Abstract
State policymakers strive to improve their business climates, and social scientists are interested in exploring both the causes and consequences of this action. However, the notion of a “business climate” is poorly conceptualized and crudely measured, and this has hindered progress in this area. We propose a multidimensional measure derived from a weakly confirmatory factor analysis, and show how this measure illuminates substantive differences among economic development policies—differences that are obscured by conventional measures of policy activity. We illustrate the validity of our measure by tracking its movement in relation to the evolution of development strategy in Indiana, a state known for its aggressive efforts to stimulate growth. We then demonstrate the utility of our measure in quantitative analyses of the determinants of development policies, and their impact on state economies.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 213-228 |
| Number of pages | 16 |
| Journal | Economic Development Quarterly |
| Volume | 5 |
| Issue number | 3 |
| DOIs | |
| State | Published - Aug 1991 |
All Science Journal Classification (ASJC) codes
- Development
- Economics and Econometrics
- Urban Studies
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In: Economic Development Quarterly, Vol. 5, No. 3, 08.1991, p. 213-228.
Research output: Contribution to journal › Article › peer-review
TY - JOUR
T1 - Gauging the Rainmakers
T2 - Toward a Meteorology of State Legislative Climates
AU - Hanson, Russell L.
AU - Berkman, Michael B.
N1 - Funding Information: Hanson Russell L. Indiana University, Bloomington Berkman Michael B. Pennsylvania State University 08 1991 5 3 213 228 State policymakers strive to improve their business climates, and social scientists are interested in exploring both the causes and consequences of this action. However, the notion of a "business climate" is poorly conceptualized and crudely measured, and this has hindered progress in this area. We propose a multidimensional measure derived from a weakly confirmatory factor analysis, and show how this measure illuminates substantive differences among economic development policies—differences that are obscured by conventional measures of policy activity. We illustrate the validity of our measure by tracking its movement in relation to the evolution of development strategy in Indiana, a state known for its aggressive efforts to stimulate growth. We then demonstrate the utility of our measure in quantitative analyses of the determinants of development policies, and their impact on state economies. sagemeta-type Journal Article search-text Gauging the Rainmakers: Toward a Meteorology of State Legislative Climates Russell L. Hanson Indiana University, Bloomington Michael B. Berkman Pennsylvania State University State policymakers strive to improve their business climates, and social scientists are interested in exploring both the causes and consequences of this action. How- ever, the notion of a "business climate" is poorly conceptualized and crudely mea- sured, and this has hindered progress in this area. We propose a multidimensional measure derived from a weakly confirmatory factor analysis, and show how this measure illuminates substantive differences among economic development policies - differences that are obscured by conventional measures ofpolicy activity. We illustrate the validity of our measure by tracking its movement in relation to the evolution of development strategy in Indiana, a state known for its aggressive efforts to stimulate growth. We then demonstrate the utility of our measure in quantitative analyses of the determinants of development policies, and their impact on state economies. State policymakers have long been preoccupied with economic development, but their concern intensified recently as state economies stagnated, and the competitiveness of many basic industries declined. Responding to these problems, political elites in nearly every state sought legislation designed to stimulate economic development. As a result, efforts to create jobs, provide capital, increase productivity, and invest in high technology are being made on a scale comparable to that of many European corporatist states. Indeed, many states now surpass our own national govern- ment in efforts to restore economic competitiveness.! Until recently, there was no reason to believe that these actions improved the performance of state economies, any more than 19th-century rainmakers brought relief to drought-stricken communities. Now there is some evidence that economic development policies are important for cultivating new industries associated with the emergence of a postindustrial economy. The impact of such policies is greatest where states pursue a coherent strategy for economic development, one that does not attempt to reverse fundamental trends in the private sector, but rather seeks to augment and direct them in ways that serve public purposes.2 These policies can provide the "intellectual infrastructure and entrepreneurial breeding grounds" essential to economic innovation, the key to growth.3 Even so, economic development policies seem to make a difference only at the margin, when other, more important, investment criteria are equally well-satisfied by more than one location. Of AUTHORS' NOTE: We gratefully acknowledge the support of the Ford Foundation's Project on Social Welfare Policy and the American Future, which provided funding for this research. Joseph Aistrup, Charles Warren, and John Hartman made valuable contributions to our thinking about these matters. Referees for this journal also provided helpful comments and suggestions. ECONOMIC DEVELOPMENT QUARTERLY, Vol. 5 No. 3, August 1991 213-228 1991 Sage Publications, Inc. Russell L. Hanson is Associate Professor of Political Science at Indiana University, Bloomington. His publications include The Democratic Imagination in America: Conversations with Our Past as well as articles on state politics. He is currently examining the impact of efforts to promote economic growth on states' willingness and ability to provide social welfare benefits. Michael B. Berkman is Assistant Professor of Political Science at Pennsylvania State University. His publications include an article on elections to the United States Senate. He is currently investigating policy interests among members of Congress with state legislative experience. 213 214 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 . . . state policies now organize interactions that once took place almost entirely within the private sector, or between investors and officials of local government. course, this does not deter policymakers from adopting such policies. They are under popular pressure to do something about unemployment and other social ills that accompany stagnation. Increasingly, those who do nothing are punished by voters as governors and other state policymak- ers are held accountable for the performance of state economies.4 On the other hand, those who advocate aggressive action are often rewarded at the polls, and in some cases, are able to move to higher office by virtue of their purported success as economic miracle workers. Yet we understand very little about the different ways in which policymakers fulfill this electoral obligation. To be sure, the number of detailed case studies of individual states' economic develop- ment policy is steadily growing, but they often lack a systematic assessment of similarities and differences among state policies. They also tend to stress political conditions for successful policy-making, for example, the role of leadership and the importance of administrative arrange- ments, rather than the policies themselves. Hence they do not easily lend themselves to efforts aimed at making generalizations about economic development policy across the states. We intend to remedy this defect by presenting a new approach for conceiving and measuring economic development policy. We argue that competitive pressures have forced state policymakers into a strategic mode of action. The last decade has witnessed the rise of an entrepreneurial state which emphasizes a broad range of activities intended to stimulate growth. Policymakers in the entrepreneurial state are not so concerned with raiding companies from other states, nor are they content to defend against raids on their own businesses. Instead, they now stress the expansion and diversification of existing businesses, the formation of new ventures, and even the creation of whole new industries. To facilitate these processes, state policymakers have assumed the task of identifying, ranking, and developing market opportunities for locally produced goods and services. To an unprecedented degree, they have become marketers, brokers, financiers, and risk-bearers in partnership with private actors. Consequently, state policies now organize interactions that once took place almost entirely within the private sector, or between investors and officials of local government.5 With the rise of the entrepreneurial state, innovative policymakers have explored policy combinations that promise to improve their competitive position vis-h-vis other states in the contest to attract business investment.6 For some, this entails actions that will at least partially offset their state's disadvantages on crucial investment criteria; others try to capitalize on their state's advantages. These policy orientations represent distinct strategies for promoting development, and if we can discover a useful way of characterizing these strategies, we can determine how economic and political circumstances affect the choices elites make as they pursue economic growth. In short, we will be able to offer a better explanation of policy choices, once we arrive at an accurate description of those choices, and the way in which they reflect the competitive nature of state development policy. RATING STATE BUSINESS CLIMATES Policymakers' interest in economic development is commonly expressed as a need to improve their state's business climate, and we begin with that terminology. The notion of a business climate is notoriously ambiguous. In principle, the business climate of a state or locale includes all factors relevant to investment decisions involving expansion and location of industrial and commercial activity. The pertinent factors vary from industry to industry, and even firm to firm, as is evident in the different ratings of state business climates that are produced by business consultants and publications, for example, Inc. magazine, Fantus, or Grant Thornton.7 Despite this ambiguity the publication of rankings of state business and legislative climates has intensified the competition between states for business investment.8 Policymakers from highly ranked states use their favorable evaluation in promotional materials and campaigns touting the advantages of their states to prospective investors. On the other hand, policymakers from poorly rated states often complain of biases in the rankings, but nevertheless feel compelled to improve Hanson, Berkman / STATE LEGISLATIVE CLIMATES 215 their standing, either through advertising campaigns, or by enacting policies that will make them more competitive. Among the most widely accepted ratings are those produced annually by Conway Publications, a consulting service that assists firms in selecting sites for doing business.9 The surveys look exclusively at so-called legislative climates, which Conway regards as a crucial element of a state's overall climate for doing business. These legislative climate surveys do not purport to analyze the real economic impact of development policies, nor do they examine the impact of other policy areas, such as education, bearing on investment. They merely summarize the disposition of policymakers to offer incentives or make concessions to businesses, which is symbolically important to investors.10 These ratings are the foundation for a number of explicit comparisons by social scientists concerned with development policy, for example, Hansen, and Bowman and Keamey." The usual way of proceeding is to compare states in terms of the number of relevant policies in force at a given time, that is, the level of political support for economic development. Unfortunately, such measures lack refinement. They fail to differentiate among substantively different kinds of policy, because the measures are a simple count or a proportion of the number of policies in place in a state at some time. These measures also weigh policies equally, neglecting the fact that some policies are hard to initiate, and others are easy insofar as the political and economic costs associated with their adoption are low. Happily, the shortcomings of additive indices can be avoided by the judicious use of more advanced measurement techniques. In particular, factor analysis can help differentiate policies according to their content. The policies that are most strongly associated with each factor enable us to make inferences about the aims of policymakers, and the overall pattern of factors allows us to glimpse the nature of the economic development strategy that officials are pursuing. Factor analysis also helps with the problem of separating hard and easy policies and their import: it weights variables by assigning loadings that reflect the importance of individual variables in defining particular factors. Finally, factor analysis permits us to compute factor scores that do a much better job of judging the competitive standing of states. A state's score on a particular factor depends not only on its own actions vis-a-vis the policies which comprise that factor, but also on the actions of other states on those same policies. A high factor score means that a state has adopted policies that make it especially competitive with other states, and is therefore more informative than an additive index. Furthermore, a set of factor scores, each corresponding to a strategic dimension of development policy, makes it possible to locate individual states in a multidimensional space, so that substan- tively important patterns of competition and innovation can be discerned.12 As a method for measurement, then, factor analysis can be efficacious. However, its helpful powers fail where the concepts that are being measured are poorly conceived. That is surely true of state economic development policy, and so we first present a scheme for classifying develop- ment policies in a theoretically interesting way. Then we return to the measurement issue to show how a different conceptualization and measurement of development policy raises crucial questions about the economic and political constraints that determine policymakers' choices in this area. STRATEGIES FOR DEVELOPMENT In very general terms, policymakers hope that firms find it more profitable to do business in their state than any other, and economic development policies are contrived with that end in mind. This calculus assumes that, as far as businesses are concerned, the profit on an investment is the bottom line, and it is determined by the size of the investment, as well as the rate of return on that investment. The rate of return is itself a function of many things, including tax liabilities and the efficiency of the investment. Modern technologies of production are more efficient than outmoded methods because they permit more goods and services to be created from a given combination of 216 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 inputs. Similarly, investments in capital goods, such as modem plants and machinery, tend to be more efficient or productive than investments in labor costs, such as wages and fringe benefits, because they produce greater marginal returns, especially if an economy is characterized by a relatively low productivity of labor. With this in mind, we may distinguish four types of economic development policy: those which subsidize operating expenses and capital investments, respectively, and those which primarily use taxes to affect the rate of return on operating and capital outlays, respectively."3 For example, policies that subsidize capital expenses include such things as loans and loan guarantees for plant and machinery. Through these policies state governments seek to reduce the size of the investment that must be made by decision makers in the private sector, chiefly by lowering interest costs. Similarly, programs such as the Massachusetts Venture Capital Fund address shortages of capital, as do banking reforms and the investment of public employee pension funds."4 Such effects might also be achieved through regulatory policy, but it is mainly through spending that states subsidize capital investments. Tax exemptions or credits for investments in machinery, and so on exemplify the type of policy that affects the rate of return on capital goods. They do so in two ways. First, these policies skew investment toward capital goods (which is often a more efficient mode of investment), and second, they directly reduce the tax liability of firms making capital expenditures. As such, they increase profits, enhancing the business climate of states that allow them. Regulatory policies and spending for research and development of new technologies might have similar effects, but this is clearly a policy-making area dominated by the tax code. With respect to policies that subsidize operating expenses, state governments can influence labor costs, and, hence, the amount of an investment that must be made in human capital. Some policies, for example, liberal minimum wage and worker's compensation laws, make labor costs higher in some states, compared to others. Right-to-work laws depress labor costs in states that adopt them because they retard unionization and forestall the high wages and lucrative fringe benefits negotiated by unions. Again, taxing and spending policies could have the same effect, but regulatory actions are perhaps the most common instruments. Finally, state governments may pursue policies that increase the rate of return on outlays for operation by boosting productivity. Obvious ways include spending on job training programs and granting tax credits for job creation. Other, less obvious, policies involve income and sales tax exemptions for individuals and corporations. Firms in high-tax states must pay higher wages and salaries to offset taxes paid by their employees. However, the availability of exemptions may make it less costly to recruit and retain highly qualified workers, or so it is sometimes argued by business organizations.' This suggests that income taxes affect productivity, and hence the rate of return on investment. State policymakers emphasize one or more of these orientations toward development as they strive to improve their business climate, or at least those elements that form the legislative climate for doing business in their state. The aforementioned surveys by Conway Publications record this emphasis in great detail, as they include many examples of our four types of economic development policy. Several of the most important policies are listed in Table 1, according to their strategic aim.'6 They are the specific indicators we used to construct a four-dimensional measure of economic development activity in the states. Table 1 also includes the results of a factor analysis we performed in order to determine if the variables actually cluster in the expected manner. Our analysis is weakly confirmatory, insofar as we expected at least four factors to emerge, with a pattern of high loadings congruent with the preceding discussion. Our's is not a strongly confirmatory approach, however, because we were unable to predict which variables would not load together. That is, we were unable to say that each and every variable should load on one, and only one, factor. Hence, we could not impose constraints in the way that a strongly confirmatory approach demands. To conduct the factor analysis, we first computed a matrix of tetrachoric correlations to sum- marize the bivariate associations among the indicators in question."7 Bengt Muthen's LISCOMP, Hanson, Berkman / STATE LEGISLATIVE CLIMATES 217 TABLE I Promax Factor Loadings of Selected Policies, by Economic Development Function Factor Policies, by Function 1 2 3 4 Capital subsidies Financing for plant expansion 1.02 0.09 0.06 0.00 Building and construction loans 0.87 -0.13 0.22 -0.08 Equipment and machinery loans 0.86 -0.02 0.21 -0.09 State revenue bond financing 0.69 -0.36 0.21 0.04 General obligation bond financing 0.56 -0.02 0.40 0.01 Building and construction loan guarantees 0.56 -0.03 -0.16 0.18 Equipment and machinery loan guarantees Enhancements to returns on capital investments Raw materials tax exemption -0.14 0.11 -0.21 0.82 Research, development tax exemption 0.01 -0.11 0.21 0.77 Sales use tax exemption on new equipment 0.22 0.05 -0.19 0.54 State exemption on manufacturing inventory -0.28 -0.30 0.29 0.51 Accelerated depreciation of equipment 0.05 0.07 -0.20 0.46 Equipment, machinery tax exemptions 0.22 0.19 0.28 0.35 Land, capital improvement tax exemptions Operating subsidies State fair-employment code 0.09 0.95 0.09 -0.02 Minimum-wage laws 0.12 0.85 -0.02 0.08 Tax credits for state products 0.21 0.77 0.25 0.16 Right-to-work laws -0.54 0.50 0.18 0.02 Tax stabilization agreements 0.66 0.02 -0.26 -0.03 Uniform property tax evaluation laws -0.40 -0.25 0.03 0.04 Enhancements to returns on operating outlays Corporate income tax exemption -0.01 0.13 0.74 -0.01 Excise tax exemption 0.08 -0.15 0.73 0.00 Personal income tax exemption 0.06 0.21 0.65 -0.15 Retraining of industrial employees 0.47 0.09 -0.08 0.22 Recruit, screen industrial employees -0.13 0.09 -0.29 0.03 Training of industrial employeesb a. Variables combined because of extreme collinearity. b. Indicates a highly skewed variable excluded from analysis. a program with special capabilities for analyzing dichotomous (i.e., nonnormal) data, was used to extract four factors.'8 The four factors were subsequently rotated to a promax solution, a procrus- tean method that involves a modest relaxation of the assumption of orthogonal factors. The promax loadings of each variable on the four factors are reported on the right side of Table 1, and the pattern of heavy loadings is consistent with our predictions. Normally, loadings in excess of .50 (in absolute value) are used to interpret factors. Quite clearly, Factor 1 corresponds to capital subsidies: all of the variables involving loans, loan guarantees, and other forms of state financing for development load heavily on this factor. Only one other variable, tax stabilization agreements for specific industries, has an unexpectedly high loading. The substantive meaning of Factor 1 is therefore self-evident. Factor 2 apparently involves operating subsidies. The existence of right-to-work laws, and the absence of fair-employment codes and state minimum-wage requirements, generally depress wages and diminish fringe benefits: they reduce labor costs, and effectively subsidize operations. Tax credits for state industries also function as a subsidy, lowering the cost of such goods and services to consumers. Two other variables -tax stabilization agreements for specific industries and uniform property tax evaluations - do not load on this factor, contrary to our expectation. Still, 218 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 the interpretation of Factor 2 is clear enough, especially because no other variables load heavily on it. The variables which load most heavily on Factor 3 are corporate income tax exemptions, excise income tax exemptions, and personal income tax exemptions. This is consistent with our charac- terization of policies that increase rates of return on operating outlays (hereafter designated operating returns policies). Such policies increase productivity by allowing corporations to hire and retain qualified workers, buy efficient machines, or reinvest profits without having to absorb some or all of the tax costs associated with these actions. Screening and training programs evidently do not have this impact, perhaps because nearly all states have such programs: there is little or no variation for Factor 3 to explain on these variables."9 Factor 4 centers on tax exemptions for raw materials, research and development, and manufac- turing inventories, as well as sales tax exemptions on new machinery purchases, and so on. Accelerated depreciation of industrial equipment also loads most heavily on this factor, although its value of .46 is just under the cut-off point of .50. All of these policies improve the rate of return on capital investments by decreasing tax liabilities; they form a capital returns factor consistent with our expectations. Overall, the pattern of promax factor loadings confirms our differentiation of four types of development policy. Each of the derived and rotated factors has an unambiguous interpretation, which encouraged us to use the regression method to compute four factor scores for each state, in each year from 1967 to 1986. The individual scores represent each state's standing, relative to other states, in a given area of policy activity. Together, the four scores offer a multidimensional characterization of each state's development strategy at a particular point in time. In short, the factor scores provide an improved measure of states' legislative climates - a measure that does not suffer from the shortcomings we mentioned earlier. Of course, common factor scores have their own weaknesses: they are notoriously indetermi- nate, insofar as a given factor solution may be consistent with several possible scoring patterns. However, it is possible to assess the extent to which a particular set of scores approaches uniqueness.' The correlation between the true scores and those estimated from a common factor solution, Harman demonstrates, is equal to the multiple correlation of the estimated scores with the variables of the data matrix.2' When this correlation is high, the scores are accurate, and also approach uniqueness, in the sense that there is little difference between the estimated scores and a maximally different possible set of scores. The multiple correlation may be estimated by computing the standard deviation of the estimated scores for each factor that is extracted.22 The standard deviations of the raw factor scores for operating subsidies, capital subsidies, and capital returns exceed .90, indicating that our scores are quite unique. The standard deviation of the operating returns scores is .79 -not as good, but still satisfactory. Therefore we may confidently conclude that our factor scores provide a reliable and robust description of state development strategies. As we show in the next section, they also enjoy substantial validity, judging from their correspondence with other accounts of state efforts to stimulate growth. VALIDATING THE NEW MEASURE To see how factor scores provide a valid characterization of state development strategies, consider the case of Indiana, a state where policymakers responded aggressively to the decline of basic industries and the deep recession of 1982. In response to these events state officials began a concerted effort to improve Indiana's business climate, and their strategy has been discussed and praised widely in business, trade, and policy publications. If our scores are valid, they should register this shift in strategy; that is, the scores ought to record improvements in Indiana's standing, relative to other states, on appropriate dimensions of development policymaking. Figure 1 shows that this is the case. Hanson, Berkman / STATE LEGISLATIVE CLIMATES 219 1.5r- 0.51- .0.5 us IN U -1.5 1 1967 Capital Subsidiei I 1 1971 1975 Capital Tax Incentive I I I 1987 1971 1975 I I I 1979 1983 1987 IN us I I- 1979 1983 1987 us IN General Tax Relief 1 1 I I I I 1967 1971 1975 1979 19 1987 us L-- Operating Subsidies IN 1 1 1S67 1971 I I I 1 1975 1979 1983 1987 Figure 1: Strategic Dimensions of Indiana's Development Policy 40.5, .1.5 0.5 -0.5 1.5 -0.5 -1.5 - - - L 1.5 9 220 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 The top graph in Figure 1 compares Indiana's position to the national average on policies designed to make investment capital more readily available (Factor 1). The gently increasing solid line confirms the general importance of this strategy in virtually all states, especially in recent years. The dotted line traces Indiana's involvement in this area; except for a brief period in the midseventies, the state has consistently lagged behind other states in subsidizing investment capital via loans and loan guarantees.23 Only in 1982 did Indiana policymakers act to reduce this competitive disadvantage by creating loan programs for building, equipment, and machinery. These actions were part of a conscious effort to improve Indiana's business climate. Under the leadership of Republican Lieutenant Governor John Mutz, the state began to implement a strategic development plan that relied heavily on tax policy to promote expansion and new investment.24 This is evident in the second and third panels in Figure 1, both of which show a dramatic improvement in the state's legislative climate, especially after 1981. In 1982 Indiana reinstated a tax exemption for research and development, which it had rescinded in 1969. In so doing, it regained a significant advantage vis-A-vis other states in stimulating capital investment by reducing its tax liability, as the second panel in Figure 1 shows.2? This reflects increasing activity on Factor 4 (capital returns). At the same time Indiana moved decisively to achieve parity on broadly based taxes that affect operating costs. In 1974 the state imposed a freeze on property tax increases, and offset the loss in revenues by eliminating recently enacted exemptions on corporate and personal income taxes, as well as certain excise tax exemptions. As the third panel in Figure 1 demonstrates, this caused a precipitous decline in Indiana's legislative climate, even though state income tax rates remained unusually low. However, the corporate income tax exemption was restored in 1982, and the state then approached the national average in this area of economic development policy, which corresponds to Factor 3, or operating returns.26 The last panel in Figure 1 shows that Indiana has begun to lag badly in comparison to many other states' actions that subsidize operating costs (chiefly by depressing wage levels). Because of its large manufacturing base, the state's work force is fairly well-unionized, at least in comparison to other states. Not surprisingly, this is reflected in policies enacted by the state, which eliminated its right-to-work law in 1969, and has implemented both minimum-wage and antidiscrimination laws. Thus, wage levels are above the national average (even though worker's compensation and unemployment insurance benefits are far below average).27 As a result, the state's score on Factor 2, or operating subsidies, declined. Despite recent efforts to improve the state's legislative climate, Indiana still lags behind most other states in the Great Lakes region on three dimensions of development policy. The state trails badly on policies to reduce business expenses: neither Indiana's programs for subsidizing invest- ment capital nor its operating subsidies compare favorably with neighboring industrial states.28 This is a serious liability for a state in need of reindustrialization, especially given its other disadvantages (high labor costs, etc.) But this weakness is obscured when levels of activity alone - a conventional measure of development policy - are considered; Indiana's level of activity, measured only in terms of the number of policies adopted, is well above the national average, and is second only to Minnesota in the Great Lakes region. The need to differentiate development policies according to their function is clearly demon- strated in Table 2, which lists the states' factor scores for 1984, the year in which development policy activity peaked in the states. Also included in Table 2 is an aggregate measure of activity based on the number of policies from Table 1 implemented by each state in 1984. This allows us to compare our multidimensional characterization of state business climates with a typical index of activity. The column labelled Level contains the score on the latter measure, and columns Capital Subsidies, Capital Returns, Operating Subsidies, and Operating Returns include the factor scores for the four dimensions of interest to us. (All scores for 1984 have been standardized to facilitate comparisons). Generally speaking, Level is an incomplete, and some cases misleading, indicator of develop- ment policy. For example, in the Great Lakes states, and to a lesser extent in New England, simple Hanson, Berkman / STATE LEGISLATIVE CLIMATES 221 TABLE 2 Standardized Measures of State Development Activity, by Region and State, for 1984 Policy Measure Operating Operating Capital Region State Level Returns Subsidies Subsidies Capital Returns Pacific Rim AK 0.49 0.25 0.27 1.16 -0.73 CA 1.20 0.54 -0.12 0.76 -0.41 HI -0.59 0.50 -1.38 0.80 -1.85 OR 0.13 -0.47 0.06 0.49 -0.35 WA -0.95 1.35 -1.36 -1.78 0.84 Mean 0.06 0.43 -0.51 0.29 -0.50 Mountain West AZ -0.59 0.15 0.74 0.29 -0.68 CO -2.38 -1.40 -0.34 -0.93 -0.24 ID -2.02 -1.43 -0.69 -1.20 0.13 NV -0.59 2.04 -0.94 -0.89 -1.22 NM -0.23 -1.12 0.18 0.47 -0.42 OK -0.23 -2.14 1.09 1.88 -1.44 UT -1.30 -0.87 -0.80 -1.84 1.54 Mean -1.05 -0.68 -0.11 -0.32 -0.33 Upper Midwest IA 0.13 0.10 0.51 -0.39 1.06 KS -1.30 0.04 -0.08 -1.46 -0.04 MT -0.23 0.40 -0.40 0.90 -1.88 NE -0.95 -0.91 -0.16 -0.95 -0.01 ND 1.20 1.20 -0.22 0.15 0.82 SD 0.85 1.24 0.96 0.52 -0.68 WY 0.13 1.14 -0.31 0.88 -2.02 Mean -0.02 0.46 0.04 -0.05 -0.39 Deep South AL 0.49 1.56 0.54 -0.14 0.76 FL 1.20 1.41 1.91 -0.01 0.92 GA -1.66 -1.00 0.50 -0.60 -0.42 LA 1.56 0.14 2.44 1.75 0.04 MS 1.20 0.37 0.17 -0.02 0.98 NC -1.66 -1.24 0.15 -1.01 0.09 SC 0.85 0.38 -0.07 -0.60 0.99 VA -0.59 -0.90 -0.29 -1.25 1.77 Mean 0.17 0.09 0.67 -0.24 0.64 Border South AR 0.49 -0.14 2.72 1.04 -0.82 KY -0.59 -1.09 0.54 0.75 -0.79 MO 0.49 -0.14 0.55 0.89 -0.46 TN -0.59 0.15 2.07 -0.37 0.33 TX -0.95 0.08 1.85 1.17 -1.58 WV 0.85 1.46 -1.45 -0.34 0.54 Mean -0.05 0.05 1.05 0.52 -0.46 Great Lakes IL 0.13 -1.51 0.19 0.93 -0.37 IN 0.85 -0.20 -0.90 -0.35 1.08 MI 0.85 0.01 0.27 0.75 -0.57 MN 2.28 1.47 0.93 0.80 0.19 OH -0.59 -0.15 0.27 1.42 -2.01 WI -0.95 0.08 -1.79 -2.34 1.44 Mean 0.43 -0.05 -0.17 0.20 -0.04 New England CN 1.20 0.69 -0.90 0.15 0.77 ME 0.13 -0.34 -0.70 -0.56 0.94 MA 0.85 1.15 -1.36 -1.46 1.58 NH -0.95 -0.87 -0.42 -0.15 -0.49 RI -0.23 -1.30 -0.64 0.21 0.56 VT 0.49 -1.59 -0.03 1.73 -1.15 Mean 0.25 -0.37 -0.67 -0.02 0.37 (continued) 222 ECONOMIC DEVELOPMENT QUARTERLY I August 1991 TABLE 2 Continued Policy Measure Operating Operating Capital Region State Level Returns Subsidies Subsidies Capital Returns Mid-Atlantic DE -0.59 0.37 -0.47 -1.12 0.03 MD 0.85 -0.20 -0.90 -0.35 1.08 NJ 0.13 -1.10 -0.40 0.36 0.70 NY 1.20 1.38 -0.67 0.44 0.48 PA 0.49 0.50 -1.13 -0.57 0.93 Mean 0.42 0.19 -0.71 -0.25 0.65 measures of activity tend to overstate the accomplishments of state policymakers. For these two regions, the mean level of activity is above the national average, but on three of four dimensions of policy these states fall well below the national average. Conversely, Mountain states are in many cases much closer to the national average on three dimensions of activity than their severely depressed level of activity suggests. Level clearly underestimates the concern of policymakers in these states simply because it is insensitive to the fact that they pursue development by other means. The same is true of the states on the Pacific Rim, whose regional activity in development is at the national average. Yet this group of states falls one-half a standard deviation below average on operating subsidies and tax breaks for capital investment, and one-half a standard deviation above average on policies that increase the rate of return on operating outlays. Such policies mainly involve excise and income tax exemptions -a reflection not only of business climate concerns, but also tax revolts that were so prominent in the far West. This distinctive strategy, which clearly reflects a politically interesting choice about the best or most acceptable route to economic progress, is almost completely obscured by measures such as Level, which only correlates well with capital subsidization strategies (perhaps because these actions are over represented in the Conway surveys). The southern states provide an even more dramatic example of this weakness. The mean of Level for states in the Deep South is .17, a little above the national average. This actually understates the amount by which southern states lag in making capital subsidies, and does not reflect the favorable tax treatment accorded capital investment by southern states. Nor does it reflect the large value for operating subsidies, the true essence of the southern strategy for economic development, which is to keep labor costs down by adopting right-to-work laws, and so on. (A high score on operating subsidies means that a state has not adopted fair employment and minimum-wage laws, and has implemented a right-to-work law. The climate for labor is poor, and that means the business climate is good, if we assume that such measures reduce the costs of production.) Those who rely only on a simple count of policies in force completely miss the content of this widely noted southern strategy. Other regional patterns are evident in our measures, and they square with common understand- ings of economic development in these areas. Hence our scores seem to enjoy substantial face validity, and they emphasize the fact that policymakers in the American states pursue distinct strategies for economic development. And, as we show in the next section, whenever policymakers change their strategies, it is clearly reflected in our measures, although the same cannot be said for policy indicators that fail to assess the content of activity. DETERMINING STRATEGIES Factor scores provide an effective way of describing different facets of economic development strategy. However, their scientific value ultimately rests on the utility of factor scores in quantita- tive analyses of the causes and consequences of policy choices. Do factor scores promise to Hanson, Berkman / STATE LEGISLATIVE CLIMATES 223 improve our understanding of the considerations that lead policymakers to choose certain policies, and not others? And do factor scores reveal new and fruitful ways of investigating the impact of such choices on economic performance? We cannot answer these questions definitively in the space that remains, but we will present some initial results that suggest the potential value of factor scores. Consider, for example, the simple models outlined in equations 1.1-1.4: = a, + blOperating Returnsi, - 1+ b2Unemploymenti, - 1 + b3GSPU, - 1+ b4Ideologyit 1 + e+, = a2 + b5Operating Subsidies', - 1+ b6Unemploymenti, l + b7GSP, - 1+ b8ldeologyi, - 1 + e,, = a3 + bgCapital Subsidies, - I+ b1oUnemploymenti, - 1 + blGSPil - I+ bl2Ideologyi, - 1 + ej, = a4 + bl3Capital Retumsi, - + b14Unemploymenti, - I + bl5GSPit - 1+ bl6ldeologyi, - 1 + eit where Unemployment GSP Ideology Operating Returns Operating Subsidies Capital Subsidies Capital Returns i, t = average annual unemployment rate;29 = gross state product in millions;-M = ideology of state policymakers;31 = factor score on operating returns policies; = factor score on operating subsidy policies; = factor score on capital subsidy policies; = factor score on capital returns policies; = ith state at time t, for i = 1, 2,... 50 and t = 1968, 1969,... 1986. Equations 1.1 to 1.4 inquire into the determinants of development policy choices.32 Specifically, these equations assert that current policies of a given type are a reflection of past choices of that same type, updated in light of political and economic circumstances. Many authors have suggested that states adapt economic development policies in response to economic decline; the policies are intended to halt or even reverse decay by making states more competitive. In some states, this implies that policymakers must enact fairly sweeping packages of legislation in order to become competitive: South Carolina in 1983, Kansas in 1985, and Wisconsin in 1986 exemplify this "big bang" approach to economic development.33 Other states need to make only modest changes, if they already offer many of the incentives that are available in other states. Among the most important economic considerations that affect development policy is the rate of unemployment, a politically sensitive indicator of economic vitality. High rates of unemploy- ment often precipitate new or expanded development activities on the part of policymakers accountable to the electorate.34 A state's economy also imposes a loose reality test on the sort of strategies that elites may successfully advocate: the strategies must seem appropriate to the unique strengths of the state and its people. Gross state product offers a crude, but nevertheless useful, measure of the opportunities for policy intervention that are embodied in a state's economy. Political considerations, too, may play a role in development policymaking. For example, it is frequently suggested that conservative policymakers will be especially attentive to business concerns when formulating policy, whereas liberal policymakers will favor labor interests. This possibility is represented in equations 1.1 to 1.4 by the inclusion of a measure of the dominant ideology of policymakers in a given state at a given time. Thus, both political and economic determinants of the updating process can be tested by these models. The economic impact of development policies is harder to assess, but equation 2.1 incorporates a straightforward test of the proposition that state policymakers can lower unemployment rates by judicious actions. Operating Returns', Operating Subsidiesi, Capital Subsidiesi, Capital Returns,, (1.1) (1.2) (1.3) (1.4) 224 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 TABLE 3 Generalized Least Squares Estimates For Selected Determinants and Effects of Four Types of Development Policy (Standard Errors in Parenthesis) Unemployment Operating Operating Capital Capital Rate Returns Subsidies Subsidies Returns [2.1] [1.1] [1.21 [1.3] [1.4] Constant 1.352 -0.067 0.044 -0.134 0.000 (.126) (.021) (.038) (.035) (.029) Unemployment, - 1 0.785 0.012 -0.009 0.016 0.004 (.021) (.003) (.006) (.005) (.005) GSP,- 1 (x 10-5) 0.156 0.011 0.016 0.051 0.008 (.085) (.014) (.019) (.025) (.020) Ideology, l na 0.000 0.000 0.001 0.000 na (.000) (.002) (.000) (.000) Operating returns, - 0.012 0.906 (.053) (.013) Operating subsidies, _ 1 -0.004 0.884 (.044) (.015) Capital subsidies,_ 1 0.063 0.894 (.052) (.015) Capital returns,_ 1 0.051 0.876 (.055) (.015) Buse R-square .65 .86 .79 .82 .79 Durbin-Watson 1.830 1.933 1.893 1.945 1.872 N of Cases 950 950 950 950 950 na = not applicable Unemployment, = a5 + bl6Unemploymenti, - 1+ bl7GSP, -I + b180perating Returnsi, - 1+ b19Operating Subsidiesi - 1 + b20Capital Subsidiesi, - 1+ b2lCapital Returns,, 1+ e', (2.1) This model asserts that fluctuations in unemployment rates are a function of the size and structure of a state's economy, and the state's relative standing on four dimensions of development policy. The advantage of this formulation is that it permits inferences about which policy emphases, if any, have the desired effect on economic performance. Obviously, aggregate measures of activity cannot supply such information, because they do not distinguish among policies. Equations 1.1 to 2.1 are dynamic adjustment models: the first lag of the corresponding dependent variable appears on the right-hand side of each expression. This term incorporates the influence of past policies of a given type on current decisions about policies of the same type, and is therefore a measure of policy inertia. Inclusion of this term also means that coefficients for other independent variables predict changes in the dependent variable, and account for policy adapta- tions or innovations.35 The error terms for equations 1.1 to 2.4 are complicated by the existence of systematic dis- turbances associated with the analysis of pooled cross-sections of data.36 Because the observations span almost 2 decades, serial correlation is present in the errors for each state, albeit in varying degrees. The variance of the errors is not constant: the errors of some states are relatively large, and those for other states tend to be small, reflecting great differences in the scale of their gross state products and other variables. Fortunately, both problems are tractable, and the statistical package SHAZAM provides a convenient procedure for calculating consistent generalized least squares (GLS) estimates in the presence of autocorrelated and heteroskedastic errors. The GLS estimates for equations 1.1 to 2.4 are presented in Table 3. Hanson, Berkman / STATE LEGISLATIVE CLIMATES 225 Evidently, state economic development policies have no significant impact on unemployment rates. Rates of unemployment change slowly, and mainly in response to economic expansion or contraction. None of the four types of development policy have a significant effect on unemploy- ment rates; only operating subsidies reduce rates of unemployment, and that effect is very weak. These findings are congruent with most other studies of development policies, which conclude that development policies have only a marginal impact on economic performance. Far more important to most investors are such considerations as availability of labor, access to markets, proximity to resources and energy, among others, over which states exert little or no direct control. Allowing more time for the realization of the indirect influence of development policies on unemployment might alter our conclusions, and of course unemployment is not the only measure of economic vitality. Other indicators, such as new business formation or investment in plant modernization, might reveal stronger policy effects. Also, sectorally specific analyses would probably reveal a more pronounced role for at least some types of policy. However, such effects can only be detected sensibly by using measures that differentiate policies according to their function. Investigations that employ disaggregated measures of economic performance require disaggregated indicators of development policy. Factor scores of the sort we propose make such analyses both practical and theoretically meaningful. The same is true where the determinants of development strategy are concerned. The results in Table 3 suggest that the prevailing ideological disposition of state policymakers plays no role in formulating development policy within a particular area of activity.37 Once a strategic combination of policy types has been selected, liberal and conservative policymakers adopt comparable policies, probably because they face similar pressures from business interests, which occupy a privileged position with respect to policy.38 Policymakers also face competition from their counterparts in other states who are vying for investors.39 Hence, the context of decisionmaking on a given dimension of activity leaves little room for ideology to operate: choices are dictated by other factors. On the other hand, economic considerations do occasion changes in development policy. High rates of unemployment lead policymakers to make more tax concessions (operating returns), and more generous capital subsidies. The largest improvements in capital subsidies are found in states with larger, more diverse, economies, which are better able to sustain public loans and loan guarantees. States with smaller economies often do not have the capacity to generate new resources for capital subsidies, unless they engage in politically painful reallocations. They are at a clear disadvantage on this dimension of development activity. Operating subsidies are only weakly affected by economic events. The biggest enhancements are found where unemployment is low, and where the bargaining position of labor is correspond- ingly strong. The smallest adaptations occur where unemployment rates are high, and where there is little need or pressure to adopt policies that depress wage levels; the discipline of the labor market is sufficient for that purpose. For similar reasons, economic factors (at least as measured here) play no role in determining a state's tax policy toward capital investments; policy evidently reflects other considerations, some of which may be political. Political considerations enter the process in another way, as well. Policymakers choose between areas of policy in fashioning a development strategy. Important political decisions are made when leaders prefer capital subsidies over operating subsidies, or when they choose broad-based tax relief over concessions specifically aimed at capital investors. Such policy emphases matter, and the great virtue of our multidimensional characterization of development policy is that it permits analysis of strategic combinations of policy.40 We conclude with some brief remarks on this promising possibility. Evidently, state economic development policies have no significant impact on unemployment rates. Rates of unemployment change slowly, and mainly in response to economic expansion or contraction. None of the four types of development policy have a significant effect on unemployment rates. DISCUSSION Wong has argued in another context that economic circumstances constrain policy choices, particularly at the subnational level of politics.4' However, these constraints are never fully 226 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 binding; political institutions and practices, as well as actors themselves, play an important role in determining outcomes. He suggests that this is true even where development policy is concerned; when opposition to development exists, policymakers may be forced to contract their development activity, but where strong political leadership exists, the level of activity may be higher than it would otherwise be. These effects are independent of economic circumstances, which operate mainly to give development policy itself a higher priority than other kinds of policy. We have shown that the scope for political choice, appropriately conceived and measured, is even broader than this. It is not only the level of activity, but its strategic orientation as well, that is affected by political responses to economic circumstances. Economic circumstances may force state policymakers into action, but the actions or strategies they choose are not economically determined. Rather, they are political determinations made by state policymakers trying to outdo their rivals in competing states, and reap the political rewards that accrue to successful political entrepreneurs. That is why these strategic actions can only be understood in the context of regional and national competition for investment, for it is in the heat of competition that innovations arise and diffuse throughout the states. Thus better measures of economic development policy suggest interesting questions about the determinants of state policy. But they also permit more refined analyses of the effects of policies on economic performance. It seems likely that as our measures of policy move beyond levels of activity to include the strategic content of different actions, they will be more useful in gauging the relative impact of various development programs. Eventually, studies that employ new measures may simply confirm current scientific opinion, which seems to regard economic development policies as being no more efficacious than rain dances. Or they may discover that certain strategies actually resemble efforts to seed the clouds, a rather more effective way of influencing the weather. NOTES 1. See Susan B. Hansen, "State Industrial Policy: The Case of Pennsylvania" (Paper delivered at the annual meeting of the Southwest Political Science Association, Houston, TX, March 20-23, 1984); and David Osborne, Laboratories of Democracy: A New Breed of Governor Creates Models for National Economic Growth (Boston, MA: Harvard Business School Press, 1988); idem, Economic Competitiveness: The States Take the Lead, with an introduction by Robert B. Reich (Washington, DC: Economic Policy Institute, 1987). 2. Gregory A. Daneke, "Small Business Policy Amid State Level Economic Development Planning," Policy Studies Journal 13 (1988): 722-28; Dan Pilcher, "Economic Development: Old Term has New Meaning," State Legislatures, 12, No. 7 (1988): 18-21. A useful review of studies concerned with the effect of state and local policies on investment decisions is provided by John Blair and Robert Premus, "Major Factors in Industrial Location: A Review," Economic Development Quarterly 1 (1987): 72-85. 3. Osborne, Laboratories of Democracy, p. 13. 4. Larry Sabato, Goodbye to Good-time Charlie: The American Governorship Transformed (Washington, DC: Congressional Quarterly Press, 1983). See also John E. Chubb, "Institutions, the Economy, and the Dynamics of State Elections," American Political Science Review, 82, No. 1 (1988): 133-54. 5. Peter K. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development in the United States (Madison, WI: University of Madison Press, La Follette Public Policy Book Series, 1988). 6. Blair and Premus, "MajorFactors in Industrial Location," observe that interstate competition proceeds on two levels: it exists between regions, and between states within regions. Interregional competition often centers on economic considerations, for example, availability of labor, access to markets, and proximity to resources and energy, over which states have little or no control. State development policies must, therefore, work to reinforce regional advantages, as they cannot easily alter or overcome them. In that respect, political decision making mirrors the corporate decision-making process, which typically establishes a list of sites that satisfy basic investment criteria. Often these sites are all in a single state or region, at which point a second set of decision-making criteria come into play. At this point, too, investors may induce policymakers into bidding against each other, as in the case of General Motors Saturn plant. 7. See "Report Card on the States," in the October issues of Inc. magazine for 1981-1987; Fantus Company, State Rankings of Business Climates (Chicago: Fantus Company, 1975 and other years); and Alexander Grant and Company, A Study ofManufacturing Climates ofthe Forty-eight Contiguous States ofAmerica (Chicago: Alexander Grant and Company, Hanson, Berkman / STATE LEGISLATIVE CLIMATES 227 1980-1986, except for 1983). A thoughtful discussion of these studies' weaknesses may be found in Rodney A. Erickson, "Business Climate Studies: A Critical Evaluation," Economic Development Quarterly 1 (1987): 67-71. 8. Jerry Hagstrom and Robert Guskind, "Playing the State Ranking Game-A New National Pastime Catches On," NationalJournal 26 (June 30, 1984): 1268-74; see also Bernard L. Weinstein and Harold T. Gross, "What Counts Most in the Race for Development," State Legislatures, 14, No. 5 (1988): 22-27. 9. The results of the annual surveys are published every year in Industrial Development, though the month of publication varies. In recent years The Book of the States has published partial summaries of the Conway surveys. 10. Dan Pilcher, "Assessing State Business Climates," State Legislatures, 9, No. 7 (1983): 9-12. The importance of development policy is more than symbolic, however. As corporate investment becomes increasingly strategic, decision makers in the private sector will become ever-more concerned with specific development policies that affect their individual enterprises. See Lee Walker, "Strategic Economic Planning," State Government News, 31, No. 11 (1988): 16-18. 11. Hansen, "State Industrial Policy"; Ann 0. Bowman and Richard C. Kearney, The Resurgence of the States (Englewood Cliffs, NJ: Prentice-Hall, 1986). 12. Ironically, factor analysis is similar in approach to some consultants' surveys, which recognize substantive differences among policies and assign weights to them, based on business decision makers' subjective evaluations of their importance in the calculus of investment. However, as Fisher and Hanink argue, factor analysis provides a more reliable method for assigning weights, and in addition it allows for sounder judgments about changes in the relative position of states. Compare with James S. Fisher and Dean M. Hanink, "Business Climate: Behind the Geographic Shift of American Manufacturing," Economic Review of the Federal Reserve Bank ofAtlanta, 67, No. 6 (1982): 20-31. 13. Our typology is in the spirit of Ernest Sternberg, "A Practitioner's Classification of Economic Development Policy Instruments, with Some Inspiration from Political Economy," Economic Development Quarterly 1 (1987): 149-61, which we discovered after writing this article. 14. An examination of Massachusetts' fund is presented in James E. Jarrett, Fostering Capitalism: The Massachusetts Venture Capital Fund (Lexington, KY: Council of State Governments, 1984). 15. Robert Tannenwald, "Rating Massachusetts'Tax Competitiveness,"NewEngland EconomicReview 69 (November/ December, 1987): 33-45. 16. Table 1 contains fewer than half of the policies that comprise the annual review of "legislative climates" by Conway Publications. We considered only policies that required action by state governments; we purposely did not consider enabling legislation to assist local governments in attracting businesses because our concern was with the activities of state government officials. In any case, many of the traditional activities of local government have been absorbed by state government, and others have been transformed by the addition of state resources (and controls over their use). Local governments are, and will continue to be, important in economic development, but their success now turns crucially on state policies emphasized here. Neither did we consider laws on pollution control because state responses are strongly conditioned by agencies of the national government. Furthermore, we concentrated on policies that have specific objectives consistent with our four-fold schema. Policies such as those which create industrial development authorities were ignored because they lack specificity, or because they are almost purely symbolic, in the sense that they do not require any substantial commitment of state resources. 17. We used the tetrachoric correlation because the variables itemized in Table I are binary: Conway Publications reports whether or not each state has such a policy in place at the time of the survey. We coded a state's response as one if it had adopted a policy that encouraged development, or had not adopted a policy that discouraged development. Otherwise, the response was coded zero. This scheme does not recognize qualitative differences among positive state responses, some of which are mentioned in footnotes to the Conway surveys. It does not, therefore, discriminate between, say, large and small tax exemptions for machinery or buildings, but such differences often reflect other differences in the tax code, and so go well beyond our concern. However, our codes do distinguish active and inactive policymakers, which is our main concern here. 18. Information on the relevant variables was recorded for each state in each year from 1967 to 1986, yielding 1,000 cases for the factor analysis, which was done on the pooled cross-sections under the assumption that a stable factor pattern exists across the years in question. We found no evidence to question this assumption; year-by-year solutions corresponded quite well with the pooled solution. The data used in subsequent analyses are derived from the pooled solution. A general treatment of longitudinal factor analysis is Stephen L Bieber and William Merideth, "Transformation to Achieve a Longitudinally Stationary Factor Pattern Matrix," Psychometrika 51 (1986): 535-47. 19. Alternatively, binary measures of the presence or absence of employment policies may obscure differences in screening and retraining programs that have a clear bearing on productivity. Exploration of this possibility must await better information on the content of these programs. 20. Richard L. Gorsuch, FactorAnalysis, 2d ed. (Hillsdale, NJ: Lawrence Erlbaum, 1983). 21. Harry H. Harman, Modern FactorAnalysis, 3d ed. (Chicago: University of Chicago Press, 1976). 22. R. J. Rummel, Applied Factor Analysis (Evanston, IL: Northwestern University Press, 1970). 23. The downward spike in 1974 for Indiana probably results from an error in the Conway survey for that year; that is the only year from 1973 to 1986 in which Indiana is listed as not making loan guarantees for equipment and machinery. 24. Indiana Department of Commerce, In Step with the Future: Indiana's Strategic Development Plan (Indianapolis: Indiana Department of Commerce, 1983). 228 ECONOMIC DEVELOPMENT QUARTERLY / August 1991 25. Indiana also established a Corporation for Science and Technology to improve the transfer of technology from universities to corporations. Relatively few states offer the exemption for research and development, so that Indiana's standardized value on this variable is fairly high. In addition, this variable loads at about .77 on this factor. Both contribute to the sizable jump (and earlier drop) in this aspect of the state's legislative climate. We mention this because it illustrates ones of the principal advantages of our measure: innovative states are rewarded for undertaking unusual or difficult action. Measures that make no distinctions among development policies and rely on simple aggregation rules do not adequately capture this sort of competitive advance. 26. Ironically, this preference for low taxes, which clearly limits the possibilities for strategic action, has not translated into a hothouse business climate. The shortcomings of Indiana's strategy are rooted in a sentiment for low taxes that has been cultivated assiduously by both political parties. This means the state lacks the resources necessary to compete with the kind of subsidies provided by other states in the region; it also means the state does not have a tax system that lends itself easily to tax concessions for capital investment. Although low nominal rates of taxation in Indiana are an advantage, effective rates of taxation are less so, because the absence of exemptions compares unfavorably with other states. Nominal tax rates do not differ greatly across the states, and so it is quite possible for ostensibly high tax states to have low effective rates of taxation, if they also allow generous exemptions and deductions. These states may actually have lower effective rates of taxation than states with low nominal rates, but no exemptions. 27. Actually, Indiana has not changed these policies since 1969. The decline in its relative standing is attributable to changes in other variables, for example, exemptions on manufacturing inventory and for investment in research and development. Although these policies load weakly on this factor, they do contribute by virtue of the large z scores associated with these unusual actions. 28. Compare with Eisinger, The Entrepreneurial State, for a good discussion of the increasing reliance of state and local governments on policies to promote capital formation. 29. Based on total unemployment as a percentage of the civilian labor force. Information on recent years is from the U.S. Bureau of Labor Statistics, Geographic Profile of Employment and Unemployment (Washington, DC: Government Printing Office). For earlier years, the data are from annual Manpower Reports. 30. U.S. Department of Commerce, Bureau of Economic Analysis (Vernon Renshaw, Edward A. Trott, Jr., and Howard L. Friedenberg), "Gross State Product by Industry, 1963-1986," Survey of CurrentBusiness, 68, No. 5 (May, 1988): 30-46. 31. For each -year, average Committee on Political Education scores were computed for each state's Republican and Democratic delegations in the U.S. House of Representatives. The appropriate score was then assigned to the governor and controlling party in each chamber of the legislature, under the assumption that state party elites are ideologically similar to their party's House delegation -an important, but not unreasonable, assumption. The score of the least liberal element of state government was then taken as a summary of the ideological orientation of state policymakers. Because the assent of both chambers of the legislature and the governor is needed for legislation to be enacted, any one of the three may block action. This means that decisions will be limited to policies that are acceptable to the least liberal actor in state government. 32. Policies implemented at time t were typically enacted at time t - 1. Hence the explanatory variables are all lagged one period. 33. On South Carolina, see Bowman and Kearney, The Resurgence of the States; about Kansas, consult Pilcher, "Economic Development"; and for Wisconsin, peruse Keon S. Chi, Strategic Planning for Economic Development: The Wisconsin Experience (Lexington, KY: Council of State Governments, 1986). 34. Compare with Hansen, "State Industrial Policy." 35. Actually, positive changes in the dependent variable generally represent increased activity or innovation. Negative changes in a state's score on a particular factor signify a decline in relative standing, which typically occurs when a state fails to act, while others intensify their effort. Hence, negative scores do not imply a reduction in absolute levels of activity, because states seldom rescind policies. 36. Jan Kmenta, Elements of Econometrics, 2d ed. (New York: MacMillan), pp. 508-514. 37. We will return to this point in our concluding remarks, where we note that political considerations may play a prominent role in choosing between areas of policy activity. 38. Margery M. Ambrosius, "The Role of Occupational Interests in State Economic Development Policymaking," Western Political Quarterly 42, No. 1 (1989): 53-68. 39. Dennis 0. Grady, "State Economic Development Incentives: Why do StatesCompete?"State andLocalGovernment Review, Fall 1987, pp. 86-94. 40. Compare with Russell L. Hanson, "The Development of Development Policy," Policy StudiesReview, forthcoming. 41. Kenneth K. Wong, "Economic Constraint and Political Choice in Urban Policymaking," American Journal of Political Science 32,1 (1988): 1-18. 1. See Susan B. Hansen, "State Industrial Policy: The Case of Pennsylvania" (Paper delivered at the annual meeting of the Southwest Political Science Association, Houston, TX, March 20-23, 1984); and David Osborne, Laboratories of Democracy: A New Breed of Governor Creates Models for National Economic Growth (Boston, MA: Harvard Business School Press, 1988); idem, Economic Competitiveness: The States Take the Lead, with an introduction by Robert B. Reich (Washington, DC: Economic Policy Institute, 1987). 2. Gregory A. Daneke, "Small Business Policy Amid State Level Economic Development Planning," Policy Studies Journal 13 (1988): 722-28; Dan Pilcher, "Economic Development: Old Term has New Meaning," State Legislatures, 12, No. 7 (1988): 18-21. A useful review of studies concerned with the effect of state and local policies on investment decisions is provided by John Blair and Robert Premus, "Major Factors in Industrial Location: A Review," Economic Development Quarterly 1 (1987): 72-85. 3. Osborne, Laboratories of Democracy, p. 13. 4. Larry Sabato, Goodbye to Good-time Charlie: The American Governorship Transformed (Washington, DC: Congressional Quarterly Press, 1983). See also John E. Chubb, "Institutions, the Economy, and the Dynamics of State Elections," American Political Science Review, 82, No. 1 (1988): 133-54. 5. Peter K. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development in the United States (Madison, WI: University of Madison Press, La Follette Public Policy Book Series, 1988). 6. Blair and Premus, "Major Factors in Industrial Location," observe that interstate competition proceeds on two levels: it exists between regions, and between states within regions. Interregional competition often centers on economic considerations, for example, availability of labor, access to markets, and proximity to resources and energy, over which states have little or no control. State development policies must, therefore, work to reinforce regional advantages, as they cannot easily alter or overcome them. In that respect, political decision making mirrors the corporate decision-making process, which typically establishes a list of sites that satisfy basic investment criteria. Often these sites are all in a single state or region, at which point a second set of decision-making criteria come into play. At this point, too, investors may induce policymakers into bidding against each other, as in the case of General Motors Saturn plant. 7. See "Report Card on the States," in the October issues of Inc. magazine for 1981-1987; Fantus Company, State Rankings of Business Climates (Chicago: Fantus Company, 1975 and other years); and Alexander Grant and Company, A Study of Manufacturing Climates of the Forty-eight Contiguous States of America (Chicago: Alexander Grant and Company, 1980-1986, except for 1983). A thoughtful discussion of these studies' weaknesses may be found in Rodney A. Erickson, "Business Climate Studies: A Critical Evaluation," Economic Development Quarterly 1 (1987): 67-71. 8. Jerry Hagstrom and Robert Guskind, "Playing the State Ranking Game—A New National Pastime Catches On," National Journal 26 (June 30, 1984): 1268-74; see also Bernard L. Weinstein and Harold T. Gross, "What Counts Most in the Race for Development," State Legislatures, 14, No. 5 (1988): 22-27. 9. The results of the annual surveys are published every year in Industrial Development, though the month of publication varies. In recent years The Book of the States has published partial summaries of the Conway surveys. 10. Dan Pilcher, "Assessing State Business Climates," State Legislatures, 9, No. 7 (1983): 9-12. The importance of development policy is more than symbolic, however. As corporate investment becomes increasingly strategic, decision makers in the private sector will become ever-more concerned with specific development policies that affect their individual enterprises. See Lee Walker, "Strategic Economic Planning," State Government News, 31, No. 11 (1988): 16-18. 11. Hansen, "State Industrial Policy"; Ann O. Bowman and Richard C. Kearney, The Resurgence of the States (Englewood Cliffs, NJ: Prentice-Hall, 1986). 12. Ironically, factor analysis is similar in approach to some consultants' surveys, which recognize substantive differences among policies and assign weights to them, based on business decision makers' subjective evaluations of their importance in the calculus of investment. However, as Fisher and Hanink argue, factor analysis provides a more reliable method for assigning weights, and in addition it allows for sounder judgments about changes in the relative position of states. Compare with James S. Fisher and Dean M. Hanink, "Business Climate: Behind the Geographic Shift of American Manufacturing," Economic Review of the Federal Reserve Bank of Atlanta, 67, No. 6 (1982): 20-31. 13. Our typology is in the spirit of Ernest Sternberg, "A Practitioner's Classification of Economic Development Policy Instruments, with Some Inspiration from Political Economy," Economic Development Quarterly 1 (1987): 149-61, which we discovered after writing this article. 14. An examination of Massachusetts' fund is presented in James E. Jarrett, Fostering Capitalism: The Massachusetts Venture Capital Fund (Lexington, KY: Council of State Governments, 1984). 15. Robert Tannenwald, "Rating Massachusetts' Tax Competitiveness," New England Economic Review 69 (November/December, 1987): 33-45. 16. Table 1 contains fewer than half of the policies that comprise the annual review of "legislative climates" by Conway Publications. We considered only policies that required action by state governments; we purposely did not consider enabling legislation to assist local governments in attracting businesses because our concern was with the activities of state government officials. In any case, many of the traditional activities of local government have been absorbed by state government, and others have been transformed by the addition of state resources (and controls over their use). Local governments are, and will continue to be, important in economic development, but their success now turns crucially on state policies emphasized here. Neither did we consider laws on pollution control because state responses are strongly conditioned by agencies of the national government. Furthermore, we concentrated on policies that have specific objectives consistent with our four-fold schema. Policies such as those which create industrial development authorities were ignored because they lack specificity, or because they are almost purely symbolic, in the sense that they do not require any substantial commitment of state resources. 17. We used the tetrachoric correlation because the variables itemized in Table 1 are binary: Conway Publications reports whether or not each state has such a policy in place at the time of the survey. We coded a state's response as one if it had adopted a policy that encouraged development, or had not adopted a policy that discouraged development. Otherwise, the response was coded zero. This scheme does not recognize qualitative differences among positive state responses, some of which are mentioned in footnotes to the Conway surveys. It does not, therefore, discriminate between, say, large and small tax exemptions for machinery or buildings, but such differences often reflect other differences in the tax code, and so go well beyond our concern. However, our codes do distinguish active and inactive policymakers, which is our main concern here. 18. Information on the relevant variables was recorded for each state in each year from 1967 to 1986, yielding 1,000 cases for the factor analysis, which was done on the pooled cross-sections under the assumption that a stable factor pattern exists across the years in question. We found no evidence to question this assumption; year-by-year solutions corresponded quite well with the pooled solution. The data used in subsequent analyses are derived from the pooled solution. A general treatment of longitudinal factor analysis is Stephen L. Bieber and William Merideth, "Transformation to Achieve a Longitudinally Stationary Factor Pattern Matrix," Psychometrika 51 (1986): 535-47. 19. Alternatively, binary measures of the presence or absence of employment policies may obscure differences in screening and retraining programs that have a clear bearing on productivity. Exploration of this possibility must await better information on the content of these programs. 20. Richard L. Gorsuch, Factor Analysis, 2d ed. (Hillsdale, NJ: Lawrence Erlbaum, 1983). 21. Harry H. Harman, Modern Factor Analysis, 3d ed. (Chicago: University of Chicago Press, 1976). 22. R. J. Rummel, Applied Factor Analysis (Evanston, IL: Northwestern University Press, 1970). 23. The downward spike in 1974 for Indiana probably results from an error in the Conway survey for that year; that is the only year from 1973 to 1986 in which Indiana is listed as not making loan guarantees for equipment and machinery. 24. Indiana Department of Commerce, In Step with the Future: Indiana's Strategic Development Plan (Indianapolis: Indiana Department of Commerce, 1983). 25. Indiana also established a Corporation for Science and Technology to improve the transfer of technology from universities to corporations. Relatively few states offer the exemption for research and development, so that Indiana's standardized value on this variable is fairly high. In addition, this variable loads at about .77 on this factor. Both contribute to the sizable jump (and earlier drop) in this aspect of the state's legislative climate. We mention this because it illustrates ones of the principal advantages of our measure: innovative states are rewarded for undertaking unusual or difficult action. Measures that make no distinctions among development policies and rely on simple aggregation rules do not adequately capture this sort of competitive advance. 26. Ironically, this preference for low taxes, which clearly limits the possibilities for strategic action, has not translated into a hothouse business climate. The shortcomings of Indiana's strategy are rooted in a sentiment for low taxes that has been cultivated assiduously by both political parties. This means the state lacks the resources necessary to compete with the kind of subsidies provided by other states in the region; it also means the state does not have a tax system that lends itself easily to tax concessions for capital investment. Although low nominal rates of taxation in Indiana are an advantage, effective rates of taxation are less so, because the absence of exemptions compares unfavorably with other states. Nominal tax rates do not differ greatly across the states, and so it is quite possible for ostensibly high tax states to have low effective rates of taxation, if they also allow generous exemptions and deductions. These states may actually have lower effective rates of taxation than states with low nominal rates, but no exemptions. 27. Actually, Indiana has not changed these policies since 1969. The decline in its relative standing is attributable to changes in other variables, for example, exemptions on manufacturing inventory and for investment in research and development. Although these policies load weakly on this factor, they do contribute by virtue of the large z scores associated with these unusual actions. 28. Compare with Eisinger, The Entrepreneurial State, for a good discussion of the increasing reliance of state and local governments on policies to promote capital formation. 29. Based on total unemployment as a percentage of the civilian labor force. Information on recent years is from the U.S. Bureau of Labor Statistics, Geographic Profile of Employment and Unemployment (Washington, DC: Government Printing Office). For earlier years, the data are from annual Manpower Reports. 30. U.S. Department of Commerce, Bureau of Economic Analysis (Vernon Renshaw, Edward A. Trott, Jr., and Howard L. Friedenberg), "Gross State Product by Industry, 1963-1986," Survey of Current Business, 68, No. 5 (May, 1988): 30-46. 31. For each-year, average Committee on Political Education scores were computed for each state's Republican and Democratic delegations in the U.S. House of Representatives. The appropriate score was then assigned to the governor and controlling party in each chamber of the legislature, under the assumption that state party elites are ideologically similar to their party's House delegation—an important, but not unreasonable, assumption. The score of the least liberal element of state government was then taken as a summary of the ideological orientation of state policymakers. Because the assent of both chambers of the legislature and the governor is needed for legislation to be enacted, any one of the three may block action. This means that decisions will be limited to policies that are acceptable to the least liberal actor in state government. 32. Policies implemented at time t were typically enacted at time t - 1. Hence the explanatory variables are all lagged one period. 33. On South Carolina, see Bowman and Kearney, The Resurgence of the States; about Kansas, consult Pilcher, "Economic Development"; and for Wisconsin, peruse Keon S. Chi, Strategic Planning for Economic Development: The Wisconsin Experience (Lexington, KY: Council of State Governments, 1986). 34. Compare with Hansen, "State Industrial Policy." 35. Actually, positive changes in the dependent variable generally represent increased activity or innovation. Negative changes in a state's score on a particular factor signify a decline in relative standing, which typically occurs when a state fails to act, while others intensify their effort. Hence, negative scores do not imply a reduction in absolute levels of activity, because states seldom rescind policies. 36. Jan Kmenta, Elements of Econometrics, 2d ed. (New York: MacMillan), pp. 508-514. 37. We will return to this point in our concluding remarks, where we note that political considerations may play a prominent role in choosing between areas of policy activity. 38. Margery M. Ambrosius, "The Role of Occupational Interests in State Economic Development Policymaking," Western Political Quarterly 42, No. 1 (1989): 53-68. 39. Dennis O. Grady, "State Economic Development Incentives: Why do States Compete?" State and Local Government Review, Fall 1987, pp. 86-94. 40. Compare with Russell L. Hanson, "The Development of Development Policy," Policy Studies Review, forthcoming. 41. Kenneth K. Wong, "Economic Constraint and Political Choice in Urban Policymaking," American Journal of Political Science 32, 1 (1988): 1-18.
PY - 1991/8
Y1 - 1991/8
N2 - State policymakers strive to improve their business climates, and social scientists are interested in exploring both the causes and consequences of this action. However, the notion of a “business climate” is poorly conceptualized and crudely measured, and this has hindered progress in this area. We propose a multidimensional measure derived from a weakly confirmatory factor analysis, and show how this measure illuminates substantive differences among economic development policies—differences that are obscured by conventional measures of policy activity. We illustrate the validity of our measure by tracking its movement in relation to the evolution of development strategy in Indiana, a state known for its aggressive efforts to stimulate growth. We then demonstrate the utility of our measure in quantitative analyses of the determinants of development policies, and their impact on state economies.
AB - State policymakers strive to improve their business climates, and social scientists are interested in exploring both the causes and consequences of this action. However, the notion of a “business climate” is poorly conceptualized and crudely measured, and this has hindered progress in this area. We propose a multidimensional measure derived from a weakly confirmatory factor analysis, and show how this measure illuminates substantive differences among economic development policies—differences that are obscured by conventional measures of policy activity. We illustrate the validity of our measure by tracking its movement in relation to the evolution of development strategy in Indiana, a state known for its aggressive efforts to stimulate growth. We then demonstrate the utility of our measure in quantitative analyses of the determinants of development policies, and their impact on state economies.
UR - http://www.scopus.com/inward/record.url?scp=84972717740&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84972717740&partnerID=8YFLogxK
U2 - 10.1177/089124249100500303
DO - 10.1177/089124249100500303
M3 - Article
AN - SCOPUS:84972717740
SN - 0891-2424
VL - 5
SP - 213
EP - 228
JO - Economic Development Quarterly
JF - Economic Development Quarterly
IS - 3
ER -