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States Re-Examine How They Use Incentives to Attract Business

Many states are taking a harder look at their traditional incentives offerings and opting for newer approaches including "economic gardening," consulting services, and cold cash.

Winter 2012
Most states have historically offered some sort of incentive programs designed to attract major business development - often a combination of tax breaks, job training, or infrastructure investments.

One of the most aggressive states in terms of awarding tax abatements for targeted industries in recent years has been Michigan. But in 2010, Michigan elected former Gateway Computers CEO Rick Snyder as its governor, and Snyder declared that this approach to economic development would have to give way to more innovative approaches. He ordered his economic development staff to investigate effective practices in other states, and to develop recommendations that would put more emphasis on the growth of existing companies based in the state.

Innovative Approaches

As it turned out, there was much to be found. Michigan was far from the first state to look at the traditional method of luring companies and recognize that it wasn't producing the desired result. Bob Jensen, CEO of the Wyoming Business Council, says his state went through a similar soul-searching exercise in 1998.

"Whatever we were doing in the `80s and `90s didn't work," Jensen says. "It wasn't effective. We've always had a low tax base, but that in itself isn't an incentive to get businesses to come here or grow here."

Wyoming's solution was to develop the Wyoming Business Council, which is governed by a board of 15 business executives appointed by the governor. The board hires a CEO, who runs the operation by business principles, although the council is state-funded and has to be effective enough to also survive the rigors of the political process.

The Business Council's job is to react to local officials' requests for various forms of support when a company is considering relocating or expanding in Wyoming. A recent example concerned a California-based company that was looking to build a new plant in Evanston, which is in the southwest corner of Wyoming. The potential obstacle was money for infrastructure, so the Business Council worked to ensure that Evanston could access a grant program that would cover those costs. The same program also paid for the construction of a facility, which is owned by the city and leased to the company. "That company moved into Evanston and it was a great success," Jensen notes.

In other communities, of course, the need may be entirely different, so the Business Council works with representatives in different regions of the state in determining what need it must satisfy in any given situation. All told, Jensen says the Business Council has generated more than 3,000 jobs and $200 million in investment during those years.

"Economic Gardening"
The Wyoming approach is based on a concept called "economic gardening," which originated in 1988 in Littleton, Colorado, under the direction of Chris Gibbons, who was then - and remains - the city's director of Business/Industry Affairs. The idea arose after the city took a sucker punch in the form of 7,000 layoffs back in 1987. That was when the Soviet Union was collapsing and defense spending was being slashed. The town's largest employer was Martin-Marietta (now Lockheed-Martin), which was headquartered in another state, and had no choice but to slash payrolls when Pentagon contracts went wanting.

"Our council became concerned about our future being controlled by an out-of-state company," Gibbons says. "It isn't that we didn't like them, but we were told to work with local companies to create local jobs."

Gibbons' response was to develop a storefront operation - available to any company operating in Littleton - that would provide local businesses with support in a variety of ways if they asked for it. That could include competitor intelligence, industry trend research, GIS mapping, or consumer expenditure data. Today the offerings have been expanded to include more modern items like how to improve your search listings on Google.

Consulting Engagements

Gibbons' approach of "economic gardening" - and much of the thinking behind it - originated with the private Edward Lowe Foundation. It has become the basis for many states' economic development efforts.

Florida, for example, began a state-funded program in 2009 that seeks to apply the Littleton model on a statewide level. But in a state of 18 million people, that couldn't be done with a storefront. It required the establishment of GrowFL, administered throughout the state by the Florida Economic Gardening Institute (FEGI) at the University of Central Florida.

Fran Korosec, director of client services at FEGI, says his group worked with the Lowe Foundation to tailor the program to Florida's needs. GrowFL decided to structure its assistance to business as consulting engagements, usually spanning a period of four to six weeks.

"We do everything via conference call and through an online collaboration tool," Korosec says. "We're on the phone with the client, we agree on the work terms, we do our work, and we post that work on the collaboration tool. The client may need to provide us with data, and they can post that data to the collaboration tool, which is secure."

GrowFL reports that its efforts have resulted in the direct creation of 1,419 jobs, plus 819 jobs created indirectly, and total economic input - as measured by sales and output - of $510.4 million.

Abandoning the Hunter/Gatherer Model

The economic gardening approach is the one that has caught Michigan's attention. The state has just launched a pilot program with the Edward Lowe Foundation to provide assistance to 50 companies that were identified as entrepreneurial and having the potential to grow in coming years.

Joseph Serwach, director of communications for the Michigan Economic Development Corp., says the change was badly needed: "Traditional economic development is like a hunter/gatherer model. For example, in the `80s, GM announced they were going to make Saturn a new car company, and every state in the union wanted to have Saturn located in their state. It's like everybody hunting for an elk or deer. This is the big company. How do we get it?"

The winning states inevitably trot out their governors for press conferences to announce how many jobs they have secured. But Michigan concluded that most jobs are actually created by smaller companies, and decided to eschew the hunter/gatherer model.

"Economic gardening," however, is not the only approach to economic development that is gaining favor. In Pennsylvania, an organization known as Ben Franklin Technology Partners has set up a series of business incubators and makes monetary investments in companies that show potential for growth and job creation, but might not meet the traditional funding criterion of a bank. The investments can take the form of debt or equity, and can be converted to one or the other. The key is that the concept can grow into a viable company.

"We're a jobs program," says Liz Wilson, marketing director for the Ben Franklin Technology Partners. "We're not investing in inventors that just want to come up with the newest and greatest widget. It has to be something that's going to start a small business."

Show Them the Money
Other states, by contrast, take an entirely different approach. Virginia, for example, actually offers companies cash incentives to do business in the state. Like Michigan, Virginia decided that tax incentives didn't work, but for different reasons.

"With tax credits in your proposal, you can build up a pretty nice hefty number that looks like you're providing a lot of value to that company," says Rob McClintock, director of research for the Virginia Economic Development Partnership. "But in the early years of the project, the company has to spend so much money to develop its site that it may not be in a cash-positive position, so it may not have tax liability. So the credits are not that useful. The beauty of cash is that it's fungible. Everyone understands what you can do with cash."

In order to qualify for a cash incentive, companies have to agree to certain performance measures - and in some cases they can't collect the incentives until the goals are achieved. Rolls-Royce, for example, was approved for a $35 million performance grant - but it is currently behind on its progress, so the state is holding the money to see if it catches up. And for each package, the Assembly has to pass legislation specifically approving the deal.

States have certainly not stopped chasing after business, but in recent years they have clearly taken a harder look at the results of their efforts. And when the results aren't what they should be, it appears that change is in the air.

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