Factors in the adoption of industial development incentives by states

Abstract

The continued proliferation of state indusrial development incentive programmes in the absence of any evidence of their effectiveness raises several interesting policy questions. First, why do states continue to adopt new incentive programmes and secondly, what factors determine the type of new incentives that are adopted? These questions are investigated through the use of a set of empirical (logit) models of states' decisions to adopt new industrial development incentive programmes. In these models the decisions are hypothesized to be influenced by the states's economic and fiscal condition, the state's relative advantages and disadvantages with respect to important industrial location factors, and the incentive packages of the subject state and its neighbours. The results provide limited support for the frequently advanced, but previously untested, hypothesis that a primary determinant of a state's incentive adoption decision is the recent adoption of similar incentivies in neighbouring states. The decisions are also found to be influenced by the state's economic and fiscal condition and its relative advantage with respect to the traditional industrial location factors.