Targeted state economic development incentives and entrepreneurship

DOIhttps://doi.org/10.1108/JEPP-D-18-00033
Date03 September 2018
Pages235-247
Published date03 September 2018
AuthorMeg Patrick Tuszynski,Dean Stansel
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Targeted state economic
development incentives
and entrepreneurship
Meg Patrick Tuszynski and Dean Stansel
Southern Methodist University, Dallas, Texas, USA
Abstract
Purpose The purpose of this paper is to examine the relationship between state economic development
incentives programs and entrepreneurial activity.
Design/methodology/approach The authors use panel data and a fixed-effects model to examine the
determinants of five measures of entrepreneurial activity. To measure state economic development incentives
programs, they use a new and substantially improved data set from Bartik (2017). They also include a
measure for economic freedom, the Fraser Institutes Economic Freedom of North America index.
Findings The authors find a robustly negative relationship between development incentives and patent
activity. They find some evidence that incentives are negatively associated with small business
establishments (o10 employees) as a percentage of total establishments but positively associated with the
large business establishment (W500 employees) share. They also find evidence of a positive relationship
between economic freedom and both patent activity and net business formation.
Research limitations/implications The results imply that economic development incentive programs
are unlikely to increase entrepreneurial activity and may decrease it. They also imply increased economic
freedom (lower taxes, lower spending, and lower governmental restrictions on labor markets) may increase
entrepreneurial activity.
Originality/value To the authorsknowledge, this paper provides the first examination of the relationship
between development incentives and entrepreneurial activity that utilizes Bartik (2017), a new vastly
improved data set of state economic development incentive programs. The paper also contributes to the
literature on the relationship between economic freedom and entrepreneurial activity.
Keywords Entrepreneurship, Economic freedom, Patents, Business formation, Sole proprietorship,
Targeted development incentives
Paper type Research paper
1. Introduction
State and local governments have been trying to lure businesses away from other areas for
decades, offering generous taxpayer subsidies of many varieties. The effectiveness of that
strategy has frequently been questioned. While economic development policy is generally
aimed at topdown attraction of major firms to a locality, oftentimes innovation and
entrepreneurship happen at much lower levels of aggregation. This makes the relationship
between entrepreneurship and development incentives very interesting to study. Most
economic development incentives are aimed at attracting large, established firms; indeed,
the states and localities offering these incentives have neither the time nor the resources to
sift through small projects and figure out to which they should award funding.
Consequently, it is large companies and large projects that often receive these types of
incentives, since the grantors of the incentives can justify the expense by saying the project
brought many jobs to the area or resulted in other tangible outcomes. Furthermore, because
they have more financial and political capital, larger companies tend to be better able to win
these subsidies.
Until very recently, there were very few data sources available for a researcher interested
in studying the provision of economic development incentives in any comprehensive way.
A great many studies exist that look at the economic impacts of specific types of incentives,
or the impact of packages of incentives in a specific geographical location. Yet cross-state
panel studies of the effects of state-provided development incentives were virtually
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 3, 2018
pp. 235-247
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00033
Received 9 July 2018
Accepted 10 July 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
235
Targeted state
economic
development
incentives

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