Place-Based Policies and the Geography of Corporate Investment

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 efficacy of place-based policies by studying a 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 $17,000. These responses are driven by more financially constrained firms and firms which rely on costly but long-lived capital inputs like industrial machines. The policy did not generate positive local spillovers to ineligible plants or spillovers through inter-regional trade networks. Plant-level hiring in ineligible areas outstripped that in eligible areas, suggesting firms reallocated funds from the write-offs within their internal network. How multi-plant firms react to spatially targeted tax incentives ultimately depends on their internal network and their composition of intermediate capital inputs used in production.