Four takeaways from the Toyota/Mazda $1.6 billion investment in Alabama

Amazon is not the only global company making major investment decisions. Earlier this month, Toyota and Mazda announced a joint $1.6 billion investment in a new automotive production facility in Huntsville, Ala. In exchange for the investment, which could create up to 4,000 jobs, the two Japanese auto giants will receive what is expected to be between $800 and $900 million in local and state economic incentives. This development has been big news in Alabama, and President Trump gave it some added exposure when he tweeted out, “Cutting taxes and simplifying regulations makes America the place to invest!”

However, this deal is about more than just Toyota, Alabama, and Trump. It represents the latest instance of America’s de facto job creation policy: cities, regions, and states compete with one another for capital investments from globally mobile companies and the economic opportunities they deliver, amidst significant national policy changes related to taxes, trade, and regulation. In that sense, here are four specific realities that this announcement signals about U.S. economic development trends.

1. The American South’s industrial attraction stays its global course.

For nearly a century, southern U.S. states have utilized business attraction as a key economic development tactic, initially by incentivizing the relocation of industrial companies from northern industrial hubs and then evolving to international attraction beginning in the 1980s. Over the past three decades, for instance, foreign automakers invested in nearly every major southern state: Alabama (Mercedes-Benz, Toyota), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan), South Carolina (BMW), and Tennessee (Nissan, Volkswagen). Tax breaks play a significant role in these attraction policies. Since 2000, of the 10 U.S. states that provided at least half of their economic development incentive spending to foreign companies, five are in the South, led by Mississippi (88 percent), Alabama (84 percent), and Georgia (59 percent). Alabama is uniquely foreign-oriented: the seven most highly subsidized companies in the state have headquarters outside the United States.

Map: Share of subsidy on foreign companies by state

2018.01.25_Table1_Share of subsidy-final

2. Tax incentives were necessary but not determinative.

Municipal, county, and state governments in Alabama provided roughly $800-900 million in tax incentives to Toyota and Mazda, including $380 million from the state. Two statewide tax credit programs—a job creation tax credit and a capital investment tax credit—accounted for about $300 million in incentives, and the state has promised to construct a training facility along with an assortment of other rebates. Localities will foot the rest of the subsidy bill. Interestingly, Louisiana and North Carolina came up short after submitting even larger incentive packages, suggesting that tax breaks were not the central reason for Alabama’s selection. Nevertheless, the fact that these other states presented such aggressive packages forced Alabama to offer more incentives than it otherwise would have. Unfortunately, this wasteful aspect of local and state economic development continues at taxpayer expense.

3. Toyota cared more about Alabama’s existing industrial strengths.

The automotive industry clusters geographically. Large automakers like Toyota rely on highly efficient networks of parts suppliers, many of which cluster nearby to minimize transportation costs and allow for face-to-face interaction. Automakers are able to negotiate such large megadeals partly because localities and states want to attract their supply chains as well. And one reason why Alabama beat out Louisiana and North Carolina with a smaller incentive package was because it offered a greater concentration of auto suppliers nearby that Toyota could draw upon. Even as management technologies allow for supply chain management across many countries, Toyota’s decision reflects the continued force of industrial clustering.

4. Maintaining global connectivity will still be critical, though, particularly within North America.

Chief executive Akio Toyoda called the planned facility a “built-in-America success story,” and much of Toyota’s supply chain will remain in Alabama and nearby states — but not all of it. Supply chains for global automakers stretch regionally in North America, stitching together industrial hubs across Canada, Mexico, and the United States. This platform exists not only due to the complementary nature of the three economies but also the regulatory and commercial advantages provided by the North American Free Trade Agreement (NAFTA), which is currently under renegotiation. As Jim Lentz, the CEO of Toyota North America, noted last week: “this supply base that all (automakers) have in North America is based on NAFTA.”

Viewed in these ways, the Toyota/Mazda investment in Alabama is not only a notable business headline, but also a helpful exemplar of the market trends and local, state, and national policy developments influencing economic growth and opportunity in America.