The (re)location effects of enterprise zones

Thierry Mayer, Florian Mayneris, Loriane Py, 28 September 2012

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Spatial inequalities within French municipalities are striking. Some depressed urban areas with low income, high unemployment rate, low level of education and deprived social housing are just a few blocks away from wealthy neighbourhoods. These urban disparities have important social and economic implications. They are often linked to social segregation and exclusion phenomena, with rich and poor people self-selecting into different neighbourhoods according to their willingness to pay for housing. This generates self-reinforcing deterioration of the economic and living conditions in originally depressed zones, and may lead to urban violence, as exemplified by the riots in French suburbs in 2005.

As a response, many governments have implemented ‘urban enterprise zones’ programs (first in the UK and in the US in the 1980s, and more recently in France). These programs provide tax exemptions combined generally with a whole set of incentives designed to attract firms and enhance local employment growth in deprived urban areas. The efficiency of such schemes is however debated.

Enterprise zones programs: Some conflicting results

Since the 1990s, there have been quite a few empirical evaluations of enterprise zones, mainly focusing on the US experience. While Boarnet and Bogart (1996) and Billings (2009) find no significant effect of enterprise zones on the number of establishments in targeted areas in New Jersey and Colorado, Neumark and Kolko (2010) tend to find a negative effect in California. However, some studies suggest that more complex dynamics may be at work, with the benefits of such programs on the entry of new firms being potentially compensated by the exit of some firms due to increased levels of competition (Greenbaum and Engberg 2004; Bondonio and Greenbaum 2007).

Regarding the impact of enterprise zones on employment growth, empirical results appear also very mixed, with studies finding no effects (e.g. Neumark and Kolko 2010; Lynch and Zax 2011) or positive effects (e.g. Ham et al. 2011, Busso et al. 2012) depending on the scheme.

Finally, the impact of such policies on residents’ employment is also controversial. Elvery (2009) finds no impact in Florida, Gobillon et al. (2012) a small, positive, but short-lived impact for France, and Busso et al. (2012) a positive effect for federal programs in the US.

New lessons from the French experience

In a recent study (Mayer et al. 2012), we shed new light on this question, based on the evaluation of the French experiment labelled Zones Franches Urbaines. We focus on establishments’ location decisions; this dimension is crucial since it largely determines the ability of such policies to revitalise targeted areas and to increase job opportunities for local residents.

The policy started in 1996 and zones have been created in three waves (1996, 2004 and 2006). It is the main tool in favour of urban depressed areas in France. Firms locating in a designated zone are exempted for at least five years from business tax, tax on corporate profits, property tax on built lands, and from employers' social contributions. For social contributions exemptions, a local hiring condition applies after the third job creation.

The incentives provided by this French program are sizable. In 2007, the French government spent on average €360 per resident in such zones, substantially more than the $240 per worker in California (Neumark and Kolko, 2010), or the £60 per resident in the UK (Einio and Overman, 2011).

We evaluate the impact of the second generation of zones using a microgeographic dataset that provides information on all plants locations in France over the period 2000-2007. We are able to precisely draw the boundaries of targeted zones within French municipalities. We can thus identify whether a plant locates in the part of a municipality that benefits from the exemptions.

Figure 1 shows that within municipalities benefiting from enterprise zones, the share of plants locating in the zone suddenly increased in 2004 and the years after, i.e. contemporaneously to the implementation of the policy. For the third wave in 2007, we also observe a sudden increase in 2006, when the programme was announced, and 2007.

Figure 1. Share of establishments’ entries in the enterprise zones of municipalities

The positive impact of the policy on plants’ location decisions suggested by this graphical analysis is confirmed by our econometric results. We use a difference-in-differences approach and compare the probability that a plant locates in the zone after 2004 to that same probability before 2004. We find the probability to increase from 8.4% to 11% after the implementation of the program.

However, we show that this effect is highly heterogeneous. It depends on:

  • Area characteristics: The effect of the policy is stronger for areas that are initially less depressed, suggesting that tax exemptions can hardly counteract an important attractiveness deficit.
  • Industry characteristics: The impact is stronger for firms belonging to industries with lower relocation costs, suggesting the existence of opportunistic relocations.
  • Firm characteristics: Since only firms with fewer than 50 employees are eligible for exemptions, the impact of the policy is stronger for smaller firms. Moreover, independently of the policy, we show that the zones always attract smaller firms.

Our results also indicate that the zone policy does not generate any increase in the number of plants’ at the city level, and that the impact is stronger for relocations of already existing plants than for newly created plants. The policy thus seems to displace economic activity within municipalities.

Are enterprise zones a good remedy to urban ills?

Our results show that the zone policy succeeded in promoting the location of economic activities in targeted zones. However, our quantification exercise indicates that the cost of these displacements is quite high. Besides, our results indirectly suggest that the impact on residents' employment might be low, since a large part of the average effect is due to opportunistic (re)locations of small firms within the municipality.

This contributes to explain why the effect of the policy on local employment growth, especially for the residents of the affected areas, has been estimated to be weak (see Rathelot and Sillard 2010 and Gobillon et al. 2012).

In the place-based v people-based debate (Glaeser and Gottlieb 2008), the French experience thus suggests that enterprise zones can succeed in attracting new plants in targeted areas. However, for these programs to benefit local residents, they should be coupled with specific devices oriented towards people. Improving the employability of local residents seems to be a necessary complement for firms attracted in enterprise zones to employ local unemployed workers. Specific vocational training, with internships in incentivised firms, might be a way to favour the insertion of unemployed residents on the labour market.

The views expressed in this column are those of the authors and do not necessarily reflect those of the Banque de France.

References

Billings S. (2009): “Do enterprise zones work?,” Public Finance Review, 37(1), 68-93.

Boarnet M. G. and W. T. Bogart (1996), “Enterprise zones and employment: evidence from New Jersey," Journal of Urban Economics, 40(2), 198-215.

Bondonio D. and R. T. Greenbaum (2007), “Do local tax incentives affect economic growth? What mean impacts miss in the analysis of enterprise zone policies,” Regional Science and Urban Economics, 37(1), 121-136.

Busso M., J. Gregory, and P. M. Kline (2010), “Assessing the incidence and efficiency of a prominent place based Policy," American Economic Review, forthcoming.

Glaeser E. L and J. D. Gottlieb (2008), “The Economics of Place-Making Policies”, Brookings Papers on Economic Activity, 2 (2008), 155-239.

Einio E. and H. Overman (2011), “The effects of spatially targeted enterprise initiatives: Evidence from UK LEGI,” mimeo.

Elvery, J. (2009), “The impact of enterprise zones on residential employment: an evaluation of the enterprise zone programs of California and Florida," Economic Development Quarterly, 23(1), 44-59.

Gobillon L., T. Magnac, and H. Selod (2012), “Do unemployed workers benefit from enterprise zones: the French experience,” Journal of Public Economics, forthcoming.

Ham, J. C., C. Swenson, A. Imrohoroglu, and H. Song (2011), “Government programs can improve local labor markets: Evidence from State Enterprise Zones, Federal Empowerment Zones and Federal Enterprise Community,” Journal of Public Economics, 95(7-8), 779-797.

Lynch D. and J. S. Zax (2011), “Incidence and substitution in enterprise zone programs: the case of Colorado,” Public Finance Review, 39(2), 226-255.

Mayer, T., F. Mayneris and L. Py (2012), “The impact of urban enterprise zones on establishments’ location decisions: evidence from French ZFUs”, CEPR Discussion Paper 9074.

Neumark D. and J. Kolko (2010), “Do enterprise zones create job? Evidence from California's enterprise zone program”, Journal of Urban Economics, 68(1), 1-19.

Rathelot, R., and P. Sillard (2008), “Zones Franches Urbaines : quels effets sur l'emploi salarié et les créations d'établissements?”, Economie et Statistique, 415(1), 81-96.

Topics: Industrial organisation
Tags: Enterprise zones, firms, France

Thierry Mayer
Professor of Economics at Sciences-Po and CEPR Research Fellow
Assistant Professor, Université catholique de Louvain
Economist in the Structural Policies Research Division, Banque de France