Market Potential and Fiscal Incentives Influence Firms’ Location Decisions: Evidence From U.S. Counties

Abstract

How important are market potential and fiscal incentives for firms’ location decisions? We estimate the influence of subsidies and tax breaks on the decisions of firms to relocate or to remain in a certain U.S. county using a structural economic geography model developed in Meurers and Moenius (2018). In a panel data set from 1990 to 2016 for almost 3,000 U.S. counties, the authors find a strong and robust impact of economic geography on firms’ location decisions: The closer a county is to market demand and to the supply of inputs, the more firms locate there. As the model predicts, public investment attracts firms while the local tax burden disincentivizes economic activity, although to a lesser extent. Furthermore, in counties that are closer to economic centers, firms respond less to public investment and tax changes than firms in counties far away from centers. These data, therefore, confirm the predictions of the model regarding the potential effectiveness of regional development policies, in particular for investment tax credits, job creation, and training.