Offer It, and They [Still Won’t] Come: Should governments use money to lure companies?

Ever since Amazon’s country-wide fishing expedition, the question has drawn incredible vigor and debate. Even after the selection and their withdrawal from New York City however, the discussions seem to have died down but the answers are no closer. Those in favor argue for the long-term benefits, and worship it almost as a surefire way for economic growth. Those against are not much better— regarding any offer as a deal with the devil hellbent on gentrification and socioeconomic inequity.

To step away from the extremes of both ends, I want to restart the argument from ground-up. Or as the now turned-corporate-buzzword would be “from first principles.”

To start off, we need to make some basic assumptions on what the goals of the deal are. Though not exhaustive, I will think of them as:

  1. Introduce a new stream of future tax revenue
  2. Encourage the local/regional entrepreneurial and technological economy by employing locals to the new high paying tech jobs
  3. Help transform the existing infrastructure towards a forward looking culture and system to make it more resilient and strong against future economic and technological/social shocks
  4. The company investing in the area has such positive effects on points 2 and 3 that it brings in more companies that themselves have positive feedback effects for all points

Though it’s easy to quantify point 1 (as it is often the number thrown around within the arguments for the deals), it’s much harder to define or even make concrete goals for the others. I think it fair to say however, that the point of the latter three are to create an almost second Silicon Valley— as defined as a central tech hub associated with job and quality of life growth.

Photo Credits to Carles Rabada

With the goals in place, let’s have a brief examination on possible outcomes. For simplicity’s sake, I have but two outcomes in mind: success and failure. Success means that the company takes the deal offered. Failure means they don’t.

The big issue is that failure is very real. Take Amazon’s bid, a tale of but 2 winners for a country of 50 states. The biggest problem with failure (and success arguably) is a question of moral hazard. Winners suffer less as they reap the presumed rewards, but losers have shown to the world their soft underbelly: “This is how much I will beg you to come to me. Do not otherwise.”

But what about success?

In the case of success, we have few to go on. Deals surrounding modern large technology companies are almost by definition more new, and it may be decades before we see whether or not the trade was worth it for places like Washington. Instead, we might have to refer instead to deals done for traditional companies such as Wisconsin gave to Foxconn or Indiana to Carrier.

In the former, Foxconn has taken a deal but there are reports that much of their site remains offline— and the ones that are not may be employing primarily non-local workers. Carrier continued to lay off workers and invested in automation— seeking to eventually relieve the labor-intensive workforce that remain. They did however mention increased hiring for highly skilled technical workers.

If the conclusion for traditional manufacturing companies is that incentives will only in turn be used to invest in capital that seeks to reduce labor or replace it with capital— then it can be safe to say that it makes no sense to offer deals to those companies. The only compensation they offer will be rent and temporarily spikes for local employment.

But we’re talking about technology companies, and they must be different… right? Yes and no. The positive news is that they somewhat are. Software engineers, system architects, product designers, and other creatives can not yet be replaced with capital. That’s why the reward of every deal involved the word “high-paying jobs.”

Unfortunately, the “no” is that these companies have the same motivations as traditional companies. The gears that run it may be different, but the minds that do are not. Like our manufacturing jobs, software projects are outsourced to large foreign firms like HCL all the time (much to the chagrin of our QA teams). As the rest of the world catches up with software and technology education, this will become especially so— as the gap in skill decreases but costs increase. Wait another few decades and perhaps even these jobs will see their demise in automation to our AI overlords.

The idea that companies will be here to stay and provide the benefits persistently for just one deal is idealistic and repeatedly proven untrue.

That draws us to the presumed best case “realistic” scenario: We offer. They accept. They move after the deal is over to the next bidder, whether it be through an “HQ3” or simply just pausing local growth.

In that case, was the incentive still worth it? I would say hardly. Technology jobs are difficult— both to find and employ. Facebook in San Francisco employs people the world and country-over because the best software engineer for Instagram may be applying from Montana and not California. By virtue then, the physical location of the company only acts as a preference/bias for jobs to be filled by local residents. It is a strong bias, but not enough as tech-jobs are more open to remote work and receptiveness to relocation due to their higher salaries.

Yet money will still be introduced to the local economy. So will the new populace and their ideas and potential drive for entrepreneurialism. Is that not enough? Probably not. Unless one of them sparks some butterfly effect that creates the next decacorn (and even then) or the company prompts another to come (also unlikely, density and attraction of labor follows a threshold before inflection rather than by specific company), each individual company entrance will likely not have a persistent effect on the region. That’s because when they move after their deal, their top jobs and workers often go with it— leaving behind ghost cities just like the oil rush before it.

If that’s the case, and deals aren’t worth it— what does it mean for us and our local governments? Just let the dice roll and hope the next Amazon or Facebook grow in our backyard? Definitely not.

In the most basic of building blocks, I believe companies have 3 pressures: Costs, Market, and Resources. We’ve only looked at the first, but there’s a whole other world of incentives.

That though, will be in part 2.

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