What Does a Corporation Owe Its Hometown?

Towns and cities spend lots of time and energy wooing companies. Often, they get little in return besides broken promises.

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In an era in which companies enjoy unprecedented mobility to invest where they choose, one of the toughest issues for governments at the federal, state, and local level is deciding what to do to attract and retain those investments. Governments should want to compete for investments that bring jobs, spin-off businesses, and tax revenue. And corporations – often with many suitors — can and do demand tax breaks, cheap energy, help with training programs, improvements in road and air access and other favorable legislation, and regulations that only governments can supply.

But what do the companies owe in return? Too often, it seems, they believe the answer is nothing. The aerospace giant Boeing, which is the largest exporter in the United States, used every one of its considerable political chits in Washington to wrest away from Airbus a $35 billion contract for Air Force refueling tankers. It enlisted, among others, the powerful Kansas senator Pat Roberts (R-KS) by promising that the contract would help save jobs in Wichita. Then earlier this year, the company announced that it would close its Wichita plant and move the work to several other states, citing cutbacks in defense spending. More than 2,100 employees in Wichita will lose their jobs next year. State Representative Mike Pompeo (R-KS) said that while Boeing had every right to move the work, it "will indeed break years and years of promises" to the state.

But it’s hard to top the behavior of Microsoft in the tiny farming community of Quincy in Washington State. Microsoft is a great company, an iconic capitalist success story much like Boeing. It was the world’s leader in the development of personal computer operating systems, which did more than any other single product to drive the productivity gains of the past two decades. Its founder Bill Gates has become one of the most influential philanthropists of this or any period in U.S. history, on a par with the Rockefellers and the Fords.

But his company’s behavior in Quincy, as reported by the New York Times over the weekend, was more reminiscent of Al Capone. The county, eager for tax revenue and jobs, agreed to offer reliable hydroelectric power at less than half the prevailing national cost so that Microsoft could establish a huge data farm to power its Bing search engine. Microsoft committed to using a certain quantity of power, and the local utility agreed to set aside that power and not sell it to other customers to ensure there would be no shortage for the data center.

Near the end of last year, Microsoft received a notice from the county utility that it would be fined $210,000 for over-estimating its power needs, a mistake that prevented the county from re-selling the power. Yahoo, which also runs a server farm in the town, similarly over-estimated and quietly paid its $94,608 penalty. But Microsoft instead began to burn power furiously in what it admitted was a “commercially unproductive” manner, and warned that it would continue doing so unless the county lowered the fine.  The utility board caved in during a special weekend session and agreed to lower the fine to $60,000.

These are not isolated examples. Instead, they are the unsurprising result of a growing power imbalance between corporations and governments. Much as Caterpillar – another great American company – could force a six-year wage freeze on its Joliet, Illinois employees. These companies know they hold the cards. States and communities are so desperate for business investment that they will agree to almost anything to secure and retain it.

Can anything change this imbalance? The Harvard Business School’s Competitiveness Project earlier this year made an appeal for enlightened corporate behavior, encouraging companies to invest in the “commons” – by expanding training, working with local suppliers, and lobbying governments for “business-wide improvements” rather than special interest advantages. While these goals are laudable, and there are plenty of examples of such responsible corporate action, they are unlikely to move the needle very far.

Instead, governments are going to have to rediscover their sources of leverage. Companies like Microsoft, Boeing, and Caterpillar want many things from governments. At the national level, these include better protection of their intellectual property, support in trade and investment disputes, and favorable immigration rules. At the state and local level they include university and community college education and training, support for research and development, and investment in roads and rails.

Corporations want a profitable location to do business; governments want a commitment to the communities they represent. In future posts, I will start to sketch out ideas on how both interests might be better served.

This post originally appeared on the Council on Foreign Relations Renewing America blog, an Atlantic partner site.

About the Author

  • Edward Alden is the Bernard L. Schwartz senior fellow at the Council on Foreign Relations, specializing in U.S. economic competitiveness.