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Do incentives help or hurt N.C.'s brand?

Set aside what you learned in civics class.

The state is not just a collection of people hemmed in by geographic boundaries and ruled by a common government.

It is product like blue jeans or cars. North Carolina is a brand like Wrangler or Ford.

Such is the way of economic development. The people responsible for getting businesses to come here -- or stay here -- have to persuade executives to "buy" our product, to convince them that North Carolina is a better fit than, say, Virginia or China.

Leaders tout North Carolina's work force, its universities, its location within a 700-mile radius of 170 million U.S. and Canadian consumers.

Increasingly, they also offer financial incentives -- since 2003, $367 million from one program alone to companies including Lenovo in Morrisville and Merck in Durham. Leaders promise grants, similar to the cash-back promotions automakers use to get shoppers to buy their cars. Or they dangle tax breaks, akin to the price discounts you might get on out-of-season clothes.

Time was, state officials wouldn't engage in heavy discounting to attract industry. In 1993, North Carolina lost a Mercedes manufacturing plant to Alabama. Officials here offered incentives worth an estimated $109 million. Alabama offered closer to $300 million.

"The kind of thing that Alabama did is not right for North Carolina," then-Gov. Jim Hunt said at the time.

But attitudes have changed. In 2004, state and local leaders offered Dell $280 million in incentives to build a plant in Winston-Salem and create 1,500 jobs. Last year, Google won as much as $260 million in grants and tax breaks over 30 years to create 210 jobs in Lenoir.

Gov. Mike Easley, who has shepherded the state economy as it lost more than 200,000 manufacturing jobs, talks about government-industry partnerships and about showing businesses that North Carolina is willing to take a chance on their success.

Many of the incentives require companies to meet hiring and investment goals. If they fall short, they don't get all the aid.

Even so, incentives are an important issue for taxpayers. When leaders promise companies grants or tax breaks to bring jobs, they give up revenue that could be used to improve roads, schools or other public services. Politicians bet that the broader economic benefits -- more jobs that spur more houses that spur more restaurants and shops, for instance -- will more than make up for the taxes they forgo or the grants they pay to individual companies.

Incentives also affect the North Carolina brand and its perception in the marketplace -- as they do with other products.

In business, incentives are typically used to introduce a product (a coupon for a new cookie) or to boost interest in a familiar one with flat sales (buy two tubes of toothpaste, get one free).

Used carefully, they can help boost a brand to stardom. Used too often, they can undermine a hard-earned reputation.

Think about the domestic auto industry. General Motors, Ford and Chrysler are well known for hefty incentives to attract consumers. Remember summer 2005? General Motors introduced employee pricing, and the other two automakers soon followed.

That's one of the difficulties with incentives. In a highly competitive business, when one company offers a discount, others often follow, triggering a price war that erodes profits that could help improve future products.

"You don't want your brand to be seen as bargain basement," said Jessica Caldwell, an analyst with Edmunds.com, which tracks the auto industry. "If you're just saying, 'We offer $5,000 cash back,' nobody really notices the quality." They have no loyalty; they just want a deal, she said.

A dangerous precedent?

Critics of incentives to recruit businesses fear that is already happening in North Carolina. As an example, they point to a special legislative session last month that resulted in as much as $60 million in incentives going to two tire makers, Goodyear and Bridgestone, already in the state. The companies said they might pare or close North Carolina operations unless they got government assistance.

Opponents contend that lawmakers showed that North Carolina is more interested in competing on price (lowering the cost of doing business in the state with grants and tax breaks) than on quality (building superior roads, schools and other public services.)

"I think our economy overall has a very positive image," said Elaine Mejia, director of the N.C. Budget & Tax Center, which has criticized incentives. "But I think we're at a point where our incentives policies, if we don't draw a clear line going forward, could begin hurting our image more than helping."

Jim Fain, Easley's top lieutenant for bringing new businesses to the state, says the worry is misguided.

"We're not selling on incentives," said Fain, secretary of the N.C. Department of Commerce. "We're not advertising 0 percent interest for five years. We're advertising a high-quality car. ... No amount of incentives will overcome the disadvantage of a poor work force or poor quality of life and place."

To make the point, he pulled out a slide show used to attract executives and site selection consultants. Incentives aren't mentioned until page 18 of 20.

The rest of the pitch touts investment in schools, the creation of Research Triangle Park, the presence of companies such as IBM, and amenities including the Pinehurst No. 2 golf course. "We have not lost our way here," Fain said.

The thing is, other places are catching up with North Carolina, he said. They have also invested in education and training and transportation. The assets that used to set North Carolina apart are becoming a baseline.

And advances in technology mean that companies are no longer inhibited by geography. They can put operations here as easily as they can in Virginia or Singapore or China and often make those decisions based on cost.

Grants and tax breaks, then, become a tiebreaker -- an important one, Fain said. If North Carolina fails to attract companies such as Google, Fidelity Investments and Network Appliance, its brand can be tarnished.

"Incentives help us be successful," he said, "and that's the aura that undergirds the brand."

The fashion business illustrates the argument. Clothing companies often give away merchandise to celebrities to increase the value of their brands. If musician Justin Timberlake is spotted wearing a Lacoste shirt, the brand gains cachet and Lacoste can win more customers willing to pay higher prices.

Recruiters make a similar argument in economic development. Dell's plant in Winston-Salem has been mentioned in at least 95 publications around the world. The value of that marketing makes up for the cost of incentives, some say, because other companies take note of Dell's decision and consider expansion in North Carolina.

Eventually, though, a brand has to stand on its own.

"Do we really need to chase every single piece of business out there and basically show them our underwear?" asked David Chapman, chief executive of 919 Marketing, a marketing and public relations firm in Holly Springs. "I don't know. But from a branding perspective, I do think in many cases it makes us a 'me too' brand where it comes down to who gave me the best carrot."

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