Innovation Online

By William Graves

North Carolinians are uncomfortable with economic development incentives. The state’s recent payment of more than $280 million to Dell Computer of Round Rock, Texas, to build a manufacturing facility in Forsyth County was greeted with a mix of elation and trepidation. The elation was a product of a visible success in bringing “new economy” manufacturing jobs to a region that was rapidly losing “old economy” employment in textiles and furniture. The trepidation was from those who performed an informal cost-benefit calculation: North Carolina paid $205,000 per job that Dell says will pay an annual salary of $28,000.

Such payments are increasingly necessary in an environment where geographic advantages no longer assure economic growth, but the expanding cost (and declining returns) of public subsidies for private firms has magnified the public’s discomfort with the process. The growing debate on the effectiveness of using public incentives to attract private firms has yet to identify realistic alternatives to the current incentives policy.

I propose there is a different and viable economic development policy available, evident from an examination of the state’s recent history. Since 1990, Mecklenburg County has added 175,000 jobs, nearly 20% of the state’s total. Much of this growth comes from two local firms that are now among the state’s largest employers, Bank of America and Wachovia. Charlotte’s two banks made significant investments in their hometowns in order to enhance their competitive position in the global economy. The dramatic changes that have occurred in Charlotte’s economy are largely a result of this private investment. This level of corporate participation in economic development presents a compelling alternative to the current paradigm which views state subsidies to be a necessity for job creation.

Privately Funded Economic Development

Charlotte’s redevelopment was necessary to create a city that met the geographic requirements for the headquarters of a major bank. First, banks need a prominent and prestigious location for their offices in order to appeal to their depositors’ need for security – thus downtown locations are mandatory. Second, since banks compete for executive talent in a global market, they must draw workers from other financial centers such as New York, San Francisco and London; therefore, they must be located in a place which offers a similar level of urban amenities in order to successfully recruit executives.

While Charlotte has been home to North Carolina’s largest banks for more than half a century, its downtown was openly ridiculed throughout the 1970s, 1980s and early 1990s. It was viewed as either dangerous (its police district had the highest homicide rate in the U.S. at one point during the 1970s) or boring (the Atlanta Journal-Constitution labeled Charlotte “the city that always sleeps” in 1994). In spite of its reputation, this urban setting served as the backdrop for one of the most rapid expansions in financial industry history—Bank of America’s transformation from a regional bank into the first truly national bank.

As early as 1979, Bank of America became aware that the city of Charlotte was meeting few of its needs. Its increasingly suburban customer base viewed downtown with disdain. And more critically, the bank faced difficulty recruiting the executives it needed to support its expansion beyond North Carolina. Arriving executives were appalled to find that Charlotte was simply a collection of suburbs that offered none of the urban amenities to which financial industry executives had become accustomed. It was clear that Charlotte’s image was an impediment to the bank’s planned expansion in the 1980s.

Faced with a recruiting crisis, Bank of America had three options. First, it could leave Charlotte and relocate its corporate headquarters to a city that appealed to its new hires. Second, it could appeal to the city to revitalize itself in ways better suited for a major financial firm. Or finally, it could rectify the problems associated with its hometown on its own.

Corporate relocation was a feasible option, given Bank of America’s voracious acquisition of banks from larger cities. However, relocation was rejected, in part because Charlotte was the home of many of the bank’s original executive core, executives who espoused a strong allegiance to their communities. Publicly funded urban revitalization was politically impossible since the vast majority of Charlotte’s residents lived and worked in suburban areas and thus resented significant public expenditure on city center redevelopment. Because of this political situation, privately financed urban revitalization was the only viable option for Bank of America to create conditions that would accommodate its expansion.

Charlotte’s downtown redevelopment was financed largely by the Community Development Corporation (CDC), a non-profit subsidiary of Bank of America. The CDC provided more than $11 million in subsidized loans to individuals willing to refurbish (and inhabit) downtown housing by 1979. In addition to subsidies for loans to individual homeowners, Charlotte’s private firms, led by Bank of America, invested more than $2.3 billion dollars in the center of the city by 1995. Much of this was used to create new office space, multi-family housing and space for retail and entertainment activities. Public expenditures on downtown projects during this period totaled less than $300 million; the majority of these funds were for infrastructure unrelated to banking such as a new courthouse and jail.

By 2005, private investment had wholly revitalized Charlotte’s center city. The CDC had initiated the creation of residential space for nearly 10,000 residents at a variety of price points. In addition, CDC and corporate investments created one of the largest concentrations of office space in the state, daycare centers, grocery stores, and an entertainment district. From a corporate perspective, the addition of more than 10,000 jobs (with an average wage of $85,000) to Bank of America’s Charlotte offices suggests the redevelopment was successful. The visible presence of residents and visitors downtown after working hours suggests the public has embraced the redevelopment as well.

The most striking characteristic of Charlotte’s downtown redevelopment was the source of its funding. Comparatively little public investment was used in the redevelopment process. Since the use of private investment to create economic infrastructure is almost unheard of in this era of public subsidies, why did Bank of America’s finance this economic development project?

Restarting the Growth Machine

Private companies were the primary financiers of economic development projects in the pre-global economy. Most firms were dependent on the economic health of their local markets to ensure revenue growth. Bank of America’s investment in the Charlotte economy is, in part, a product of this history. Before North Carolina’s banks were permitted to expand out of the state, the Charlotte market was Bank of America’s primary profit center. Promoting Charlotte as a great place to live resulted in more deposits, more loans and greater profits. Banks, real estate developers and utilities formed an informal coalition that actively pursued policies that would facilitate job growth in the region.

Such corporate growth machines have produced great success in North Carolina. The state’s most dramatic example of privately funded economic development was the creation of Duke Power Company out of the earnings of James B. Duke’s American Tobacco Company. Because the electric utility was among the first in the South it was forced to stimulate industrial development in order to operate profitably. This industrial development fulfilled Duke’s desire to contribute to the economy of his home state as well as fund his charitable endowment for the Carolinas.

Unfortunately, these growth machines were destroyed by the emergence of the global economy. Once firms began to operate in national and global markets the significance of home markets declined. From an economic perspective it would have clearly been in Bank of America’s best interests to simply relocate to a bigger city in order to facilitate hiring. However, Bank of America had strong local connections that were the product of the firm’s creation and maturation within North Carolina. These connections led to the recreation of the corporate growth machine and dramatic investments in the bank’s hometown.

Global firms, which lack personal ties to a region, are firms that have little motivation to make community investments. Profits generated in new North Carolina facilities will be expatriated to their home states. These placeless firms are driven by economic forces to accept public incentives and remain only until a better deal can be cultivated elsewhere. These same economic forces doom state subsidies for placeless firms to low returns and limited local impacts.

If Charlotte’s example suggest that the state has more to gain from locally grown companies than the visiting firms that the current incentives policy attracts, then it becomes imperative to restructure the current policy to promote privately financed economic development.

A Sustainable Economic Development Policy

Given the growing competition between places for jobs, a statewide economic development policy is a necessity of modern times. However, the current system, that emphasizes public subsidies for private facilities, appears to be unsustainable given the rapidly escalating costs of these programs. Charlotte’s recent experience tells us that private firms are willing to fund economic development in certain contexts.

It is firms that are strongly linked to their communities that are likely to be willing participants in local economic development. Because of this, the most efficient use of public economic development funds may be to invest in programs that will encourage and facilitate entrepreneurship. Loan guarantees, community-based finance, business incubators and the facilitation of intra-state technology transfer from the university system into small firms may combine to create a more entrepreneurial environment in North Carolina.

In the long term, some of these companies will grow to the point where they are willing and financially able to reinvest in the communities that fostered them. Indeed, a long-term community reinvestment obligation could be a contractual element in any financial assistance from the state.

In addition to yielding greater benefits, investing in entrepreneurship has considerably lower costs than the current policy. Dell’s $284 million could have been used to seed 56 startups at $5 million each. Smaller investments would facilitate a geographically targeted strategy that could yield broader benefits to the state’s economy.

Admittedly, this is a risky process that offers few economic benefits in the short-term. However, in the long-term, restructuring North Carolina’s current economic development policy to direct incentives to emerging firms rather than focusing payments to lure large out of state firms will build the strongest state economy – one that will eventually finance its own growth and allow state funds to be used to benefit all citizens, not just the employees of a few out of state firms.

William Graves is a GlaxoSmithKlineFaculty Fellow at the Institute for Emerging Issues and an Assistant Professor at the University of North Carolina at Charlotte.