Information Technology

Public Policy

Corporate Incentive Packages

In November 2004, Dell Corporation negotiated a contract with the state of North Carolina to open its third manufacturing plant in the state in the fall of 2005. This investment required over $100 million and was set to create 1,200 direct jobs and a spillover effect of 6,000 jobs in related sectors. The price tag for the state of North Carolina is $242 million in corporate incentives, from tax credits to worker training, over the next 20 years.1

Following the deal, individual counties in the Triad began a bidding war over the investment. Guilford County and the city of Greensboro offered a combined $12.4 million incentives package, while Forsyth County and Winston-Salem proposed a total of $28 million.2 Ultimately, Dell located its facility in Winston-Salem.

How effective are corporate incentive packages? The case of Flextronics International offers some insight. When Flextronics was deciding on a location for its primary East Coast industrial campus, Atlanta, Georgia, reportedly offered it a total of $20 million in direct corporate incentives. By contrast, Franklin County, North Carolina, offered $5.5 million, over $3 million of which would go for retraining local textile workers for the technically sophisticated jobs at the local community college.3 To the surprise of many, Flextronics eventually decided to expand its small operations in Franklin County despite the temptation offered by the rival southern state. As one Flextronics manager mentions in an interview, the high quality of the personnel, the opportunities for retraining, the proximity of clients in the RTP area and the warm relations with the local government played an important role in the decision.4

Arguments Against Corporate Incentive Packages

The most important criticism against corporate incentives is that they are not considered very essential by companies themselves and divert scarce resources from other investments that are truly valued in the business community. A survey taken in 2000 by Rondinelli and Burpitt found that international company executives operating in North Carolina placed government tax incentives, agency assistance and financing close to the bottom of the 11-item list of factors that managers felt to be influential in their location decision.5

While the requirements of companies in different industries differ considerably, the following factors headed the list: labor force, transportation, quality of life, business climate and education. For the high value-added industries such as information technology and biotechnology, we can expect the importance of labor force factors, quality of life and proximity to educational institutions to be even more critical than average, given these industries' reliance on skilled labor and collaboration with research institutions. Even if incentives come into consideration, this is at the final stage of the selection process and even then they can be trumped by other factors, as the Flextronics experience suggests. Thus, corporate incentives have been shown to be ineffectual in their avowed purpose - job creation and economic growth.

Another reason why grants are inefficient is because states usually fall prey to the "winner's curse," sometimes paying an unacceptable price for the jobs ultimately created. They often fail to realize that companies might locate their business only for a small portion of the incentives, as did Flextronics. Also, the practice might be abused by companies. For example, they might withhold their decision to locate in a state until the maximum possible amount of "incentives" is doled out, or they might use the threat of moving out to blackmail the communities where they are located. The latter was the case of RF Micro Devices, which received $2 million in 1999 from Greensboro to prevent it from relocating to China.6

Even if incentives attract jobs, are these the kinds of jobs that North Carolina wants? Companies that locate in this state solely as a result of incentives might not be interested in developing North Carolina's distinct competitive advantages in priority sectors, such as high technologies. It is particularly disturbing that some of those jobs are not even bound by the minimum wage.7

The practice of corporate incentives can be challenged as extremely inequitable in two additional ways. First, since these benefits are geared towards large and highly visible enterprises, it is discriminatory towards small businesses, which employ a large segment of the labor force and may even have better growth prospects than big manufacturers. Second, corporate incentives also create geographic inequalities within the state since a limited number of counties are affected by the location of a corporation's business in the state. In effect, it represents redistribution of income from taxpayers to large corporations, often in exchange for very little in terms of real benefits.

Policy Recommendations

  • Invest in transportation, education, cluster economy and quality-of-life public services. Business leaders are unequivocal that these are among the most important sources of competitive advantage. Sustained investments in infrastructure are likely to enhance the long-term attractiveness of a place. The RTP area is attracting scores of companies even four decades after its inception. Also, it is a lot more equitable than grants to individual big companies. For example, local citizens benefit from better quality of life in the RTP region just as much as the skilled workers who are attracted to the region's jobs from other parts of the country. Also, the cluster economy of RTP and the state-subsidized technological infrastructure are accessible to both recent IT start-ups and giants like IBM and Cisco Systems.

  • Worker training subsidies: The assistance goes to those who most need it: less-educated workers from traditional industries. The jobs that retrained workers take are usually higher paying and technology-related, exactly the type of jobs that North Carolina needs. The availability of worker training subsidies can help companies set up operations in less-developed parts of the state, where skilled personnel may not be available. In fact, it makes it more profitable for a company to move directly to poorer counties, because it will be able to pay relatively low wages for its newly trained technicians in comparison to the salaries of college-educated engineers elsewhere.

  • Revisions to the William S. Lee Act Tax Breaks. The Lee Act was passed in 1996 in order to promote investment and job creation in the less developed regions of the state. It separated the counties into tiers, with job creation and investment tax credits increasing dramatically if done in a less developed county. A job created in a prosperous region can bring as little as $500 in tax credit; the same job in one of the poorest counties can in fact bring $16,500.8

    The impact, however, turned out to be different than anticipated: two-thirds of the more than $60 million of credit claimed in 2001 were awarded to the top counties, with those at the bottom barely receiving anything.9 The high incentives obviously did not make employers migrate to poorer regions, undermining the claim that the tax breaks can make a difference. There are also other troubling signs that the William S. Lee Act is not serving its purpose of stimulating economic activity in underdeveloped regions. In particular, many businesses operating in lower-tier counties tend to have little profit and cannot claim all of the tax credits for which they qualify.10 Also, there has been considerable disagreement about the specific industries that would be favored under the act, with some industries claiming it is too discriminatory.

    Some ways in which the tax breaks can be made more effective:

    1. Eliminate the tax breaks for the wealthiest (Tier 5) counties. They have conditions good enough to attract new jobs on their own.
    2. Transform the tax credits into cash grants for small businesses in economically distressed regions (Tier 3 and below), which cannot claim their entire amount because of low revenue and profits.
  • Cash Incentives and Discretionary Grants/Tax Credits: There are signs that the state is moving away from the rigid system of the William S. Lee Act towards the more flexible approach of offering incentives specifically targeted to major businesses considering moving into the state. For example, the One North Carolina Fund provides "financial assistance to those businesses or industries deemed by the Governor to be vital to a healthy and growing State economy and that are making significant efforts to expand in North Carolina."11

    The advantages of such a targeted approach is obvious. Research shows that although incentives may not count for too much at the initial stage of future site selection, their role increases as a company starts narrowing the choices. So it might make sense to offer tailored incentives to those companies that are ambivalent about moving into the state.

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Replicating the Success of Research Triangle Park (RTP)

The North Carolina Research Triangle Park (RTP) is the one of the largest research parks in the world. Of the 157 different organizations in the 7,000-acre park, more than 80% are multinational companies, and 84% of them are research and development-related organizations. Of the more than 39,000 employees, 97.3% work for R&D-related organizations. These statistics alone make RTP one of the most dynamic parts of the increasingly globalized North Carolina economy. These organizations span the gamut of industries from information technology, biotechnology, and pharmaceuticals, to telecommunications, environmental sciences, and public health. The largest employers in RTP are IBM (10,800 employees), GlaxoSmithKline (6,400 employees), Cisco Systems (3,400), Nortel (2,800), and RTI International (2,600).12

The public policy question that arises from the success of RTP is: should North Carolina create more parks in other parts of the state?

What makes the RTP attractive?

Research Triangle Park in North Carolina is a landmark public/private initiative, created in 1959 by leaders from business, academia and industry. The idea behind RTP is that companies can succeed and produce at a higher efficiency if they are located near each other, and they can jointly draw upon a capable labor force and the region's universities as a source of vast knowledge. The founders of the park over 40 years ago mixed the best of all worlds, strategically locating the RTP between the major cities of Raleigh and Durham, as well as at arm's length from some of the most prestigious research institutions in the United States, such as Duke University, the University of North Carolina at Chapel Hill, and North Carolina State University.

Corporations are attracted to the Triangle for monetary as well as structural reasons. In addition to offering a great labor force and connections to the leading universities of the nation, the state of North Carolina offers vast corporate incentives to companies that plan on moving to the Triangle area, including industrial revenue bonds, tax exemptions, business energy improvement loans, and other assorted grants and funds.13

The state government supports the RTP in more ways than just the apparent corporate incentives packages. The government funds costly renovation programs for state highways near RTP, one of which, I-40, passes directly through the park, and the Raleigh-Durham (RDU) Airport, which services 8 million passengers a year and is located only five miles from the park.

Comparing Greenville-Pitt County with Kinston's Global Trans Park

The policy issue must then discuss whether there are other parts of the state that, if put in the same situation, would be as successful. The issue takes on critical importance for state lawmakers attempting to reduce the growing disparities between richer and poorer counties. The success of Greenville-Pitt County area in Eastern North Carolina as an emerging innovation cluster and the failure of the Global Trans Park in Kinston offers some insight into how the state might approach the problem.

The city of Greenville is becoming a booming area for R&D companies related to medical devices because of the large medical center there. East Carolina University's Brody Medicine Center in Greenville is a leading nationwide hub for telemedicine, an emerging field that uses telecommunications to provide medical information and services.14 Hit hard by the struggling tobacco industry, the rural counties in Greenville are also attempting to retrain workers in the fields of pharmaceuticals and biotechnology. The Golden Leaf Foundation approved $60 million in grants from the state's tobacco settlement money for worker retraining programs.15 The key to Pitt County's success has been in its ability to utilize the presence of an academic institution and its research specialization to help transform the region's job potential.

The Kinston Global TransPark, however, was a failed experiment by the state of North Carolina to create an industrial park using the model of RTP. The Carolina Journal writes that the TransPark was "a boondoggle from the start," and also "what is possibly the largest government waste and failure in North Carolina state history, a failed cargo-airport project that has brought false hopes but little impact to Kinston and Eastern North Carolina", referring to the $534 million package offered to Boeing."16 The biggest problem with this research park was the lack of anchors that made RTP successful - presence of universities, lack of research centers and an already-existing qualified workforce. Given the success of the Triad region in attracting Dell Corporation, it can be argued that the benefits of setting up a Global Trans Park may have been better served by locating it in the Greensboro-Winston Salem area of North Carolina.

It is clear from the above section that duplicating the success of RTP in other parts of the state is no easy matter. However, the effort is a worthy goal in the interests of fairness and equity in channeling state tax dollars for the benefit of all state citizens.

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References

  1. Gary Robertson, "New Dell Manufacturing Plant in N.C. to Employ At Least 1,500," Associated Press, November 9, 2004. Last accessed January 18, 2005. [http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2004/11/09/financial1216EST0129.DTL]
  2. "Triad leaders say money's left to lure more business." JournalNow (Winston-Salem), December 5, 2004.
  3. Dan Egbert, "Flextronics Stays in State." The News and Observer (Raleigh), February 9, 2002
  4. Dan Egbert, "Startups are Key to Plants' Success." The News and Observer (Raleigh), April 24, 2002
  5. D. Rondinelli and W. Burpitt, "Do Government Incentives Attract and Retain International Investments? Evidence from North Carolina." Policy Sciences, Vol 33, 2000. pp. 181-205.
  6. "Corporate Incentives Mixed Track at Best," Editorial, Greensboro News & Record, August 24, 2003; David Nivens, "Dell Incentives Offer Will Be The Most Lucrative Ever In Guilford, N.C.," High Point Enterprise, November 26, 2004
  7. Ibid.
  8. North Carolina Department of Commerce, "Summary of North Carolina Tax Credits: William S. Lee Tax Credits (Section 3A)," Website. Last accessed January 19, 2005. [http://www.nccommerce.com/finance/pdf/Lee_Act_RD_Credit_Summary.pdf]
  9. Scott Mooneyham, "Wealthy Counties Claim Bulk of Business Tax Breaks." Associated Press News Wires, July 6, 2004
  10. Scott Mooneyham, "New Report Raises Questions About Business Tax Breaks." Associated Press News Wires, July 6, 2004.
  11. North Carolina Department of Commerce, "One North Carolina Fund," Website. Last accessed January 19, 2005. [http://www.nccommerce.com/finance/incentives/onenc]
  12. Research Triangle Foundation, "Facts and Figures: Largest Employers."Website. Last accessed August 11, 2007. [http://www.rtp.org/index.cfm?fuseaction=page&filename=facts_and_figures_largest_employers.html]
  13. Research Triangle Foundation, "Why RTP: Incentives." Website. Last accessed January 19, 2005. [http://www.rtp.org/index.cfm?fuseaction=page&filename=why_rtp_incentives.html]
  14. East Carolina University, Brody School of Medicine, "What is Telemedicine." Website. Last accessed August 11, 2007. [http://www.ecu.edu/telemedicine/]
  15. North Carolina State University, "Golden Leaf Foundation Gives Boost to State's Biotech Industry." Press Release. Last accessed on January 20, 2005. [http://delta.ncsu.edu/sipd/strategic/documents/BioTech_Golden_LEAF_60M.pdf]
  16. "The Global Trans Park." Carolina Business Journal, 2005. Last accessed January 19, 2005. [http://www.carolinajournal.com/exclusives/series.html?id=3]

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