Opinion

Does doling out economic incentives create jobs? A UNC study says no.

Alexa ‘apologizes’ to Raleigh-Durham for not getting Amazon HQ2

With Amazon's HQ2 sites selected, 18 cities are left feeling a little dejected after spending millions of dollars and months courting and waiting. Austin-based ad agency McGarrah Jessee created an apology from Alexa. (Not actually Alexa)
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With Amazon's HQ2 sites selected, 18 cities are left feeling a little dejected after spending millions of dollars and months courting and waiting. Austin-based ad agency McGarrah Jessee created an apology from Alexa. (Not actually Alexa)

We dodged another bullet when Apple chose Austin, Texas over North Carolina, saving taxpayers millions in corporate subsidies. Apple’s decision, like Amazon’s before, means we can spend those same economic development dollars more wisely, including extending help to smaller North Carolina businesses. Doing so disperses economic risk across multiple firms — and offers the potential of even more jobs for North Carolina workers.

With the digital dust settling after Amazon’s controversial HQ 2.0 competition, policymakers and business leaders are reconsidering the utility of the “buffalo hunt” incentives game. And they are right to question its value. New evidence from a national study we conducted on incentive deal performance suggests that large corporations that receive an incentive to relocate, expand or remain in place fail to produce their promised jobs and revenue.

The first of its kind on a national scale, our study measured how economic development incentive deals impact company jobs and sales. Using a new national database of deals between 1995 and 2010, we matched each company that received an incentive to a carefully selected set of similar companies that never received one. We then compared trends in employment and sales between each company that received incentives and its matched peers.

We find no evidence that incentives create jobs. In fact, our analysis showed that incentivized companies grew three percent slower than similar companies. While this finding alone should give policymakers pause, more important conclusions can be drawn after considering establishment size. Incentives to small (under 50 employees) and medium sized (50-250) establishments are linked to positive job gains, while deals to large firms (>1000) are strongly negative.

Considering this research, some might argue that incentives should be abolished. Others might suggest redirecting public funding to home-grown enterprises. While we generally applaud these reforms we also recognize political reality: incentives are here to stay, and it is difficult for one state to stop using them while their neighbors continue. Moreover, banning incentives overlooks the role strategic recruitment and retention play in rounding out regional economies—filling gaps within existing supply chains and bringing innovative ventures into a state, ultimately contributing to a deepening of economic infrastructure. North Carolina has demonstrated as much in key growth industries like biotechnology, non-woven textiles and aerospace.

Still, our state can take steps to enhance incentive deal effectiveness through more thoughtful economic development planning. At one level, this means tying incentives to quality jobs — ensuring that incentives generate inclusive economic development through living wages, targeted local hiring and career-enhancing job training. Smaller firms are often less generous with wages and benefits, giving North Carolina an opportunity to use incentives to boost compensation while helping low-resource small firms offset some additional costs.

More broadly, improving incentive granting requires a comprehensive approach to economic development. Our study found that incentives to larger firms perform much better when a state adopts a balanced economic budget—meaning the legislature allocates spending to ensure concurrent support to both industry recruitment and ‘home-grown’ business and technology development. This approach produces a moderating effect: negative employment results for large-firm incentive deals disappear..

This result could be due to wiser public investments — lower incentive and recruitment budgets could mean these states pick better deals. Or it could be that balanced budgeting priorities prod states into driving a harder bargain, pushing larger firms to make more substantial job commitments.

With Apple and Amazon’s money on the table, North Carolina has an opportunity to reassess its approach to incentive granting and economic development. Rather than treat these big deals as major losses, let’s find a way to turn these high-profile decisions into series of smaller, high-impact gains.

Nichola Lowe and T. William Lester are faculty members in City and Regional Planning at UNC Chapel Hill. Mary Donegan is a faculty member in Urban and Community Studies at the University of Connecticut.

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