POLS 620 - Literature Review - Tom Fellrath

Tom FellrathPOLS 620 - Literature ReviewNovember 23, 2009

An examination of economic development incentives and academic literature on the topicIntroduction

As this review is being written, the United States has emerged from the brink of financialdisaster through a Federal bailout of the American financial services sector, billions of dollars inFederal loans to manufacturers and a massive economic stimulus bill. It is unclear if theseFederal investments have reversed the decline in the American economy, but it appears that thenegative momentum has slowed considerably. Despite all this flurry of activity, however, Ohiois still struggling. The state’s governmental leaders have suggested repeatedly that robusteconomic development will deliver the state from the crisis that it currently faces. This renewedfocus on economic development makes now the ideal time to learn more about this topic, assessits merits and uncover its weaknesses.This literature review will pursue the question, “Do economic development incentives serve theinterests of the people?” In other words, “Do the financial incentives to individual businessentities provide sufficient benefit to the taxpayers to warrant public investment?” In tightbudgetary times, the use of public dollars for any purpose – be it health care, education, publicsafety or economic development – demands fresh scrutiny and a realistic assessment of the returnon investment of those dollars. Keeping this in mind, this review will consider a sampling of

Tom Fellrath 2available literature on the topic of economic development incentives and share their findingswith the hope of answering our research question.This review is divided into component sections. First is an overview and definition of economicdevelopment with a complementary definition of economic development incentives. Next, thisreview will consider the three main categories of economic development incentives. The reviewwill conclude with an overview the large body of criticism and commentary about that which hasbeen learned.

Definitions

What is economic development?

“Economic development” is a broadly-used catch-all in the modern parlance, and little emphasishas been placed on what the term actually means. In fact, Miriam-Webster Online does not offera definition for the term. A search of Google.com reveals fifteen unique definitions of “economic development” from governmental, business and academic sources across the globeincluding such diverse concepts as “any effort or undertaking which aids in the growth of theeconomy,” “growth that is planned and or desired,” “raising the productive capacities of societies” and “Qualitative change and restructuring in a country's economy in connection withtechnological and social progress” (“define:Economic development,” 2009). This lack of anaccepted standard is a significant challenge to conducting any analytical review. Without acommonly shared definition of a concept, is it possible to determine if the available literatureoffers any guidance on whether the research question can be tested?

Tom Fellrath 3Having to choose one definition when no commonality exists (and no peer-reviewed definitionwas identified), this literature review will follow in the spirit of the Indiana EconomicDevelopment Corporation’s 2006 strategic plan, which suggests that, “The bottom line is wealthcreation” (

Accelerating Growth

, p. 2). This makes sense at an intuitive level; a fostering of wealth will take the form of job creation (both direct and indirect) and lead to corresponding taxrevenue growth for government (Downing (2004), Bartik (2005)). The focus on wealth creationdoes not include or exclude any specific industries, activities or behaviors. Thus, we will use thefollowing definition as our foundation:

Economic development

is the act of using public sector tools to build wealth for the larger population of citizens and businesses, as well as thegovernment.

It is those tools, in pursuit of this goal, that this review will consider.Economic development can be conducted either through encouragement of expansion of homegrown entrepreneurial activity or retention of incumbent employers who could leave thecommunity or close their doors altogether. It also can take the form of attraction or recruitmentof new employers to the locality (Fleming and Leonard (1994) and Downing (2004)). Mostentities that focus on economic development implement a multipronged strategy that isdisproportionately weighed toward retention and recruitment activities.Regardless of the approach, it appears that the likelihood of success of economic developmentactivity depends on the fiscal health of the municipality or state, the governmental structure, theextent of professionalism in the economic development function and level of competition amongcities for economic development (Reese, 1999). To illustrate the counterpoint, rural localitieshave a host of unique challenges to achieving economic development success, including the