Thomas J. Stringer, Esq., Managing Director & Practice Leader, Site Selection and Business Incentives Group, BDO USA (November 2010)
Despite the ongoing recession - or perhaps because of it - the importance of and spotlight on state and local business incentives has never been greater. In an age of TARP, bailouts, and stimulus spending, economic partnerships between government and strategic businesses are commonplace. While public opinion has varied on their success at the federal level, states and municipalities are using their traditional and newly crafted programs to solidify their tax bases and fight back at the Great Recession.
Changing Global Dynamics
For more than 30 years, locations in the United States and around the world have tried to attract new jobs, new taxes, and encourage economic development through various tax and business incentive programs. Typically these benefits played a second-tier role in the vast majority of real estate transactions and site selection examinations. For decades, other factors such as proximity to customers or markets or work force availability were tops on the site selection short list. Building the product or undertaking a service at the location where the best work force existed was a premium.
To a large extent this is still true, but global competition has changed that dynamic dramatically. In a seamless world where barriers to transportation, markets, capital, and talent have disappeared, controlling cost has become a dominant means of sustaining growth, and providing returns to shareholders. Add in a worldwide downturn and stalled global economy, and obtaining a competitive advantage through cost control has become a preeminent guiding principal of site decisions. Simply put, tighter budgets, fewer customers, more choices, and equal services/talent lead to a situation where cost is the only metric that decision-makers can exercise control over.
While incentives were always present in the decision-making process, they often were a second-tier item only serving as the deal-maker when locations would effectively be tied as finalists on the short list. They always made a good deal better, but were never the justification for making a bad deal good. But today, in a world with this equal economic landscape, incentives - as a major component of cost control - have arrived at the top of the list.
Cost Control and Value Added
The 2009 site selection factors are on-target and reflect the decisions we see daily in the site location process. It is very interesting that of the top-10 ranked site selection factors, three really address the precise same topic: cost control. Tax exemptions (ranked third), corporate tax rate (ranked fifth), and state and local incentives (ranked eighth) are all, in reality, a single factor. Each factor represents a way of saying, "How can we partner with our governmental officials to reduce the cost of operations?"
To treat these separately is a misnomer. Each of the factors is a way to either curb market-related costs or tax liability thru governmental assistance. In return, these benefits, if structured properly, provide the particular jurisdiction with a steady stream of jobs, tax revenue, and economic activity. Solid "pay for performance" incentives structures such as New Jersey's BEIP program, Virginia's VDIG grant, and New York's new Excelsior Refundable Tax Credit program are symbiotic and provide a strong return on investment for both the company and the jurisdiction.
Three of the remaining top-10 2009 site selection factors are all direct "market costs," i.e. how much will it cost me to produce my goods or services at this location and then to get them to market? These factors were always measured and balanced against the talent factor. The final decision was often made based on the skills required and relative costs. But the reach of talent has increased exponentially and become, in many instances and industries, a mere commodity.
Professional services, manufacturing technology skill sets, and education are nearly equal across the developed world, and the BRIC (Brazil, Russia, India, and China) economies are growing at even faster paces. Specialized pockets in certain industries certainly exist. But will they in five or 10 more years? History tells us that it is not very likely.
Determining the "value added" of a particular location may turn out to be the single most important step in the site selection process for the next several years for both companies and as a self-examination for jurisdictions. If that special talent gap does not accrue to one's benefit, if somebody absolutely does not have to be in a particular location, then yes, it is all about cost. Incentives play a major role in mitigating that cost and that factor is here to stay.