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What Really Motivates CEOs to Invest in Some States and Not Others

Do CEOs like to expand and establish companies especially in states with high poverty rates? The question has emerged in some quarters as a criticism of how CEOs surveyed by Chief Executive determined their choices for the magazine’s “Best States” and “Worst States” for doing business, in the May-June issue.

Typical of this argument is a recent column in the Orange County (Calif.) Register which pointedly raised the general question in this way: “Do CEOs seek sites where the locals might be desperate to work?” wrote Jonathan Lansner.

His “evidence” for making the charge: the disparity in poverty rates between Chief Executive’s “Best States” and “Worst States.” The top 10 states—Texas, Florida, North Carolina, Tennessee, Indiana, Virginia, South Carolina, Georgia, Utah and Arizona—had 16.7 percent of their combined adult population in poverty compared with the national average of 15.3 percent, Lansner calculated.

Meanwhile, the bottom 10 states—Hawaii, Oregon, Pennsylvania, Connecticut, New Jersey, Michigan, Massachusetts, Illinois, New York and, last, California—had a poverty rate of just 14.4 percent, he figured, using the U.S. Census’s 2010 American Community Survey (ACS).

The problems with Lansner’s logic and his allegation include fallacies of both correlation and motivation as well as a lack of recognition of economic transitions that all states undergo, said economists as well as CEOs, corporate relocators, recruiters and others who make and participate in business site and expansion decisions.

To be sure, there appears to be a correlation between favorability for business investment and states that demonstrate relatively low-cost infrastructure, including labor costs—which, of course, end up translating roughly into consumer income—as well as taxes and other corporate penalties.

“It’s always going to be true that if two locations are equal in every respect, and one is cheaper, companies will go with the cheaper one,” said Dan Levine, owner of MetroCompare, a Scotch Plains, N.J.-based corporate-relocation consultant.

But even that “correlation does not imply causation,” argued Mark Robyn, economist for the Tax Foundation, in Washington, D.C. “There are so many other factors that determine tax levels and poverty levels that just looking at the two of them would not tell you whether there is any causative relationships or which one is causing the other, or whether they are both being caused by something else.”

Among the major factors besides taxes that go into a CEO’s siting calculus are regulation, location, climate, employment laws, property values, level of workforce skills, crime rates, and costs and standards of living, corporate location consultants noted.

At the same time, sifting through broader data sets uncovers indicators that smudge Lausner’s picture. Most important, the ACS data doesn’t include cost-of-living adjustments that provide a more complete context of the financial wherewithal of residents of each state.

“That’s the kicker that makes [Lausner’s] numbers almost meaningless,” said Jonathan Williams, director of the Center for State Fiscal Reform, part of the American Legislative Exchange Council, in Washington, D.C. After making cost-of-living adjustments, for instance, the poverty rate in California is actually higher than in Texas, Williams said, “because who can afford a house in California? That’s a big deal.”

What about CEOs’ motives? Are they really like the villainous Potter in It’s a Wonderful Life, intent on exploiting and keeping down the masses? Clearly, whatever the individual or collective motives of company leaders in siting decisions, it’s possible to interpret them in a more beneficent way.

Elisha Tropper, CEO of Cambridge Security Seals, a manufacturer based in Pomona, N.Y., said: “The business community appreciates a more motivated workforce” and that the governments of the most-favored states are “being responsible to their citizenry” by courting corporate investment.

CEOs and business owners “aren’t just looking for the lowest-cost labor force, and they’re certainly not looking for a desperate workforce,” added Dane Stangler, research director at the Kauffman Center, a Kansas City-based organization that promotes and studies entrepreneurship.

In fact, said Marc Cenedella, CEO of The Ladders, a New York-based job-matching service: “If there is a positive correlation statistically between states with higher poverty rates and those more friendly to business, it’s because they have to be friendlier to business—and they haven’t gotten rich enough to generate the interest groups yet that gum up the system.”

Cenedella’s observation got at the real gist of the situation: that economic transition in states typically starts with a low cost structure that attracts profit-making businesses to locate and expand there. Then the state may proceed to a kind of attractiveness equilibrium. But from there, as employee compensation, regulatory requirements and other business costs rise, states often begin devolving into relatively unattractive places for business even as—for a while, at least—residents remain better off financially than in the more attractive states for business.

One depiction of this transition is relative joblessness. Collective unemployment rates have fallen at a greater rate in the top ten “Best States” between 2010 and early 2012 than in the bottom ten, or “Worst States,” over the same period, calculated Dick Carpenter, director of strategic research for the Institute for Justice, an Arlington, Va.-based free-market think tank. What’s more, the collective unemployment rate in the “Best States” is lower than the national average jobless rate while the likewise rate for the “Worst States” is above the national averages.

Many of the low-poverty, high-cost states “are making it harder to do business,” said Richard Bernstein, CEO of a health-care and insurance advisory firm.

Yes, corporations are investing heavily in high-poverty states. But the idea is to bring them up, not keep them down.

About Dale Buss

Dale Buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.