States and cities across the U.S., hungry to create jobs, are using increasingly controversial incentives to compete for some of the world’s most sophisticated manufacturers: passenger-jet makers. The trend, writes The Wall Street Journal (Dec.12, 2012), has accelerated since the recession, with states providing at least $1 billion in various incentives since 2008 to draw aerospace investments. That includes $450 million to attract Boeing to S. Carolina, $158 million from Alabama for rival Airbus, and $57 million from Virginia to draw engine-maker Rolls-Royce. But the escalation of local sweeteners also faces opposition from critics who say politicians are using public funds inefficiently to pick winners that market forces should be lifting.
Discussing the issue over lunch with my friend Michael yesterday, we agreed that these incentive packages don’t do much to help the overall economy. The benefit to one state is simply a loss to another. Michael, the retired CEO of 2 major multinationals, has made many location decisions in his career. In almost every case, the location selection hinged on a slew of other factors (qualified employees, distribution channels, right-to-work, among others). Incentives were the bonus that he fought for after finding the best site–never the #1 criterion.
But backers of incentives say aerospace factories are especially attractive because they lead to follow-on investment and other jobs at suppliers. Alabama Gov. Robert Bentley admits wooing Airbus “was an expensive project.” The funding will support training for many of the 1,000 new staff, new equipment and local infrastructure. For every new position at the Airbus facility, Bentley predicts 4 additional jobs at suppliers and service businesses will be created. Similarly, S. Carolina estimates the Boeing factory, employing more than 6,000 people, will create thousands more jobs in the local supply chain and generate $4.6 billion in annual economic benefits to the region.
Discussion questions:
1. Refer your students to the Chapter 8 OM in Action box regarding Mercedes decision to open a plant in Alabama. What do the auto and aerospace industries have in common?
2. What factors should OM managers focus on in decisions such as these?