When Amazon announced it would pull out of its HQ2 project in Long Island City due to local opposition, many were shocked. How could local residents oppose a deal that would generate 25,000 jobs and $27 billion in tax revenues for a relatively meager $3 billion in tax breaks? It just seemed illogical and bizarre.
Yet look closer and the concerns do not appear to be completely unfounded. You only have to look at the recent situation with Foxconn in Wisconsin, where massive tax breaks led not to prosperity, but to a string of broken promises, to see the perils. While the Amazon deal was vastly different, the pitfalls of these kind of transactions is very real.
At the same time, New York doesn't seem to have trouble attracting businesses without sweetheart deals, despite high taxes. In much the same way technology and entertainment companies continue to flock to California. So the real question is not the merits or demerits of any particular deal, but how does a region become an industrial center in the first place?
In the 1960s and 70s, Route 128 outside of Boston was the center of technology, but by the 1990s Silicon Valley had taken over and never looked back. As AnnaLee Saxenian explained in Regional Advantage, the key difference was that while Route 128 saw itself as a collection of individual companies, Silicon Valley saw itself as an ecosystem.
That led to a major difference in tactics and outcomes. The Boston based businesses, for example, lobbied for tax breaks to increase profitability, while the Silicon Valley firms pushed for community colleges and better infrastructure to support an expanding workforce. Those investments accelerated the region's growth.
Additionally, while the Boston-based companies were highly insular, the Silicon Valley firms were highly collaborative, both with each other and with universities like Stanford and UC Berkeley. Talented engineers would come to the valley, start businesses and make their fortunes. They would then invest in other engineers like themselves, accelerating the virtuous cycle.
While in my own personal conversations with Saxenian she was careful to stress that many of the differences were due to a unique confluence of forces at the time, there's much we can learn from Silicon Valley's rise and Route 128's concurrent decline. The best way to support businesses is by empowering them to succeed.
Reinvigorating an Industrial Base
Unlike Silicon Valley, which before the rise of the tech industry was largely made up of farmland and relatively undeveloped, Chattanooga, Tennessee was once a great industrial center. Yet by the 1980s, the city was in deep decline. Much like many formerly prosperous Rust Belt cities, it seemed that jobs had left for good.
Yet as a report by Brookings explains, things began to turn around in the 1990s. It began with a plan to revitalize its riverfront area to attract tourists, with the hope that would attract businesses to serve them. That initial project led to further efforts to build a state-of-the-art aquarium, improve the downtown area and revamp the education system.
With an improved urban environment and a better educated workforce, jobs began to return. At first, many of these were in tourism related industries, but as Chattanooga became known as a great place to do business, it began to attract others as well, such as finance and insurance companies. Jobs increased and tax revenues rose.
The Brookings report also noted other cities, such as Akron, Ohio and Louisville, Kentucky that have gone through similar transformations in recent decades. In each case, it was noted that the key to success was deep collaboration between government, business and the non-profit community to increase the capacity of the region.
The Rise of Advanced Manufacturing
While much attention over the past few decades has been focused on digital technology, the future will be based more on atoms than bits. Rapid advancement in areas like materials science, genomics and robotics will drive innovation in the physical world much like computer technology did with the virtual world. McKinsey calls this shift Industry 4.0.
The transformation underway now, however, will be fundamentally different than the digital revolution in many ways. First of all, rather than being centered around one technology, the microchip, we're hitting three inflection points simultaneously. Second, the mix of technologies and industries wil be far too complex to be dominated by a single region, like Silicon Valley.
What's most exciting is that this new wave offers great opportunities for state and local governments that have the will to make long-term investments. I visited one facility in Detroit, partially funded by the state government, that was a partnership between state universities, private corporations and the Manufacturing Institutes set up under the Obama Administration.
The purpose of the facility is to help companies develop and test advanced composite materials and lightweight metals. That helps local businesses, such as car manufacturers, build innovative new products that create jobs. Just as importantly, centers such these create unique capabilities and skill sets that attract other companies and talent to the region.
It's Not Any Particular Node, but Networks, That Drive Prosperity
Everybody likes to have a tax break, but there is little evidence that those types of incentives contribute significantly to competitiveness and innovation. California and New York rank at the bottom of the Tax Foundation's Business Tax Climate Index, but have thriving innovation economies. At the same time, of the three states named as the most innovative in 2018, only one, Washington, has low tax rates.
The reason why is that it's not particular nodes, but networks that drive innovation. Regions like Silicon Valley and New York thrive not because they aggressively lure companies to locate there, but because so many feel that they have to have a presence there. Despite the pullout, Amazon still says it's going to be adding jobs in New York and Google Google recently announced a billion dollar expansion in the city with no incentives at all.
At the same time, many states court business so aggressively that they deplete money from their coffers that could go to build up resources that allow an ecosystem to flourish. If you're not investing in education, infrastructure and science, you simply won't be able to support high value industries no matter what incentives you offer.
So maybe losing HQ2 isn't such a bad thing for New York. While 25,000 jobs is nothing to sneeze at, it is just a fraction of the 71,000 jobs created in the city in just the last year. The fact is, businesses will continue to go there because the region offers unique assets that makes it attractive. They will go there because its good for business.