Related story: ‘Desperate’ States: Incentives Sometimes Given Even After Firms Have Made Location Decisions: A new study raises doubts about the benefit of state-funded tax incentives to lure large international companies to North Carolina, despite recent legislation and other efforts supporting such actions.

More importantly, the study concludes, foreign-owned companies locating businesses in the United States chose North Carolina chiefly because of its quality of life, infrastructure and commercial resources that towns and cities offered to support business expansion.

“Based on the research — most foreign-owned companies in North Carolina see government incentives as a minor factor in their location decisions,” says Dennis A. Rondinelli, Glaxo distinguished professor of management at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School. “They have consistently told us — that the primary criteria are locational assets…good transportation access, skilled labor force, quality of life, good education and training facilities and ability to train workforce for their industry.”

William J. Burpitt, a management professor at Elon University, conducted the study with Rondinelli to identify strategies international firms use to locate operations. The work involved surveying 78 executives in 26 foreign-owned firms that set up shop in North Carolina over the past 15 years. In an article to be published early next year in the Journal of World Business, Burpitt and Rondinelli cite major factors that strongly influenced location decisions.

“One that was common to all firms was the area’s resource base,” Rondinelli says. “They stressed the importance of convenient access to transportation, especially highways. They also described how important a pool of well-trained, productive labor was.”

Asked how they evaluated a labor pool, executives listed the availability and quality of vocational and technical schools, high schools, training programs at community colleges, Rondinelli says. Quality of life also was critical, as were related issues like the cost and quality of housing, quality of schools and proximity to shopping, cultural facilities and an airport.

Another major factor was complementary businesses, the study found. Executives sought nearness not only to customers but also to suppliers on whom their businesses depended. They also valued proximity to rival firms, or at least firms in industries overlapping their own. Still another factor that executives valued were locations that allowed companies to focus on manufacturing and distributing limited sets of products as they initially entered the U.S. market.

“This study codifies what most economists would already tell you that the state’s ability to guide economic growth is limited, but in the area where it does have power, the best strategy is the overall reduction of tax rates or overall improvement of public services … not this targeted incremental approach,” says John Hood, president of the John Locke Foundation, a Raleigh-based group that is a strong critic of tax incentives. “This is a finding that has its basis in core economic theory. If government and legislature knew which businesses would succeed and fail, they wouldn’t be human. This is not how a free market economy works.”

States support incentives, some more than others

Despite the conclusions of this and other studies and the opinions of Hood and fellow critics, state legislatures have typically taken measures supporting tax incentives to lure large companies within their borders. The Carolinas are no exception.

In recent months, both states have put together incentive packages valued in the tens of millions of dollars in bids to lure major investments by Daimler-Chrysler, Federal Express and AOL Time Warner. South Carolina recently lost to Georgia in a bidding war to lure a Daimler-Benz van plant, even though its incentive package of $346 million was valued at $20 million more.

In 1998, the N.C. general assembly amended state law to extend tax credits to air-courier services so it could land a major Fedex hub at Piedmont Triad International Airport. The Memphis-based company signed a 24-year lease with the Greensboro airport last month and expects to open in 2007, thanks in part to a $115 million incentives package. In Charlotte, Time Warner has agreed to move about 400 corporate jobs here from Denver and other locations in exchange for a $63 million incentives package.

Supporting further incentives in North Carolina is the Economic Development Board, a 37-member board appointed last year by Gov. Mike Easley. The group is charged with developing a strategy for helping the state recover from a decades-long loss of manufacturing jobs to overseas factories, as well as ensuring that all parts of North Carolina take part in economic growth. It also supports increased spending on education and a greater emphasis on retraining laid-off workers for fast-growing technology sectors.

Easley recently signed into law a bill promising new companies money for creating jobs. The Easley-backed tax incentives bill gives his administration $10 million a year to recruit as many as 15 companies. He commended state legislators for passing the incentives bill, saying “We can’t wait for a convenient economy to change things…we have to act now.”

The Economic Development Board, while taking credit for the incentives bill, said it is still not enough to lure companies away from more aggressive competitors like South Carolina, which recently snatched Pilot Therapeutics from its Winston-Salem headquarters with a $10-million plus incentives package. Pilot is expected to grow as it prepares to launch a medical food product for asthma called Airozin. The board supports giving more tax breaks to such highly sought-after technology companies that are involved in the research and development of new products.

Due in large parts to the state government’s action supporting tax incentives, North Carolina has claimed the top slot in Site Selection magazine’s annual business climate ranking for the second year in a row. The survey takes into consideration the number of new and expanded business facilities opened during the previous two years, as well as the opinions of corporate real estate executives about which states they consider to be the most pro-business. Georgia ranked fifth and South Carolina ranked sixth.

UNC-Chapel Hill:

Elon University:

John Locke Foundation:

North Carolina Gov’t: