Upstate New York s Comparative Advantage

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1 Background With local governments in Central New York suffering from serious budget deficits, high unemployment, and a diminishing labor force, the promotion of the nanotech industry throughout Upstate New York presents a potential solution to its economic development problems. As such, government officials may be prepared to offer a number of economic incentives to companies considering locating to this region. Although economic incentives are becoming increasingly popular among governments looking to benefit from new employment and investment opportunities, local governments need to be careful in considering what kinds of incentives to offer, as these can be just as harmful as they are useful. In leading the business attraction efforts for the new Nanotechnology Innovation and Commercialization Excellerator (NICE) in Salina, New York, CenterState needs to highlight the comparative advantage that the region holds for high-tech companies, and use this to discourage the use of financial business incentives. The Benefits of the Nano-Tech Industry for Upstate New York The development of NICE in Central New York is significant because of its potential to turn Albany s nanotechnology hub into an expansion that could lead to an agglomeration economy for Upstate New York in an industry that has already generated thousands of jobs statewide. Projections by Global Industry Analysts Inc. show that by 2015, nanotechnology will be a $2.4 trillion industry i. According to the U.S. Bureau of Labor Statistics, future high tech employment growth is expected to be over 50 percent greater than average employment growth for all industries, and high tech output growth is expected to be over twice the all-industry average. If we include jobs created in supplier industries when high tech expands, the growth of high tech industries is expected to generate a little more than one-quarter of net new jobs in the U.S. economy ii. Albany is considered to be the center of this growing industry, thanks to the creation of the College of Nanoscale Science and Engineering (CNSE) located at the University of Albany. Employment in this regional industry has already grown at impressive rates, starting with 72 new jobs in 2001, to over 2,500 today, marking the capital region of New York as the country s third fastest growing high-tech job market. The benefits have also been felt at the state level, with the creation and retention of 12,500 nanotechnology jobs statewide iii. The collaboration between CNSE and Lockheed Martin (located in Salina), will allow Central and other parts of Upstate New York to take advantage of this growing industry, not simply by trying to replicate Albany s success, but rather by building on its technological innovations to produce manufacturing centers that are needed in the region. As you are already aware, the new research center is expected to create 250 new jobs, and help retain over 2,000 of the already existing jobs with Lockheed Martin. Group4 Labs Inc., the second company to sign on as a tenant at the restored building center, also plans to employ up to 14 people in Salina, with plans to create 94 local jobs by 2015 iv. Using Lockheed Martin, one of the country s biggest defense contractors as a lightning rod, Central New York has a good shot at attracting a number of smaller companies looking to enter this industry. Upstate New York s Comparative Advantage 1

2 New York is the country s third fastest growing high-tech market. Since 2001, the state has generated an estimated $25 billion in private sector investment in this sector. This is due in large part to the influence of CNSE. The nano-tech interdisciplinary fields taught here include nanosciences, nanoengineering and nanoeconomics. Both Albany NanoTech and the Rensselaer Polytechnic Institute train and educate operators, engineers and scientists, which is an extremely valuable asset to high-tech companies looking for skilled labor. In fact, New York is ranked first for degrees awarded in the material, computer and medical sciences and second for degrees awarded in the electrical engineering, mathematics and biological sciences. Overall, more than one million students are enrolled in undergraduate and graduate programs at 325 institutions of higher learning v. Clearly, the new NICE center is ideally situated not only in the center of the State, but in the center of a number of educational and research centers which are training a very skilled labor force. As Alain E. Kaloyeros, chief executive officer of the CNSE, explains, Hightech companies must innovate or die including Lockheed, a leader in defense systems. The value of the co-location model is that it brings suppliers close to business users. The exchange of ideas is more dynamic. vi The Problem with Financial Business Incentives Economic incentives used by local governments to attract businesses have taken several different forms, from property tax forgiveness, tax increment financing authorities (TIFA s), industrial development bonds (IDBs), downtown development authorities (DDAs), and other related activities vii. But as the literature in this field has found, these incentives can be dangerous tools when governments become too eager to convince businesses to relocate to their city. More specifically, the use of local development incentives to attract business capital and employment to a specific jurisdiction results in foregone local tax revenue if the business receiving them would have located there without it. viii The collaboration between CNSE, Lockheed Martin, and CenterState appears to be a promising plan, especially considering that CenterState will be in charge of the management of the center. Since CenterState covers12 counties in Upstate New York, it can take advantage of resources at the regional level, as well as plan for better distribution of the benefits. Before deciding on any specific incentive package, a thorough cost/benefit analysis should be conducted to estimate the net benefits a particular business can bring to the area. Any such analysis for economic development planning entails the question of whether the endeavor will create more jobs for the region. At least in the short-term, the nanotech industry may not actually provide many job opportunities for Syracuse residents themselves. Although a greater local business presence may result in higher local residential employment rate ix, there are other benefits that CNY can take advantage of besides increased employment. Research by Wassmer and Anderson promote the targeted use of local incentives by fiscally blighted communities x. These targeted uses will be discussed in the set of recommendations provided below. Considering the already distressed economic situation facing Central New York, including serious budget deficits, lowering business tax rates would be inefficient since it would force local governments to raise household taxes and/or cut more public services. Instead, CenterState should focus on developing economic rent for businesses interested in locating to 2

3 the area. This economic rent is not only a less risky strategy for attracting businesses, but it would also provide benefits for both potential businesses and local residents. The following recommendations are meant to provide CenterState with a set of alternatives to financial incentives that can be used to attract high tech companies to the region. These recommendations are based on thorough research studies by Timothy Bartik on the most important components to business attraction strategies. While financial incentives may still be necessary, it recommended that they be limited either by the additions of the non-financial incentives presented, or with the attachment of conditions that are meant to alleviate the economic hardships in the region. Recommendations 1. Highlight and Invest in Relevant Infrastructure: Non-incentive factors that have been shown to be influential in business location decisions include the availability of land and the appropriate infrastructure for business needs xi. Therefore, any incentive package offered to potential businesses looking to locate to the NICE center in Salina, New York, should highlight as its main feature, the provision of infrastructure amenities. These include not only the $16 million expansion and renovation of the Electronic Park Building near Lockheed Martin, but also the $12 million that will go toward funding specialized equipment and resources in the Center. This valuable space will serve the function of a business incubator by facilitating the collaboration and integration of businesses in the nanotech industry. Additionally, the State Assembly announced that it would create a business incubator and technology accelerator at the State University of New York Institute of Technology at Utica/Rome in partnership with Albany s NanoTech center xii. These investments in infrastructure are valuable assets to any high tech company looking for suitable location to start-up or expand their company. 2. Provide Job Training and Recruitment Services: Another crucial factor involved in the location decision for businesses is the availability of a labor force that is equipped with the relevant skills, and which can be hired at a reasonable wage rate xiii. This benefit can be a mutual arrangement if a company decides to hire locally. High-tech businesses require a great deal of high-skilled labor. These positions will usually be filled from other areas, bringing in-migrants to the local area, rather than providing new employment opportunities to local residents. However, Bartik also notes that this industry also requires a great deal of medium skilled labor, which is more scarce than low-skilled labor, but less mobile than high skilled labor xiv. Many local governments require local hiring in return for incentives, but this condition is rarely enforced. This strategy may also backfire, by discouraging companies, especially if the current labor force in a region does not match their labor needs. However, one possible alternative may be to implement a program similar to Berkeley s First Source, which requires that businesses consider hiring workers referred by the program xv. This option presents an opportunity for local government to provide a service that can be beneficial for both local residents and potential businesses. By providing job training tailored to meet the 3

4 needs of industry clusters, local governments can provide their residents with valuable skills, while at the same time offering businesses the service of training their potential candidates. While these training incentives are usually funded by the State, they are usually offered by local community colleges, which abound in the area xvi. In order to ensure success of these training programs, it is vital that regional R&D centers and business leaders are consulted in the design of the program, from its curriculum to its evaluation processes. An example of this type of program is the Center for Construction Trades Training at the Arsenal Business and Technology Park, developed by M+W Zander. The purpose of the center is to address the shortage of workers trained for high-tech construction jobs xvii. An added benefit of this non-financial incentive is that even if a company decides to relocate or shut down, the training of local residents serves several other purposes including increasing human capital among disadvantaged groups, and the possibility of applying these skills to other industries. 3. Improve Local Amenities, With an Emphasis on Education: Keeping in mind that high-tech companies need high-skilled labor, the location decision for these businesses will inevitably take into account how attractive a locality is for these employees. For this reason, Bartik suggests that local governments should focus on building up amenities that would be attractive to professional and technical workers xviii. These amenities include entertainment centers, safe and efficient public transportation, and centers of arts and culture. Perhaps the most important amenity, however, is the strength of local schools for their children. Currently, several pockets in the region, including the major urban centers of Syracuse and Rochester, are facing high rates of poverty and unemployment. Furthermore, the public schools in these cities are well known for their poor performance compared to state averages. If local governments in Central and UpState New York wish to become a renowned region for the nano-tech industry, it is absolutely crucial that they focus on improving their public education. Furthermore, it would be especially helpful to invest in the math and sciences to highlight the region s commitment to the tech industry. Some examples of investments include charter or magnet schools that emphasize these subjects, as well as the sponsorship of local school competitions and conferences where students are encouraged to explore the basics of this field. 4. Promote an Industry Network by Connecting Businesses with Local Universities The high-tech sector tends to be more sensitive to the quality of local universities because they depend on these institutions in two ways: 1. they are providers of knowledge and 2. they train high skilled workers. As explained above, New York s comparative advantage in the high tech sector stems largely from its abundance of educational and research institutions in this field. To underscore this strength, interaction between employers and local universities should be encouraged as a way to promote confidence in these institutions. Establishing partnerships (such as internships, scholarships, and research projects) between these schools and high-tech companies will serve to highlight the benefits of the industry network offered by the region, as well as provide networking opportunities between potential employers and employees. 4

5 5. Create a business friendly atmosphere: Finally, high-tech companies take a longer time to develop. For smaller to medium-sized companies this industry, access to information is vital to their success. Therefore, creating a business friendly atmosphere can be an important step in attracting companies to the region. Creating this type of environment involves individualized attention which can include help with state or local regulations, customized training for new or existing employees, and expedited provision of site-related public infrastructure, such as access roads. xix Once a business has decided to locate in the region, business retention strategies will be crucial in the success of creating this industry cluster. Not only is it important to retain businesses that choose to locate in the area, but it is also important to have these businesses share their positive experience with their networks. Business retention strategies should focus on understanding the needs of these industry businesses, and working with local and state government to meet those needs. Examples of these programs include routine visitation and surveying programs, low cost general consulting, and referrals to private consulting firms xx. 6. Conditioning Financial Incentives: Despite CNY s strong comparative advantage in the nano-tech industry, negotiations with potential businesses with likely still require offering financial incentives. Although these risky offers may be unavoidable in some cases, selectivity in the use of these incentives can help limit possible negative outcomes. Although tying incentives to local hiring requirements may not be the best option, limiting incentives to businesses that agree to partnerships and/or sponsorships with local schools, universities, and job training programs can provide public services to the community that can help offset some of the lost tax revenue from business incentives. 7. Invest in a Thorough Marketing Strategy: CenterState should invest in a nationwide marketing campaign to promote the region as a growing and promising center for the nanotech industry. Currently, the New York Loves Nanotech website provides valuable information and resources to key stakeholders in this industry. The development of these marketing resources and proliferation of this information should be coordinated with marketing consultants and site consultants. This is especially important since Bartik finds that large corporations locating a new plant now use site consultants over 50% of the time xxi. Conclusion Central New York, like many regions, has experienced a serious economic downturn in recent years that has been accompanied by the loss of businesses and their accompanying employment opportunities. Currently, the region s two greatest employment sectors are the healthcare industry and higher education. While local economic development opportunities should continue nurturing these industries, Central New York should consider other opportunities as well. The expansion of the nano-tech industry from the Albany region to CNY appears to be a promising investment, not only because of the positive projections for growth, 5

6 but also because of the region s unique comparative advantage. Nevertheless, the development of this cluster is sure to be challenging, and the region has a lot of work to do to prepare the field for potential businesses With CenterState leading the business attraction efforts, there is hope that a regional metro-wide strategy will help provide benefits to the entire area. By investing in the strategies listed above, and working closely with the State Assembly, CNY can begin receiving the benefits that until now has been focused in the High Tech Valley of the Albany region. These benefits include improved public services and amenities, job training and placement opportunities, improved schools, and a more vital economic environment. ENDNOTES i Alain E. Kaloyeros, The nanotechnology revolution is New York s moon shoot for the 21 st century (Syracuse: The Post Standard, February ) ii Timothy J. Bartik, Local Economic Development Policies (Michigan, Jan 2003) 31. iii Kaloyeros, The nanotechnology revolution is New York s moon shoot for the 21 st century iii Bartik, Local Economic Development Policies, 31. iv Rick Moriarty, California Nanotech company with plans for Salina will also open plant in Albany (Syracuse: The Post Standard, March ) v NY LOVES Nanotech. Accessed on April 25, vi Political Fantasy? Local nanotechnology project is not redundant (Syracuse: The Post Standard, February ) vii Robert W. Wassmer and John E. Anderson, Bidding for Business: New Evidence on the Effect of Locally Offered Economic Development Incentives in a Metropolitan Area (Economic Development Quarterly, 2001 Vol 15: 132) 132. viii Wassmer, Bidding for Business: New Evidence on the Effect of Locally Offered Economic Development Incentives in a Metropolitan Area, 133. ix Wassmer, Bidding for Business: New Evidence on the Effect of Locally Offered Economic Development Incentives in a Metropolitan Area, 135. x Wassmer, Bidding for Business: New Evidence on the Effect of Locally Offered Economic Development Incentives in a Metropolitan Area, xi xii Rick Moriarty, New York State plans to spend $28 million to create nanotechnology lab in Salina (Syracuse: The Post Standard, September ) xiii Bartik, Local Economic Development Policies, 15. xiv Bartik, Local Economic Development Policies, 15. 6

7 xv Bartik, Solving the Problems of Economic Development Incentives, 151. xvi Bartik, Local Economic Development Policies,16 xvii NY LOVES Nanotech. Accessed May 9, xviii Bartik, Solving the Problems of Economic Development Incentives, 148. xix, Solving the Problems of Economic Development Incentives, 140. xx Bartik, Local Economic Development Policies, 21. xxi Bartik, Local Economic Development Policies,15 7