Foxconn deal: Fiscal costs certain, but a potential for large gains
By NOAH WILLIAMS
Courtesy of the Wisconsin Policy Research Institute
The announcement of Foxconn’s $10 billion planned investment in Wisconsin with up to 13,000 new jobs was broadly hailed as “transformational.” At the same time, many have raised concerns about the potential $3 billion cost of the state incentives package and whether the promised jobs will materialize.
These direct costs, and the opportunity cost of forgoing other expenditures, must be weighed against the potential that Foxconn Technology Group of Taiwan may help southeastern Wisconsin develop as a hub of high-tech manufacturing and industry, which could generate gains far beyond the direct jobs created.
In a survey last fall, Site Selection magazine ranked the top criteria for executives in charge of investment location decisions. The pro-growth policy changes in Wisconsin in recent years have improved the state’s ranking on this list. For example, state and local taxes were ranked third most important, and permitting and regulation ninth.
In addition, land in Wisconsin is relatively inexpensive (ranked fifth on the list), and property tax rates have remained flat in recent years. But transportation infrastructure (ranked fourth) has been problematic, and the Foxconn incentive package includes highway funding. Perhaps most important, although Wisconsin’s workforce is relatively well-educated, workforce growth is low, and many current job openings in the state have remained unfilled.
Thus workforce skills and workforce development (first and sixth on the list, respectively) are a major concern in bringing the Foxconn LCD manufacturing plant into full operation. This difficulty points to the key role of the second-most important criterion: incentives.
State and local business investment incentives have proliferated in recent years but remain controversial. In order to attract investment, it is generally better to enact broad policy changes affecting all firms equally, not have the state target beneficiaries. Further, state investment incentives are socially wasteful, as they affect the location more than the level of economic activity. But knowing that other states would offer incentives, Wisconsin could either lose Foxconn or compete with its own incentive package.
There is mixed evidence on the impact of business incentives, with many studies finding them ineffective and costly. However, recent research has shown that large plant openings can have important spillover effects.
In particular, Greenstone, Hornbeck and Moretti (2010) showed that existing firms in counties that have won large investment projects have seen productivity increase by an average of 12 percent five years after the plant opening. Greenstone and Moretti (2004) also found that industry labor earnings in winning counties increased by an average of 9 percent five years after the plant opening, with similar increases in related industries and neighboring counties. Property values, a proxy for the overall net benefits of the investment package, increased by roughly 7 percent in the five-year span. Moreover, they found no reduction in government services, suggesting the incentives did not crowd out other government expenditure.
While large plant openings led to gains on average, there was significant heterogeneity. A leading successful example is BMW, which in 1992 was promised $115 million in incentives by South Carolina for an initial investment with 2,000 planned jobs. Within five years, the plant was supporting over 3,500 supplier jobs, and by 2014, employment at the plant had grown to over 7,600, with an estimated additional 22,000 indirect and induced jobs throughout the state. By contrast, Mercedes in 1993 opened a plant in Alabama, with $450 million in incentives for 1,500 promised jobs. Within five years, the area around the plant had lost more than 800 supplier jobs.
Foxconn has the potential to generate broad gains that go far beyond the official job estimates and tax revenue costs that have dominated the recent discussion. But the gains are by no means certain — they require that the high-tech investment by Foxconn in Wisconsin would induce other firms to invest in the area, cause high-productivity workers to relocate there and lead current workers to improve their skills.
In evaluating the Foxconn package, the uncertain potential gains in jobs, wages, output and property values must be weighed against the certain fiscal costs. This is a risk, but if a new hub of economic activity materializes, then University of Wisconsin-Madison Chancellor Rebecca Blank could prove correct in calling the decision of Foxconn to invest in Wisconsin “a major leap forward for our state’s economy.”
Noah Williams is director of the Center for Research on the Wisconsin Economy and Juli Plant Grainger Professor of Economics at the University of Wisconsin-Madison.