Never-Ending Debate: Job Creation vs. Wealth Creation, Innovation vs. Industrial Recruitment

Editor’s note: The debate about whether to use tax incentives as a means to bring jobs to North Carolina is a never-ending one with law suits challenging – so far unsuccessfully – a package given to PC giant Dell, for example. On Friday, North Carolina announced a $300,000 grant for West Pharmaceuticals to create 154 jobs in Kinston. Thomas Vass, co-founder of the RTP product development Guild, has been an outspoken critic of incentives. In the latest RTP Product Pipeline, he discusses incentives vs. innovation.

MORRSVILLE – In 1987, the City of Littleton, Colorado pioneered an entrepreneurial alternative to the traditional economic development practice of recruiting industries. They called their new approach "economic gardening.”

"The term economic gardening means growing our economy from within” says the Web site for Littleton. This is accomplished by providing access to technology and business expertise for helping both new and existing small businesses located within the cities of Loveland and Littleton to thrive and grow.

Our approach to new product development at the RTP Product Development Guild is similar in philosophy to the goals of Littleton, Colorado. We believe that the greatest level of regional wealth in the RTP will be created by creating a huge flow of local new ventures that commercialize technology in the form of new products.

Our regional economic goal is wealth creation, which is an important policy difference with the advocates of industrial recruitment, who cite job creation as the primary policy goal. We think a full-blown public debate over the goals of economic development in the RTP and North Carolina is critical at this time, before the taxpayers are forced to pay even higher incentives to recruit industries to our state.

As we pointed out in a previous column, the use of incentives involves 3 types of irreversible ratchets: their amounts keep going up because the lawyers and consultants who obtain them are getting better at playing regions off against each other, the secret undemocratic negotiations between private and public agents keep getting worse, and the tax burdens shifted to ordinary citizens keep going up.

We used the example of the $60 million tire incentives in our last column about ratchets, and, sure enough, the News and Observer of Raleigh reported that now the shipping company involved transporting the rubber to the tire factory also wants an incentive to stay at the port in Morehead City. The incentives game is a never-ending losing proposition, propped up by a false argument about job creation.

Our argument about job creation as a misleading economic goal is pretty simple and easily verified by economic research. First, the job creation potential of industrial recruitment provides fewer jobs than those created by local economic gardening. Second, industrial recruitment, based upon the logic of low cost global competitiveness, creates a treadmill of unstable, low wage jobs that will need to be replaced in the next round of global adjustments, just like the history of textiles and tobacco taught us from the jobs recruited to North Carolina 30 years ago. Those low wage jobs lead to no jobs, as will the current crop of jobs now being recruited to the state.

The case of the Dell incentives can be used as an example. From the global competitiveness perspective, outsourcing production to geographically dispersed branch operations allows a global corporation, like Dell, to manage their costs better in the fast product life cycles of global markets. A region that recruited part of the global production chain to a low cost area, like North Carolina, would benefit the corporation, but because other parts of the production process were located outside the region, would not necessarily add to the region’s economic strength.

Dell needed the location in the eastern part of the United States to meet its own internal goals for global manufacturing and marketing, not because the existing local firms in Winston-Salem were important to making and distributing computers.

In fact, the location of the Dell plant is Winston-Salem appears to have had very limited inter-industry multiplier effects on the regional economy. As the News and Observer reported, “Dell opened a sprawling manufacturing complex in October 2005. State and local leaders promised the company $280 million in tax breaks and grants to build here. In exchange, Dell is supposed to create 1,500 jobs and jump-start a region hurt by declines in agriculture and traditional manufacturing. It has created 1,100 jobs — more than the 900 it was supposed to have by now — but it hasn’t been the economic engine some expected. "I’ve not seen any changes except for the traffic," said Jean Beck, owner of All About You Salon & Day Spa in Wallburg, about five miles from the plant. "I’ve been disappointed."

The industrial recruitment strategy that landed Dell in North Carolina is successful at creating 1000 jobs inside the Dell facility, without necessarily creating long term wealth based upon strengthening knowledge flows among regional firms.

That part of the economic development process depends on private equity investments in regional new ventures located in the region’s industrial cluster. The economic evidence to support our argument is easily seen in the number of jobs created by local businesses versus the number of jobs in companies recruited to the state. The incentives given away to recruit companies places local companies at a competitive disadvantage, the most glaring case being the new competitor recruited to the state to compete against Captive-Aire, one of the greatest high tech success stories in the RTP.

The News and Observer reported that “State and community leaders predicted that Dell would generate thousands of ancillary jobs, from suppliers, retailers and other businesses that would come, without financial enticements, to serve the company and its employees. One state estimate put the total number at more than 6,000 jobs.”

The same type of public relations political hyperbole afflicts the state’s current fascination with biotechnology. Pharmaceuticals and biotech have very limited economic connections to other industrial sectors. Most of the production process in SIC 28 occurs inside this sector, which limits the ability of this sector to generate inter-industry income and employment multiplier effects. The location of a single large pharmaceutical plant in Raleigh, North Carolina, for example, may directly create jobs inside the factory, just like the Dell plant in Winston-Salem created 1,000 jobs.

The indirect job creation effect of the single biotech plant will be very modest on other sectors in the RTP regional economy of North Carolina.

When the economic development goal shifts from the false promise of industrial recruitment job creation to the solid future of wealth creation, residents of this state will obtain much better economic outcomes. Those better economic outcomes begin with economic gardening networking events, like those sponsored by our Guild, where people with great business ideas obtain professional advice on how to produce and market their new products.

Editor’s note: he opinions of the author are his own and do not necessarily represent those of WRAL Local Tech Wire.

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 Vass are co-founders of the RTP Product Development Guild, Inc. Roland is also the president of the Carolinas Chapter of the Product Development Management Association. Their column appears weekly.