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Beating Them At Their Own Game:
Chapter 3


Economic Development In New York

The idea of being active in economic development is not new in New York.

At the same time the state was starting to make itself uncompetitive by raising taxes and creating new regulations, the Urban Development Corp. and Job Development Authority were born.

Those programs were helpful, and their remaining operations remain so. But they were no match for the punishing business climate created by other state policies such as our high taxes and heavy-handed regulations.

That's because, to be truly effective, economic development must be customer-focused. That is, it must recognize what businesses really need to be effective. Too often, in the past, New York's economic development efforts were designed more to respond to political needs of this or that narrow constituency, than to create real growth and jobs.

In 1995, the new Pataki Administration reorganized the state's economic development agencies under the umbrella of the Empire State Development Corp. By eliminating duplication and overlap, the state consolidated 100 incentive programs into seven types of assistance. Among other programmatic changes, a new strategic business division was created, to focus on Fortune 500-type companies. The net effect was to improve efficiency while reducing overall staff by 27 percent.

This year, Governor Pataki is proposing further restructuring, consolidating the Department of Economic Development, Science & Technology Foundation and Empire State Development Corp. into one organization. Again, the purpose is to increase flexibility and responsiveness to business.

Another major change in the last two years is active, personal involvement by the Governor in convincing CEOs that New York truly has a new attitude about the value of business and jobs.

A good package to work with
Available business incentives in New York and some key competitor states
Incentive New York Illinois Michigan North Carolina Ohio Pennsylvania South Carolina
Exempt mfg. machinery from sales tax Yes Yes No Lower rate applies Yes Yes Yes
Direct loans Yes Yes Yes Yes Yes Yes Yes
Seed money grants Yes Yes Yes Yes Yes Yes Yes
Grants/loans for day care Yes No No No No No Yes
Bond funding Yes No Yes Yes Yes Yes Yes
Job training Yes No Yes Yes Yes No Yes
Enterprise zone property tax abatement Yes Yes No No Yes No No
Tax increment financing Yes Yes Yes No Yes No No
Technical assistance Yes Yes No Yes Yes Yes No
Tech center Yes No No No Yes No No
Site infrastructure improvement Yes No No Yes No No No
Foreign trade zones Yes No No No Yes No No
Sources: Taxation and Economic Development: A Blueprint for Reform in Ohio;
New York State Economic Development Council

The changes are starting to gain attention. Business Facilities magazine recently named Empire State Development the winner of an Economic Development Achievement Award for incentive programs. "Innovative in their own right, and successful in improving New York's business image and business climate, the various initiatives are also singularly noteworthy because of their boldness and effectiveness," the magazine wrote.

A product, and a process

Experts on economic development sometimes think of their field as being divided into two categories. The "product" is the type of workforce available, the cost of doing business, the available incentives, and so on. The "process" is the activities of economic developers and other interested parties (such as chambers of commerce, elected officials and leading business people) who seek to attract new investment and jobs, to stimulate growth from already existing companies, or simply to keep those companies thriving where they are.(1)

Process includes enhancing things for existing businesses that are having problems. Local economic developers, and to a lesser extent the state, have done this for years. It may include finding low-cost electrical power or other steps. It's necessary — we don't want to lose any major employer — but it's not going to provide the growth we need. On the other hand, it's important that economic developers work with existing businesses to help in finding a site, obtaining financing or meeting other needs that do create growth.

Then comes enticement, which includes attracting companies from elsewhere.

Finally, the process can include engendering, helping entrepreneurs start new businesses and keep them alive in the critical early years. Business incubator facilities are one example; networks of chief executives in related, especially local, businesses are another.

Just as getting truly serious about attracting new businesses and jobs means dramatic improvement in our product (major tax cuts, historic workers' compensation reforms and so on), so it also means stepping up the process. Some of the above, such as CEO networks, can and should be done by the private sector.

And some should be joint public-private efforts. For instance, other states routinely fly economic development officials — and others, including leaders of education institutions — into New York to meet with leaders of our most important employers. Top management of Eastman Kodak, our largest manufacturer, was paid a courtesy call by representatives of North Carolina last year. That wasn't because Kodak is important to the state; the company has no manufacturing operations there. The state representatives hope, though, that the company will become important in North Carolina — by placing new jobs there, instead of in New York, or even shifting some existing operations. There's no indication Kodak is considering North Carolina for future expansions, let alone moving existing jobs there. But New York can learn from that experience. It tells us we need to be aggressive in telling companies we want them to locate, stay and grow here. That's what the competition is doing.

Top executives of major companies in the other state may come along or make contact in another form. The purpose is simply to make sure the company here is aware of any improvements in the other state's business climate, or advantages it may have over New York — the same thing any good salesperson does, regardless of the product. Perhaps we should do the same. Potential early targets: the companies that are likely to be building the next multi-billion-dollar plant to produce computer chips.

We've only just begun

New York has taken useful steps in the last two years; other changes are needed. Most important, aside from improving our business climate, New York needs to get serious about putting its resources into proving we want businesses. That includes expanding the JOBS/NOW fund, so we can attract the truly massive new projects that create many hundreds of jobs at a time. It includes expanding our assistance for training.

As state leaders plan to increase funding for economic development, it's important to make sure those dollars are used as effectively as possible. And the ongoing move to consolidate Albany's economic development efforts provides the perfect environment in which to make any necessary changes. Improvements could include a more cooperative relationship between state officials and the local economic developers who usually are key players in major new business projects. The state's regional economic development offices should have more authority to make decisions, in consultation with local leaders, about using state dollars in their own regions. Fewer strictures — and more flexibility — in appropriations to Empire State Development Corp. would allow more effective and creative use of available resources. And the regional offices should be given the responsibility of coordinating all state economic development programs and functions so that, for instance, state-funded technology organizations are working in a coordinated fashion with ESDC and local and regional organizations.

And certainly, we need to do a better job of letting the world know about the changes taking place in the Empire State. The current perception out there doesn't match the new reality of New York's business climate — one that is already much improved, and is likely to improve further in the coming year. But investors make decisions based on their perception of reality, not ours.

New York also can improve its already enviable supply of capital for business, by easing investment restrictions on our huge public pension funds. The state's Common Retirement Fund has assets of more than $76 billion, while the New York City public pension funds total another $63 billion. Managers of the pension funds — State Comptroller McCall, for the state fund; and a board headed by City Comptroller Hevesi, for the city funds — are limited by a "legal list" of investments they can make with the funds' assets.

Giving the fund managers more leeway, using a "prudent person" standard for investments, would most likely result in greater return, meaning a better deal for both pensioners and taxpayers. Among other things, it would allow more investment in foreign markets, many of which have grown in recent years even more than the booming U.S. market. That, in turn, would encourage more overseas investment in New York. If Daimler-Benz is planning a new factory in America, for instance, its attitude about the Empire State might be just a little more positive with the knowledge that New York pension funds hold a significant number of the company's shares.

Leave useful programs in place

In economic development as in medicine, one of the cardinal rules is, "First, do no harm."

Yet in recent years there have been numerous proposals to harm our economic development efforts with needless restrictions on one of our most effective tools, industrial development agencies. Most states do not have local IDAs, like New York does. Perhaps their greatest value for new or expanded businesses is the ability to abate local property taxes (which otherwise are a major competitive problem for New York) while, in most cases, generating payments in lieu of taxes. The last thing we can afford is to get rid of, or even limit severely, such a potent weapon in the battle for new growth and jobs.(2)

Indeed, Albany should be alert for opportunities to use the benefits of IDAs in new ways. One example is financing of health-care facilities for the aging. Other than expensive nursing homes, New York provides few living and health care alternatives for senior citizens. Other states have promoted development of continuing care retirement communities and other nonprofit facilities through use of tax-exempt financing. Because such financing is generally not available in New York, seniors either leave the state to find less expensive options, or divest themselves of assets in order to qualify for Medicaid-assisted nursing home care. IDA financing could spur development of such facilities in New York by providing access to the tax-exempt market and by significantly reducing the cost and time of issuing such bonds. One study by the investment firm Smith, Barney found that such a change would likely result in more than 34,000 new, permanent jobs.

As with IDAs, New York should capitalize further on the competitive advantage created by project financing provided through Empire State Development. The $40 million or so appropriated in the 1996-97 state budget was allocated just a few months into the fiscal year. Rather than reducing such funding, the state should be expanding it. Governor Pataki's budget does so.

One school of thought holds that economic developers should especially focus on promoting better cooperation among companies in the same industry cluster. Such efforts may include helping spread the word about new technologies, sharing personnel, and improving customer-supplier relationships.(3) That's another area where New York does a good job. The state's Centers for Advanced Technology are collaborative efforts between businesses and leading universities to promote economic growth in particular industry sectors. For instance, the center at Rensselaer Polytechnic Institute specializes in automation, robotics and manufacturing; Alfred University in ceramics; and Cornell University in biotechnology.

Keep measuring our competitiveness

New York State has taken giant steps toward greater competitiveness, and therefore a stronger economy, in recent years. The main reason for those achievements: New Yorkers and their leaders measured our growth against other states', and found our performance lacking.

Information drives improvement. Thousands of businesses and other organizations across the country use "benchmarking" — comparing the quality of their products and services, and their success in the marketplace — as a key part of continuous improvement efforts. Albany is more focused on competitiveness than it's been in many years, but we should institutionalize that attitude. One way would be creation of an official, annual "Report on New York's Competitiveness." Such a report might compare our job growth and other key economic statistics with those of other states, as well as important business climate factors such as our taxes, state-mandated benefit costs and the results produced by our education and job training systems.

We're getting better at both the product, and the process, of economic development. But the competition that's been beating us for years isn't sitting still, either. New York can beat them. Let's do it!

1. The "product-process" theme is one developed by David Cordeau, president of the Greater Syracuse Chamber of Commerce.

2. For a fuller discussion of the value of IDAs, see Economical Development, The Public Policy Institute, April 1993.

3. Brian Bosworth, "Economic Development As Inter-firm Cooperation: Networks, Sectors and Clusters," presentation at Nelson A. Rockefeller Institute of Government, Albany, June 17, 1996.

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