Banks & Finance

Public Policy

How Financial Incentives are Used to Attract Private Companies to North Carolina

The Commerce Finance Center (CFC), the subdivision of the North Carolina Department of Commerce in charge of attracting corporations to North Carolina by negotiating financial incentives and programs, is increasingly looking to the finance sector as a target for its efforts. Financial incentives can take many forms, the most common of which are: tax breaks, grants and loans, infrastructure expansion or improvement, physical capital renovation and purchase, land purchase or physical capital amortization, and human capital training and attraction through an extensive community college network. Currently, five out of the eight established financial incentive programs available to private corporations pertain to the finance sector.1

1. William S. Lee Tax Credit and subsequent acts: This 1996 enacted and 1998 amended tax credit rewards job creation, investment, worker training, and research & development activity conducted by private enterprises in North Carolina. It is used to offset state income taxes, franchise taxes, or gross premiums tax burdens.
2. North Carolina Small Cities Community Development Block Grant Program: Administered by local authorities, this grant provides financial assistance to businesses that create new, local jobs. This financial assistance is used for machinery or equipment purchase and property acquisition or construction. The funded activity must benefit North Carolina workers, at least 60% of whom are of low or moderate family income status.
3. Industrial Development Fund: This fund assists local government authorities to finance infrastructure improvement or building renovation and equipment for eligible private enterprises through the William S. Lee Tax Credit.
4. One North Carolina Fund: The Governor may provide direct financial assistance to businesses and industries perceived as both vital to the growth and health of the North Carolina economy, and willing and able to expand in North Carolina. This fund is only applicable if North Carolina is in competition with another location for the expansion project.
5. Job Development Investment Grant: This annual grant provides financial assistance to private enterprises that demonstrate interest in creating new jobs in North Carolina. The allotted grant depends on the amount of withheld taxes paid by new employees.

Recent Relocations and Expansions: CSFB and Citigroup

In late November 2004, North Carolina Governor Easley proudly announced that Credit Suisse First Boston (CSFB) officially decided to locate one of three worldwide Global Business Centers in the Research Triangle Park, creating 400 new jobs with a $100 million investment.2 The NC Department of Commerce estimates the economic impact of this investment at more than $2.4 billion to gross state product and $83.7 million more in state revenue over the next ten years. In an effort to attract CSFB to North Carolina, Governor Easley provided a $3 million grant from the One North Carolina Fund and promised a customized community college training program to prepare the local workforce for CSFB's needs. Additionally, CSFB was awarded an $8.9 million grant over the next 10 years as the 18th recipient of the North Carolina Job Development Investment Grant award. CSFB stated that the well-established information technology industry cluster, the highly renowned NC university system, the local infrastructure, and a high standard of living were additional deciding factors.3 The center opened at the beginning of August 2005.

Another major corporation that received financial incentives is Citigroup. In March 2004, Citigroup announced a $35 million dollar Citi Cards call center in Guilford County. The decision to come to Guilford County was aided by an economic-development incentives package of $5.21 million from the state and $1.2 million from Guilford County. The grant, like a part of the CSFB aid, came from the Job Development Investment Grant program, with the expectation of creating 700 new jobs. This is expected to add $833 million to the gross state product. Citigroup's employment of 900 new employees by 2005 in the new facility will help employment in an area struggling in the wake of job losses in the tobacco and textile industries. The location decision was aided by Guilford County's established industrial presence, a quality labor force, and a strong telecommunications structure.4

Concerns with Financial Incentives

However, policy decisions regarding financial incentives are not as simple as offering lucrative packages to attract new plants and firms to North Carolina. As a 2000 survey of government incentives in North Carolina showed, financial incentives tend not to be very important to the location decisions of firms. It was discovered that among 513 global firms with a presence in North Carolina that were surveyed, tax incentives placed eighth most important and government financing factors was tenth. Labor force, transportation, quality of life, and educational facilities all ranked higher in this survey. Furthermore, competing locations can easily end up in bidding wars over financial incentives, the results of which can be too costly compared with the return.5

Given the direct financial provisions to private companies currently in operation, the NC Department of Commerce should look into creating and maintaining indirect financial incentives, such as general education and infrastructure improvements, that would have the potential to attract expanding firms to North Carolina. This strategy will allow North Carolina to maintain and capitalize on the existing competitive advantages it possesses over other locations. The vibrant finance sector in North Carolina, particularly in Charlotte, creates a competitive cluster that attracts other financial institutions with positive location externalities for other industries. Additional advantages include the numerous universities, strong and effective community college and public school networks for worker retraining, efficient and up-to-date infrastructure, several well-known medical centers, and the high standard of living in the state.

State investments that aim to maintain these competitive advantages could benefit the North Carolina economy in all industries, therefore more effectively generating new jobs. Nevertheless, as the CSFB and Citigroup cases illustrate, direct financial incentives directed to relocating corporations can be successful and should be maintained as a policy option. Although government incentive packages have helped bring two major recent investments to the state economy, indirect financial incentives still need to serve as complementary programs that ensure the continued competitive advantage of the NC finance industry.

Case Studies

• Interview with Cary Nordan, Triangle Capital Partners, Raleigh, NC
• Interview with William J. Pickens, Senior Vice President of Business Development, Mechanics and Farmers Bank

References

1. North Carolina Department of Commerce. Commerce Finance Center. [downloaded January 10, 2005].
2. North Carolina Office of the Governor. Press Release. October 21, 2004. [downloaded January 10, 2005].
3. Ibid., and Knight Ridder Tribune News Service. "Credit Suisse First Boston Plans Center for Raleigh, N.C.-area Business Park." October 22, 2004, p. 1.
4. Knight Ridder Tribune News Service. "Citicorp Picks Guilford County, N.C., for Credit Services Location, 900 Jobs." March 22, 2004, p. 1; and DeGraff, Nate. "Concrete Rising at Call-Center Site." Greensboro News Record. June 23, 2004, p. A1.
5. Rondinelli, Dennis A., and William J. Burpitt. "Do Government Incentives Attract and Retain International Investment? A Study of Foreign-Owned Firms in North Carolina." Policy Sciences 33 (2): 2000. Pp. 181-205.