The darker side to winning the Amazon HQ2 sweepstakes

Is it worth it? (Reuters/Mike Segar)
Is it worth it? (Reuters/Mike Segar)
We may earn a commission from links on this page.

As the frenzy to snag the Amazon HQ2 prize gains steam among the cities watching for signs of favor from Jeff Bezos, it may be time to reexamine the stakes for the winning bid. Cities vying to be Amazon’s next headquarters are dazzled by the potential benefits—local job opportunities, enhanced private-sector productivity and competitiveness, as well as the PR value of winning such a widely promoted bid.

Yet with every opportunity, there’s a potential flip side. Here are two obstacles that an up-and-coming tech community could face if it becomes the home of the new Amazon HQ.

The incentive trade-off

Studies suggest that cities often end up overpaying when they bid so eagerly for the investment of a major new company presence. For example, the small hamlet of Waukee, Iowa was selected by Apple for construction of a data center. Why? Waukee wooed the tech giant with tax incentives totaling $213 million for 50 permanent jobs, which nets out to over $4 million per employee. A the same time, Wisconsin Governor Scott Walker was able to lure Foxconn with a $3 billion incentive package. The state will build a factory for the Taiwanese electronics giant even though some analyses indicate that it will take more than 25 years for Wisconsin to break even, let alone profit. Finally, there’s Tesla’s offer of  $1.25 billion in assistance from a generous Nevada state government to build a gigafactory there. And these are just some recent examples of state incentive packages that may never fully realize a return on their investments. Certainly, costs are soaring in the “arms race” for jobs. Amazon’s HQ2 takes the cake, however. New Jersey, for example, proposed an obscene $7 billion in tax incentives for its bid.

At what point do such incentives cease to be worth it? Studies find that corporate subsidies today total $70 billion annually. Critics note that giveaways divert government dollars from traditional public services like education, frequently costing more than the realized benefits—even over the long term. According to Greg LeRoy, Executive Director of Good Jobs First, a national watchdog of state and local economic development subsidies, says of the Amazon deal that “states and cities are going to overspend for the deal so badly that they’ll never break even.”

Hurting local startups

Beyond incentives, Amazon HQ2 could even undercut the local startup community in the city that wins the bid. This is especially the case for emerging technology hubs like Cleveland or Kansas City. The new headquarters will bring with it 50,000 jobs—mostly in the technology sector, but also across marketing, sales and other areas. And to fill these positions, Amazon will recruit and hire locally, likely stealing talent away from the local startup community. In September, Mark Pavlidis, Founder of Toronto-based Flixel, tweeted his concerns: “Amazon HQ2 in Toronto would be devastating to the local startup community. Talent that would otherwise be helping to build startups will be sucked up by Amazon.”

He’s certainly not wrong. Keep in mind, Toronto, which is also my hometown, is still developing as a technology epicenter. Amazon could effectively kill hundreds of startups that would lose talent to the new HQ2. There are few businesses that could compete with them for talent, given their resources and benefits. The most troubling impact, however, might be the technological innovation that could be stifled in whichever city becomes Amazon’s new home. This will slow the creation of new platforms and technologies, ceding innovation to other emerging tech communities.

The MIMBY approach

For the two reasons above, I strongly believe that any rising tech community should adopt a position of cautious enthusiasm in wooing major multinational players. I call it the MIMBY or “maybe in my backyard” strategy. This approach prioritizes local government investment without sacrificing opportunities that come with new businesses who can add real value to the community.

Here are three MIMBY suggestions for burgeoning tech communities to consider as they contemplate “big bid” situations:

  • A long-term outlook. Many politicians who want Amazon in their city aren’t looking at the whole picture. Sure, the selection may open opportunities in the short term. But what does it offer down the road? If not done correctly, a city’s growth may slow if a big player comes in and impacts the ecosystem. It’s important to assess the long-term benefits, and possibly to negotiate for ancillary opportunities in a city with specific needs like funding for a languishing infrastructure project, or in-kind donations to needy schools. Companies like Amazon owe bidders some idea on commitments and potential collaborations beyond those stated in the RFP.
  • Politicians and representatives sharing the same core mission. The first job of city representatives should be helping resident technology businesses scale, export their products or services and rise as industry leaders. To do this effectively, government stakeholders need to be clear-eyed about the potentially negative impact that receiving a company like Amazon might have on these efforts. They will cannibalize local talent, and constrain scale and growth for many. The community will need to plan for that, providing incentives to startups—not just the big guys — to ensure they can maintain teams and help them grow.
  • Data about big incentive bidding. Are there any local precedents or studies that show the negative effect of large giveaways on smaller local companies who don’t enjoy similar incentives? If adequate research doesn’t exist, it should be undertaken. Importantly, engaging with all stakeholders determines whether a municipality is treating homegrown businesses and entrepreneurs with the same enthusiasm and urgency as the Amazons of the world.

Initial impressions are positive, but healthy skepticism and a little early fence-sitting will help cities make smarter decisions about big investments from technology giants.