PA 315 Government Business Relations

Lecture 6

Agenda
Government strategies with business The Disney Case

Strategies
How does government promote economic development?

3 Government Strategies with Business

Industrial recruitment

Governments subsidize businesses to lure more investment in their jurisdictions. Governments adopt policies that promise to increase public revenue, focusing on new firm and technology development.

Entrepreneurial strategy

Privatization (especially through public-private partnership)

An increasingly important means of local economic development

Industrial Recruitment
(competitive federalism)

Government often offers incentives to lure business from other jurisdictions or to prevent indigenous firms from leaving. It is often understood as a product of competitive federalism, which assumes that the diversity of services offered by state and local governments creates a market for public goods.

Industrial Recruitment
(competitive federalism)

Tends to be case-by-case strategy Example: the United Air Lines (Kantor & Savitch 1993)

93 cities competed for the United hub

Other examples: tourism, foreign trade, recreational franchises, federal grants

Industrial Recruitment
(competitive federalism)

Pros

democratic open to public scrutiny Capitalistic principle: competition Governments can be selective
Erodes the tax base Can lead to economic powerhouses manipulating government Exacerbates inequities among jurisdictions (winners and losers)
7

Cons

Entrepreneurial Strategies
Government adopts policies that promise to increase public revenue, focusing on new firm and technology development. What drives state to use entrepreneurial strategies?

Necessity: environmental stress or pressure (i.e. economic stagnation, high unemployment, poverty), fiscal stress Resource availability (fiscal comfort): capacity for action, surplus resources Opportunity
8

Entrepreneurial Strategies
not case-by-case strategy (rather it is policy driven) What makes it work so well some times and fail so miserably other times?

Wisdom of idea Implementation

Entrepreneurial Strategies

Examples:

State of Nevada: Gambling no state tax States of Delaware, Nevada, Wyoming incorporation, tax laws Countries of Malta, Cuba, Brazil generic pharmaceuticals CORPORATE CENTERS Hong Kong: International Financial & Trade Center Dubai: world business hub (innovative real estate projects, hotels, and sports events) Cayman Islands: International Financial Center Bahamas: tourism, a growing foreign corporate centers
Do not hear of failures by definition but they are many too, especially when a jurisdiction cannot let go of a formerly successful strategy
10

Does the ideology of policy makers make a difference in the strategy used?
Strategies affected by the dominant political ideology. e.g., Liberal states should be more disposed toward entrepreneurial strategies (policy based). Conservative states should be more disposed to industrial recruitment strategy (case-by-case strategy).

11

Findings by Saiz

Large and robust support for industrial recruitment strategy. Very modest support for entrepreneurial strategy related to stress of unemployment. Does NOT assert that entrepreneurial strategies do not exist; just that they are not (consistently) driven by fiscal comfort/discomfort. Does NOT assert that ideological perspectives do not affect economic development strategies at all; but does assert that it is not consistent and therefore statistically insignificant
12

Privatization

The practice of delegating public duties to private organizations (Dohanue 1989)

Question: When does it make sense to delegate which duties to which entities? What types of public duties make sense? Government functions Government services Government facilities Not: inherently government, especially policy Private organizations? Profit-seeking firms Nonprofit corporations Voluntary service organizations Religious and neighborhood organizations

Forms of Privatization (GAO 1997)

Asset Sale: the transfer of ownership of government assets,

commercial-type enterprises, or functions to the private sector.

i.e. GovSales

Contracting Out: the hiring of private-sector firms or nonprofit

organizations to provide goods or services for the government.

i.e. Defense contracts

Deregulation: the process by which governments remove, reduce, or

simplify restrictions on business and individuals in order to (in theory) encourage the efficient operation of markets. i.e. Ma Bell system; California energy system

Franchises: a concession or privilege government grants to a private

organization to conduct business in a particular market or geographical area

i.e. Highway 91 Express Lanes; Cable franchise

Forms of Privatization (GAO 1997)

Government Corporations: separate legal entities that are created

by Congress, generally with the intent of conducting revenue-producing commercial-type activities, and that are generally free from certain government restrictions related to personnel and procurement.

i.e. Community Development Financial Institutions Fund; Overseas Private Investment Corporation (OPIC); Federal Deposit Insurance Corporation (FDIC); Amtrak

Grants (or subsidies): a sum of money (or a privilege or rights)

government gives to private organizations to encourage their involvement in accomplishing public purposes

i.e.: the funding of low-income housing, or tax subsidies, R&D grants or tax credits.

Lease: the arrangement of government granting the temporary

possession or use of (lands, facilities, etc.) to private organizations, usually for compensation at a fixed rate and with service and profit restrictions.

i.e.: lease of airport

Forms of Privatization (GAO 1997)

Voluntarism: activities conducted through either a formal agency

volunteer program or a private nonprofit service organization.

Vouchers: government financial subsidies given to individuals for the

purchase of specific goods or services from the private or public sector.

i.e.: Food stamps, housing vouchers

Forms of Privatization

Public-Private Partnership

A contractual arrangement formed between publicand private-sector partners that can include a variety of activities that involve the private sector in the development, financing, ownership, and operation of a public facility or service. An increasingly important means of local economic development

Public-Private Partnerships

Five-point characterization (Peters 1998):

Involve two or more actors, at least one of which is a public entity Each of the participating actors can bargain on its own behalf The partnership involves a long-term, enduring relationship Each actor must be able to bring either material or symbolic goods to the relationship All actors have a shared responsibility for the outcomes

Advantages of PPP

Low-cost solutions to urgent problems

Leveraging increasingly scarce public sector resources with those of the private and nonprofit sectors
A form of governance that reflects the prevailing political and cultural ideology (that gives higher standing to the private sector) A greater diversity of voices from three sectors

Transcending ideological divide

Bridging mechanisms

Reasons for Privatization

Market failure

Government failure: inefficiency, corruption, red tape

Cost, quality, proximity to client, innovation & expertise, responsiveness Competition & choice (range of alternatives among service providers) Devolution and decentralization Political ideology

Reasons for Privatization

Business Sectors Strengths

Responsiveness to rapid change Innovation Success replicability Abandonment of obsolete Risk tolerant Capital generation Professional expertise Economies of scale

Challenges and threats in privatization

Market does not work properly

Too small Easily manipulated Market abandoned by private sector but society wants service accomplished Needs yardstick competition for benchmarks

Public prefers higher safety in service quality or equity that comes for the public sector Ultimately, privatization is one of many policy possibilities that may make more or less sense on a case by case basis Quality of implementation of privatization as important as policy itself!

Question

Look at the local municipal level. Do you see evidence of these strategies in local cities or counties?

23

Case Study: Disney Land

Questions:

What are the requirements of eminent domain by the Fifth Amendment? Do you think eminent domain is necessary for economic development? Why or why not? Why do the Riverside City laws make it difficult to use eminent domain to acquire an owner-occupied house? Do you think it is fair that the agency settles the cases by paying the property owner more than the appraisal? What do you think are the potential costs and benefits of the expanded Disney Theme Park to the City of Anaheim (Westcot Adventureland)? Do you think the City made a right decision? Why or why not? Do you think the Disney Theme Park case satisfies the requirements of the Fifth Amendment? Why or why not?