.

Enterprise Zones (EZ) are a popular form of ABI which involve firms receiving tax breaks and other incentives to locate or expand in specific areas. For example, in 2011 the UK government announced the creation of 21 Enterprise Zones in England (subsequently expanded to 24 zones). These Enterprise Zones offer firms five year rebates on business rates (the UK’s business property tax), simplified planning regulations and access to superfast broadband; in some cases firms are also able to claim tax relief on new plant and machinery investments. At the same time, local authorities will be able to keep 100% of any subsequent business rate growth for 25 years after the Zone begins operations.

Given the policy interest in these particular schemes (and confusion about their likely impacts), it is worth considering their possible effects in a little more detail.

Many economists worry that such schemes may be effective at redistributing activity within urban areas, but may not be very effective at redistributing across urban areas. When firms think about where to locate they are trading off the benefits and costs of producing in different places. When places are very similar in terms of costs and benefits – as might be the case for two neighbouring office developments – anything that lowers costs will have a big impact in terms of attracting new firms (or encouraging the expansion of existing firms). On that basis, an EZ in a given city may pull in activity from other parts of the city; the EZ will be ‘successful’ (with more firms and jobs than before) but city-wide levels of economic activity may stay the same (as firms and employment simply shift from outside the Zone to inside it). In practice, the extent to which activity is additional may depend partly on the strength of the wider urban economy.

Once we start thinking about comparisons across different cities, any tax breaks (or other financial incentives) provided in poorer cities may be easily offset if productivity in those cities is too low or if labour or land costs are too high (e.g. due to national pay setting or local land regulations). This could then make a policy ineffective at larger spatial scales (for example, if we are using EZs as a tool for rebalancing the national economy). The spatial scale at which effects occur, and the extent to which any positive effects are driven by displacement, will be a central focus of our investigation ofof the evaluation evidence.

If labour markets are very local then even these shifts may benefit local residents within the zone. However, if labour markets are relatively large compared to zones, then this shifting employment may have no impact on employment for residents living within the zone (because jobs are taken by other workers who commute in). This makes it important to distinguish between effects on employment and on unemployment. Again, this is something that will consider in our discussion of the evaluation evidence.

To better understand the overall impact of these type of policies it is useful to distinguish between a) what happens in the Enterprise Zone, and b) wider effects on local employment and growth. In areas with strong economies, planning may act as a break on business expansion and development, and local governments may have few incentives to allow more development. In these circumstances, EZs could help encourage growth. Some of this growth would come at the expense of other areas in the UK, but much of it could be additional. Overall, we might reasonably expect both local and national employment and growth to increase.

But EZs, in Britain as elsewhere, have tended to be located in areas with weak economies. Here, the fundamental problem is that these are relatively unproductive places for business investment. The evidence on past waves of UK Enterprise Zones suggests that, with one or two exceptions such as the Docklands, they generated substantial physical improvements, but little additional employment benefit relative to their cost. We consider the extent to which this is confirmed by higher quality evaluations of similar international schemes.

Of course, the outcomes of the current set of English EZs may be different from the historical or international experience (not least because compared with past versions of the policy, current policy aims to locate Zones in higher growth cities and city neighbourhoods). However, by construction, incentive packages for businesses will not address any more fundamental area-level problems, such as the educational level of the local labour force, which hold back productivity in those places. It is also possible that much of EZ-related growth would come at the expense of other areas in Britain – most likely in the form of displacement from other areas very close by. In short, the effects of support may differ depending on the type of area.

One way to mitigate displacement effects is to have the policy apply at a larger geographical scale. Of course, the problem with this is that unconditional support across a large geographical scale would soon become very expensive. Many EU programmes are able to do this, and operate at large scales: for example, Structural Funds target whole regions and operate across multiple member states. These EU programmes also offer a broader package of support.

An alternative approach is to make support ‘selective’, perhaps conditional on characteristics of the firm, or on certain firm behaviours. For example, in some cases support is targeted at firms that mainly serve national or international markets; in others support is conditional on firms hiring a certain proportion of workers from the target area, as in US Empowerment Zones or French Urban Free Zones (ZFUs).

In contrast to subsidies for firms, some ABIs target the characteristics and skills of households (e.g. to improve education or labour market participation). Generally speaking, we do not cover these kind of schemes. That said, a number of the schemes we consider involve a component of support for households. As with many programmes, the boundary lines are sometimes fuzzy, but the focus in this report is on schemes that tend to support businesses either directly or indirectly. For similar reasons, we do not cover schemes that specifically target improvements to the built environment. Although, again, some of the area based schemes we consider will involve an element of expenditure that does this.

A number of the schemes that we consider – particularly the EU schemes – will involve a substantial component of infrastructure investment alongside economic incentives. Our previous reviews on broadband and transport investment discuss the likely effects of such investments.

Definition of Area Based Initiatives

Area based initiatives (ABIs) encompass a broad range of interventions at a variety of scales and of a variety of types. This evidence review focuses on three distinct types of support:

  • EU Cohesion Policies (such as the European Social Fund and the European Regional Development Fund);
  • Enterprise and Empowerment Zones;
  • Other area based business support (such as Regional Selective Assistance).

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