Monday, February 24, 2014

Launch Pad Legislation

The recent House Bill 4343 introduced in West Virginia's legislature seeks to entice companies with "state-of-the-art" technologies to setup their businesses in the state. Whenever you hear governments talk about encouraging economic activity you have to wonder how they plan to go about accomplishing those ends. Politicians have a finite amount of tools they can use for encouraging business activity. This bill mainly looks to institute tax breaks for manufacturers of certain technologies*. 
So how effective at attracting business activity is the method of offering tax breaks and other subsidies? The effect of this political action can be examined with some basic economic thinking. If a government offers privileges to certain businesses, it stands to reason that those businesses will notice and be more likely to locate within the area of that government. But there are multiple surrounding governments, in this case different states, where a manufacturer can choose to locate a company. If those other states offer the same or similar privileges, the company and its directors have no incentive to choose one state above the other. Therefore, if West Virginia offers a tax break to companies that is similar to a tax break in Virginia, Ohio, and Kentucky a company choosing between the four still has no particular reason to choose West Virginia. Under such a scenario, the best that can be said for the tax break is that it "stays competitive" with the enticements of other governments.
The bill states in its introduction, "West Virginia has not done a good job to position itself for economic development in the new economy, which largely can be located anywhere in the United States or for that matter, the world." If the businesses this bill is trying to attract can be located anywhere in the U.S., then using policies that can be enacted anywhere in the U.S. is not a selling point. It is not a comparative advantage to any particular state. That is, it does not use the existing skill sets and infrastructure particular to a certain people to attract business. For example, if a nanotechnology company is trying to decide where to locate its operations, it will look at a variety of factors. Two of the main factors will be the existing infrastructure and skilled workforce of an area. A nanotechnology company looking at Indiana would see that Purdue University has the Birck Nanotechnology Center that produces the research and educates the students needed for its business. If it then looks at West Virginia and sees no existing research facilities or workers skilled with nanotechnology, it will not be swayed to locate in West Virginia solely by tax breaks.
This is not to say that a state lacking high technology will never host companies producing it. Those states with high-tech companies had to start somewhere. But the path to being the home of specialized industries is more difficult than offering financial incentives. It starts with existing resources. Then, governments or individuals with the necessary funds can concentrate their resources into a very particular sector. That attracts knowledge workers with complimentary skill sets. Out of this base of workers some will create new companies that go on to benefit the rest of the state. This is one logical way to develop new economic activity, but there is no formula or easy fix. If there were an easy policy solution, every politician would use it and garner the praise and respect for instituting it. 

*Among those listed in the bill are: aeronautics, biotechnology, materials science, nanotechnology, homeland security, photonics, and alternative fuel vehicles.

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