Economic Incentives a Major Boon for Reshoring and Foreign Direct Investment
Can incentives take a site from good to great?
The Reshoring Initiative, a nonprofit organization with the mission to bring good, well-paying manufacturing jobs back to the United States, just released their 2020 Data Report on June 2nd. The findings illustrate a silver lining of the pandemic: U.S. supply chain disruptions can be mitigated by producing goods closer to the end market.
This fundamental pendulum swing, accelerated by COVID-19, led to 161,000 new manufacturing jobs in 2020 compared to 110,000 in 2019. And for the first time since 2013, reshoring activities created more manufacturing jobs in the United States than foreign direct investment (FDI). FDI fell sharply in 2020, no doubt due to travel restrictions imposed from the pandemic.
Top Factors Driving New Investment
The two most important factors cited in the report for companies reshoring or foreign companies investing in manufacturing in the United States are:
- Proximity to customers and market
- Economic incentives
The importance of customer proximity is known, but how valuable are incentives to a company’s bottom line? The short answer is that economic incentives can help push capital projects across the finish line, creating new employment opportunities and adding to the tax base.
Results from 2020
Colliers Site Selection analysis found that in 2020 alone, 1,206 incentive deals were forged across the United States, representing $1.8 billion worth of cash grants, tax credits and abatements, training grants, and others. The figure represents $14,249 in incentives per job. And this was done in a year of work-from-home schedules, minimal travel, and a pandemic-induced recession.
In reviewing the average incentive package as a percent of capital expenditure in 2020, Colliers found incentives went towards offsetting about 2 percent of project capital expenditures. The 2 percent reduction is a far cry from the 6-,7-, and 11 percent seen in 2019, 2018, and 2017, respectively.
Reshoring operations, including expanding existing manufacturing, distribution, and e-commerce facilities, are eligible for incentives just as much as new FDI or greenfield projects. Colliers’ experience shows the 2% value creation last year is anemic compared to the 15-20% our incentives team produces.
Good to Great
Remember the old adage; economic incentives make a good location great, but they do not make a bad location good. Companies planning large capital projects are advised to follow a proven process and methodology to narrow the options, focusing on labor availability and quality, the labor union environment, operating costs, and operational risk. No amount of incentives will ever be enough to mitigate high recurring operating costs, an unfriendly business climate, or a difficult market to hire a well-trained workforce.