Over the past year or so, there has been a notable slowdown in business activity. The causes are varied, of course, but clearly recognizable.
The domestic and global weakness dampened the demand for microelectronics, telecommunications equipment, and other manufactured goods. The terrorist activities on September 11 significantly affected airlines and tourism, as well as many additional sectors. Major disruptions were also caused by the dot-com collapse, the demise of several energy trading companies, corporate scandals, and an enduring drought of record proportions.
So now what do we do? There are many steps that can be taken to enhance the state’s economic status, and later on I’ll talk about more of them. But for now, let’s look at the importance of economic development incentives and marketing.
In a perfect world with perfect information, all economic activity would invariably gravitate to its optimal (least cost) location, and there would be no role for incentives or aggressive marketing programs. But there is no perfect world. Thus, in the “real” world, both are essential elements in the competition for expanded investment and job opportunities. In fact, a variety of factors have coalesced in recent years to make them even more important.
First, labor and capital mobility have greatly increased. Skilled workers in key growth sectors have shown willingness to relocate in response to potential opportunities, and today’s financial markets efficiently move capital and financial resources to their highest and best uses.
Second, the site selection process has become more sophisticated. Firms now recognize they have substantial “bargaining power” with state and local governments and are using it to effectively reduce overall costs.
Third, increasing globalization has brought greater attention to all aspects of costs. Companies, particularly those in growth-oriented manufacturing sectors, must offer a mix of output, innovation, and profits that is competitive on an international scale. Consequently, corporations are undertaking massive efforts to improve efficiency and reduce costs.
Fourth, firms are now held to higher levels of public scrutiny in debt and equity markets than has been the case historically. As a result, all costs receive a great amount of attention. Thus, in seeking new locations, lower tax rates and specific economic incentive packages become extremely important.
These forces pose a significant challenge for Texas since the tax structure of the State imposes disproportionate burdens on capital-intensive sectors relative to other areas. In addition, the state’s marketing and incentive programs are not as extensive or aggressive as those in other parts of the country and the world.
This situation has been exacerbated by two ongoing trends. The increasing technological component of production processes across a broad range of industries is resulting in much higher investment levels in plant and equipment as facilities are built, expanded, or modernized. In addition, there has been a definitive trend of late toward greater relative reliance on state and local governments to provide public services.
The percentage of total civilian services obtained at the state level has risen from 67.5% to 80.7% over the past three decades. Similarly, the portion of all government services, including defense, provided at the state and local level has risen from 50.1% to 73.0%. With the exception of defense and security priorities surfacing in the aftermath of 9/11, this pattern is projected to continue into the future as responsibilities are increasingly shifted away from the federal government.
In the early to mid-1990s, Texas was the undisputed leader in the race for new capital investments, job growth, and new and expanding facilities. More recently, the state’s position has dropped dramatically. Quite simply, Texas is falling behind. The state is getting a smaller absolute and relative share of a growing pool of manufacturers and other locations, and virtually all the big ones are getting away.
To reverse the trend, Texas needs to systematically examine its existing programs and implement an effective strategy for future competitiveness. Progress is being made in that direction, but much more remains to be done. It’s a challenge that must be met.