Assessing the Need for Incentives

Voice of the Practitioner

…[Business owners] They’re not going to make a decision [based solely on incentives] even if they could build for free. What if distribution costs go up 70% at a certain site? They’ll eat up the free money (the incentives) within a year, and then what? They can’t make decisions just on incentives. They need to know where they need to be.
Rob Sparks, Executive Director, Corporation for Economic Development | Madison County, Indiana

Foreign investors weigh many factors, including incentives, before deciding to establish, expand, or relocate business operations. In the initial stages of the location decision process, incentives are useful as marketing tools, but they often are but one consideration in the determination about whether the region is a good fit for the prospective investor overall.

In the latter stages of a location decision, if multiple locations have similar costs and advantages, incentives may tip the balance for one location over others being considered.

Incentives can also make a difference if a region that is otherwise a good fit has a competitive weakness that a local investment can help overcome, such as a training program customized to the company’s needs or an infrastructure project that makes the site more accessible quickly.

Potential Activities

  • Identify typical barriers (e.g., tax policies, pools of unskilled or unemployed workers, high energy or land costs, etc.) that may require financial incentives to offset costs.
  • Examine the mix of incentives to determine how each addresses the most significant barriers.
  • Develop a consensus with partners on a philosophy and policy guiding when to use incentives and when not to use incentives.


The desire to attract the “right” kind of FDI  

It is understandable that authorities compete fiercely to attract FDI that creates jobs and helps revitalize local economies. Most economic developers are familiar with the case of the BMW plant as a driver of broad economic growth in Greenville, South Carolina. BMW received $130 million in incentives in the early 1990s, including tax incentives, road improvements, and job training. BMW also invested some $2.2 billion in the region and created more than 5,000 jobs, in addition to thousands more created by the automotive parts suppliers and research facilities that subsequently invested in the area. But such investments do not always succeed, and money spent on incentives can be inefficient, wasted, and even a drag that precludes other more important investments that a region could make instead. For example, the failure of Mamtek’s $65 million investment in 2011 in an artificial sweetener plant in Moberly, Missouri sparked debates on government subsidies for foreign investors.  Uri Dadush, 2013  


Checklists and Guides

Tim Bartik, What Works in State Economic Development Policies (2011). This document (pp. 1-9) guides localities through cost-effective economic development policies, recommending targeting business incentives on high-wage businesses that are most likely to create net new jobs.

OECD Checklist for Foreign Direct Investment Policies: Competition Policy Supplemental Questions (2003). This checklist (pp. 10-22) guides readers through the organizational framework around establishing and improving a competition policy.

OECD, Policy Framework for Investment (2015). This report (pp. 59-63) provides a thoughtful discussion for evaluating the costs and benefits of incentives, and offers some core principles and questions to guide policy decisions.

World Bank, Using tax incentives to compete for foreign investment – Are they worth the costs? (2001). This report (pp. 21-24) uses an academic approach to demonstrate the high cost of tax abatements.