The Role of High-Tech Firms in Driving Gentrification
When high-tech companies announce plans to build large plants in the U.S., city officials across the country often vie to attract these major investments. Alluring tax incentives are proffered in bidding wars for the windfalls of economic stimulus and job creation. If, for instance, Amazon chose your hometown for its new headquarters, the news would generate an overwhelmingly bright economic outlook with the promise of new high-skilled jobs and local investments for years to come.
The effects of large, successful ventures will generally raise living standards and benefit the residents who currently live near the new corporate neighbor. The benefits that an incoming firm brings do not flow equally to area inhabitants.
The effects of large, successful ventures will generally raise living standards and benefit the residents who currently live near the new corporate neighbor. The benefits that an incoming firm brings do not flow equally to area inhabitants.
In this week’s Kenan Insight, we discuss new research that sheds light on the differences in gains among local residents after a high-tech company moves to town and also examines how these benefits are disbursed.
Winners and Losers
“When a high-tech firm moves into an area, some residents are helped more than others – and some may even be harmed,” UNC Kenan-Flagler Business School Professor and Co-author Franklin Qian says, referring to the findings in the forthcoming study, “The Effects of High-skilled Firm Entry on Incumbent Residents.”
The study, written with fellow Stanford-trained economist Rose Tan, finds that local homeowners with college degrees typically reap the most from a high-tech company’s move to the area, as this group’s property values and average wages increase.
“We find that, five to eight years after a firm’s entry, high-skilled homeowners near the entry site are in better financial shape than their counterparts who live further away, with less debt and delinquency and more consumption,” Qian says.
Meanwhile, renters who do not have a college degree may suffer economically, as new development in the area means higher prices yet without the wage increases experienced by those with college degrees .
“It seems that so-called ‘low-skilled’ incumbents, those without college degrees, could actually be harmed, as they see rents rise and their wages remain relatively flat,” Qian says. These effects cause demographic changes, as renters and incumbents without college degrees move away, replaced by residents who are more likely to have gone to college. These neighborhood outcomes may sound familiar as the term “gentrification” comes to mind.
High-tech Development Pays Dividends and Raises Rents
The study examines nearly 400 cases of firms in “high-technology” industries, as classified by the National Science Foundation, which opened new operations from 1990–2010. Narrowing the sample to those that promised at least 500 new jobs – most of which required a college degree – the authors found that these investments ($245 million in their sample average) offset the lucrative tax incentives that local governments use to entice incoming firms.
“For a representative firm, one with 1,000 new employees entering a metropolitan area with a population of 1.1 million, the cumulative welfare benefit for all local residents is the annual equivalent of $25 million,” Qian says. At this rate, “from a tax base perspective, it would take about five years in this scenario for the tax incentives to begin paying dividends.”
The study’s sample features many familiar corporate names, such as Amazon, BMW, General Motors, IBM and Pfizer. The targeted metropolitan areas vary widely by size and geography – from Seattle, New York and Dallas to smaller urban centers like Saint Charles, Mo., and Spartanburg, S.C. Drawing commuting distance rings around firm entry sites, the authors analyze data describing the migration patterns, housing characteristics and credit history of approximately 45 million local residents.
“We see the greatest impacts on people who live closest to the firm entry location, and these effects diminish as you get further away,” Qian says. The study finds that within a 10-minute commute from the entry site, renters without college degrees lose the equivalent of $448 annually compared to college-educated homeowners – a non-trivial amount, comparable to a stimulus check.
Higher rent and property values, higher wages for those with college degrees, and the displacement of renters and those without college degrees characterize the economic and social upheavals at the center of change.
“We find that low-skilled homeowners near a point of entry may reap the benefits of higher home values, yet this group also experiences a greater incidence of displacement. Not only are they are more likely to leave their neighborhood, they are more likely to move away from their home city,” Qian says.
Displacement of long-term residents is the main downside of the gentrification that high-tech newcomers set in motion. Rising rents bring painful and costly disruptions that may be overshadowed in popular consciousness by the aesthetics of gentrification and a neighborhood’s changing retail characteristics. A local corner store becoming a Starbucks, for instance, is a more recognizable symbol of gentrification than a family of renters being forced to move out.
“Residents without college degrees incur the elevated cost of living that follows a high-tech firm entry without the wage increases,” Qian says. “Many are forced to move away, which is itself an expensive proposition, and we find that displaced renters tend to move to neighborhoods with lower home values, decreased average incomes and diminished upward mobility for children.”
Controlling for Broader Economic Trends
In identifying the impacts that high-tech firm entries have on local residents, the authors took steps to control the broader economic trends and other neighborhood characteristics that could affect the experience of incumbents. Qian and Tan compared outcomes for people living close to firm entry sites to those living in similar neighborhoods in the same county without the shock of having a high-tech company opening a plant nearby. The authors took pains to determine these similar neighborhoods by building a model that incorporates the particular characteristics a high-tech company looks for when picking a new entry site, such as the demographics of nearby residents, rent prices and home values, and proximity to other firms and business districts. High-tech firms do not set up shop just anywhere, so Qian and Tan compared the neighborhoods near firm entry sites with similar neighborhoods where the companies might have built but did not.
“We were careful to rule out other economic trends so that we could determine with confidence the direct and indirect results from the entry of high-tech firms,” Qian says. “We find that the overall economic stimulus from these kinds of events is quite real – through direct effects from investment and job creation as well as indirect ‘equilibrium’ effects such as ancillary jobs created by the entry as well jobs created by other complementary firms that come to the area following the large high-tech entry.”
An example of an equilibrium effect is when other complementary firms follow the high-tech firm entry, spurring job creation and additional economic activity – a common occurrence, according to Qian.
The researchers looked at cases where a locale experienced a single firm entry in a span of five years. In places with multiple entries, when more than one high-tech firm opened plants in the same area, it is called a “cluster” or “agglomeration,” like in North Carolina’s Research Triangle Park.
“Welfare effects for residents in these clusters or agglomerations could be much greater than what we observed,” Qian says. In some extreme examples, he says, a large firm entering a small or economically depressed area may produce outsized impacts on the people who live there.
New Shocks Intensify Existing Inequalities
The study underscores the overwhelming importance of housing costs, with renters losing their footholds as prices rise. High-tech firm entries tend to alter the educational profile of local labor markets. Commuting distance also matters: The closer you are to a high-tech company’s entry point, the greater you will feel its economic winds.
“How will proximity’s importance change now that working from home has become much more commonplace?” Qian asks. “Will a firm’s entry have such large or geographically specific impacts if workers come to the office only a few days a week?”
Qian and Tan’s findings highlight ethical problems stemming from a high-tech firm’s entry to a given area, but ill effects are not inevitable.
“Consideration should be given to local residents and their preferences,” Qian says. “If local officials can protect incumbent residents from rent hikes, that would shield many from significant harm.”
In short, when a high-tech company moves into an area, existing inequalities in the adjacent neighborhood are exacerbated: Homeowners and residents with higher education thrive while renters and those without a college background are more likely to be squeezed out. Housing costs, educational attainment, commuting time and the needs of the high-tech driven labor market disrupt the status quo and shape a distinct model of contemporary American development.
Be sure to check out our additional content exploring the latest trends in economic development, real estate, and technology, innovation and strategy.
