Incentives vs Value Propositions, Wealth through Ownership, & Generation Toolbelt
Small Cities Weekly | 04.05.2024
As part of the work we are doing on the Small City Segment, we send out a brief weekly post of thoughts, links, and research in progress that reflect the week’s work. I’d love to hear from you if you have any thoughts, questions, disagreements, or things to add. Please forward this on to people you think might enjoy reading it.
Incentives vs Value Propositions
A paper came out this week that explored the effects of federal policies that incentivized manufacturing firms to establish a presence in smaller regional hubs in Japan in the 1980s (see summary & commentary here). The goal of the paper was to see, longitudinally, the effects of the policy and try to relate it back to the current federal regional tech hub initiative that is doing something similar here in the US.
From the summary and commentary:
“Our results cast doubt on the ability of place-based incentives extended to large multi-plant firms to stimulate peripheral labor markets,” the researchers write, adding: “Our key takeaway is that local capital subsidies may fail to mitigate regional inequality but can result in net gains for the aggregate economy.”
The simple explanation of the program was that Japan allowed firms to accelerate their depreciation schedule for certain physical assets if they built plants in these areas. This decreased their annual tax liability, freeing up cash for further investment. Except what they saw is that those financial gains were reinvested back into the original core plants, not the new ones.
The good news is that the companies did make the initial investments, jobs were created, and the firms didn’t pull out after the incentive ended.
The bad news is that there wasn’t really a compounding effect - all the future gains went toward plants that were in already-established hubs. (This has interesting crossover with a paper that came out last year on “regional hinterlands” that we discussed here.)
This all got me thinking about the difference between offering incentives and offering value propositions. It seems that, while the tax break was beneficial as an incentive, it didn’t contribute to the strategic competitive advantages of the companies that used it. Its universal appeal to these companies is also what made it limited in its long-term effects. Everyone can use more free cash flow - but that cash is going to be invested in the competitive advantages they are trying to build. If the incentives don’t help further those aims in the target region, it’s not surprising that the cash gets used elsewhere. After all, they were deciding to invest elsewhere before the incentive - that was part of the problem to be solved.
I don’t know exactly how you go about designing different policies or if it is even feasible - this is hardly my area of expertise. But it does seem fundamental that if attracting investment from outside firms is part of a long-term playbook, offering something strategic, and not just beneficial, is a place to start.
Chasing tech stacks today doesn’t look anymore more appealing to me than chasing smokestacks was in decades past.
Links
You can find links from this and all previous editions here.
Redefining the American Dream: From House Keys to Business Keys, David Roos, Core Innovation Capital
This leads to the conclusion that there’s a promising alternative to our staged path to the American Dream– own businesses. Coincidentally we are primed to go through a massive business turnover over the next decade. $10T of small-to-medium sized private businesses (SMBs) need to be transitioned over the next two decades from Baby Boomers to the next generation. Diving deeper into the numbers, 2/3rds of family-owned businesses do not have a succession plan and only 30% of businesses ultimately find a buyer. Instead of spending time finding homes for ourselves, let’s find the future homes for these businesses.
I’ve mentioned in the past (here and here) of this newfound interest in employee ownership and innovation to make it more accessible. There is something really compelling about this argument above - and I think it gets even more compelling as people worry about more technology coming into blue-collar work. The incentives shift dramatically when employees own the productivity gains introduced by technology, and it could mean a much more aligned set of incentives for its adoption.
How Gen Z Is Becoming the Toolbelt Generation, Te-Ping Chen, WSJ
Demand for trade apprenticeships, which let students combine work experience with a course of study often paid for by employers, has boomed lately. In a survey of high school and college-age people by software company Jobber last year, 75% said they would be interested in vocational schools offering paid, on-the-job training.
The rise of generative AI is changing the career calculus for some young people. The majority of respondents Jobber surveyed said they thought blue-collar jobs offered better job security than white-collar ones, given the growth of AI.
This is an interesting dynamic, especially when paired with the ideas above about employee ownership and the wave of succession plans needed coming in small businesses. The transfer of ownership of HVAC, construction, small-scale manufacturing, and other skilled-trade businesses to a younger generation of people who have apprenticed in those trades is an example of the kind of strategies that small cities could be well positioned to act on.
South Bend is vulnerable to lead poisoning — here’s how ND-LIT can help, Gwen O'Brien, University of Notre Dame
Lead exposure is suspected to be a significant issue for South Bend since 80 percent of the city’s homes were built before 1978. State data from 2016 revealed parts of South Bend had some of Indiana’s highest rates of children with elevated levels of lead in their blood.
One of the more under explored areas of the affordable housing conversation is how to use the existing, although older, stock of housing. This strategy faces its own issues though - things like lead, energy efficiency, and bringing systems up to code. There are some interesting strategies being explored here by Notre Dame in South Bend, but I imagine there are many other paths that could make this a more accessible strategy.
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