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Economic development incentives favor large businesses

October 27, 2015 / Carolina Small Business / Economy, Small Business

A recent report by Good Jobs First, a national policy resource center focusing on economic development, poses an important question that we often find ourselves asking as well: Are states investing economic development dollars in ways that benefit small companies, especially those seeking to grow?

As we’ve argued in research reports and past blog posts, the answer to this question, at least in North Carolina, would be no. While there are programs directed toward business attraction and retention, tourism, and certain high-growth sectors, there is a critical gap in the allocation of economic development funds and resources when it comes to supporting small business development. This new report by Good Jobs First provides some evidence for this argument with analysis of economic development incentive programs across several states, showing that by and large these incentives go to large businesses.

For this analysis, Good Jobs First examined at 4,200 economic development incentive awards across 500 incentive programs in 14 states.Their analysis showed that 80 to 96 percent of deals– in total worth over $3.2 billion– went to large businesses.

In this study, “large” businesses are defined as either companies with more than 100 employees, companies of any size that are not locally and independently owned, or have ten or more establishments. This definition is much more targeted than the standard definitions for large or small businesses, often based on a single factor such as employment size or revenues. As such, this report identifies companies that are small and more likely rooted in local communities. This definition was applied to businesses in the year that they received incentives.

Of the many programs analyzed, 16 programs were isolated for further analysis. Of course, there is some variation between the states and incentive programs, however there is a consistent trend toward large businesses throughout.

The report includes a brief analysis of the One North Carolina Fund, which is a broad program aim to “recruit and expand quality jobs in high value-added, knowledge-driven industries.”  Companies must meet an average wage test and must have a match for financial assistance from local governments to qualify. There is no minimum for job creation or retention, however factors that are considered include the economic impact, quality of jobs, environmental impact and more with special consideration for companies in areas that are particularly economically distressed. Financial assistance is provided to companies as grants as the project benchmarks are met. The One North Carolina Fund made $26.4 million in awards between 2008 and 2013. This was a total of 182 deals, of which 93 percent went to large businesses (accounting for 95 percent of total funds awarded).

As stated in the report,

When on average only two percent of a state’s employers have more than 100 employees, yet such firms are receiving 80 or 90+ percent of incentive dollars, there is a deep policy mismatch that is favors most U.S. employers.

This is certainly true in NC, where 96 percent of firms have less than 100 employees. In order to ensure that businesses of all sizes have the resources needed to start up, grow, and thrive, it is important that state economic development strategies incorporate the types of investments that will benefit smaller companies, as well as larger ones. This includes vehicles to expand access to capital, training and technical assistance programs to help companies succeed, and other investments in local infrastructure, education, and workforce development. To fund these investments, Good Jobs First recommends narrowing the criteria for incentive programs so that the largest companies that are less likely to need state assistance do not take up such a large share of resources. In fact, incentives are not a top factor in businesses’ location decisions. The funds saved could be then used for other investments.

While it is important to support the growth of large businesses for the health of local or state economies, this study shows just how biased economic development incentive programs– the primary economic development vehicle in many states– are toward large business, despite the critical role that small businesses play in local economies. Reexamining the allocation of resources and making a commitment to support businesses both large and small would do much for our state’s economic development.