Case Study #5: Moving Corporate headquarters into Kansas

Incentives are an important decision-making factor when companies choose to locate in another jurisdiction. Among economic development agencies, incentives and bonusing are regularly applied to attract potential operations. Furthermore, attracting corporate headquarters, regional headquarters or regional/global R&D headquarters is considered an important win for any city, given that the specific nature of the investment tends to attract higher-paying jobs and the investment itself tends to be sticky in the event of a downturn. Simply put, headquarters are considered “high-value targets” by the site location community.

Given its status as a Tier 2 U.S. state, the particular competitive dynamics facing Kansas are similar to those of most western Canadian centres. For example, mergers and acquisitions have caused a number of national U.S. firms that started in Kansas to relocate their headquarters out-of-state; others have been “demoted” to regional headquarters. For example, in a 2001 study, Michael Porter identified ten national headquarters in Wichita that were removed from Kansas or demoted to secondary administrative status as a result of mergers or acquisitions¹⁶². These included Lear (acquired by Bombardier and HQ moved to Dallas), Pizza Hut (acquired by Pepsi), Beech Aircraft (acquired by Raytheon and HQ moved to Denver), Cessna (acquired by Textron), Bank IV (acquired by Bank of America), etc. This has been typically the case for countless western Canadian companies, especially in the Electronics and ICT sector.

Kansas recognizes its Tier 2 status and has instituted a good mix of incentives to attract and retain companies’ headquarters. In a detailed study commissioned by Kansas Inc. on the rationale for HQ moves, it was found that:

• National headquarters constitute only a small share of all business establishments, and provide a small share of the economic base in Kansas;
• National headquarters are not very likely to move between regions;
• When national headquarters do move, the causes are typically outside the reach of state policy; and
• When national headquarters move for reasons that can be affected by state policy, the appropriate policies typically are ones that should not be targeted to headquarters only.

The Kansas Inc. study also found that many national headquarters are closely attached to a major operational unit. Their location is primarily determined by the requirements of that unit, rather the specific HQ requirements¹⁶³. About one-fourth of national headquarters are located in a cluster of headquarters belonging to the same industry. Most of the rest are located in metropolitan areas near other headquarters and business services. The three most important location requirements for stand-alone national headquarters (which would be important in the western Canadian context) are a concentration of professional business services, good airline connections and a high quality of life. National headquarters in very small metropolitan areas or rural areas are nearly always collocated¹⁶⁴.

These are important points to keep in mind when thinking about the types of strategies and tools needed to attract Tier 1 players in different sectors to invest in Western Canada.

As in Western Canada, Kansas’ economic development strategies have traditionally opposed aggressive incentive programs, but supported incentives that maintain regional competitiveness. In 2001, the state instituted a strategic plan whereby it put more emphasis on tax incentives than on previous strategies, but it was in the context of a taxation strategy seeking to "neutralize tax impacts on industry" rather than having the lowest effective taxes in the region¹⁶⁵.

Furthermore, under the Kansas Constitution, headquarters are not eligible for local property tax abatements. However, Kansas has achieved outcomes similar to those of other states by providing credits against the state corporate income tax, based partly on local property taxes paid. More consistently than any other nearby state, Kansas has made headquarters establishments eligible across-the-board for all state-level economic development tax incentives.

As to influencing the location decision following a merger, one policy option a number of states and localities have adopted is a "clawback" of economic development benefits, in some cases charging interest, if a business involved in a merger relocates¹⁶⁶. For start-ups, these clawbacks can sometimes be considerable. In the case of Kansas, local governments have the authority to impose recapture conditions on property tax abatements that they grant, with Wichita, Overland Park and others beginning to use it. The Kansas 2004 Bioscience Authority Act requires recapture of benefits if an assisted firm relocates out of Kansas within ten years. Other municipal jurisdictions in Kansas have policies such as doubling the cap on royalties for firms, in which the state has made an equity investment, that move out-of-state. However, Kansas economic development income tax credits do not have recapture rules.

In our view, Kansas provides a good case of non-“beggar thy neighbour” policies at the state level. Kansas recognizes that firms that are likely to locate or relocate their headquarters in Kansas are likely to do so because a major operational or R&D unit already exists in the state. Attracting the location of operational and R&D units seems to be an appropriate strategy that is very much in line with the global positioning of western Canadian clusters.