Bluestone, Clayton-Matthews answer life science criticism
STATES AND LOCAL GOVERNMENTS have, at best, a checkered past in providing public handouts to private industry. In a desperate attempt to retain jobs or attract them, many states, cities, and towns have provided individual companies with tax incentives and property tax rebates – trusting these would make the difference in the location decisions of CEOs.
In survey research the Dukakis Center for Urban and Regional Policy carried out in 2005 with corporate location and site specialists from across the country, we learned that such incentives pale in comparison with other factors when it comes to corporate location decisions. Chief among these are the speed with which zoning appeals and building inspections are completed, the existence of an appropriated-trained labor force in the community, and adequate infrastructure.
As such, when the Dukakis Center agreed in 2012 to carry out an assessment of the Massachusetts Life Sciences Center and Governor Deval Patrick’s ambitious 10-year, $1 billion state commitment to the life sciences super-cluster, we were naturally skeptical of whether these public investments would have a reasonable rate of return to the residents of the state. As such, in the course of our evaluation work, we probed deeply using both quantitative and qualitative tools to obtain the most accurate assessment possible.
Why has this initiative been so successful? There are five key reasons.
1. Instead of providing resources to individual companies that share little in common, the initiative targets an entire super-cluster of firms, academic institutions, research and training centers, and municipalities to create a self-reinforcing “ecosystem” giving rise not to one or two super-star companies, but an entire industrial sector.
2. Only a small fraction of the $300 million spent so far – less than 20 percent – has gone to tax incentives and these have overwhelmingly gone to small firms.
3. Moreover, employment targets have been set and those firms failing to meet those job targets either return the incentive payments voluntarily or are forced to do so through “clawback” provisions. A much larger share of the Life Science Center’s budget goes for accelerator loans, which are being repaid, and an even larger share of these funds have gone for internship programs, research grants to young researchers, and infrastructure projects. These are all legitimate investments in human and physical capital.
4. In terms of regional economic development, the life sciences cluster operates very differently than traditional industries. In traditional industries, states and municipalities often attempt to use tax incentives to lure a big company to town in the hopes that that company will attract a large number of smaller supplier companies around it. In the life sciences, we found that large companies – including eight of the 10 largest Big Pharma companies in the world – have been attracted to Massachusetts because of the proliferation of small, innovative start-ups that might be the incubator for the next big drug or medical device breakthrough. Even with their enormous R&D budgets, Big Pharma knows it is not certain that their own scientists will come up with a breakthrough drug treatment or device. As such, they want a front-row seat where the small innovative companies are located. Their model of growth is acquisition. The reason why the Life Sciences Initiative is so effective is that the smaller firms depend on it for start-up capital and for linking them to research labs and skilled labor. While an accelerator loan or tax incentive might mean little for the big fish, they are critical for the minnows. But the big fish want to be where the minnows are and therefore the initiative is indirectly responsible for bringing the likes of Pfizer, Novartis, and Johnson & Johnson to the Commonwealth.
5. Decisions about which companies and research institutions receive initiative support have been largely insulated from politics. Instead a highly professional Scientific Advisory Board composed of research scientists, venture capital experts, and entrepreneurs review applications for aid and make decisions on which of these applicants are most likely to succeed in meeting their job targets. As a result, very few of the tax incentives and accelerator loans have turned sour.
A small section of our overall evaluation considered just one of the many programs of the Life Science Center – the tax incentives offered to small companies. Based on our best statistical analysis, we concluded that the incentives helped generate over 2,500 additional jobs. Given the wages and salaries provided by these jobs, we concluded that for every dollar in incentive the state earned back $1.66 in additional income and sales tax – a nifty rate of return.
The important point, however, is that this initiative is so much more than the tax incentive package. It has been critical to helping develop a talent stream for this industry as well as creating a platform under the entire life sciences sector leading to a level of collaboration between industry, academia, and the public sector that virtually everyone we interviewed told us would never have evolved.
In the end, we are not great fans of many tax incentive programs and we have never been kind to such programs as the film tax credit. But the Mass. Life Sciences Initiative is a horse of another color and deserves respect and support. It would be good if it served as a template for other state efforts at nurturing job creation.Barry Bluestone is the director and Alan Clayton-Matthews is senior research associate at the Dukakis Center for Urban and Regional Policy at Northeastern University.