Why should NC reward big companies over entrepreneurs?
The Research Triangle remains a top contender to become the new home of Amazon’s new headquarters, which could bring 50,000 jobs to the region. But “winning” comes at a steep price. Details on financial incentives that the state is offering the retailing behemoth are closely-held, but we know that North Carolina would need to put substantial perks on the table, given that Newark announced $7 billion in tax credits and Maryland offered an $8.5 billion incentive package.
As we dangle incentives to attract Amazon, here is one perspective to consider: while adding more jobs to the workforce appears to be a big win, do efforts to attract established companies actually cause unintended harm to new businesses?
Despite all the media coverage of successful entrepreneurs, the rate of new business formation in the U.S. is not quite what it once was. Start-up rates have fallen from the 11 to 18 percent range in the late 1970s to 4 to 9 percent today. New businesses are essential for economic growth, helping to drive productivity and provide more job options for workers. The decline in young and innovative start-ups in the U.S. account for 32 percent of the decline in job creation, and 26 percent of the decline in job reallocation from the late 1980s through the mid-2000s.
As entrepreneurship and broader measures of economic dynamism – like the frequency of job changes – remains far below their levels in prior decades, many public policies inexplicably favor large, established companies at the expense of budding businesses. While the federal government has numerous programs to support entrepreneurship, there are also many policies at the state and local levels that impede new business entry and growth. Think about what we could do to support entrepreneurs if we reallocated even a fraction of the incentives we spend to lure large employers.
To put this in perspective, consider research by economist Timothy Bartik which estimates that states spent approximately $45 billion in 2015 on incentives for mostly large companies, and an analysis from The New York Times that suggests the overall incentives are close to $80 billion per year.
While incentives can help steer jobs from one state to the next, they also bolster existing firms, which can hinder new firms trying to compete with them. But states are understandably reluctant to give up incentives for fear that other states would steal employers. So how do we curb wasteful incentives and help entrepreneurs?
In a recent Hamilton Project at the Brookings Institution report, we propose the creation of the Main Street Fund. This federal-state program would reduce state incentives offered to large companies and divert these funds to investments in evidence-based initiatives that promote a more competitive economy. These initiatives include management training for new entrepreneurs, investments in broadband infrastructure, and reimbursements for out-of-state licenses to promote worker mobility.
The plan would support state programs targeting young firms that have high growth potential. It could also support public-private partnerships like the North Carolina Next Generation Network – a coalition of municipalities, universities, and firms – working to bring affordable high-speed broadband networks to Research Triangle.
More must be done to reduce barriers to entrepreneurship and make it easier for new businesses to compete with established companies. As we lay out the welcome mat for existing corporations, we must also consider initiatives to promote start-ups.