Cities need to stop selling out to big tech companies. There’s a better way

July 13, 2018

By Greg LeRoy and Maryann Feldman

Fostering local hi-tech success doesn’t have to mean offering huge subsidies to companies like Apple and Amazon. Here are some alternative strategies

Every mayor and governor wants to attract hi-tech jobs. And why not? Depending on the nature of the facility, such jobs can be well-paid and strengthen a region’s economy.

But too few elected officials have taken the time to learn how hi-tech companies start up, how they thrive, and how government can best assist them – without overspending on a few big deals.

Getting policy right is critical for high-tech success. It’s more complicated and volatile than the “old economy”: hi-tech firms are more susceptible to disruption. Product life cycles are typically much shorter. Skill sets are more specialised. Some facilities create very few permanent jobs, and some generate a lot of toxins.

For all those reasons and more, using “old economy” incentives for “new economy” firms can be costly and counterproductive. The “lots of eggs in one basket” strategy is especially ill-suited. But many public leaders haven’t switched gears yet, often putting taxpayers at great risk, especially because some tech companies have become very aggressive about demanding big tax breaks. Companies with famous names are even more irresistible to politicians who want to look active on jobs.

First, the too-many-eggs problem: hi-tech firms are prominent among recent tax-break “megadeals” awarded by cities and states. Tesla’s battery factory ($1.3bn from Nevada), Foxconn’s

display-screen plant

in Wisconsin ($4.8bn) and Apple’s data centre in Iowa ($214m) are typical.

The Apple centre, a cloud computing facility, will have only 50 permanent jobs, so the cost per job exceeds $4.2m. The


deal, even by the state’s own official estimate, won’t break even for taxpayers for 25 years – an extremely risky time horizon given the likelihood of new technologies leapfrogging the company’s product much sooner. The Tesla deal was 14 times costlier than anything Nevada had done before.

It doesn’t have to be this way. There are proven alternatives to this buffalo-hunting, trophy deal school of economic development that can reduce taxpayer risk, grow many more employers and intentionally build valuable relationships between promising firms and local public institutions.

Two proven alternatives

Here are two proven alternative strategies. The first could be called “back to basics”. A regional government inventories existing small- and medium-sized firms, the backbone of many local communities. Typically family-owned and located in micropolitan and rural areas, these firms are often neglected by policymakers and shortchanged by incentive programmes.

A regional government asks: which industry sectors are we already comparatively good at? Which of those sectors have the best futures? How can our public systems help those promising firms grow? Do they need export assistance? Customised training? Technology diffusion? More engineering-school graduates?

There are some simple fixes that could go a long way.

The second alternative takes this same approach and applies it to very young companies and to emerging technologies with more speculative prospects. This was North Carolina’s successful strategy from the 1950s until the mid-1990s. Making no big bets on any one company, the state invested in all levels of education, created its community college system and upgraded the state universities. It also focused on highway upgrades and other infrastructure investments.

The state followed up with targeted investments such as the

North Carolina

Biotechnology Center, which especially benefited the Research Triangle Region. The centre wasn’t created for one company; its programmes provided an umbrella for a range of activities that promoted collaboration and commercialisation, such as offering small amounts of seed money to enable companies to test ideas, and convening diverse groups to respond to larger funding opportunities. Rather than defining biotechnology narrowly, it supported biomaterials, bioelectronics and biofuels.

Though even North Carolina can stray from the wisdom of its history. Despite the Triangle’s steady success, the state would later abandon its patient approach and go buffalo hunting for hi-tech jobs. After secret negotiations and a one-day legislative session, in 2004 it gave


a package worth almost a quarter of a billion dollars. Five years later, the plant, a so-called screwdriver shop that assembled components imported from Asia (ie its supply chain was not in-state), shut down.

When North Carolina got it right, it bolstered public systems to help young companies. Investments like these succeed because they jump-start what academics call the agglomeration economies that benefit local firms. That is, as clusters of small firms grow in an area, government assistance can help grow the scientific talent pool, the entrepreneurial skills base and other key inputs. Some companies won’t make it, while others will thrive and grow the whole industry – but taxpayers won’t lose on any one big bet.

Austin, Texas, currently the hottest tech-led economy in the US, provides a model: there, local entrepreneurs became local champions, creating early incubators, reinvesting their gains and working with local government.

George Kozmetsky

is perhaps Austin’s most famous champion: before his death in 2003, he helped develop more than 100 tech-based companies, including Dell and Teledyne Technologies. He also held business-school positions at the University of Texas for more than 35 years.

The most important element for public officials and local champions is to have a long-term vision rooted in an informed analysis of local strengths and weaknesses and market potential. Informed by that analysis, incentives to individual firms may make sense, along with the investments in public goods intended to benefit many employers.

This is a strategy for the long term, but arguably a much safer and more effective use of government funds. Plus it uses the tax revenue of current local citizens for their own benefit.

Maryann Feldman is the Heninger distinguished professor in the Department of Public Policy at the University of North Carolina, and director at the Center for Innovative and Prosperous Economies at the Kenan Institute of Private Enterprise.

Greg LeRoy directs Good Jobs First, a nonprofit watchdog group on economic development incentives.