March 6, 2014

Study: Merced benefits from ‘knowledge spillover’

Every dollar increase in university spending generates an 89 cent increase in local non-education labor income — evidence of a measurable spillover effect created by public research institutions, according to recently published research from a professor at UC Merced.

Thanks to UC Merced, businesses in town could be benefiting from something called “knowledge spillover,” according to recently published research.

As research students develop new technologies and ideas, or just better ways to conduct business, the information is passed on to the businesses working closely with the university, UC Merced Professor Alexander Whalley explained.

He and Connecticut-based Rensselaer Polytechnic Institute Professor Shawn Kantor sought to figure out how research universities economically benefit their surrounding counties. They tracked spending at 135 universities and compared it to the economic changes in the counties around them between 1981 and 1996.

According to the study, for every dollar spent by a research university, there’s an 89-cent increase in labor income for industries outside of education.

“It’s not what we’d call a fiscal spillover, where you get this money multiplying in the local economy,” Whalley said. “The idea is it makes workers more productive. It increases their skills or their knowledge base.”

The study did not include liberal arts schools or two-year colleges.

The paper “Knowledge Spillovers from Research Universities: Evidence from Endowment Value Shocks” has been published in The Review of Economics and Statistics, a 97-year-old general journal of applied economics. The journal is edited at the John F. Kennedy School of Government at Harvard University, also known as the Harvard Kennedy School, and published by MIT Press.

Whalley said the research shows that taxpayers, who subsidize public colleges, benefit from a nearby university even if they never enroll in it. The businesses working with or near the university catch on to the findings before anyone else. “Local firms have a better idea of those discoveries than firms in, say, China or other parts the country would have,” he said.

In addition to these findings, numbers are released every year by UC Merced officials on the money the campus generates for the region’s economy. The value of wages and benefits paid, construction contracts awarded, and goods and services purchased within the Valley by UC Merced between July 2000 and August 2013 amounted to $946 million, according to the university’s latest numbers.

Whalley said growth of the universities typically molds the types of businesses in a given town as well.

He said the businesses in Silicon Valley, which is near Stanford University, are different than those here. He noted that UC Merced could be a factor in recent area changes. He pointed to the deal Google made for a test site at Castle Commerce Center, and the addition of places that appeal to a younger crowd, such as Panera Bread, Chipotle Mexican Grill and the 17th Street Public House.

Whalley said he expects that it would take 15 or 20 years from the day UC Merced opened, which was in 2005, to see major affects.

Frank Quintero, the city of Merced’s economic development director, said he expects Merced will see the biggest benefits when more UC Merced graduates decide to stay in the area. He said local firms commonly use interns from the university, but it remains unclear if those interactions have lasting benefits.

UC Merced has long been expected to be an economic driver in the community and beyond. “Over the course of the years, that has proven to be absolutely true,” said Mark Hendrickson, Merced County’s director of community and economic development. “They are absolutely contributing to our local economy.”

Hendrickson said the university has the opportunity to help diversify Merced County’s industries.

Whalley said his research shows that benefits come faster and greater for the technology industry but that an economy based heavily on agriculture should see results as well, as the industry embraces more and more technology.

The benefit of a university’s findings may not always be obvious, Whalley said, but being aware of new information gives firms the opportunity to use it. “So, business owners should interact with the university,” he said. “They should try to figure out how to adapt the findings of the university to their business.”

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