Place-Based Policies and the Geography of Corporate Investment

Abstract

Growing spatial inequality has led policymakers to enact tax breaks to attract corporate investment and jobs to economically peripheral regions. We demonstrate the importance of multi-plant firms’ physical capital structure for the take-up and efficacy of place-based policies by studying a national bonus depreciation scheme in Japan which altered the relative cost of capital across locations, offering high-tech manufacturers immediate cost deductions from their corporate income tax bill. Combining corporate balance sheets with a registry containing investment by plant location and asset type, we find the policy generated big gains in employment and investment in building construction and in machines at pre-existing production sites, with an implied fiscal cost per job created of $16,000. These responses are driven by more financially constrained firms, firms which rely on costly but long-lived capital inputs, and firms with a larger portion of their existing operations proximal to the policy catchment areas. The policy did not generate positive local spillovers to ineligible plants or spillovers through inter-regional trade networks. For eligible firms, plant-level hiring in ineligible areas outstripped that in eligible areas, suggesting reallocation of resources within firms’ internal capital and labor markets mitigates the spatial misallocation inherent in subsidizing low productivity areas.

Keywords: place-based policies, spatial firms, bonus depreciation, internal capital markets, long-lived assets, financing constraints

JEL Classification: E22, G31, H25, R12, R38