'Buying' Industry (2001+)
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Seeking to attract outside firms into a regional economy (ie to recruit industries as compared with achieving growth by developing the capabilities of established firms and industries) has often been a politically favoured economic tactic (because of its head-line grabbing appeal).

There is considerable evidence of the use of this tactic in Queensland.

However it is not an effective way of developing a high productivity industry cluster (See Developing a Regional Industry Cluster). Problems include:

  • competition from low-wage countries in recent decades has limited the productivity that can be achieved by attracting footloose operations (see below);

  • the cost of incentives further reduces net contribution to economic product;

  • the integrated functioning of a regional economic system as a whole is critical to productivity - especially now that the knowledge provided through the linkages within industry clusters has become more critical to competitiveness than capital investment. And this will not be promoted by introducing individual firms with strong established external linkages who may be not 'fit' well with the capabilities and needs of other regional enterprises;

  • the time and resources expended to attract (say) 20-30 firms annually might have been used create a business environment which could grow (or attract) 200-300 equivalent operations;

  • the risk that firms attracted by incentives will move on when they get a better offer.

Industrial recruitment was a respected technique in the industrial era but it lost a lot of credibility in the 1980s in both Europe and North America (eg see account of changes in thinking about industrial location, in Attachment F to SEQ 2001: A Plan for an Underdeveloped Economy).

The basic point is that, because of competition from low wage countries, there is now little footloose industry that is likely to be highly productive (ie generate high value-added - where the latter equates to return on capital, plus wages and salaries plus net payments TO government). Certainly it is possible to 'buy' industry through subsidies, but one can seldom do so in a way which makes a positive contribution to community wealth and a sustainable contribution to net jobs.  Development of the capabilities of endogenous (ie local) firms, rather than industrial recruitment, tends to have been accepted as the best way to create high-productivity / sustainable jobs. 

Australia's image has unfortunately become that of the cheapest source of skilled labour in the Asia Pacific region (with Queensland being the cheapest region in Australia). This is unfortunate because the economic catch-up strategy used by Japan (and other countries in East Asia) involved deliberately turning their back on their initial comparative advantages as a source of cheap labour - which they realised would have permanently kept them relatively poor.    

In particular, reliance on subsidies to persuade firms to invest may become an alternative to developing the economy so that investment would occur naturally. Furthermore it must tend to bias investments towards poor quality projects (ie subsidies will attract the attention of firms whose projects are only marginally commercially viable), and thus create a relatively weak and unproductive economy in the longer term. Subsidies have also been seen as:

  • a vote of no confidence in Australian manufacturing, and an obstacle to building Australia's economic credibility (eg Oxley A. 'Industry subsidies are votes of no confidence',  Australian, 29/4/02)

  • disadvantaging established firms (noting comments regarding a payment to Berri above);

  • an alternative to spending funds in ways that might advantage established firms (see comments on Movie World above). 

The fact that an emphasis on attracting investment remained Queensland's major practical economic tactic during the 1990s (and that most emphasis was then given to unprofitable capital intensive projects - see Note 9 on Queensland's Challenge) is a major part of the explanation of its poor economic performance, and the resulting social symptoms and mid-1990's political instability (see Queensland's Economic Strategy; Defects in Economic Tactics, Strategy and Outcomes; and Assessing the Implications of Pauline Hanson's One Nation)  

Similarly 'bidding wars' over research and technological infrastructure is economically futile because Australia's traditional problem in succeeding with innovation lies in the lack of commercial capability within the market economy to commercialize technical breakthroughs (ie turn them into successful businesses) not in any shortage of technical breakthroughs in the first place. (See  Queensland's Lack of Serious Public Policy: A Comment on Smart State). Furthermore the components of an economic system have to work as a functioning whole. When components are established by fiat there is a risk that they will not 'fit' (see Comments on 'Innovation: Queensland's Future').

It has been suggested that there is little value in incentive to attract investment in R&D facilities if there is not an environment that encourages them to stay (Woodhead B 'R&D incentives lacking, says Ericsson', FR, 29/10/02)

The costs of 'bidding wars' for industrial location appear to be a not inconsiderable factor in Queensland's deteriorating financial position (See Note 52 on Queensland's Challenge; and About Queensland's Budget)

Queensland's Treasurer has been quoted as arguing that incentive payments are not the reasons that companies come to Queensland [1]. If so, why bother?

Tactics that seem likely to be far more effective in developing a productive modern economy are suggested in Queensland's Economic Strategy.

In August 2004 it appeared that the futility of 'buying industry' was belatedly recognized [1, 2] - perhaps because of increasingly difficult financial constraints.

In October 2005, Queensland's premier pointed out that providing incentives to attract industry had not worked [1]. This emerged at a time when priorities were being reviewed because of proposals for large additional spending on public hospitals.

From August 2001
Evidence

Evidence

  • Queensland intends to continue in its 'business bidding' agenda (Strutt S., FR, 9/5/03)

  • Queensland's Premier suggested that Queensland would be little more than a beach if government did not provide funding support for projects such as AMC (Wardill S 'Beattie defends risk of backing troubled AMC', CM, 28/4/03) [CPDC Comment: this shows  naivety about the nature of economic development. See Defects in Economic Tactics, Strategy and Outcomes and Queensland's Economic Strategy];

  • Tens of millions of dollars flows from Queensland government to business - yet no one outside Treasury, state development and the premier's office knows where it goes. Public accountability is becoming an issue. State Development minister refused a request for details stating it would be too much work for his department. $64m grants are on top of special one-offs like $100m to AMC magnesium project. Accountability matters - especially noting Productivity Commission's evidence that Queensland's expenditure on selective assistance has been growing faster than in other states - and that it is hard to assess the benefits. For example, $300m state and federal assistance to Comalco amounted to $750,000 per job created. Queensland Government argues that it has a rigorous system for assessing grants, and that they pay off in terms of extra payroll tax, that NSW and Victoria and NSW provide more and Queensland has to compete for industry location (Syvret P 'Funny business', Bulletin, 3/12/02)

  • Competition amongst the states to lure big projects is pushing corporate welfare out of control (and costing about $3.3bn pa) for little return according to Productivity Commission head, Gary Banks. Such deals are hard to justify on economic grounds, and even harder in terms of good governance. Resources should be concentrated on improving economic governance, tax regimes, infrastructure and service delivery. Queensland's corporate welfare payments had doubled since 1996. These claims were badly received by a Brisbane audience many of whom were from the public sector. All government payments to companies should be made public so their value can be assessed. States tend to fight over projects that would locate in Australia no matter what. To rectify the situation, the Productivity Commission called for explicit selection criteria, rigorous assessments, public announcements of the nature and value of assistance and monitoring by audit agencies (Fraser Andrew '$3.3bn lost on luring companies', A, 7/11/02)

  • Queensland taxpayers might fund a $10m incentives package to entice BHP to spend $380m expanding Yabulu nickel refinery - that would create 400 jobs (Franklin M 'Beattie offers $10m aid for nickel project', CM, 9/10/02)

  • Queensland Government spending on grants for private companies has increased eight fold in five years to $64m pa (Franklin M. 'Grants to business increase eightfold',  CM,  31/8/02)

  • the Queensland Government has refused to join a pact with NSW and Victoria and SA to scrap bidding wars between states to attract major corporate investors (Franklin M and Hart M 'Beattie shuns incentive protocol',  CM,  30/8/02)

  • Queensland Government's bid to make the state into a technology powerhouse received a strong boost with Oracle, Accenture and IBM all announcing major expansions of IT operations in Queensland. The appeal lies in financial incentives, and business infrastructure which government has put in place. Oracle is to expand its software development centre by 20. Mincom is to set up IT services operation with Accenture. IBM will create 65 software security jobs - heavily influenced by payroll-tax and training subsidies. Available highly qualified software engineers also significant. DSD cites payroll tax concessions, training subsidies and relocation assistance as the main lures used - in exchange for corporate commitment to job creation / investment. Strategy attracted red hat. State government also works with local councils in developing industry clusters in various regions (eg at Gold Coast DSD arranged with Delfin Lend lease to produce economic development strategy to attract $100m interstate / international investment focused on Bond University (Byrne M. 'Qld on its way to realizing tech dream', FR,  9/7/02)

  • the effectiveness of Queensland's efforts to 'buy jobs' has been questioned (Johnstone C 'The high cost of buying jobs', CM,  25/5/02)

  • Queensland taxpayers paid $17 to lure businesses to the state last year - paid to 31 companies (Odgers R 'State pays $17m to attract business', CM, 21/5/02)

  • The South Australian Government more than doubled (to $50m) the $20m state package offered to Mitsibishi by a previous government to gain a $976m investment (Altmann C et al 'Double or nothing: Mitsubishi's winner',  Australian,  27-28/4/02) [See also Oxley A. 'Industry subsidies are votes of no confidence',  Australian, 29/4/02]

  • Mitsubishi has been given $85m to provide 1300 new jobs and keep its South Australian car operation open (Morris S. 'Mitsubishi's $95m deal buys 1300 jobs',  Australian,  26/4/02)

  • A clash between Victoria and Queensland Premiers sets the stage for a big expansion in state funded projects in bio and nano technologies. With state government help University of Queensland is seeking to establish a $50m Australian Institute for Bioengineering and Nanotechnology - after losing earlier projects to a pre-emptive strike from Victoria (Jay C. 'Beattie and Bracks clash on high tech',  Financial Review,  19/4/02) (see also: Emerson S. 'Share or die states told', Australian, 1/4/02)

  • the North Queensland film industry has joined critics of an $8m loan to Movie World - on the grounds that public funds should not be used to fund a giant global company which could raise its own funds, and because the money would have been better spent supporting post-production or studio space in North Queensland (Franklin M. 'State filmmakers censure $8m Movie World loan',  Courier Mail,  26/3/02)

  • Queensland is treading a fine line between genius and madness in public funding of investment incentives for big companies. How far should this go to establish operations whilst avoiding corporate feather-bedding. Companies are enticing government to provide money that they don’t really need. Cases include loan to Warner to expand its movie studio and grants to Berri for a fruit juice option. The Premier is giving top priority to job creation – but will not survive perceptions that he is being taken for a ride. In his absence no one in government was able to respond to opposition allegations that incentives provided to Berri had damaged other existing producers (Franklin M. ‘Beattie risks movie madness’, Courier Mail. 23/3/02)

  • Warner Bros refused to expand its Gold Coast Movie studio without an $8m loan from the Queensland Government according to the Government – a claim which attracted criticism from the opposition who argue that Government should not be the banker for an international media giant. The loan will be repaid with interest – though $2m might be forgiven under some circumstances. The Auditor General is to conduct an inquiry into incentives provided to Berri to establish a fruit juice operation that has been claimed to have disadvantaged existing producers. Commerce Queensland suggested that firms would not be interested in government incentives if this would expose them to political controversy (Frankilin M and Odgers R ‘Beattie defends studio loan’, Courier Mail. 23/3/02)

  • Fair questions about the granting of an investment incentive to a fruit juice company are being treated with contempt by the state government. One of the five criteria in government guidelines on incentive grants requires that grants not disadvantage existing firms. It has been claimed that a grant to Berri (the amount of which is secret) has disadvantaged Burnett-region fruit growers (Franklin M. ‘Juice extracts from taxpayers’, Courier Mail. 19/3/02)

  • interstate rivalry to attract industry (with tax breaks) makes it difficult for Australia to present a united front as a location for innovation in the region (Janz C. 'State rivalry hurt nation: analyst',  Australian,  5/3/02)

  • financial incentives to encourage firms to locate in Queensland have been identified in the Department of State Development's annual report - about $11m pa for 26 firms (Jones C. 'Beattie Govt outlines cash grants, tax incentives', Courier Mail,  16/11/01) [CPDS comment - this appears to cover only a small fraction of the subsidies being offered to recruit industry]

  • an alumina refinery project in central Queensland would not have proceeded without strong levels of government funding (see Business Investment: Good News)

  • "The state government is to step in to prop up the private sector in regional Queensland. It will do this with a two pronged proposal to subsidise the delivery of gas into Townsville and offer revenue assistance for a private power station in the city ... The package follows funding pledges from both the State and Federal Government's of more than $600m to prop up Comalco's alumina refinery in Gladstone and the proposed Australian Magnesium smelter at Stanwell" (McCarthy J. 'State Govt steps up strategy to boost regional development', Courier Mail, 2001)

  • "Queensland has entered an intense bidding war to snare the Australian headquarters of a new, no frills international airline being planned by Qantas" (Maynard N. and Franklin M. 'State in chase for Qantas offshoot', Courier Mail, 17/8/01)

  • "Australia's biotechnology industry is struggling against investor apathy .... (a recent report) criticized the state and federal governments for failing to adopt a coordinated approach to the industry, saying Australia's strategy was deeply flawed.   The biggest risk was that each state would duplicate infrastructure ... With no critical mass and a small population, Australia would have difficulty fighting international heavyweights" (Anderson F. 'Aussie biotech strategy deeply flawed', Courier Mail, 15/8/01)

  • A large subsidy was offered to encourage a magnesium industry investment  - a project which subsequently experienced serious management and financing problems

  • "Intense competition, bizarre rumours and even allegations of interstate spying" characterized the Queensland and Victorian Premier's visit to a San Diego conference of the Biotechnology Industry Association (Franklin M. 'State rivals press hard for biotech supremacy', Courier Mail, 30/6/01)

  • "Premier Peter Beattie has fired another shot in his high-tech war with Victoria announcing plans for a $60m institute for nanotechnology', Franklin M. and Parnell S. 'Smart State thinks small for its next big thing', Courier Mail, 26/6/01)

  • "The three biggest states have started an intense bidding war to lure Australian born researches home from foreign universities" (McIlveen L. 'States step up war for best brains', Australian, 16/5/01)

  • The Government was accused (by the Auditor General) of needlessly hiding details of its deal to woo Virgin airlines into Queensland and abusing use of 'commercial in confidence' provisions