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.

Quite frankly, we were surprised by our findings – especially in light of what we had thought we might find based on the earlier location expert survey results.  All of our statistical analyses and our interviews with large and small life science companies and high level scientists have provided admittedly circumstantial, but we believe fully sufficient, evidence that this particular state initiative is proving its worth and that the Life Sciences Center charged with implementing it is being run in a highly effective and efficient manner.

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.

This number has been questioned by a number of critics, including one associated with this website. We admit that we cannot prove beyond a shadow of a doubt that none of these jobs would have existed in the absence of the tax incentive. But, in our defense, our critics should consider two things.  First, in making this claim we did not use a “multiplier” as is common in such calculations. The multiplier presumably measures the indirect jobs created as a result of the added consumption generated by the increase in income emanating from the direct jobs produced.  As such the total number of jobs that might be credited to the tax incentives is actually substantially greater than our estimate suggests. But even then, let us suppose there is no multiplier and a thousand of the total new jobs added at firms receiving the tax incentives would have been generated anyway.   That still leaves the state at breakeven. If the multiplier were just 1.2 – low by any standard – the rate of return to the Commonwealth would still be a healthy 17 percent.

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.

Meet the Author

Barry Bluestone

Guest Contributor

About Barry Bluestone

Barry Bluestone is a professor and director of the Dukakis Center for Urban and Regional Policy at Northeastern University.

About Barry Bluestone

Barry Bluestone is a professor and director of the Dukakis Center for Urban and Regional Policy at Northeastern University.

Meet the Author
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.