State assistance to business

Here is a juxtaposition of news stories that came across my computer screen this morning:
   The Wall Street Journal - States Move to Cut Incentives to Businesses
   Forbes - States That Truly Bet On Small Business

This isn't such a big paradox, however. The Journal article is on how budget problems are forcing states to cut back on tax breaks to lure companies into the state -- and includes tax breaks for film and TV productions. The Forbes piece (and its "in-depth" slide show) talks about the multitude of grants, loans and even equity capital programs. The focus is on innovation, entrepreneurship, technology-based development and start-up activities -- like Ohio's Third Frontier program (see earlier posting), the Pennsylvania Ben Franklin Partners, the Texas Emerging Technology Fund, Maryland's TEDCO, etc.

The difference in these types of programs is night and day. One is the traditional recruitment strategy -- "smokestack chasing" updated to the I-Cubed Economy. While incentives for factories are still part of this strategy, states use the same tools to go after R&D facilities, headquarters (ala the recent fight between VA, MD and DC over Northup Grumman) and film shoots. The other focuses on a "grow-your-own" strategy.

I have always favored the grow-your-own strategy over smokestack chasing. I understand that company recruitment has its place in the overall economic development program. But I agree with the critics -- as the Journal story notes:

William Fox, a professor of economics at the University of Tennessee who specializes in state tax policies, says few tax credits have any real bearing on where companies locate or how they spend and hire. "Taxes matter, but not very much," he says.

Worse than that, if the main reason why the company came was because of the tax break, it is quite possible that they will either want more when the break expire or head off to find a better deal.

In contrast, companies that are home grown tend to stay. Yes, some leave - and as they grow they open facilities in other locations. But they seem to be much more locally rooted ("sticky") that those recruited from the outside. In addition, the types of programs the grow-your-own strategy uses -- technology development and commercialization help, marketing assistance, capital for new product development -- are all tools that can help promote the recruitment of companies. Many companies what to be in an innovation ecosystem that will support their growth. Programs to help create that eco-system and nurture the small start-ups that make up much of that ecosystem help make the area attractive to large companies as well.

So my advice to the states is this: cut back on the tax breaks that don't really help and put the money into start-up programs that do. In the long run, your economy will be stronger.