FOREIGN INVESTMENT IN THE UNITED STATES: AN ANALYSIS OF ECONOMIC EFFECTS OF STATE INCENTIVES
CRS Report for Congress
Foreign Investment in the United States: An
Analysis of Economic Effects of State Incentives
May 26, 1998
James K. Jackson
Specialist in International Trade and Finance
Congressional Research Service ˜ The Library of Congress
This report focuses on several topics related to economic and financial incentives state and
local governments offer firms, especially foreign firms, to invest in their jurisdictions. It
briefly examines empirical research on the role incentives and subsidies play in the decisions
of firms to invest abroad and the competition between state and local governments to attract
investments. This report also examines recent international attempts to address the issue of
incentives and subsidies offered by an increasing number of developing countries to attract
multinational firms to invest within their borders. This report may be updated as legislative
Foreign Investment in the United States: An
Analysis of Economic Effects of State Incentives
State and local governments have long sponsored economic incentives to firms.
Such incentives are designed to attract investment and to stimulate and diversify the
local economies. In general, these incentives can include such economic subsidies
and tax breaks as loans, grants, public venture capital programs, tax exemptions, tax
deductions, and tax abatements. These programs, however, have both strong
supporters and detractors, who disagree sharply over the economic effects, both
intended and unintended, of industrial location incentives.
Supporters argue that they need economic incentives, because they send a
message to businesses that the state or locality is favorably disposed toward business.
The supporters also argue that they need a well developed package of incentives to
compete with other localities that offer similar types of incentives. Critics argue that
this type of "beggar-thy-neighbor" competition among localities and states
contributes nothing to the national economy and likely costs more in lost revenues
and direct outlays than it generates in tax revenues and jobs.
Empirical analyses offer mixed evidence. A majority of studies indicates that
industrial location subsidies and incentives do little to affect business location
decisions. In most cases, other economic factors outweigh incentives and subsidies
in importance to firms making location decisions. Nevertheless, recent research
indicates that, under some circumstances, tax incentives may be important factors for
some firms making investment decisions.
Many of the developing nations, starved for investment funds, have proliferated
the use of investment subsidies and incentives to attract foreign investment. This has
increased the cost of such subsidies for all nations and pushed the issue into the
forefront of international negotiations on foreign investment. Subsidies were to have
been on the agenda for discussion among the developed economies during the
negotiations over the Multilateral Agreement on Investment (MAI), but those
negotiations ceased in early 1998.
Within the United States, some Members of Congress have expressed concern
over the use of incentives by jurisdictions and the competition for investments.
Congress also is concerned that subsidies offered abroad will spur U.S. firms to
invest overseas at the expense of investments and jobs at home. Despite these
concerns, Congress has been reluctant to step in to regulate or control the subsidies
state and local governments offer firms. Moreover, state and local governments
apparently feel compelled to continue offering incentives to stay competitive with
other states. So far, no one state has been willing to risk a possible loss in corporate
investment by being the first to reject such subsidies. It is unlikely, therefore, that
the present situation will change, despite expressed disenchantment among all levels
Incentives by State.................................................2
Factors Involved in Site Selection.....................................6
Advanced Technology Industries.................................7
Experience in the 1990s........................................12
Incentives in International Foreign Investment..........................17
Appendix A: Economic Development
Incentives of Selected States....................................23
List of Tables
Table 1. Selected States: Financial And Tax Incentives
Offered to Prospective Businesses, 1993............................4
Table 2. Summary of Research on Locational Factors Involved in
Table 3. Fiscal Incentives for Foreign Investors: Frequency by Region
Number of Countries Offering a Type of Incentive (early 1990s).......18
Table 4. Fiscal Incentives for Foreign Investors: Changes in 92 Countries Between
Mid 1980s and Early 1990s.....................................19
Foreign Investment in the United States: An
Analysis of Economic Effects of State Incentives
State sponsored economic incentives for firms are not new. They date back to
at least 1791, when New Jersey offered tax incentives to Alexander Hamilton to
induce him to locate his manufacturing business in the state.1 In the 1980s and
1990s, however, subsidies and incentives escalated sharply as states and localities
competed in bidding wars to attract foreign and domestic firms and the attendant
jobs, prompting calls within the United States and abroad for curbs on such
activities. There have been numerous attempts to rein in investment subsidies,2
including the Multilateral Agreement on Investment (MAI). This agreement
attempted to standardize such practices and to make them more easily discernible,
or transparent, to firms of all nationalities.
Within the United States, state and local governments generally exercise broad
discretion in designing and offering incentives, but they do not have unlimited
authority. They are restrained by the U.S. Constitution, which gives to the Congress
the power "to regulate Commerce with foreign nations and among the several
states..." In general, state and local governments use economic and financial
incentives to attract investment and to stimulate and diversify their respective
economies. Such activities have a strong core of supporters and critics who disagree
sharply over the effects, intended and unintended, that are associated with such
investment incentives. Congress has expressed concern over investment subsidies
and their role in competition between states for investments. Investment subsidies
are emerging as an important international issue and was to have been a key
component of the Multilateral Agreement on Investment (MAI) before those talks
collapsed. It is likely, however, that Congress will have to confront this issue again
as it reemerges in other international discussions.
Some critics argue that competition among states and local governments spurs
the governments to lower their respective environmental and labor standards to
satisfy firms seeking the lowest level of standards. These conclusions are not
universally accepted. Some observers argue that investment subsidies shift some
economic activity from one state or locality to another, but they doubt that such
"beggar-thy-neighbor" competition is sustainable over the long run or that it adds to3
the productive capacity of the U.S. economy as a whole.
1Key, Kimberly Gillian, and James K. Smith. Trends in State and Local Economic
Development Incentives. Journal of State Taxation. Fall 1996. p. 1.
2See CRS Report 97-469 E, Multilateral Agreement on Investment: Implications for
the United States, by James K. Jackson.
3The term, beggar-thy-neighbor, arises from the field of international trade in which
Incentives by State
Economic competition between states and cities is not new. During the
nineteenth century, states and cities competed against each other by offering
subsidies to railroad companies to gain access to the growing national rail system.4
A CRS report on state economic development programs indicates that, "state and
local governments have long provided various incentives to businesses as part of
their larger strategies of promoting economic development."5 Over the last decade,
state and local governments broadened their efforts by offering incentives6
specifically targeted to attract foreign investors, an act some have termed, "the new
mercantilism."7 Investment incentives and subsidies have also increased as state and
local governments have broadened their search for additional revenue sources to8
compensate for reduced federal government spending. Appendix A lists a sample
of the incentives that are offered by the six states with the largest amounts of foreign
The National Association of State Development Agencies publishes a directory
of each state and the types of incentives each offers.10 This directory indicates that
states offer a broad array of incentives, which can be grouped into three main
!Capital subsidies consisting of direct state loans, loan guarantees, grants,
public venture capital programs, and industrial revenue bonds.
one country attempts to improve its income and welfare at the expense of other countries.
4Taylor, Mark. A Proposal to Prohibit Industrial Relocation Subsidies. Texas Law
Review, February 1994. p. 671.
5CRS Report 89-680, State Economic Development Programs: Their Evolution,
Characteristics and Implications for Trade Agreements, by J. F. Hornbeck.
6Milward, H. Brinton, and Heidi Hosbach Newman. State Incentive Packages and the
Industrial Location Decision. Economic Development Quarterly, August 1989. p. 203.
7Hansen, Susan B. Industrial Policies in the American States: Historical and
Comparative Perspectives. In: The Politics of Industrial Recruitment: Japanese Automobile
Investment and Economic Development in the American States. ed. by Ernest J. Yanarella
and William C. Green. New York, Greenwood Press, 1990. p. 4.
8Kenyon, Daphine, A. Theories of Interjurisdictional Competition. New England
Economic Review, March-April 1997. p. 31-35.
9The United States defines direct investment abroad as the ownership or control,
directly or indirectly, by one person (individual, branch, partnership, association,
government, etc.) of 10 percent or more of the voting securities of an incorporated business
enterprise or an equivalent interest in an unincorporated business enterprise. 15 CFR §
10Directory of Incentives for Business Investment and Development in the United
States: A State-by-State Guide. National Association of State Development Agencies. The
Urban Institute, Washington, 1986; also, see: Fahey, Jennifer Campbell, Janine E.
Kaczmarowski, and Dorothy Krauss. States Use Several Methods to Attract and Retain
Business. Journal of State Taxation, summer 1997. p. 45-78.
!Tax subsidies which include exemptions, credits, deductions, and local
property tax abatements.
!Economic development strategies which include enterprise zones and11
Although these incentives have become quite ubiquitous, states are not entirely
free to design and implement investment incentives in any manner they wish. They
are restrained by the U.S. Constitution, which gives Congress the power to regulate
commerce between states and with foreign countries, and by international trade12
agreements. The U.S. Supreme Court has not addressed directly the
constitutionality of state economic incentive programs, but there are a number of
cases which indicate that the Court places limits on some of these activities.13 States
apparently are free to create an environment conducive to economic activities as long
as they do not enact schemes that discriminate in favor of a specific group of
investors, such as local businesses.14
Generally, state and local governments offer incentives to businesses, regardless
of their nationality. Table 1 (page 4) shows how one group of state governments has
used incentives to entice firms to locate within their borders. These incentives
include such financial inducements as bonds and loans, and tax incentives covering
income, sales, and ad valorem taxes. As foreign investors displayed their interest in
investing in the United States in the 1980s and 1990s, state and local governments
offered incentives to these firms as well.
Except for some highly visible cases, however, it generally is difficult to
determine whether states or local governments offered incentives to foreign firms
that were not offered to U.S. firms. This is not to suggest that state and local
governments have not occasionally offered foreign investors additional incentives
to locate parts of their business operations within their borders, only that such
incentives are likely to be case-specific and difficult to assess. According to a mid-
1980 survey by the National Governors' Association, half of all states had a
designated international trade office responsible for both promoting exports and
attracting foreign direct investment. The same survey also indicated that 33 states
had some form of official overseas representation, and that all but three states15
conducted overseas trade missions.
11Hornbeck, State Economic Development Programs..., p. 6-19
12Key and Smith, Trends in State and Local Economic Development Incentives, p. 1.
13For additional details, see: Ibid., p, 8-9.
14The difference between benign and discriminatory incentives under the Commerce
Clause are explored in: Hellerstein, Walter, and Dan T. Coenen. Commerce Clause
Restraints on State Business Development Incentives. Cornell Law Review, May 1996. p.
789-878; and Enrich, Peter D. Saving the States From Themselves: Commerce Clause
Constraints on State Tax Incentives for Business. Harvard Law Review, December 1996.
15Clark, Marianne K. Revitalizing State Economies. National Governors' Association,
Table 1. Selected States: Financial And Tax Incentives
Offered to Prospective Businesses, 1993
AR IL IN KY MS MO TN
State or agency guaranty programsYNYYYYN
General obligation bondsYYYNYYY
Sales and use tax exemptions
Machinery and equipmentYYYNNYY
Pollution control devicesYYYNNYY
State income taxes
Personal income tax leviedYYYYYYY
Corporate income tax leviedYYYYYYY
Federal income tax deductible
Ad valorem tax exemptions
Machinery and equipmentNYNYYNN
Enterprise zone exemption
Corporate income taxYYYYNYY
Note: the states in this table are: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee.
Source: Zaretsky, Adam M. Are States Giving Away the Store? Federal Reserve Bank of Saint Louis,
January 1994. p. 7.
Some reported examples of the incentives state and local governments have
offered foreign firms include:
!In a bidding war between Washington and Oregon for a $60
million Nippon Kokan plant to make polychrystaline silicon,
Oregon secured the investment by offering a one million dollar
water pipeline, partial property tax exemption for five years, and
cut-rate power, and funding for a Japanese school for children16
of the managers.
!Flat Rock, Michigan secured an investment by Mazda Motors
in an automobile assembly plant by waiving property taxes for
!Kentucky promised Toyota 1,500 acres of free land, $47 million
in new roads, and $65 million in employee training programs to
attract a $800 million plant.17
!In an escalating "border war" in 1994 between Connecticut and
New York, New York lured the Dress Barn company,
Connecticut's 55th largest public corporation, to relocate to New
York. In turn, Connecticut offered Swiss Bank Corporation
$120 million in tax breaks to move from New York to
Connecticut. New York responded to this move by offering
Viacom Inc. $15 million in tax incentives to stay in
!In 1992, South Carolina gave BMW (Bavarian Motor Works)
$135 million in incentives to locate a plant in the state; in 1993,
Alabama gave Mercedes Benz $253 million in incentives and
tax breaks to entice the German firm to locate an assembly
operation in that state.
!Virginia offered $166 million in tax breaks and incentives to an
IBM-Toshiba joint venture to locate a semiconductor
manufacturing facility in Virginia.
!Alabama gave Mercedes Benz $42.6 million in "tax increment"
bonds by the State Industrial Development Authority as
reimbursement cost for constructing a $300 million automobile
factory. The state also exempted the firm from corporate
income taxes equal to the value of the bonds. Alabama gave
Mercedes a property tax abatement for ten years, while
providing infrastructure improvements for sewer and road
access, reimbursing the firm for the costs of training facilities19
and equipment, and providing rail line access.
16Once-Insular Oregon Opening its Arms to Japanese Investments. The Wall Street
Journal, July 21, 1987. p. 1.
17The Grab That Never Was. The Economist. April 11, 1987, p. 28.
18Behr, Peter, To Lure Jobs, States Surrender Key Tax Revenue. The Washington Post,
Aug. 24, 1995. p. A1.
19Hartzheim, Lori A. State Tax Incentives: Headed in the Right Direction. Journal
of State Taxation, Spring 1997. p. 56.
Factors Involved in Site Selection
Analysts, representing economics, business, law, and sociology, have
contributed to the literature on industrial location. Often, however, these analysts
have reached contradictory or ambiguous conclusions. Part of this problem arises
from shortcomings inherent in attempting to draw general conclusions about
industrial location decisions when the very factors involved in reaching those
decisions change in importance as firms proceed through a multistage process they
use to decide where to locate. As one analyst has written, "The location decision is
a non-standard, complex, and trying one for many managers largely because the
factors that affect it can be quite numerous, and not easily quantified."20
According to economists' traditional view of direct investment, firms invest
abroad to maximize their profits.21 While true, this view offers little insight into the
direct investment process. More recent views argue that firms invest abroad because
they possess superior technology or manufacturing processes, which give them an
economic advantage over their competitors; another theory stresses that firms invest
overseas because they are attracted by the economic performance of foreign markets.
Once firms have decided to invest overseas, they use a different set of factors to
differentiate among locations. Often, these factors are difficult to quantify and the
decision-making process may be imperceptible to those outside the firm's chain of
command. After reviewing a broad spectrum of the industrial location literature, two
economists concluded that the location process is a sequential decision-making
process that involves a number of stages.
The first stage is the choice of a state or region. Over half of all
locational studies make their first cut at the multistate level. Once the state
or region has been selected, a more micro-focus will culminate in the
selection of a specific community and site. The important locational
factors differ between the first stage when firms are seeking a general
region in which to locate and the second, more geographically focused
stage. In selecting a broad region, the site selection team will focus on
labor, state tax variables, climate, proximity to markets, and other features
that may have significant interregional variation, but are similar almost
everywhere within the region. Locational factors that vary at the micro-
geographic level of detail such as land costs, access to major roads, and22
schools are generally available somewhere within all major regions.
20Schemenner, Roger W. Making Business Location Decisions. Englewood Cliffs,
Prentice-Hall, Inc., 1982. p. 121.
21Hayter, Roger. The Dynamics of Industrial Location: The Factory, the Firm, and the
Production System. Chichester, John Wiley and Sons, 1997. p. 79.
22Blair, John p., and Robert Premus. Major Factors in Industrial Location: A Review.
Economic Development Quarterly, February 1987. p. 74-75.
The range and rank order of factors involved in a firm's location decision also
vary by a range of industrial characteristics. This means that the factors relevant to
a location decision can vary by industry, by the types and amounts of raw materials
and skilled labor that are used, by the type and area of the market, by company size,23
experience, personal preferences, and by other factors. For instance, labor costs are
especially important in the apparel and shoe industries and other labor-intensive
industries. Labor-intensive industries, on the whole are also more likely to be
sensitive to labor unionization than are such capital-intensive industries as
petroleum, chemicals, food processing, basic metals, and paper-making.
Transportation costs are especially important for firms in food processing, lumber
or paper, common chemicals, plastic, glass, metals, and metal fabricating. Firms
which process agricultural, mining, or forest products generally prefer to locate close
to sources of raw materials, while firms in industries involving multi-stage, or24
complex, processes prefer to locate in close proximity to existing facilities.
These and other factors involved in the industrial location process means that
the process is complicated and generally not fully captured in empirical studies. As
a result, most of the empirical literature offers little evidence that state-sponsored
economic and tax incentives are important factors affecting firms' location choices.
One survey of firms receiving state-sponsored economic incentives indicated that the
firms did not view the incentives as significant or as giving them a competitive
advantage over their competitors, because they believed their competitors received
similar treatment.25 On the other hand, some firms apparently do view tax and
financial credits as important factors if competing sites are comparable in terms of
labor market costs and proximity to resources and markets.26
Advanced Technology Industries
The fast-growing advanced technology industries have led analysts to conclude
that these industries use a new and different set of factors in deciding where to locate
their plants. According to this viewpoint, state and local tax systems, education, the
"business climate," and the availability of certain types of skilled labor are important
location factors. Other analysts argue that state-sponsored incentives help promote
economic conditions that are unique to a state and help familiarize others, especially
foreign firms, with the resources of that state. Such promotional activities appear to
be important to firms that do not engage in a rigorous state-by-state analysis of27
location factors. A panel of experts assembled by the Federal Reserve Bank of
Boston on the topic of state and local government policies on economic development
concluded that, contrary to the conventional wisdom of the 1960s and 1970s, state-
sponsored location incentives:
23Haigh, Robert W. Investment Strategies and the Plant-Location Decision: Foreign
Companies in the United States. New York, Praeger, 1989. p. 9.
24Schemenner, Making Business Location Decisions, p. 121-127.
25Key and Smith, Trends in State and Local Economic Development Incentives, p. 5.
26Hartzheim, State Tax Incentives: Headed in the Right Direction, p. 57.
27Haigh, Investment Strategies and the Plant-Location Decision, p. 31.
...do affect the pace of economic development within their (state and local
governments) borders. However...these effects are generally modest.
Evidence is inconclusive about which policies exert the greatest effects
and under which circumstances. The conditions under which state policies
can significantly influence business location and economic growth are
limited, mainly because the most important determinants of a jurisdiction's
relative rate of economic growth are largely beyond the control of state28
and local governments...
Recent empirical research on foreign firms indicates that four factors appear to
be particularly important in influencing foreign firms to invest in the United States.
These factors are market size (positively related), manufacturing wage rate
(negatively related), transportation infrastructure (positively related), and state29
promotional activities designed to attract foreign investment (positively related).
Table 2 (page 9) presents the results of this research.30
Not all economists agree with the factors identified in Table 2. Land area was
used in a number of studies as a proxy for the availability of potential location sites,
although Friedman, et al. question using this variable in this way. The influence of
taxes on the location of foreign direct investment also had mixed results, with31
Friedman, et al., alone, concluding that taxes are a significant factor. Part of the
disparity among empirical studies likely reflects the complexity of measuring and
interpreting this factor. Also, the discrepancy over the significance of taxes may
reflect the use of different measures of taxes in the studies: the various measures of
taxes include personal, corporate, unitary taxes, and per capita state and local taxes.
28Bradbury, Katherine L., Yolanda K Kodrzycki, and Robert Tannerwald. The Effects
of State and Local Public Policies on Economic Development: An Overview. New England
Economic Review, March-April 1997. p. 1.
29Friedman, Joseph, Daniel A. Gerlowski, and Johnathan Silberman. What Attracts
Foreign Multinational Corporations? Evidence From Branch Plant Location in the United
States. Journal of Regional Science, December 1992. p. 414-415.
30 Table 2 is taken from: Friedman, Gerlowski, and Silberman, What Attracts Foreign
Multinational Corporations? Evidence from Branch Plant Location in the United States, p.
403-418. The other studies included in the table are: Woodward, Douglas p. Locational
Determinants of Japanese Manufacturing Start-ups in the United States. Southern Economic
Journal, January 1992. p. 690-708; Coughlin, Cletus C., Joseph V. Terza, and Vachira
Arromdee. State Characteristics and the Location of Foreign Direct Investment Within the
United States. The Review of Economics and Statistics, November 1991. p. 675-683; Luger,
Michael I., and Sudhir Shetty. Determinants of Foreign Plant Start-ups in the United States:
Lessons For Policymakers in the Southeast. Vanderbilt Journal of Transnational Law, Spring
31Friedman, Gerlowski, and Silberman, What Attracts Foreign Multinational
Corporations?..., p. 413.
Table 2. Summary of Research on Locational Factors Involved in
Gerlowski &WoodwardTerza &Shetty
Silberman (1992)(1992)Arromdee (1991)(1985)
Geographic Unit UsedStatesCounties/StatesStatesStates
Type of FDINew PlantsNew PlantsAll TypesNew Plants
Source CountryAll Countries,JapanAll CountriesAll Countries
IndustryAll Manu-All Manu-All Manu-SIC 283, 355
Results of Tests on Various Factors
Market SizeSignificant (+)Significant (+)Significant (+)Significant (+)
UnionSignificant (+)Significant (-)Significant(+)Not Included
TaxesSignificant (-)MixedNot SignificantNot Significant
Land AreaNot SignificantMixedMixedNot Included
PromotionSignificant (+)Not SignificantSignificant (+)Significant (+)
Wage RateSignificant (-)Not IncludedSignificant (-)Significant (-)
Unemployment RateSignificant (+)Not IncludedSignificant (+)Not Included
ProductivitySignificant (+)Not IncludedNot IncludedNot Included
TransportationSignificant (+)Not IncludedSignificant (+)Not Included
Note: a + indicates that a factor is significant in a positive way, or that increases in this factor were
associated with increases in foreign direct investment in a location; a - indicates that the factor is significant in a
* Indicates industries in drugs, industrial machinery, and motor vehicles.
Source: Friedman, Joseph, Daniel A. Gerlowski, and Johnathan Silberman. What Attracts Foreign
Multinational Corporations? Evidence From Branch Plant Location in the United States. Journal of Regional
Science, December 1992.
One puzzling result from the Friedman et al. study is the significant, positive
impact of unionization, whereas Woodward finds that unionization has a significant,32
negative impact on firms' location decisions. The generally accepted proposition
argues that a higher degree of unionization would be expected to have a negative
impact on foreign direct investment, because unionization would be expected to raise
the local wage scale. Friedman et al. argue that unionization has become less
important to foreign firms as unions have declined in power and effectiveness.
Woodward argues that unionization is important to Japanese firms because of the
32Ibid., p. 416.
potentially negative effect the unions would have on Japanese managerial practices.
The reasons Japanese firms desire nonunion sites may have less to do
with saving on labor costs than with the organizational changes wrought
by the Japanese model of production. Japanese manufacturing plants often
require far fewer job categories than those commonly employed in U.S.
industry and introduce different labor relations practices. Facing only
enterprise unions at home, Japanese investors may perceive that
adversarial unions would impede the introduction of flexible production33
Researchers have also concluded that market potential and access to foreign
markets are positive and important influences on firms' decision to locate a facility
abroad. U.S. states with large market potential have well-developed infrastructure,
transportation facilities, certain economies of scale associated with firms involved34
in similar economic activities (agglomeration economies), and access to customer35
markets that attract foreign, as well as U.S., firms. Changes in the industrial
structure of the U.S. economy toward greater services and advanced technology led
other economists to conclude that these changes are heightening the importance of
such other factors as state and local taxes, education, business climate, labor skills,
and state and local physical infrastructure.36 These economists also concluded that
so many factors seem to be involved that it is difficult to determine whether subsidies
or locational incentives are significant factors in where firms decide to invest:
The lack of strong econometric and survey evidence contrasts with the
opinions of many policymakers that some development incentives are
essential for a successful job creation effort. Perhaps the varieties of
incentives are too complex to be captured by the econometric models or37
perhaps they are so widely offered that they cancel out.
Higher manufacturing wages relative to other states apparently are a significant
detriment to attracting some types of foreign direct investment. Foreign firms
apparently respond differently to the relative magnitudes of wage rates. For instance,
Japanese firms apparently are highly sensitive to wage rates and to labor productivity
in deciding where to locate their plants. European firms, on the other hand,
apparently do not respond to labor market conditions in this way and their decisions
seem to be only marginally responsive to relative wage rates. European firms
apparently are influenced more in their location decisions by such factors as access
33Woodward, Locational Determinants of Japanese Manufacturing Start-ups in the United
States, p. 696.
34Krugman refers to these as "localization economies." Krugman, Paul. Geography
and Trade. Cambridge, the MIT Press. 1991.
35Friedman, Gerlowski, and Silberman, What Attracts Foreign Multinational
Corporations?..., p. 415.
36Blair, John p., and Robert Premus. Major Factors in Industrial Location: A Review.
Economic Development Quarterly, February, 1987. p. 83.
37Ibid., p. 83.
to markets, including port facilities, local tax burden, and state promotional38
There is little doubt that financial and economic incentives are important
elements of every state's economic development strategy. What is questionable,
however, is whether the economic benefits that arise from such programs outweigh
the costs. Empirical research indicates that incentives or subsidies do not drive firms'
decisions to locate a plant or a facility abroad and, as such, constitute a
"questionable economic practice."39 Economists also conclude that such incentives
generally misallocate economic and financial resources. This misallocation arises
from at least three sources:
!Jurisdictions must expend resources to monitor the incentives offered by each
!Incentives and subsidies offered to firms may not be recouped in a reasonable
time frame, or never fully recouped.
!Subsidies may encourage firms or business activities that are a poor match
with the market or industrial structure existing within the jurisdiction, or they
may encourage firms to continue a line of activity that is unprofitable under
normal market conditions (i.e., a market without subsidies).
38Friedman, Gerlowski, and Silberman, What Attracts Foreign Multinational
Corporations?..., p. 413.
39Key and Smith, Trends in State and Local Economic Development Incentives, p. 6.
Experience in the 1990s
Many state and local jurisdictions grew disillusioned in the 1990s with40
industrial location incentives, even though they claimed publicly that such
incentives helped them "capture" firms. One author argues that jurisdictions
continue to engage in such activities, despite their reservations, because they
apparently produce more immediate political results than waiting for longer-term
entrepreneurial programs to mature.41 These jurisdictions also believe they are
unable, by themselves, to stop this activity.42 Further compounding the issue, firms
often expect to be offered attractive incentives since they have become accustomed
to having state and local governments offer incentives to attract businesses. In some
cases, states even find they have to offer incentives merely to retain certain
businesses already located within their borders. According to one author:
Many of the incentives...were tailored to suit the needs of the targeted
firm and not necessarily part of a basic package of incentives. Once a state
offers a particular incentive to a firm, however, it would be hard pressed
to withhold it from another.43
A number of state and local jurisdictions have also used incentives to signal
their interest in attracting business, or as part of an effort to establish a business44
friendly atmosphere. Once these incentives proliferated, many jurisdictions45
determined that they reduced their effectiveness. Competition among states
became so intense that state governments adopted a "truce" in 1993. Proposed by the
National Governors' Association, the truce urged states not to use public resources
merely to influence the location of private investment. Without any enforcement
provisions, however, the truce had little noticeable effect.46 Some state and local
governments apparently believe they must pursue business investment to offset47
losses in federal assistance. One author argues:
40Furton, Matthew T. The Use of Penalty Clauses in Location Incentive Agreements.
Indiana Law Journal, Summer 1995. p. 1010.
41Eisinger, Peter. State Economic Development in the 1990s: Politics and Policy
Learning. Economic Development Quarterly, May 1995. p. 155.
42 Holmes, Thomas J. Analyzing a Proposal to Ban State Tax Breaks to Businesses.
Federal Reserve Bank of Minneapolis Quarterly Review, Spring 1995. p. 29.
43Zaretsky, Adam M. Are States Giving Away the Store? Federal Reserve Bank of Saint
Louis, January 1994. p. 6.
44Elkins, David R., Richard D. Bingham, and William M. Bowen. Patterns in State
Economic Development Policy: Programmatically Rich and Programmatically Lean Policy
Patterns. State and Local Government Review, Fall 1996. p. 158-172.
45Reese, Laura A., and David Fasenfest. More of the Same: A Research Note on Local
Economic Development Policies over Time. Economic Development Quarterly, August
46Mahtesian, Charles. Romancing the Smokestack. Governing, November 1994. p. 36.
47Herzog, Henry W. Jr., and Alan M. Schlottmann. Industrial Location in the United
States: Some New Evidence of Public Policy Efficacy. Survey of Business, Summer/Fall 1993.
The widespread availability of subsidies has created an environment
in which cities and states attempt to outbid each other to attract large
industrial plants. The corporations planning new plants openly encourage
interested cities to match other cities' offers, and thus the corporations
extract ever higher concessions from the municipalities.48
In Tennessee, where the state developed a package of incentives for the Nissan
automobile plant in Nashville, officials grew skeptical of the economic benefits they
would ultimately derive from the tax incentives the state offered. According to one
official, there is no evidence that the area grew faster or had higher incomes relative
to other places as a result of the plant, only that, "more...employment was in
manufacturing than before." When Nissan came in, this official concluded, it "paid
high wages and skimmed off the best employees, and raised land rents," which49
eliminated other businesses from starting up. As a result, some states have amended
their approach from recruiting businesses outside the state to developing an
entrepreneurial approach of helping firms grow within the state. One analyst
summarized these changes by stating:
...it would be difficult to make the case that states are abandoning the
commitment to economic development that emerged so powerfully in the
1980s, but there are signs of loss of ardor...economic development is no
longer regarded in the 1990s as the keystone policy area on which all other
state functions depend and to which other funding claims must be
States face additional financial problems that arise from industrial location
incentives. First, the subsidies shift fiscal burdens from one class of taxpayer,
principally large corporations, to other classes, such as small businesses and
homeowners. Second, corporations that receive such benefits can abandon the
promised development with little recourse for the jurisdiction.51 Moreover, as
competition between state and local governments increases, the benefit packages the
jurisdictions feel compelled to offer grow. That same competition, however,
restrains the ability of the jurisdictions to raise taxes to offset the costs of the
48Taylor, A Proposal to Prohibit Industrial Relocation Subsidies, p. 677; and Hartzheim,
State Tax Incentives: Headed in the Right Direction, p. 60-64.
49The Effects of State and Local Public Policies on Economic Development. New
England Economic Review, March/April 1997. p. 142.
50Eisinger, State Economic Development in the 1990s: Politics and Policy Learning,
51Hartzheim, State Tax Incentives: Headed in the Right Direction, p. 58.
business incentives they are offering, squeezing the financial resources of the52
Paradoxically, economic development subsidies can distort existing patterns of53
input use by firms and may cause employment to fall. For instance, subsidies or
tax reductions which encourage capital expansion or construction relative to labor
could shift the use of inputs in the favor of capital and possibly lead to relatively less
labor being used in the production process.
In general, state tax credits and incentives fall into three categories: general
economic credits and incentives; targeted social and environmental welfare credits
and incentives; and specific economic development credits and incentives.54 General
economic development credits and incentives are available to all of those who invest
within the parameters of certain specified programs or within designated areas of a
state. The most common programs include investment credits to encourage
investment in certain types of property, jobs credits for companies that hire people
from targeted groups, research and development credits for qualified research within
the state, and targeted economic development area credits, or enterprise zones, for
distressed urban and rural communities. A number of states and local communities
also offer property tax incentives to lure businesses to locate or to expand their
operations in their jurisdiction.
The use of tax credits and incentives are widespread: states have available, or
use, 15 separate tax-incentive programs; 18 financial-incentive programs; and 18
special-services programs. While not every state uses all of these programs, the
programs are used widely by many of the states. The importance of these tax
programs to firms making location decisions in a particular state depends on the
economic and tax position of the state relative to other states. As the author
...actions to attract jobs by reducing taxes or altering expenditures would
appear to have significant payoffs only in those states with very poor
business climates or poorly designed tax systems.55
Targeted credits and incentives are designed to promote or to encourage certain
activities that will benefit the societal or environmental conditions of the state.
These credits generally are available to all businesses and are not limited to specific
52Kenyon, Daphine A. Theories of Interjurisdictional Competition. New England
Economic Review, March-April 1997. p. 31-35.
53Gerking, Shelby, and William Morgan. Measuring Effects of Industrial Location and
State Economic Development Policy: A Survey. In: Industry Location and Public Policy,
ed. by Henry W. Herzog, Jr., and Alan M. Schlottmann. Knoxville, The University of
Tennessee Press. p. 36.
54Hartzheim, State Tax Incentives: Headed in the Right Direction, p. 51-52.
55Ibid., p. 28.
industries or companies.56 Specific economic development credits, however, are
aimed primarily at large corporations and are designed to encourage specific firms
to locate or to remain in a state.
Empirical studies on the effects federal, state, and local taxes have on foreign
investment raise a number of thorny issues and generate conflicting results.57 Some
critics argue that U.S. federal and state taxes materially alter the location decisions
of firms by encouraging U.S. manufacturing firms to open a plant in a foreign
country while closing down a U.S. plant. Most economists disagree with these
assertions. They argue that, since tax incentives are small relative to other costs58
firms face, they are unlikely to play a decisive role in a firm's location decisions.
For instance, New York and California have high tax rates, but both of them have
high levels of investment.
After surveying a broad number of empirical studies on business location
decisions, one author concluded that there is scant evidence, on the whole, about
whether tax-incentive programs and other financial incentives actually attract
businesses and employment.59 Despite these results other researchers contend that
business leaders will lobby strongly for such incentives, because they "have no
reason to turn down tax breaks and other giveaways even if these programs do not
affect location decisions."60
Contrary to this viewpoint, economist James R. Hines, Jr. concluded in a recent
study of state-level taxes that these tax rates "significantly influence the location of
FDI in the United States."61 He argues that previous attempts to assess the
56Ibid., p. 55.
57This report is meant to consider only a small range of tax issues which deal
specifically with incentives. For a broader treatment of tax issues, refer to: Alworth, Julian
S. The Finance, Investment and Taxation Decisions of Multinationals. Oxford, Basil
Blackwell, 1988; CRS Report 91-582 E, Federal Taxes and Foreign Investment in the
United States: An Assessment, by David L. Brumbaugh; and CRS Report 91-682 E, U.S.
Taxation of Overseas Investment: Selected Issues in the 102d Congress, by David L.
58Carlton, Dennis W. The Location and Employment Choices of New Firms: An
Econometric Model with Discrete and Continuous Endogenous Variables. Review of
Economics and Statistics, August 1983. p. 440-449.
59Wasylenko, Michael. Empirical Evidence on Interregional Business Location
Decisions and the Role of Fiscal Incentives in Economic Development. In: Industrial
Location and Public Policy, ed. by Herzog and Schlottmann, p. 13-30.
60Ibid., p. 13.
61Hines, James R., Jr. Altered States: Taxes and the Location of Foreign Direct
Investment in America. The American Economic Review, December 1996. p. 1076, also
Cummins, Jason G., and R. Glenn Hubbard. The Tax Sensitivity of Foreign Direct
Investment: Evidence From Firm-Level Panel Data. NBER Working Paper #4703, April
importance of such incentives and credits have undervalued their importance because62
they did not properly control for "important unobservable variables." In some
cases, investors are drawn to locations despite high tax rates because other factors
dominate their decisions. Hines argues that there are various factors which draw63
firms to a specific location, although many of those factors are not observable.
Hines also questions what might be expected from a correlation between taxes
and business investment. For instance, he argues that if higher business taxes
represent part of a fiscal package that includes greater spending on infrastructure and
other items that benefit business, then higher taxes might be positively correlated
with business activity. Hines concludes that the available data do not allow for a test
of the impact tax factors have in explaining foreign investment in the United States
as a whole, but that they do allow for a test concerning foreign investment within the
United States. Here, Hines finds that even small variations in local tax rates may64
have "important effects" on capital flows.
Those who assert that taxes are important, are aided little by empirical analysis,
which has not yet resolved uncertainties over how taxes affect the decisions of
multinational firms. One analyst concluded that there still is little awareness of the
actual manner in which the financial decisions of multinational corporations are65
affected by differences in taxation across government jurisdictions. Another critic
argues that incentives are ineffective in stimulating economic activity because: they
merely reward activities that would otherwise take place; tax breaks are not targeted
and not connected to economic development strategies; local advantages and
disadvantages are many and overwhelm state tax costs; and there is no apparent
correlation between high-tax and low-growth states.66
Incentives in International Foreign Investment
Investment incentives also have become an important international issue as U.S.
and other multinational firms increasingly are offered lucrative incentives to invest
in both developing and developed countries. Often, these incentives are crafted to
attract, or retain, investments within certain industrial sectors. As a result, such
incentives can exist along side investment controls as nations seek to protect certain
sectors of their economies from foreign competition.
62Hines, Altered States: Taxes and the Location of Foreign Direct Investment in
America, p. 1077.
63Ibid., p. 1079.
64Ibid., p. 1092.
65Alworth, Julian S. The Finance, Investment and Taxation Decisions of
Multinationals. Oxford, Basil Blackwell, 1988. p. 119.
66Key and Smith, Trends in State and Local Economic Development Incentives, p. 6;
and Moss, Kary L. The Privatizing of Public Wealth. Fordham Urban Law Journal, Fall
The United Nations, through its Commission on International Investment and67
Transnational Corporations, released a report in 1995 that details the proliferation
of financial and economic incentives as more nations compete aggressively to attract
foreign direct investment and to retain domestic investment. Fiscal incentives,
including tax deferrals, tax reductions, accelerated depreciation allowances, and
exemption from import duties on capital equipment, are the most widely used types
of incentive to attract foreign direct investment, as indicated in Tables 3 and 4,
which show that investment incentives have increased in every region of the world.
In explaining this proliferation, the United Nations concluded:
As governments have recognized the potential FDI (foreign direct
investment) has in contributing to economic growth, attracting FDI has
become a policy priority in many countries, both developed and
developing. Incentives are, as a result, an important component of
national policy frameworks for FDI and one which by its very nature, can
be more easily manipulated by governments than other factors influencing68
Prior to the Uruguay Round of Multilateral Trade Negotiations, no rules within
the GATT (General Agreement on Tariffs and Trade) dealt explicitly with foreign
direct investment. As a result, there was no general discipline that existed either at
the multilateral or regional levels to deal with incentives that affect direct
investment. The issue of incentives was addressed obliquely through two
agreements within the Uruguay Round: the Agreement on Trade-Related Investment
Measures (TRIMS); and the General Agreement on Trade in Services. These
provisions do not deal directly with investment incentives, but govern subsidies
which distort trade. For instance, the TRIMS Agreement seeks to eliminate
performance requirements, or conditions governments place on foreign investors
desiring to invest within their national borders. Member countries of the GATT are
prohibited by the TRIMS Agreement from conditioning investment incentives or
subsidies on local content or on export requirements. The Agreement on services
merely provides that subsidies on trade in services, which includes direct investment,
will be negotiated in the future.
67 Incentives and Foreign Direct Investment. Geneva, United Nations Conference on
Trade and Development, April 1995.
68Ibid., p. 5.
Table 3. Fiscal Incentives for Foreign Investors: Frequency by Region
Number of Countries Offering a Type of Incentive (early 1990s)
stan- Deduc- Deduc- Exemp-
Number income Tax ated me n t from gross from Duty
Region tives costs days ation ance security ings duties backs
Africa 24 19 16 13 4 2 14 16 11
Asia 17 12 12 9 5 1 11 12 8
Europe 25 20 19 6 3 2 2 13 12
Total 103 82 67 47 26 12 44 62 49
Source: Incentives and Foreign Direct Investment. Geneva, United Nations Conference on
Trade and Development, April 1995. p. 14.
During the Uruguay Round of Negotiations, the GATT adopted a definition of
subsidy, which states that a subsidy is a financial contribution by a government or
some other public body, or some other income or price support, that conveys a69
benefit to a specific industry or firm. Included within this definition are grants,
loans, equity, loan guarantees, tax forgiveness, goods and services, and government
purchase of goods. To avoid falling within the definition of a subsidy and, therefore
being subject to WTO disciplines, a government must develop its program so that it
is generally available throughout a state or local jurisdiction.70
69Colgan, Charles S. Brave New World: International Regulation of Subsidies and the
Future of State and Local Economic Development Programs. Economic Development
Quarterly, May 1995. p. 107-118; and CRS Report 96-487 E, Subsidies, Countervailing
Duties, and the World Trade Organization, by J.F. Hornbeck.
70Colgan, Brave New World, p. 108-109.
Table 4. Fiscal Incentives for Foreign Investors: Changes in 92
Countries Between Mid 1980s and Early 1990s
AfricaAsiaLatin AmericaCentral andEastern EuropeWestern Europe
No. ofincentivesNo. ofcountries thatNo. ofincentivesNo. ofcountries thatNo. ofincentivesNo. ofcountries thatNo. ofincentivesNo. ofcountries thatNo. ofincentivesNo. ofcountries that
offer theincentiveoffer theincentiveoffer theincentiveoffer theincentiveoffer theincentive
In cen t i ve
income- t axrate
A cceler ateddepreciation XX X==XXXX XX
Reinvestmentallowance X ==XXXXXXX ==
gross earningsfor income tax
purposes, orreduction in
Dutydr aw backs XXXXXXXXXX
Source: Incentives and Foreign Direct Investment. United Nations Conference on Trade and Development, 1995. p. 13.
To fall within the WTO disciplines, a subsidy or incentive must be shown to
distort trade. Even if a government economic development program offers subsidies
to investors, the subsidies would not fall within the WTO disciplines unless it also
is shown to distort trade. As one author has written, "many economic development
programs might be defined as subsidies under the rules but would only be of concern
if they actually distort trade."71 The international push to develop rules on subsidies,
however, ultimately may conflict with the efforts of the states and cities.
The American demand for ever-stricter disciplines on subsidies has
largely ignored the role that state and local governments have played in
economic development efforts...It may be reasonably expected, given past
U.S. interest in attacking foreign subsidies and the increased standard of
review in the Uruguay round agreement, that American industries will
71Ibid., p. 109.
continue to aggressively pursue subsidies in other countries. The result72
may be the ensnaring of state and local programs.
The Clinton Administration is pursuing a dual approach on direct investment
that includes reducing foreign barriers to direct investment and controlling
incentives. Consequently, the Administration is seeking agreements within a number
of multilateral frameworks to liberalize further the remaining national barriers to
direct investment. In May 1995, the Administration launched negotiations within the
OECD on a "multinational agreement on investment" (MAI). The intent of this
agreement would be to go beyond the obligations nations currently face in the OECD
to liberalize their laws and practices relevant to international investment. In
particular, the Administration pressed to have the agreement include provisions that:
!limited the number and type of industrial sectors nations can exclude from
!allowed for freedom from performance requirements (conditions imposed
on foreign investors as requirements for gaining an approval to invest);
!gave firms the freedom to make any investment-related transfer, including
of profits, capital, royalties and fees;
!established international law standards for expropriation, including that
compensation must be prompt, adequate and effective; and
!provided access to binding international arbitration of disputes between
and investor and the state.
The MAI talks faltered, however, as the United States and other nations
disagreed over the numbers and types of incentives nations could exempt from the
disciplines of the agreement. Some critics were concerned that the mandate for
national treatment in the agreement harbored potential legal problems for state and
local governments which might face suits over state consumer and environmental
legislation. Also, every nation wanted some of its industries or economic sectors
exempted from the MAI requirements for unfettered national control, either because
of national security concerns or because of specific domestic political issues. U.S.
negotiators believed that a request by European members for a broad exception for
such regional economic organizations as the European Union would have given the
European members a wholesale exemption from the agreement. The U.S. negotiators
believed this type of exemption would have allowed the Europeans effectively to
disregard the MAI obligations on national treatment and to discriminate in favor of
investments from other European Union member states.
72Ibid., p. 115.
Over the last decade, there has been a sharp escalation in the growth of
economic and tax incentives to influence the location decisions of firms. State, local,
and even national governments are skeptical of the economic benefits associated with
such incentives, but seem unable, by themselves, to retard their proliferation across
local, state, and national boundaries. Moreover, empirical analyses to date indicate
that economic incentives generally are not a decisive factor in where firms decide to
locate. Despite these results, there seems to be no reversal occurring any time soon
in the number and types of incentives state, local, and national governments seem
willing to offer. Members of Congress are concerned over the escalating use of
incentives between states that are competing for corporate investment, but Congress
has shown little desire to regulate state economic development programs. At the
international level, Congress may be required to address the issue of incentives if the
Administration negotiates successfully to include incentives as part of an
international agreement on investment.
Empirical analyses indicate that a broad array of factors, ranging from labor
availability and quality to market access, raw materials, and schools, may all play a
role in the location decisions of firms. Superior technology or advanced
manufacturing processes, however, likely give firms the initial advantage they need
to consider investing abroad. Once firms have made the decision to invest abroad,
a separate set of factors likely influence where they decide to locate. For some high
technology firms, taxes and other incentives may be important factors that influence
where they locate, but empirical research offers conflicting results on the role these
factors play. Part of this ambiguity arises from the importance specific factors may
play in locational decisions, especially since the relative importance of those factors
changes as firms proceed through a multistage process to decide whether and where
to invest abroad.
Nearly all economists agree that economic growth is determined at the national
level by broad, macroeconomic factors and conditions, but economic growth and
employment issues often dominate elections and political developments at the level
of state and local governments. As a result, political leaders at these levels feel
compelled to compete with other jurisdictions for jobs and businesses by offering
incentives even though these types of beggar-thy-neighbor policies have a dubious
track record. Few jurisdictions, however, seem willing to buck the trend and
eliminate incentives and subsidies to firms at the risk of losing investments or
At the international level, there is a growing movement toward liberalizing
foreign investment rules, especially among developing countries, where foreign firms
have become highly sought after as a source of capital and technology. These
developing countries have demonstrated that they are willing to use the types of
subsidies and incentives that developed countries have used for years to attract
multinational firms to their borders. Efforts by the developed countries over the last
two years to reach an accord on standardizing the national rules on foreign
investment have run into stiff opposition by consumer and environmental groups.
While various international forums likely will address the issue of incentives again,
the collapse of the MAI talks offers little assurance that incentives, subsidies, or a
multitude of other issues related to foreign investment will be resolved at the
multinational level any time soon.
Appendix A: Economic Development
Incentives of Selected States
Texas offers a broad range of programs and incentives to business investors,73
!The state's Business Finance office provides businesses with financial and
technical assistance, including securing funds for equipment, building
acquisition, and working capital for domestic and export activities.
!The state has three capital fund programs to promote economic growth in
rural areas of Texas and a Leverage Fund that is designated as a
"economic development bank" for cities.
!New or expanding businesses may qualify for special incentives under
Texas' Enterprise Zone Program.
!The Smart Jobs Fund provides grants to existing Texas businesses to
expand and create new jobs or retain existing jobs by upgrading the skills
of their current work force.
!The Texas Manufacturing Assistance Center provides assistance to small
Texas manufacturers seeking to upgrade their operations.
!Texas has 25 Foreign Trade Zones.
One of Texas' recent success stories is the January 1996 announcement by
Samsung Electronics that it would locate its first U.S. semiconductor manufacturing
plant in Austin, Texas. The City of Austin and the Texas Department of Commerce
offered to provide $2 million to train the 1,000 new employees needed at the plant.
The Texas Department of Commerce also aided Samsung with information on site
selection, sales and use tax exemptions, industrial revenue bonds, enterprise zones,
and permit and regulatory assistance.
California engages in a broad array of activities to promote exports and to
attract foreign investment.74 These programs fall under the general categories of
73This information on investment incentives and economic development was obtained
over the World Wide Web at the site for the Texas Department of Commerce
74This information on investment incentives and economic development was obtained
over the World Wide Web at the site for the California Department of Commerce
Economic Development and Business Development. The state also has a group of
programs focused on international sources of development. The Office of Foreign
Investment, which seeks to create jobs in California by attracting new industry to the
state and by expanding existing industry. There also is an Office of California-
Mexico Affairs, an Office of Export Finance, and Office of Export Development; the
state sponsors eight international Offices of Trade and Investment overseas to
promote exports and to seek out foreign investment in California. The offices are
located in Hong Kong, Tokyo, London, Frankfurt, Jerusalem, Mexico City, Taipei,
and Johannesburg. These offices provide in-country coordination and support for
state-sponsored trade shows, investment promotions, and business missions.
Under its Economic Development office, California offers a number of
incentives to businesses, including:
!Enterprise Zones (EZs) target economically distressed areas and offer tax
incentives to businesses which invest in EZs. In addition, Enterprise Zone
Hiring Tax Credits permit businesses to earn tax credits by hiring from
certain labor pools.
!Manufacturing Credits or Sales and Use Tax Exemptions include tax
credits for the purchase of qualified machinery and equipment; a new trade
or business in California can apply for an exemption from the state portion
of the state sales and uses tax due on manufacturing, processing, refining,
fabricating or recycling equipment.
!Business development programs include a range of programs designed to
assist local governments to retain, help expand, or attract businesses,
!Local Area Military Base Recovery Act (LAMBRA) activities designed
to create jobs in areas experiencing military base downsizing and closure.
California also has a wide range of programs and services administered by its
Office of Business Development to assist local government in their efforts to retain,
expand, and attract businesses. Business Development offers assistance through
enterprise zones and LAMBRA legislation similar to the Office of Economic
Development. In addition, the Business office sponsors a number of other programs,
!The Los Angeles Revitalization Zone was established to stimulate
economic growth, create jobs, and rebuild businesses within portions of
Los Angeles County that suffered physical and economic damage during
the 1992 civil disturbances.
!Team California is a state-wide network of economic development
professionals who work collaboratively to share information, to attract and
retain businesses, and to provide a link between businesses and the federal
and local governments.
!California uses Industrial Development Bonds, issued both at the state and
local level, to finance land acquisition, building construction, equipment,
architectural and engineering fees, and other incidental costs associated
with a project. In addition, California offers direct financial assistance to
businesses through three revolving loan funds and through loan
Ohio offers an array of programs and assistance to attract and retain
businesses.75 As a result of these programs, Ohio has been named the number one
state in attracting new facilities by site selection magazines. Through the state's
Department of Development, Ohio offers such financial assistance as loans, grants,
bonds, tax incentives and low-interest financing for fixed assets. The Office of
Business Development and Direct Foreign Investment structures incentive packages,
provides information on Ohio's business assistance programs and conducts site
searches for companies. Officials within the Business Development office review
state programs relevant to loans, tax credits, tax exemptions, training and
infrastructure programs and consider which would be the best mix for each
individual project. The Office also administers the following programs:
!The Site Selection System provides site and building information to
!The Business Development Account provides infrastructure grant
assistance to companies and/or communities for projects creating or
!The Roadwork Development Account provides road work grant assistance
for public road improvements and construction to communities and/or
companies for projects creating or retaining jobs.
Ohio has other offices which offer direct assistance to businesses:
!The Office of Tax Incentives administers various tax incentives, including
the Job Creation Tax Credit, which provides a corporation or a franchise
an income tax credit for creating at least 25 new jobs in the state. In
addition, the office administers the Ohio Manufacturer's Investment Tax
Credit, the Machinery and Equipment Investment Tax Credit, and such
property tax incentive programs as Tax Increment Financing, Community
Reinvestment Areas, and Enterprise Zones.
75This information on investment incentives and economic development was obtained
over the World Wide Web at the site for the Ohio Department of Development
!The Office of Financial Incentives engages in both fixed-asset lending and
loan servicing. In particular, the state's lending programs are comprised
of a Direct Lending Program, the Ohio Enterprise Bond Program, the Ohio
Pooled Bond Program, and the Ohio Statewide Development Corporation
!Ohio Job Creation Tax Credit program gives substantial state and
municipal tax reduction, which minimize capital expenditure to encourage
businesses to expand or to locate in Ohio.
!Research and Development Tax Credits give financial incentives to Ohio
companies to produce and perfect technologies and products.
!Ohio Export Tax Credits encourage and reward firms that export.
!Manufacturing Machinery and Equipment Investment Tax Credits
encourage small and medium-sized manufacturing companies to invest in
new machinery and equipment.
!Ohio Manufacturers Investment Tax Credits are non-refundable corporate
franchise income tax credits for a company that purchases new or retools
qualified machinery and equipment that is located in Ohio and is used for
Ohio also promotes exports for Ohio manufacturing and service companies and
encourages reverse investment in the state. The state's International Trade Division
assists Ohio businesses interested in new markets, expanding within a present market
or exporting for the first time. The Division works collaboratively with state-
sponsored trade offices in Brussels, Tokyo, Hong Kong, Toronto, Tel Aviv, and
Mexico City. These offices offer assistance to foreign companies seeking Ohio
businesses as suppliers of products and services and identifies Ohio companies
interested in joint ventures, licensing arrangements and technology transfers. The
state also offers export counseling by providing custom-tailored assistance in
international marketing and export finance to small and medium-sized companies,
and leads delegations of Ohio exporters to the world's leading trade shows.
New York state boasts of a number of factors which make it a prime location
for domestic and foreign investors: 50 percent of the wealth and 50 percent of the
population of the United States can be found within a 750 mile radius of central New
York, 20 percent of all U.S. merchandise trade flows through New York's ports.76
The state has ten regional offices which aid firms with comprehensive site and
building information, and analyses of economic, demographic, wage, tax, and utility
76This information on investment incentives and economic development was obtained
over the World Wide Web at the site for Empire State Development
costs. New York has placed a renewed emphasis on attracting foreign investment
and offers a host of tax credits to companies, including:
!Tax credit for building or for new capital investment.
!Tax credit for employing New York residents.
!Credit against corporate francise/income tax for research and development.
!40 Economic Development Zones which offer extensive tax credits and
discounts on electric power and wage tax credits.
!Financial assistance to companies which locate or expand a plant for
acquisitions of land, buildings, or machinery and equipment.
!New York state offers financial assistance in the form of direct loans,
interest rate subsidies, loan guarantees for working capital assistance, and
!The state offers financial support and technical resources to companies to
offset the cost of training employees.
!For companies interested in exporting, New York state provides
information about tariffs, industry specifications and government
The Illinois Department of Commerce & Community Affairs (DCCA) has
helped hundreds of firms over the last three decades locate within the state or helped77
existing firms expand their operations. From this experience, the DCCA concluded
that helping firms select their site is the most important way it can aid firms. It
argues that firms make a mistake by placing too much emphasis on the degree of
unionized labor, state and local taxes, and use of "business climate" rankings.
Nevertheless, the state has a number of tax incentives to encourage both existing and
new businesses: credits against corporate income tax for capital investments,
training, and employment. As an additional aid to firms seeking sites within Illinois,
the DCCA developed a computerized database with information about available
industrial sites and the communities in which they are located.
Illinois also has 91 Enterprise Zones (EZ), which offer a mix of state incentives
to encourage companies to invest within a zone. Each zone also offers a distinctive
set of such local incentives as property tax abatements, waiver of business licensing
and permit fees, streamlined building code and zoning requirements, and special
77This information on investment incentives and economic development was obtained
over the World Wide Web at the site for the Illinois Department of Commerce & Community
local financing programs and resources. Within Enterprise Zones, the state offers
!Sales tax exemption on building materials.
!Enterprise Zone Utility Tax Exemption: offers a tax exemption on gas,
electricity, and the Illinois Commerce Commission's administrative
!Enterprise Zone Investment Tax Credit: is an investment tax credit on
machinery, equipment, and buildings.
!Dividend Income Deduction: taxes are not levied on dividend income for
individuals, corporations, trusts and estates for corporations doing
substantially all their business in an Enterprise Zone.
!Jobs Tax Credit: allows a credit to businesses on income taxes for each job
created in a Zone.
!Interest Deduction: Financial institutions are not taxed on the interest
received on loans for development within an EZ.
Illinois also offers extensive assistance to firms looking to export. The state
was one of the first to organize a network of foreign trade offices and in providing
regional export assistance centers across the state. Illinois has Foreign Trade Offices
in the following seven cities: Brussels, Hong Kong, Tokyo, Mexico City, Budapest,
Illinois also has several programs through which it offers direct financial
assistance to businesses for industrial and commercial development. These programs
augment conventional sources of financing and are administered through four
different state departments.
Department of Commerce and Community Affairs
!Small Business Development Program: designed to provide direct
financing to small businesses with negotiable interest rates in cooperation
with private and public sector lenders.
!Participation Loan Program: works through banks and other conventional
lenders to provide financial assistance to small businesses that will employ
!Development Corporation Participation Loan Program: provides financial
assistance through a Development Corporation to provide financial
assistance to small businesses that provide jobs to workers in the region
served by the Development Corporation.
!Illinois Export Finance Partnership Program: a collaborative effort
between various Departments to help small and medium-sized Illinois
exporters gain access to working capital loans.
!Surety Bond Guaranty Program: assists small Illinois minority contractors
in obtaining bid, performance and payment bonds for government and
Development Finance Authority
!Industrial Revenue Bonds: issued on behalf of manufacturing companies
to finance the acquisition of such fixed assets as land, buildings, and
equipment, or for new construction or renovation.
!Direct Loan Program: provides loans to small and medium-sized Illinois
firms to purchase land or buildings, building construction and renovation
costs, and purchase machinery and equipment.
!Commercial Lease Program: provides commercial leases which allow
firms to consider the lease payments as expenses, thereby reducing their
Illinois Farm Development Authority
!Agri-Industries Guarantee Program offers guarantees for loans for land
acquisition, building construction and improvements on projects that
promote diversification of the farm economy.
Office of the State Treasurer
!Community Development Deposit Program uses state deposits to support
community development projects.