UNC-CH study shows international companies question N.C. business incentives' effectiveness

November 04, 1999

CHAPEL HILL -- North Carolina's multimillion-dollar incentives package to attract companies to the state are not important factors in the location decisions of foreign-owned firms, according to a University of North Carolina at Chapel Hill study.

The state's incentive programs ranked at the bottom of a list of 11 location factors considered by executives of 118 international firms in North Carolina surveyed by researchers at the Frank H. Kenan Institute of Private Enterprise.

Drs. Dennis A. Rondinelli, Glaxo professor of management at the Kenan-Flagler Business School and director of the Center for Global Business Research, and William J. Burpitt, senior research associate at the center and associate professor of management at Peace College in Raleigh, conducted the research.

They asked chief executive officers and other executives of foreign-owned companies in North Carolina to rank the factors that they thought influenced international firms to come to North Carolina or to expand their businesses in the state.

Executives ranked labor quality and availability, transportation, overall quality of living and the general business climate as the most important considerations affecting the decision to invest in the state. Tax incentives, location assistance from government agencies, government financing efforts and state marketing assistance ranked at the bottom of the list.

State subsidies to firms like Federal Express, DuPont, R.J. Reynolds, Nucor and QVC, along with William S. Lee Act incentives for smaller companies, were not thought to be crucial to international firms' decisions about locating in North Carolina, the study showed. The state has committed more than $1.72 billion in general and specific business tax relief and incentives between 1997 and 2006 to attract and retain firms.

Proximity to related businesses and educational quality were more important to firms in the Charlotte area. In other parts of the state, international businesses were looking for well-trained workers and access to road, rail and air transportation. North Carolina's quality of life also attracted many companies.

Most executives ranked education high on the list, but several said that the poor quality of schools in some communities discouraged them from expanding their operations there.

"These findings confirm the conclusions of other studies in the United States and abroad that state incentives play only a marginal role in the location decisions of private firms," Rondinelli and Burpitt said in their report.

"Such incentives can divert public expenditures from investments in human resources, quality of life, infrastructure and services that business executives consider more important in the location decisions."

States, counties and towns continue to provide publicly funded incentives to private companies even though most economic development professionals know that they are not effective, the researchers said. Public officials feel that they must have incentives to compete with other states.

"No state is willing to 'disarm' unilaterally," Rondinelli and Burpitt said. "In the future, effectively targeting location incentives to high-technology industries that most states now seem to favor may be even more difficult than targeting them to manufacturing industries."

The alternative is to de-emphasize targeted incentives and build the state's infrastructure and educational facilities that provide the labor and quality of life factors that seem far more attractive to 21st-century businesses than conventional incentives, they said.
Copies of the report, which will be published next year, are available by e-mailing requests to Rondinelli at dennis_rondinelli@unc.edu .

Note: Rondinelli can be reached at (919) 962-8201.

Contact: David Williamson, 962-8596

University of North Carolina at Chapel Hill

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