Ideas in Development

But economic development, as we have already noted, can be fostered by other initiatives and investments, ranging from improving the local amenities (e.g., building a museum and an aquarium) to reforming the K-12 educational system, from retaining existing businesses to fostering greater minority ownership of business enterprises.  And we believe that, in most cases, recruitment is less important than many of these other approaches.

What Is Business Recruitment and Why Is It Still So Popular?

A business recruitment program works to attract new firms to a community by offering incentives, by making appropriate investments in the area’s workforce and physical infrastructure, and by marketing an area’s strengths.  It typically consists of five key components: (1) marketing the location, (2) identifying prospects, (3) prospect tracking, (4) managing the visits of high priority and promising prospects and (5) closing the deal. 

An effective business recruitment effort creates jobs, increases tax revenues and can help to diversify a local or state economy.  It is virtually synonymous in the public’s mind with economic development (“attract jobs”) and will always remain a major development strategy.

What accounts for this appeal?

• It is “tradition” and what most development professionals know how to do, whether they operate at the city, county or state level.
• It is “fast-in”—once the decision is made, jobs come quickly.  Indeed, it is often the best way to create significant numbers of jobs over a short time.  And even if the odds are long, the payoff can be big.  This contrasts with many other approaches, where the risk may be low and the actions are almost always appropriate (e.g., improving workforce skills), but the returns are longer term and more invisible.
• Successful prospecting is a great way to boost city and state morale and visibly make a statement about the apparent healthiness of the area’s business climate.  This high visibility can also generate strong political and public support for economic development: it assures the citizenry that “something is being done.”
• It is easy to explain to the populace. 
• A strong, well-endowed recruitment strategy may be very appropriate investments for some jurisdictions.
• It can be a means of making changes in the business climate that also aid existing businesses and increase support for other types of economic development strategies, such as supporting small business development or improving labor force skills. And recruitment approaches can be meshed creatively with other strategies, such as promoting a new industrial sector.  Indigenous development efforts and business attraction can work hand-in-hand.
• Everyone thinks that they can aspire to mounting a business recruitment effort, while a number of other approaches hinge on the quality of educational institutions, its natural and cultural amenities, its proximity to growing areas and larger retail markets, and so forth.  Elected officials and many development professionals believe this is a game in which they can win, even if their assets are not super strong.  Indeed, an effective strategy, targeting companies with modest workforce skill requirements, may neither be that costly nor require much improvement in sites or infrastructure. 
• Additional expertise in marketing and other relevant development help is typically available from other public and private actors, like the state government, investor-owned utilities and banks.
• Tackling other development strategies requires greater time in building new partnerships and requires knowledge of a range of institutions (e.g., schools, community colleges, etc.) and areas of expertise (e.g., development finance, international marketing, political skills, etc.) that most development professionals do not possess.  These other development approaches are often much complicated and much more difficult to pull off.
• And financial incentives are often available from a variety of federal, state and local sources.

In summary, business recruitment is not anywhere close to becoming extinct and when suitably used, it should remain a key element in an economic development portfolio.

What Are The Limits Of This Traditional Approach?

But these arguments do not imply that all is rosy with business recruitment.  The number one limit of this strategy is that it is largely zero-sum, when viewed nationally.  In the vast majority of cases, these efforts are only determining where the facility will locate: they do not create any net new jobs in the United States as a whole. 

There are other large pitfalls and dangers to watch out for.  The odds are long, because there are not that many footloose projects.  In addition, the number of prize projects, like the large automotive or computer facilities, is actually quite rare.  So, most jobs are created by new and old indigenous companies.  And without a good customized strategy and some exemplary development assets, many jurisdictions are not really prime candidates for the trophy projects.

Second, existing companies may feel neglected, thinking leaders are only interested in new firms.

Third, there is a terrible tendency, in today’s incentives’ “arms race” atmosphere to “give away the store” through providing overly generous financial subsidies.  This can lead to a pyrrhic victory where the project does not even cover its full costs and taxes and fees are shifted to other businesses and the larger populace.  And sometimes the project does not link with the local and regional economy as well as it was predicted and the knock-on job effects and the opportunities for local businesses to contract with this new facility were grossly exaggerated.

Fourth, focusing too much energy on attraction efforts has its “opportunity costs.”  It may discourage policymakers and development professionals from giving sufficient quality time and adequate resources to other more promising development activities.

Fifth, the expectations of recruitment efforts are almost always too high.  In fact, most companies that make initial inquiries about alternative business sites do not even decide to relocate or expand from where they are currently operating.   Moreover, resentment and political fallout can result from projects that do not materialize at the eleventh hour or from suffering a low batting average when comes to bagging these prospects.

Lastly, policymakers often set inappropriate targets, for example, expecting a Japanese investor to locate in their area.  And in other cases, their recruitment effort does not target the types of jobs that their citizenry really need and have a chance to get.

For all these reasons, state (and local) policymakers need to take a more strategic, cost-effective and balanced approach to business recruitment.  Do not put all your eggs in this basket.  And try to educate the citizenry that economic development involves more than chasing computer chips or smokestacks.

How Can Incentives Be Used By States and Localities?

The competition between states to recruit new companies or to retain existing ones has never been more intense. Billions are spent nationwide via a variety of tax incentives and spending programs that have fueled a new “economic war among the states.”

To simplify some, these incentives take two forms: tax incentives and non-tax incentives.

• Tax Incentives.The traditional workhorse of business climate policy is the tax incentive. Tax incentives include various kinds of abatements, exemptions, reductions and moratoria (such as corporate income tax exemptions, sales/use tax exemptions on new equipment, and tax exemptions or moratoriums on equipment and machinery), along with other tax-related investment incentives (investment and jobs tax credits, research and development tax incentives, and accelerated depreciation of industrial and equipment).

• Non-tax Incentives.Non-tax incentives, a growing form of inducement, include grants, creative financing subsidies and customized worker training. One particular mainstay is the Industrial Development Bond, which almost every state uses to offer low-interest loans to firms.

Why Are They So Popular?

Five reasons lie behind this increased use of development incentives.

• Competition between states is an integral part of the federal system. The power of state and local governments to deliver services and raise revenues is much greater than in most other nations. The major cuts in federal development programs by recent administrations and the increased use of block grants have fueled additional competition among states, as each jurisdiction tries to attract and retain jobs.
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• The impact of plant closures, work layoffs and economic restructuring, sparked off and reinforced by global competition and new technologies, has dramatically affected the economic health of states. Elected officials are under immense pressure to “do something” about economic development. While they have little power to influence these larger macro-economic forces, they are able to change the tax code or create new non-tax incentive programs.
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• Corporate lobbyists, state officials and legislators often work in tandem to provide more incentives. Their actions are fueled by the fear that they will fail to compete effectively with other states and promoted by explicit efforts to help particular and powerful corporations. Others wish to seek a general drop in taxes on business and private investors. Providing incentives is a veiled way to answer this request. And some within these alliances believe this is just sound economic development.
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• The “incentives” for taking this approach to economic development are stronger than the “disincentives.” For instance, public officials and staff are more rewarded for making any deal happen, not just the good deals. It is easier to explain to political constituencies about industrial recruitment and the use of development incentives than it is to justify alternative approaches. The successes of landing the occasional trophy project are more visible than the scores of jobs created invisibly by providing good public services. The benefits of success can happen during an elected official’s term, while the additional costs and downside risks may occur later during another political administration.
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• Finally, there is an “arms race” mentality that requires policymakers to match any development incentive a competitor offers, regardless of its utility and effectiveness. This is fueled by a host of governments that are constantly striving to strike first in offering a particular inducement.

How Does Uncertainty Affect The Use Of Incentives?

It is worthwhile at this point to talk briefly about the uncertain situation that most policymakers face when it comes to playing the business incentive game.

First, when it comes to pursuing development strategies, most officials are not sure what works other than the use of incentives.  And even if “homegrown” economy approaches do work, the payoff for these alternatives is often long-term.  Furthermore, both game theory and psychological research suggests that participants faced with this complexity will go with a typical “solution set,” an almost formalistic response.  They will do what everyone else is doing.

Second, policymakers also recognize that these development incentives have some effects on location decisions, but they are not sure how much incentive is needed or in which situations they are most appropriate.

Third, only companies know if they are really serious about locating in a particular jurisdiction and what incentive maybe required to close the deal.

Fourth, playing the incentive and recruitment game is widely understood and it is much harder to explain to the electorate why you are not doing it or why you are doing it differently (with lots of accountability measures, for instance) than to simply go with the flow.

Fifth, there is often tremendous political and corporate pressure to offer something of consequence.  Not anteing up or coming up with too little will be typically seen as a sign of a bad business climate.  Above all, the officials must avoid looking like they are just standing by when an important prospect is courting the community or a pivotal company is making signs that it might leave.

Sixth, even if the odds in landing the plant with an incentive are not great, if the fiscal costs are long term, not too big, borne by other levels of government, and/or largely invisible, then the official will almost certainly provide an incentive.

Lastly, politics has a lot to do with credit claiming and taking symbolic actions.  Providing incentives, especially successfully, and playing on the recruitment stage with a lot of aplomb is a good way to do both.

These all represent challenges that will be difficult to overcome.  And probably no state can let their biggest corporate citizens relocate without doing all they can to stop it.  But the rest of this series will describe some promising ways to decrease uncertainties and increase the benefits of using incentives in these situations. ¹