Last week I was invited to speak to the board of the Economic Development Partnership of North Carolina. EDPNC is a state-funded entity, responsible for marketing the state to businesses and recruiting them to move to NC or to build a new office or facility here. EDPNC also has a mandate to support tourism and small businesses. Over a decade, EDPNC has played an important role, elevating North Carolina to the #1 state to do business in 2 of the last 3 years (and currently #2).
If you regularly follow my column, you know that I have been critical of the strategy of big tax incentive packages and site development expenses for large, established technology and manufacturing companies. It is increasingly rare for companies that receive these mega deals to actually hold up their end of the bargain. While the state puts clawback conditions into the incentive packages to protect against this, the opportunity cost of a failed project is still massive. And even the successful projects come at extremely high taxpayer cost-per-job.
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Meanwhile, succeed or fail, the companies and politicians at ribbon-cuttings get lots of good press at the time the deals are struck, with little negative consequence years later. The companies that we attract with these deals are huge, rich companies that don’t need the money. They take advantage that cities and states have for decades competed with each other for big projects and can’t seem to break free of that old paradigm. If places are willing to give out (relatively free) money, of course industry will take advantage of it.
I must give EDPNC credit
EDPNC, which has recently eclipsed 10 years of operation, isn’t sitting back and coasting on our high national ranking. They recognize that the world continues to evolve and that even with the big company headlines, most new jobs are still created by small businesses. According to the Statistics of US Businesses (census), 99.6% of NC businesses have fewer than 500 employees, the federal definition of a small business. Small businesses represent 44.5% of jobs in the state. This is by far the largest segment of jobs in NC and the US. Exact figures vary by state, but employment in the US breaks down as:
● 40-50% Small businesses
● 10-15% Large businesses
● 12-13% Public sector
● 10-15% Self-Employed and Unincorporated (consultants, contractors, freelancers)
● 10-20% Other (nonprofits, gig economy, temp workers)
EDPNC asked Thom Ruhe, CEO of NC IDEA, Kelly Rowell, CEO of the Center for Economic Development, Krista Covey, CEO of First Flight Venture Center and myself (Founder & Executive Director, RIoT) to educate them about Technology Based Economic Development (TBED) and supporting new job growth via entrepreneurship.
The group discussed the extremely collaborative nature of organizations across North Carolina, supporting Technology Based Economic Development. TBED is the focus of fostering and growing technology startups as a basis for broader economic development. Technology startups that scale create high-wage jobs. High-wage jobs then circulate money through the economy to support lower-wage restaurant, retail, arts and entertainment jobs. All of the above are requisite components of a healthy and diverse economy.
Focusing on emerging technology industries is key to a robust economy. New technology jobs are always more robust than established industry jobs. Here is why. Throughout all of human history, new technologies always replace older technologies over time. And mature technologies, that are not yet obsolete, tend to face heavy price pressure from broad competition. New, and emerging technologies can solve problems in the market that have never been solved before, allowing companies to attract high prices and strong margins, healthy for the company and the community in which it resides.
New tech jobs are not enough. We also need corporate headquarters.
Consider one of the recent huge economic development wins that EDPNC and Governor Cooper brought to the state. In 2021, Toyota announced plans to open a major battery manufacturing facility in Randolph County. The facility, slated to open next year, received economic incentives of $438M from the state and Toyota promises to invest close to $1.3B as they build out that facility. Governor Cooper joined the EDPNC board meeting and touted that project as he reflected on the economic growth and success we have seen during his 8 years leading NC.
The project is a boon to Randolph County. I won’t refute that. But there is another part of the story that is rarely told. The traditional big game hunting style of economic development is most commonly a zero sum game.
Since 2017, Toyota has closed 3 combustion engine factories (Georgetown, KY and Altona, Victoria Australia 2017; Long Beach, CA 2022) and dramatically downsized two others (Burnaston, Derbyshire UK 2019 and Huntsville, AL 2021). As vehicle electrification is replacing gas powered vehicles, the overall complexion of jobs at car manufacturers is changing. This happens in every industry.
From 2015 through 2023, Toyota has remained relatively flat, varying between 350,00 and 370,000 jobs worldwide. This is despite production increases from 8M to 10M vehicles a year and a valuation increase from $200M to $250M. Annual revenue growth in this period has increased from $250B to $310B. Net new jobs are not being created. They are just moving around, in part due to the global paradigm of these large tax incentives.
What has not occurred, however, is for Toyota to make significant changes at their global headquarters, where the company was founded. Their headquarters near Nagoya, in Toyota City, Japan, is still where they base new technology development, overall corporate strategy and key R&D for new vehicle models. Satellite sites are always at risk. Beyond technology and cost-driven plant closures, which are common, Toyota even moved their North American headquarters from California to Texas back in 2017.
I’m not picking on Toyota. Nearly all big companies do this. When I moved to RTP back in 1993, it was to join the first satellite office for Ericsson (a Swedish company) in North Carolina. Mobile phones were just entering the transition from analog to digital radio technology and Ericsson wanted to tap into the talent in the US market. Over the next dozen years or so, the Ericsson site in RTP grew to 1600 people. But when subprime mortgages tanked the economy in 2008, they pulled back to headquarters and shut down their primary site completely. Today, Ericsson has only a few hundred remaining employees in the region.
It is encouraging to see EDPNC looking more closely at how to support TBED style economic development.
Kelly Rowell shared CED’s goal to grow an additional $20B in enterprise value in NC over the next 10 years. They attract investors from all over the world to their annual Venture Connect summit, seeking to invest in the local startup community. Krista Covey is seeing significant growth in tech startups attracting funding to our state and is working on a major growth and capital project at FFVC. NC IDEA has deployed more than $23M to startups across the state since 2006.
We have a thriving local ecosystem, and ESOs across our state work very well together. Just the four organizations asked to speak at the EDPNC board meeting have more than 100 years of collective experience building great tech companies from the ground up in NC. But we could do more.
I shared that we do not see the same kind of state support that is growing in other regions. RIoT works in both NC and VA (the current #1 state to do business) and there are a lot of similarities. One difference, however, is that VA established a nonprofit, fully funded by the state, to deploy capital to tech startups via grants and equity investments and also to fund Entrepreneur Support Organizations (ESOs) that are helping to grow the tech economy.
One of VA’s newer programs puts taxpayer funds into private VC funds, including funds in North Carolina, who then invest in VA-based startups. It is a clever way to draw venture funding from other states into VA, as limited partners (LP investors) in those funds invest alongside the VA-based capital.
As a state, we need to increase our support of the entrepreneurial and tech communities. We have recently had a number of huge wins from the federal government, including the awarding of two NSF Engines in the state (regenerative medicine and advanced textiles), a massive DoD research center (semiconductors), a Build Back Better Award (Biotechnology) and several other multi-million dollar projects. Those are primarily focused on early stage research.
The state made a big step forward last year, with a major investment in the formation of NC Innovation, to support commercialization of technology coming out of the non R1 public universities and HBCUs in the state (i.e. not NC State, UNC, Duke). We are beginning to think differently, beyond that old tax-incentive-style of economic development.
And we’ll have to do something different. With corporate taxes in NC now 0%, tax avoidance is no longer a tool in the toolbox. ESOs have an incredible force-multiplier effect and I’m thankful to the EDPNC board (and Karen LeVert and Colin Kiser, who championed the effort) for inviting me to join such an esteemed panel of experts.
Lest we forget, even the small companies eventually get big and do the huge site development style projects we normally attract. Pendo built a high rise in downtown Raleigh. Bandwidth just built a beautiful new campus. Wolfspeed is building high tech manufacturing capability. And the SAS headquarters is never going to leave Cary. All of these are home-grown tech companies. With the right support, many more are on their way.