More than money: Alternative incentives that benefit companies and communities

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Construction in Raleigh, N.C.

Post adapted from Smart Incentives

Specialized services can complement financial incentives, while taking the concept of a partnership between business and community to a new level. Guest blogger Swati Ghosh, the International Economic Development Council‘s Director of Research and Technical Assistance, reports below on an interesting new paper addressing these and other alternative incentives.

Of all the tools that economic developers use to attract businesses to their community, incentives are the most controversial. Typically financial in nature, incentives are direct subsidies to businesses in the form of tax breaks, loans or grants. Proponents maintain that such subsidies are necessary to grow jobs locally as they reduce the cost, or risk, of doing business in a community. Critics, on the other hand, argue that there is no direct link between economic activity and such business subsidies, and some even suggest that they are a drag on economic growth.

Economic developers should closely follow an emerging alternative – programs and services that assist businesses but are not direct financial subsidies. Termed alternative incentives, these are investments in community programs that strengthen the business climate or that help a particular business in a way that benefits the broader community. They are a win-win: For businesses, alternative incentives can reduce the cost or risk of doing business in a community, yet communities retain these investments even if a firm shuts down or relocates to a different community.

IEDC’s Economic Development Research Partners program has developed a new paper focusing on alternative incentives. It is not an argument against the use of financial incentives; rather, it advocates for increased use of alternative incentives either alone or in conjunction with financial incentives. The paper, “More than Money: Alternative Incentives that Benefit Companies and Communities” (PDF), examines five categories of alternative incentives:

  • Talent/Workforce development
  • Real estate and permitting
  • Research and data
  • Networking and promotion
  • Infrastructure improvements

The paper is based on a survey of the IEDC membership to understand usage of over 40 different types of alternative incentives. It also includes several examples of organizations that have successfully utilized alternative incentives for business attraction and expansion, alone or in conjunction with other financial incentives. The paper concludes with recommendations for ways that economic developers can use alternative incentives effectively:

  • Focus on building relationships
  • Examine your organization’s strengths and utilize them creatively
  • Offer a wide spectrum of services
  • Bring along the key stakeholders
  • Focus on the needs of the community

As scrutiny, clawback provisions and other restrictions on the use of financial incentives increase, it may be beneficial to examine other options to support businesses. Alternative incentives not only stay in the community, but bring less of a burden in terms of monitoring and legal costs – benefits that every community and EDO can agree on.