05.19.08
Do investment foreign investment incentives work?
I was speaking with the site manager for a large corporation that has a significant R&D component. The Company has steadily off-shored manufacturing of its sophisticated product and little traditional manufacturing is left in the US. What is new is that the company is being tempted to offshore its R&D jobs as well. In this case Ireland is offering incentives of € 20,000 per research worker. I remarked to him that that was “real money” — the incentive being in Euros instead of dollars. Another factor was that Ireland has a low corporate income tax rate and that in particular moved decisions at the US headquarters
There is an on-going discussion about whether offering incentives produces real long-term economic growth. There are certainly lots of examples where the jobs never materialized or the industry hit hard times later on and the new plant shut down. On the other hand there are examples like the German and Japanese automakers who opened sites in the US South, bringing jobs and prosperity to those regions.
There are several issues to be addressed — does the industry fit the development strategy of the region? Putting a heavy polluting plant in Northern California would be a non-starter. Trying to develop a Web 2.0 cluster in an area of the country where few such companies exist may not result in lots of jobs.
Another issue is the net effect on government revenues – i.e. taxes. Some countries and localities have given such large concessions that the result is that the government unit has greater costs with a permanently lower income level (look at some of the oil drilling concessions). On the other hand, a good project will produce not only more jobs in the long run but also greater prosperity for the community and a larger tax base. With the aid of economic models, those contributions can be quantified.
Do incentives work? There are lots of examples where they have made an impact but the government authorities must carefully craft a package appropriate to the economic development strategy.
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