Incentives: coda

For some weird reason, there are still people out there – even after reading my blogs – that believe I am some big champion of doling out cash to companies to set up or expand here. 

I am not.  I have said and will continue to say that incentives are not a major site selection consideration for most investment decisions.  Further, if incentives – i.e. cash – is the only reason (or the main reason) why companies locate in a jurisdiction (while the rest of the business model is flawed), then they are likely to have trouble and maybe leave after the incentives run out.

I have said and will continue to say that I don’t want NB to lose at good project because it does not offer competitive tax breaks or other incentive programs.  I want these programs to be based on a good ROI for the taxpayer but I strongly feel that if all of our competition offer incentives and we don’t – and it leads to losing good projects – I think that would be a shame.  A bit like a baseball team not signing free agents or an auto company not offering cash incentives when all their competitors do.

But in my opinion government focus on all the other elements of the value proposition for specific industires is far more important (infrastructure, workforce, R&D, etc.) than incentives.

And I am not alone in my assessment.

In the World Investment Prospects survey put out by the United Nations, they ask multinational firms to rate the importance of various business factors to where they make FDI decisions.  There are 13 issues and firms are asked to rate their importance.  The findings are based out of 100%.  In other words, 9% for skilled labour as the most important business factor and 14% for stable business environment.  Incentives?  Among these multinational firms when looking at important site selection factors, incentives rank dead last at only 1%.  If you don’t believe me have a look at the survey results.

This is lower than other surveys I have looked at and it may be that companies are understating their interest in incentives but even if there is downward bias – it seems clear that incentives can only be viewed as one small part of the overall value proposition.  It is important to note, however; in that same survey that on a sectoral basis transportation equipment (cars) is the industry most interested in incentives (6.5%) which makes sense given all the bailouts around the world.

So for those of you who think I am a big fan/apologist for incentives – think again.

One final point here – and this will likely to frustrate some of you but here goes.  I don’t fault a company for accessing incentive programs.  I know that some people get all righteously indignant when a company gets a grant or a tax break from the public but I am not sure why.  If the programs are there why shouldn’t a company take advantage? 

Google, which would claim to be a company with a serious social conscience is getting hundreds of millions in incentives to locate data centres around the world and I haven’t heard anyone complain about that on these pages.  The green energy industry is one of the most heavily government subsidized in the world and the same folks that will complain when another manufacturer gets a tax break are strangely silent when wind turbine manufactures pile on the incentives and special deals.

I guess I am just asking for a little intellectual honesty here.  There are dozens of tax breaks for individuals to incentivize certain behaviours and we take advantage of them.  There are similar programs for companies to incentivize behaviour (i.e. expand) and companies take advantage of them.  It doesn’t make them bad corporate citizens. 

I think there could be cases where companies use their power to bully governments into giving them large piles of cash or tax breaks (I’m thinking of a few years back when United Airlines was threatening to leave Illinois).  That is why I prefer clean and tidy tax incentive programs that are not open to lobbying or greasing the skids.  You are either eligible or not (based on stated criteria). 

But I will not criticize on these pages companies that exercise their right to take advantage of tax or other incentive programs.  Their competitors do it.

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2 Responses to Incentives: coda

  1. mikel says:

    This is still a business friendly webblog, ‘out there’ you’ll certainly see plenty of people arguing against Google getting public money. In fact you’ll see lots of people against ANY public money going to business-they just aren’t around anymore. The reason people THINK you are in favour of cash incentives and handouts is that you just said it! But what you said is the amount and how much depends on a lot of factors. But people tend to gloss over caveats and just focus on the big picture. Good post though, and we don’t need a research institute to tell people-David has an article and has quoted on other stories at the Telegraph.

  2. Paul says:

    Having kicked around, and been involved in economic development activities in my region, the cash incentives are there to keep the economic development agencies alive, Iand gives the politicians a chance to say they are doing something. Handing out money sells well, offers photo ops and allows politicians to do what they feel they have to do to get re elected.

    Giving tax incentives and land away, no matter how much sense it makes, and I whole heartedly agree with David”s assessment of the idea that cash incentives are a poor way to drive ed, is not politically popular.

    I argued this point many times but was always told that they need “forgivable loans” to leverage more funds from other levels of government. It’s a crazy waste of cash.

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