GWSB Research Fall 2014
The George Washington University School of Business
MESSAGE
The George Washington University School of Business has long been renowned for the quality and scope of the research performed by its faculty. Their efforts reflect GWSB’s commitment to cuttingedge, groundbreaking research aimed at expanding the depth and breadth of business knowledge. Our location in the heart of Washington, D.C., provides our faculty with rich opportunities to work across industries and sectors in a truly global capacity, and the research produced as a result is some of the best in the world. This issue of GWSB Research highlights some excellent recent research work by our faculty: • Wenjing Duan, associate professor of information systems & technology management, details the factors affecting consumers’ online purchasing decisions; • Nathan M. Jensen, associate professor of international business, examines the actual effects of state-sponsored job-creation incentives;
from the Dean
• Elizabeth Mullen, associate professor of management, shares her research on how victimcompensation outcomes are affected by the severity of criminal penalties;
Did You Vote For a Job Creator?
• Department of International Business Chairman Robert J. Weiner, professor of international business, public policy, and international affairs, and Anthony P. Cannizzaro, PhD candidate in international business, discuss their work on transparency in state-owned enterprises in the global energy sector; and • John Forrer, associate research professor of strategic management & public policy and associate director of the Institute for Corporate Responsibility, sits down for a Q&A session about his recent book. Each of these articles provides an example of the high-quality research being conducted by GWSB faculty. I am sure you will enjoy reading them. Onward and Upward,
Linda A. Livingstone Dean The George Washington University School of Business
By NATHAN M. JENSEN Associate Professor of International Business
THE ECONOMICS AND POLITICS OF ATTRACTING INVESTMENT TO YOUR CITY
A RECENT SURVEY FOUND THAT 95 PERCENT OF
U.S. cities use some form of targeted financial incentives to attract firms. These incentive policies, such as tax holidays or outright grants, are not new. In fact, they date to the 12th century in Italy. (Alexander Hamilton holds the distinction of being the first known American recipient of a targeted financial incentive.) Although these policies have been one of the most common economic development tools of cities, states and countries around the world, few have asked whether these expensive policies actually work. One of my current projects examines this question using a novel research design strategy. This project focuses on Kansas and explores how that state’s flagship economic development program, Promoting Employment Across Kansas (PEAK), affects job creation. How would we know if an incentive program helps create jobs? This is an important question because in economic development most agencies (and voters) are loath to pay firms for jobs they were going to create anyway. Instead, the goal of most incentive programs is to harness taxpayer funds to provide incentives for further job creation. A useful way of thinking about whether incentives create jobs is to compare them to scholarships for high school students. Would we really say that giving a scholarship to a high school valedictorian caused the student to go to college? Isn’t it more plausible that this scholarship simply reduced the cost of college for the student? Although I agree that to help students choose to attend college and to reduce their college costs are laudable goals, this analogy helps us rethink our assumptions about job-creating incentives. Evaluations of many job-incentive programs find that most of the jobs that were “created” would have appeared with or without incentives. These “redundant” jobs make up from two-thirds to three-fourths
of the jobs claimed to result from the incentive program. In other words, it appears many incentive programs are paying firms to do something they already intended to do. However, there is a problem with these studies: They are often based on interviews with firms or make assumptions about the firms’ alternative investment locations. In my study, I harness data on all businesses in Kansas to compare how firms receiving PEAK incentives fared relative to firms that did not receive these incentives. Using matching methods (i.e., comparing very similar firms that received incentives with those that did not), I can analyze employment creation at the firm level over a six-year period. No matter how we parse them, the findings reveal that there is no clear pattern of job creation among the firms that received PEAK incentives. Surprisingly, most estimates indicate that PEAK firms created slightly fewer jobs than the firms without any incentives. If these results hold over the course of my research, then the next question is why. More specifically, why would politicians champion these policies if they are so ineffective? Another research project, which I co-authored with three other professors and which appeared in International Studies Quarterly, begins to answer this question by pointing to the political logic of incentives. Survey data on how voters evaluate new investments in their district and the use of incentives
shows that the provision of incentives is a dominant strategy for politicians. By using incentives, politicians can claim extra credit for attracting investment—and they can deflect blame if an investor chooses another location. In short, it makes sense for politicians to always offer incentives, even if they are known to be 100 percent ineffective. This research is far from complete, and I have a number of other related projects in progress as well as a co-authored book manuscript on the topic with Eddy Malesky at Duke University. If you have thoughts or suggestions related to this topic, I would be happy to hear from you.
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