How To Win: Time-to-Market or Incentives?

Lately, I have been reading some of the scholarly work on tax incentive as an economic development tool. I admit, I am perplexed why so many economic development organizations choose to compete with incentive packages for capital attraction, retention and expansion projects. The practice is clearly widespread and well entrenched, so there must be something I am not fully understanding to explain why tax incentive packages are judged as such an important tactic.

Here are some examples of what I have been reading:

  1. Todd Gabe and David Kraybill authored a paper entitled – “The Effect of State Economic Development Incentives on Employment Growth of Establishments (PDF)” which was published by the Journal of Regional Science in 2002. The authors conclude “Empirical findings indicate that incentives have very little (or even a negative) effect on actual growth and they have a substantial positive effect on announced growth.” Net, companies have a tendancy to overestimate job creation when financial incentives are part of the competitive package for location selection.
  2. In 2009, The Chicago Metropolitan Agency for Planning published a white paper on the value of incentives. They researched 50 different How to Win tactics as part of their GO TO 2040 Regional Strategic Plan. The white paper cites work by Peters and Fisher in 2004 that estimates state and local governments expend $50B in incentives annually as an economic development tactic. The paper concludes the literature reports mixed results, but the best chance to ensure an ROI for incentives is to link their use to a specific strategic objective and to avoid using incentives for job creation that is not genuinely incremental.
  3. Timothy Bartik’s paper (published in 2005) entitled “Solving the Problems of Economic Development Incentives (PDF)” was interesting. He decided eliminating incentives as a tactical choice was highly unlikely, so the best course of action is to figure out how to create incentives that deliver a positive ROI. He argues “The main problem with current incentive policies is that state and local governments often provide incentives that are not in the best interest of that state or local area, for example that are excessively costly per job created, or that provide jobs that do not improve the job opportunities of local residents.” Consequently, if the ROI could be better measured, better choices on when to use incentives would be made.

There are a number of other interesting papers that left me with the gut feel tax incentives are not particularly effective, but no economic development organization wants to be the first to stop offering incentive dollars when competing for capital investment. It feels a bit like the economic development industry equivalent of the arms race. And, of course, like the arms race taxpayers under write the use of incentives.

I think there is an alternative to tax incentives worth serious exploration. I’d like to suggest consideration of competing on time-to-market as potentially a better way for many capital investment deal opportunities.

In business, time-to-market can have significant financial value. In many cases far more significant than the amount of money that a state or community could realistically consider offering in a tax incentive package. In some cases, time-to-market can literally mean the difference between a product’s commercial success or failure.

For perspective, every day a product is not available in the market, company revenue is reduced by sales lost to competitors or to technological obsolescence. Minimizing time-to-market is a strategic goal of virtually every company.

Here’s an easy equation that gives you a rough way to think about the value of time-to-market.

Value of reduced time = time savings (in weeks) * unit sales per week * margin per unit

In my experience, the estimate of unit sales per week reflects a week of peak sales. The theory is any delay in time-to-market delays the company ability to book peak sales (and consequently peak profit). This can be an amazingly large amount of money when calculated. For most companies, if you can trim several weeks from their time-to-market you will be creating a significant positive impact on the Net Present Value of their project investment. In most cases, this will far exceed the money you would realistically consider offering a tax incentive package.

There are likely any number of ways a state or community can help positively impact time-to-market. For example, simply getting permits processed on an expedited timing will help. My guess is if reducing time-to-market was the strategic focus when comprting for capital investment, many additional and creative solutions would be found.

I would like to hear your ideas on how states and communities could reduce time-to-market for companies. What if an economic development organization offered a guaranteed time-to-market on the aspects they could influence? What would those aspects be and how competitive for capital do you think such an offer would be (particularly versus an incentive package)?  Are there any other papers you’d recommend I read on the subject?

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8 Comments so far

  1. Bob Boltz

    September 8, 2010

    Do you think your time-to-market alternative would be equally effective in attracting both service sector and commodity sector economic development?

  2. Don Holbrook

    September 9, 2010

    I have been involved in the major elements of incentive negotiations for years and decades. It is a timeless argument. Are they positive or not? The simple fact is that the US is now one of the most expensive places to do business from the cost of our over-all business climate including and heavily influenced by a antiquated and expensive tax system. Since we inefficiently tax corporations and individuals in a myriad of manners and each state does a more pervasive or less pervasive tax on companies and individuals the playing field is vastly different. Thus incentives come into play to address the costs and make a site more desirable. Taxes now are a huge piece of the cost of business and those costs are only going up now that the tax cuts are expiring. The more creative a community is in minimizing the impact of taxes the more desirable it is for investment it is as simple as that. If we really wanted to address the elimination of incentives we would just standardize taxes across the entire US. Flat income tax, sales taxes, inventory and other taxes and depreciation schedules. This would then make incentives much less important and the actual value would be more decisively tilted toward benefits such as educated workforce, quality infrastructure, availability of workers and shovel ready site cost of real estate. Since this leveling of the playing field is as unlikely as a major overhaul of how we tax ourselves and what are expectations are from government for collecting those taxes. Simply put we have to structurally over-haul our entire tax code and simplify it and reduce it or eliminate it on wealth generation and place it more on consumption of goods & services along with energy.

  3. Dolly Bhasin

    September 9, 2010

    Excellent article. Here are my two cents on how states and communities could reduce time-to-market for companies:

    1. Encourage Small business, by allowing micro and small businesses to work without too much of red tapism (licences, taxes, etc.) during the first 2-3 years of initial startup phase.

    2. Encourage the Small and Medium Businesses (SMEs) to use Ebusiness (not just ecommerce but also CRM, SCM, BI and emarketing), which involves leveraging technology in collaboration and networking with a proper value chain mapping in certain verticals.

    3. Encourage Innovation and Competitiveness, through incentives, recognition and funding.

  4. Randall Witte

    September 9, 2010

    I believe that incentives a just a NICE way of saying that- if I don’t have something that is GOOD ENOUGH to make you want to buy it as soon as it is available, maybe I can bribe you into buying “one of those”.

    IF we develop products that provide significantly positive results that are obvious to the consumer, AND we are the first ones to the market with those products, there will not be any reason to cut profitability with incentives. In fact- IF the products offer ADEQUATE value to the customer, the supplier can offer those products with an extremely high profit margin and everyone will be happy.

    The key to this methodology is that WE have to develop those products that offer that level of VALUE to the customer. A product with a 6-18 month payback that SOLVES A MAJOR PROBLEM for the customer and has an ADDED VALUE of reducing their environmental releases will nearly sell itself, once the customer finds out about it. So, the sooner you can get to market with that product, the better off everyone will be.

  5. Robert Cleveland

    September 13, 2010

    I think this is a difficult premise on which to differentiate as I don’t think most companies see time to market as a competitive advantage. I realize that sounds strange – even mediocre managers understand the concept and how faster is better – but my experience has shown it doesn’t exist as an articulated strategy in most companies. Instead, it is managed haphazardly; it’s important for some projects and not others. Some managers emphasize it, others don’t. Rightly or wrongly, I would be focused on those things tangible to every company regardless of competence, and those are usually overhead cost and talent.

  6. […] is a follow-up to my last blog post that suggested looking at time-to-market as an effective tactic in competing for capital investment.  This post looks at four speed metrics […]

  7. Douglas van den Berghe

    September 15, 2010

    Ed, I agree partially. A combination of time to market and incentives can be very efficient. Incentives usually play a role when there is a shortlist of say 2-3 locations that are competing for the project. Incentive packages should also be more tailored to the type of investment project and may be supported with an effective service agreement by the local IPA.

  8. […] on previously were central to the conversation (examples: Measuring the Impact of Speed  and How to Win: Time-to-Market or Incentives? ). Here are my take-aways from this […]

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