When cities, counties, or states provide corporations with big tax breaks to lure in factories, corporate headquarters, and other facilities, the economic benefits may go beyond the new jobs and investments the companies bring to their regions.
A new study co-authored by a UC Riverside scholar published in the Journal of Accounting Research suggests these tax incentive packages can spur innovation outside the gates of the businesses lured into communities.
Large tax subsidies known as “Megadeals” — those worth more than $50 million — were found to increase innovation among nearby businesses and create fertile ground for startups by bringing skilled inventors, technological expertise and new ideas into a region, said Aruhn Venkat, an assistant professor of accounting at UCR’s School of Business and a co-author of the study.
The researchers examined 115 Megadeals approved between 1990 and 2014 and gauged their impact on innovation by looking at the number and value of patents filed by businesses in the counties where the subsidies were awarded.
“We basically found that in counties where there’s a Megadeal you see more positive patenting among local firms,” Venkat said.
A substantial increase in subsidy size — what statisticians call a standard deviation — was associated with roughly a 3.3% to 4.9% increase in patent filings by nearby companies. At the county level, that translated to about two to three additional patents each year.
The researchers found evidence that the arrival of a large, technologically advanced operation can spread expertise beyond the company receiving the subsidy. Highly skilled workers may eventually leave for jobs at other local businesses or strike out on their own.
One of the best-known Megadeals involved Tesla, a leading manufacturer of electric vehicles. In 2014, Nevada approved $1.3 billion in tax subsidies for the company, which built a $5 billion battery factory near Reno known as the Gigafactory.
In that region, Venkat said, former Tesla engineers left the battery factory to start businesses focused on recycling battery materials. The engineers had developed ideas for retrieving and reusing lithium in spent batteries that otherwise might have been discarded, he said.
In such cases, workers take knowledge and expertise gained at the subsidized company and apply it to new problems and business opportunities in the same region.
“You might have that kind of knowledge spillover occurring between Tesla or Amazon or Microsoft and local companies, which leads to those local companies maybe learning something new and innovating on their own,” Venkat said.
Workforce training can spread knowledge even further. Venkat said some tax incentive agreements require companies to work with community colleges to develop programs that teach technical skills needed by the subsidized businesses.
But not everyone who receives that training ultimately works for the company. Some take those skills to other employers or potentially use them to start businesses of their own. The result can be a broader pool of technically skilled workers and an environment more conducive to innovation throughout the community.
The study adds nuance to the often fierce debate over tax incentives that pit communities against one another in competition for major employers — and whether such deals create enough public benefit to justify their costs.
Venkat cautioned that the study was not intended as a comprehensive cost-benefit analysis of Megadeals. Previous studies examining outcomes such as jobs and business formation have often found limited benefits, he said. But as long as governments continue offering the incentives, it is important to understand their full impact, including less tangible benefits such as innovation.
He added that such innovation and workforce benefits may not follow every Megadeal, but they occur on average.
“I’m not saying they always occur, but they do occur for the average Megadeal, which I think should be considered when you’re evaluating these sorts of tax subsidies,” Venkat said.
The study is titled “Megadeal Subsidies, Local Spillovers and Corporate Innovation.” Yoojin Lee, an associate professor of accounting at Cal State Long Beach, and Shaphan Ng, an assistant professor of accounting at Singapore Management University, are co-authors.
