IN APRIL, AMAZON ANNOUNCED the 20 cities still in contention to be the
site of its new second headquarters (HQ2), promising that the winning
city would benefit from the company’s US$5 billion investment in
HQ2 construction costs and the creation of 50,000 new jobs. Cities
throughout the U.S. and Canada have tried to woo Amazon by offering
monumental tax breaks and monetary incentives.
But will the chosen city actually be a winner? Likely not, says
Aaron Chatterji, a professor of strategy at Duke University’s Fuqua
School of Business in Durham, North Carolina. When cities manage to
lure big companies like Amazon with tax breaks and other incentives,
he says, they do so to the detriment of the real drivers of the local economy:
entrepreneurs and small businesses.
In June, Chatterji published a proposal
in conjunction with the Hamilton
Project. Launched in 2006 by the Brookings
Institution, based in Washington,
D.C., the Hamilton Project is dedicated
to promoting innovative economic
policy. Chatterji cites research stating
that, each year, U.S. states spend US$40
billion on incentivizing big business.
Amazon is just the latest example: New
Jersey offered the company $7 billion to
build HQ2 in Newark; Maryland offered
Amazon a package of $8.5 billion in tax
credits, grants, and other incentives to
choose a site near Baltimore, according
to the Baltimore Sun.
Rather than pay out huge incentives
to large companies, states could do more
to boost their economies by using those
resources to encourage small business
creation and growth, Chatterji argues.
“Evidence suggests younger, smaller
firms drive job growth, and giving out
incentives to individual companies
disadvantages new firms. Also, the lost
government revenue can do significant
harm to the U.S. economy, leading to less
spending on schools and healthcare,”
he says in a July interview in Fuqua Insights.
“We need a different approach.”
In his policy proposal, Chatterji
recommends that the U.S. government
create the Main Street Fund, an intergovernmental
fund to be managed by the
Economic Development Administration
within the Department of Commerce.
The Main Street Fund would allocate
funds to each state according to its
population and economic activity. States
would receive these funds as a reward
for eschewing large-company incentives
and instead investing those monies “in
evidence-based approaches for improving
the grassroots environment for
entrepreneurship.”
At the same time, states that provided
new incentives to large companies would
see their Main Street Fund payouts
docked. In this way, the fund would
“nudge” states to refocus their resources.
Chatterji breaks down four types of
approaches that his Main Street Fund
would support. These include investing
in broadband infrastructure, offering
management training to small-business
owners, recognizing the credentials of
workers with out-of-state licenses, and
investing in high-potential early-stage
firms via resources such as accelerators
and capital programs.
Such a shift makes sense because
“young firms grow much faster than older
firms,” he writes. “This job creation is
significant: 20 percent of total job creation
comes from startups even though
they are 10 percent of all firms.”
Chatterji recognizes a few potential
downsides to the Main Street Fund’s
objectives. For instance, without incentives,
large firms might consider moving
their facilities to other countries. But
if the Main Street Fund was rolled out
slowly, it might foster environments attractive
to large firms for other reasons.
“Creating a stronger entrepreneurial
environment and building broad-based
infrastructure will also attract larger
companies, possibly offsetting any
negative effects,” he writes. “To the
extent that it is necessary to provide U.S.
businesses with subsidies, it should be
done at the national level in a way that
balances national economic objectives
and does not discriminate between
incumbents and startups.”
Read Chatterji’s proposal, “The MainStreet Fund: Investing in an EntrepreneurialEconomy.”