Government and Institutions

Beware the lure of corporate bidding wars

Ever since Elon Musk announced plans to build a Tesla “Gigafactory” in Europe two years ago, nations across the continent have been vying to land the project – and justifiably so. Named for its immense size, the factory will be far from your average manufacturing plant. The facility is projected to create thousands of new jobs and will play a crucial role in Musk’s ambitious plan to produce more than half a million cars a year by 2020.

A similar competition for Amazon’s second corporate headquarters is also taking shape across the Atlantic. For almost a year now, American cities have been offering everything from tax subsidies to utilities discounts to win the project dubbed “HQ2”. Winning that bidding war would bring 50,000 new jobs and roughly triple that indirectly. It’s anticipated that the new wave of workers will stimulate close to $4 billion in capital investment and a further $40 billion in indirect investment.

Yet cities on both sides of the pond should be careful what they wish for. As hard as it can be to ignore the lure of companies like Amazon and Tesla – and the political coup of landing such projects – there are a number of consequential risks associated with bidding wars for corporations. Chief among them are the implications of the incentives that governments offer to companies, as well as the general relationship established between both sides.

When “corporate welfare” takes centre stage in sweepstakes like those unfolding for Tesla and Amazon’s huge projects, government leaders often tend towards excessive and hopeful gestures rather than judgements based on substantiated economic evidence. As a result, investments can be easily misdirected away from areas where their benefits are needed most, misallocating resources and yielding woefully inefficient side-effects.

This phenomenon is quite evident in the US. One recent study reveals that the benefits of higher growth rates and a stronger state or local economy are seldom delivered by the rewards offered to corporations in these bidding wars. The researchers concluded that states which use such targeted incentives at a high level tend to have lower levels of economic freedom. Moreover, case studies delving into development programs in Arkansas, Florida, and Missouri in the US fail to show any correlation between subsidies for corporations and job growth.

It’s not hard to see why this so often occurs. In some ways, the relationship between politicians and corporations can be seen as innately contradictory. After all, public officials are bound to the task of attracting corporations for the direct benefits that new jobs, development, and innovation bring. At the same time, the success of corporations hinges on their ability to make profit while satisfying the demands of consumers and obligations to stakeholders.

Despite best intentions, governments enthralled by the prospects of growth should consider how to compete in the most efficient ways possible. Put simply – substantial giveaways to corporations have to stop. To achieve sustainable economic growth, states and localities should instead focus on measures likely to benefit the economy as a whole, rather than pledges tailored towards specific firms.

This could mean policies like planning deregulation in cities, to ensure that a large influx of workers can be met with a sufficient boost to the supply of new housing. Where “giveaways” do take place, they should perhaps involve spillover benefits, whether in infrastructure investment, or apprenticeships and workforce development. Boston, for example, home to the corporate headquarters of General Electric, secured its victory a few years ago with a deal that included $125 million towards bridge renovations and transit upgrades.

For local governments to play their cards right, they have to be willing to put themselves in the position to ensure a corporation’s success while substantiating their commitment in the corporation’s long-term success. Here, interstate compacts may prove helpful, where state governments apply the same tax burden to all companies and limit their special privileges. Pairing such a strategy with prudent incentives thus creates a better playing field for competition. When market mechanisms dominate, rather than special treatment, corporations have a better idea of where their value is most appreciated.

The current business culture of hurling subsidies at firms in bidding wars for corporate welfare hurts local companies and their customers, too, since taxpayers end up with fewer public services (while paying more for them). In a time where the rate of commercial moves and mergers is increasing, national and local governments can distinguish themselves by stepping up to corporate auctions with the most sensible bids possible.

Sam is an EPICENTER Intern. He holds a B.S.B.A in International Business from Elon University in the USA and a BSc. in International Management from ESB Business School in Germany.

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