Innovation Economic Development Vs. Industrial Recruitment

Editor’s note: The RTP Product Pipeline is a new feature for WRAL Local Tech Wire. Its purpose is to help entrepreneurs, business leaders, educators and inventors better understand the product commercialization process. Montie Roland and Thomas Vass are co-founders of The RTP Product Development Guild, Inc. Their column appears weekly. This column is the first of two parts.

MORRISVILLE – The State of North Carolina recently gave two multinational tire makers located in the state over $60 million in tax incentives to remain in production in North Carolina, albeit at much reduced employment levels at each plant. The ostensible public policy logic of the tax incentives model was explained in a 2005 public policy research study on industrial cluster analysis in Eastern North Carolina, prepared by The Center for Regional Economic Competitiveness.

As they stated, “In order to replace the jobs being lost, (as a result of plant closures) North Carolina Eastern Regional Leaders seek to attract, expand and generate new companies in growing, competitive industries.” Giving private companies financial incentives to induce them to locate in the state is a tool that is used to attract the companies.

In the past, more modest incentives, in the range of $1 million per project, could be used as an inducement to locate a facility in the state. In recent years, the incentives have bloomed into hundreds of millions of dollars per project, both in the current tax year they are given, and in deferred tax savings extending out 30 years. The State of North Carolina gave Dell Computers over $300 million in financial incentives to locate a distribution center near Winston Salem, and gave Google over $250 million to locate an internet server farm in the Piedmont of the State, purportedly in exchange for the creation of 200 jobs.

Tire Plant Incentives Seek to Protect, not Create Jobs

Giving away tax incentives is like a ratchet. Once a threshold is passed, the incentives keep going up, and prior lower levels are never repeated. However, the tire manufacturing incentives represent a new version of the ratchet that is a departure from the traditional industrial recruitment practice in the fact that the incentives are given in conjunction with the promise of job losses, not job gains. The tire plant incentives were given in exchange for a promise of increased capital investment on automated production processes by the corporations. As the capital intensification of production increases, the labor required on the plant floor goes down, as capital substitutes for labor in each unit of output.

The tire incentives also mark a new level of secret negotiations between agents of government and executives in the tire corporations. While industrial recruitment has always been a secret affair, in the case of the Goodyear plant located in Fayetteville, a single state senator met in private sessions for over a year to negotiate the incentive package, and dropped the tax provision into the state budget on the last day of the General Assembly session in August of 2007. The budget passed, but Governor Mike Easley vetoed the provision related to the tire incentives because he was concerned about the job losses associated with the incentive plan.

The secret negotiations represent a political ratchet. Once a single powerful state senator begins negotiations, on his own, in private, and in secret, the process never reverts back to the constitutional provisions of checks and balances against political despotism. The ratchet is irreversible and the secret political process of giving away the incentives to private corporations is leading to more and more undemocratic procedures that are not derived in any way from the consent of the governed, nor subjected to their review.

When the members of the General Assembly returned to Raleigh in September, to override the veto they modified the language of the incentive legislation to give incentives to a second tire plant in Wilson, which had not asked for any incentives, and which was already in the process of upgrading manufacturing equipment. The total incentive package increased from $40 million to $60 million with the inclusion of the second plant.

The vote on the veto became unnecessary because the Governor accepted the compromise in language when it was modified to include the second manufacturing plant in Wilson.

When asked about the use of incentives, business and political leaders in North Carolina generally state a dislike of the policy but say they are a necessary evil of doing economic development. “Every one else uses incentives,” they say, and “if we do not use them, North Carolina will be at a competitive disadvantage in recruiting industry to the state.”

Plus, they add, “there is no alternative economic development strategy that can create jobs like industrial recruitment incentives, it’s the only tool we have.”

N.C. Still Focused on Industrial recruitment

The earlier public policy of industrial recruitment in North Carolina was successful in recruiting furniture, textiles and apparel plants and parts of the motor vehicle sector from the northern states. After some period of time, the global forces of competition caused those plants to close and workers lost their jobs in mass lay-offs. The global forces of competition have intensified with the advent of more open borders and international trade agreements. Yet the public policy of industrial recruitment has not changed.

In the case of North Carolina, the earlier period of industrial recruitment came and went without the manufacturing plants leaving any discernable long-term economic benefits for the residents of the region. On the other hand, the local proponents of industrial recruitment have continued to profit from the real estate deals associated with the recruitment process. From their perspective, what worked for them in the past can continue to work for them in the future, but with the faster product life-cycles associated with the global market.

This is the modern incarnation of the “Lost Cause” myth of the South, that the future of the South can be just like the past, with exactly the same set of social elites obtaining the benefits from the economic arrangement.

During the 1970’s, advocates of industrial recruitment, like D. M. Lauch Faircloth, the former Secretary of the N. C. Department of Commerce and later a U. S. Senator, were often quoted as saying that “a low wage job was better than no job at all.”

As it turned out in history, his statement was inaccurate. The low wage jobs that he recruited to the state in the 1970’s left no jobs at all, an irony for the residents of Eastern North Carolina, if they had ever been given the opportunity for the educational background required to appreciate the humor.

We believe that the industrial recruitment model is obsolete given the logic of low cost production in the new open global economy. Our Guild is based upon the belief that there is a superior economic development strategy for the residents of North Carolina, generally called innovation economics or technology-based economic development.

We believe that new product development and new venture creation is the best pathway to take to create self-sustaining self-renewing economic growth in North Carolina.

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Innovation Economic Development Vs. Industrial Recruitment