A NEW ERA OF CORPORATE WELFARE IN N.C.?
08/22/05
Dr. Dennis Rondinelli
Don’t get me wrong. I like Dell. I use its computers at home and at my office. It makes good-quality products at affordable prices. Once you get over the fact that your customer service agent is talking to you from India you can get pretty reliable help with the glitches that bug all computers.
And it’s nice to think that Dell will be producing some of its products in North Carolina.

But I don’t think that Dell, a multibillion-dollar company, deserves welfare from a state government that is running more than $1 billion-dollar budget shortfall.

North Carolina’s new breakthrough in corporate welfare is worrisome in several ways.

First, does Dell need welfare? Last year, the company made more than $2.6 billion in profits on more than $41 billion in sales, 17 percent higher than in 2003. It reported a 50 percent return on total capital and holds more than $20 billion in assets. Dell controls 31 percent of the U.S. market for its products and nearly 17 percent worldwide. It’s not exactly a pauper in a fast-growing industry.

Yet, when Dell announced that it was looking for a site to build a $115 million plant employing 2,000 workers, North Carolina offered more than $242 million in tax and other incentives over 20 years. The total package came out to $121,000 per job. Local officials in Forsythe County began foaming at the mouth, considering giveaways of everything from cars and gas to office space, golf memberships, and meal discounts.

A second worry is about whether providing lavish incentives is good public policy or, for that matter, good business policy. Dell, which can easily afford to build a plant anywhere without welfare, is receiving incentives from North Carolina paid for by other businesses, some of which are its competitors, and by citizens throughout the state for a couple of thousand relatively low-paying jobs.

Although an advisor to Gov. Mike Easley claims that the state will receive $4 for every $1 it invests, that may be a wildly hopeful guesstimate. Even if Dell and its suppliers create additional jobs, the state gave away incentives worth millions of dollars with no good way of calculating the real return.

Although Dell hired slightly more workers than it projected when Tennessee offered a large incentive package for its plant there, Gov. Phil Bredesen told his hometown newspaper that the thousands of hoped-for jobs outside the plant never materialized.

“There was always a hope that the industry would explode and there’d be 8,000 jobs or 18,000 jobs here,” Bredesen told The Tennessean. “That hasn’t happened.”

Another worry is whether incentives really determine where corporations locate their facilities. The fact is that if Dell was not already attracted to the Piedmont, it would not have considered Forsythe County as a location, regardless of incentives.

Several studies I carried out with Dr. William Burpitt of Elon University on the factors that international firms consider in investing in North Carolina show clearly that they gave far higher value to location assets — good transportation, trained work forces, schools, and access to markets and materials — and incentives were far down the list of selection criteria. No company made location decisions on the basis of incentives.

Despite the fact that Dell claimed it would have looked elsewhere if it did not receive a large incentive package, even a Dell company spokesperson admitted to a local newspaper that “incentives in and of themselves do not make the decision.” North Carolina may have given away too much to get too little, or may have been the favored location regardless of how much it gave away.

These and longer-term questions are likely to haunt future state legislators and governors. Has North Carolina slipped down a deep slope that will make it difficult in the future to attract any major company without offering similarly lavish incentives? Would have investing more instead in education, infrastructure, and other location assets been a better use of public funds? If the state felt compelled to be a leader in corporate welfare, why did it not invest more heavily in helping local small companies and entrepreneurial startups, which grow jobs faster and at higher rates?

And yes, as I worry about the new era of corporate welfare in North Carolina, I am typing this on a Dell computer.

Dr. Dennis Rondinelli is professor of management at UNC
Kenan-Flagler Business School.