Many film commissions use an economic multiplier when determining economic impact. All industries spend money in the course of doing business. The economic multiplier is the direct revenue, or the monetary figure you arrive at when you determine what is actually spent. There are also ways all industrial activity has an indirect effect on an area. For example, a catering company is paid for its services – this money is included in the economic impact figures. The caterer needed to purchase supplies from a store to make the meals. The store purchased food from suppliers who, in turn, paid others to provide the needed supplies. This is called the “ripple effect” because it shows the total effect that the money spent by the industry has on a community.
Another example of the ripple effect (a true story) involves a local truck company that witnessed water trucks being brought in from outside the region for the use on movie sets (a water truck is used for wet-downs to keep dust levels down and for creating a shiny effect off the pavement, a common request from directors of photography.) The local truck company decides to buy their own water truck. It gets rented constantly so they buy a second and a third truck. Then the local truck company decides to buy other typical types of movie-specific vehicles. Now, the local truck company owns over 100 vehicles including grip and electric trucks, trailers outfitted for make-up and hair departments, trailers for the cast, that are rented out exclusively to the film and television business. Each truck needs a driver (so there’s another local job right there), fuel, maintenance, truck washing, annual permits, tires, infrastructure for parking all the vehicles, etc. Each of these ancillary categories of service related to the ownerships of these trucks represents the positive ripple effect through the local economy.
There is not one standard economic multiplier used by everyone. You may be able to determine the size of the economic multiplier used by your region by contacting someone in your local economic development office or other government agency. To use the economic multiplier, you simply multiply the revenue number by the multiplier to get the total economic impact for your region.
For example, if your revenue is $1,000,000 and the multiplier is 2.5, the total economic impact would be $2,500,000. This means that for every $1 spent by production, $2.50 is spent in the community.
In other words, the original $1 results in a total economic impact of $2.50. This is an example of indirect and induced spending as discussed previously.
If you do report your revenue using a multiplier, you should be sure to note this somewhere in the report. This becomes even more critical and can even be controversial when the purpose of an economic impact study is to determine the ROI of a film incentive program.
This is where things can get confusing. There is a huge difference between the money in the government’s coffers and the economic impact on the general populace. If a tax incentive is coming out of your government’s pocket, in many cases, the government is less interested in the overall economic impact than they are in the return on investment to the government’s piggy bank. The structure will differ wildly depending upon what country, state, province, or city government that is putting out the money for an incentive. But in most cases, that money is actually the taxpayer’s money, and that money is used for things like education, healthcare, social programs and the like. And as a governing body is responsible for the overall well-being of their jurisdiction, it is not unreasonable for them to want to know what the jurisdiction is getting out of an incentive that targets this particular and specialized industry.
At this juncture, the discussion becomes about the policies that the government operates under. Is the jurisdiction targeting the film business as an area of growth? Are the policy makers envisioning a new industry and therefore a diversification of their economy? Do the policy makers believe in the use of incentives? One argument you may hear from pro-film, pro-incentive factions is this:
Governments spend money on or “invest” in education, roads, utilities, cultural programs. Do they look for a return on investment from the money spent on those things? Probably not, or at least not directly. Then is an investment in the creation of jobs any different?
A film report completed in the early 1990’s suggested the average multiplier for the industry in Los Angeles at that time was 2.12 percent. Your multiplier will probably range between 1.5 and 3 percent. Keep in mind what was discussed earlier – the more local hiring and spending in the region, the greater the economic impact. When a production just “drops in” for a shoot with most of the crew coming from outside the region, the economic impact will be far less.
Economic impact models can be deceiving. Sometimes, estimates of money re-circulating through the economy can be overstated. Multipliers look at how induced impacts continue to roll out, how money re-circulates and what additional economic impact is created (i.e. real estate purchases, retail spending). These can vary greatly by city, state/province or region.
A quick and consistent research method that can be calculated in the event that the necessary data is not available, or there is very little time for in-depth research, is found below. Developed by AFCI through its membership of North American film commissions, these guidelines are designed for calculating the production spending of certain projects. The formulas are based on analyses of studio and television network accounting records, and information provided by independent producers/production managers, commercial production companies, exit reports submitted to film commissions, and generally accepted estimates from film commissioners.
As with any formula, common sense and prevailing history should be applied.