The Economic Impact of the Mercedes Benz Investment .Journal of Agricultural and Applied Economics, 31,2(August 1999):371–382 G 1999 Southern Agricultural Economics Association

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  • Journal of Agricultural and Applied Economics, 31,2(August 1999):371382G 1999 Southern Agricultural Economics Association

    The Economic Impact of the MercedesBenz Investment on the State of Alabama

    Ellene Kebede and Mudiayi Sylvain Ngandu

    ABSTRACT

    As part of its strategy to attract new businesses, in 1994 the State of Alabama won theMercedes Benz bid to establish an automobile assembly plant in Vance, Tuscaloosa County,Alabama at the cost of $222 to $253 million worth of incentives. The study assessed theeconomic impact of the Mercedes Benz investment using IMPLAN. The IMPLAN industrycode 49, industrial construction, and industry code 384, motor vehicle, were used to projectthe impact of the investment for the construction and production phases respectively. Theresults from four scenarios indicated that the investment would generate sizable direct andindirect employment, income, output, and tax revenue for the state economy. From theestimated revenue, the pay-out period for the cost of the incentive would be from four toseven years. The scenarios also indicated that the increase in the volume of locally pur-chased automobile parts will increase the multiplier effects for the state economy. Cur-rently, the direct benefits from suppliers accrue to other states with established suppliersnetworks. The finding also suggested a heavy concentration of the impact of MercedesBenz plant in the north and northeast part of the state. These counties were also thebeneficiaries of past agglomeration economies in terms of critical physical infrastructureand human resource development.

    Key Words: economic impact, IMPLAN, Mercedes Benz, spin-off effects.

    In the 1990s, the Alabama State Governmentand the Alabama Development Office (ADO)took a significant step in providing incentivepackages to existing and new firms willing toestablish business in the state. The purposewas to raise income, generate employment,and broaden the tax base. The principal incen-tives legislation during this period was theMercedes Benz Bill which provided MercedesBenz an incentive package estimated to be$232 to $253 million in value (ADO, 1993).Incentives were also extended to automobile

    Ellene Kebede is research assistant professor and Mu-diayi Sylvain Ngandu is associate profesor at TuskegeeUniversity, Tuskegee, Alabama.

    The authors would like to thank two anonymousreviewers for valuable comments. This manuscript ispart of a USDA/CSREES funded research grant.

    parts suppliers. The rationale for the extensionof the incentives to automobile parts supplierswas to maximize the benefits to the state econ-omy from the backward and forward linkagesgenerated from the Mercedes Benz invest-ment.

    Such policies supportive of the economicgrowth and development of the state date atleast as far back as the 1970s. They are alsopart of the Southeastern state governmentsbidding wars to entice domestic and foreignautomobile assembly plants with lucrative in-centive packages (Ngandu and Kebede). Thestate took several initiatives to enhance Ala-bamas competitiveness in attracting privateinvestment through the provision of criticalfiuman and physical infrastructure. Such infra-structure development consisted of improving

  • 372 Journal of Agricultural and Applied Economics, August 1999

    land, labor training, and supplying adequatetransportation facilities (Office of State Plan-ning). The ADO, with branch offices or prox-ies in each county, coordinates the program ofvarious government agencies, private groups,and institutions, in support of such infrastruc-ture development activities.

    Vance, initially a rural town in Tuscaloosacounty, is now the site of the Mercedes Benzautomobile assembly plant. Tuscaloosa Coun-ty, one of the Metropolitan Statistical Areas

    (MSA)i in Alabama is centered around thecity of Tuscaloosa (U.S. Department of Com-merce). In 1994, Mercedes Benz invested$300 million to produce sports utility vehicles,with a projected employment of about 1,500workers at full capacity by the end of 1998.Production started in February 1997 and anoutput of 60,000 vehicles per year is expectedat full capacity. About 50 percent of the pro-duction is for the U.S. market and the other50 percent for export markets in Europe andthe rest of the world (discussion with Merce-des Benz Communication Office).

    The factors accounting for the choice ofVance as the site for the Mercedes Benz plantare consistent with the theoretical underpin-nings of industrial location decisions. Merce-des Benz selected Alabama for various rea-sons: a trainable and non-union work force;proximity to higher educational facilities; ac-cess to reasonable labor costs; the benefits ofpro-business attitudes within the government;strong local support; efficient access to high-way, rail, seaport, and air transportation sys-tems; and lucrative tax subsidy and financialincentives from the government (Doresy). Ex-pectations are high on the part of the state,local governments, and communities aboutemployment, income, and revenue generation.However, there is a lack of ex-post economicimpact analysis of the Mercedes Benz incen-tive packages.

    The overall objective of this paper was to

    1MSA is defined as community with a large pop-ulation nucleus together with adjacent major commut-ing counties and are thus presumed to have a high de-gree of economic and social integration with thenucleus, The nucleus is a city or twin cities with apopulation size of 50,000 or higher.

    assess the economic consequences of the in-vestment by Mercedes Benz for the State ofAlabama. Specific objectives were to (i) assessthe linkages, especially the backward linkagescreated in the economy and (ii) assess the eco-nomic impact of the assembly plant on thestate economy through the geographic locationof suppliers.

    An input-output model was utilized to per-form the economic impact analysis. IMPLAN,developed by the USDA Forest Service, andcurrently licensed under agreement with theMinnesota IMPLAN Group (MIG), Inc. wasused to estimate the economic impact. IM-PLAN is an input-output database available inmicrocomputer software. It has an input/out-put account with 528 industries and 14 col-umns of additional economic data on the 528industries for all counties in the U.S. It can beused to compute multipliers and analyze eco-nomic impact analysis for any region in theU.S. IMPLAN has been widely used for eco-nomic impact analysis of recreational activi-ties (Alward). Crihfield and Campbell usedIMPLAN to estimate the impact of the Dia-mend-Starr automobile plant in Ohio. Bairakand Hughes used IMPLAN to evaluate the im-pact of agricultural exports on the economy ofLouisiana. This study used the 1994 IMPLANdata for the State of Alabama (MIG, Inc.).

    Industrial Location and The EmpiricalEvidence

    In the 1970s and 1980s, the Alabama stategovernment implemented policies, incentivesand regulations designed to attract both for-eign and domestic capital. The policies includ-ed the development of convenient and reliablesources of raw materials, land, capital, trainedlabor, and adequate transportation facilities(Office of State Planning). Consistent withempirical findings in the literature, incentivepackages and tax regulations in Alabama wereused to stimulate economic growth, employ-ment, and tax revenue, and develop growthcenters (Smith; Higgins). Such factors havebeen identified as contributing to the devel-opment of social overhead capital of the state,which indirectly decreased the cost of produc-

  • Kebede and Ngandu: Impact of Mercedes Benz on Alabama 373

    tion of interested investors (Hirschman). Ac-cess to a diversified pool of labor, specializedand organized capital markets, and enhancedcompetitive advantage of a location (Green-hut) are known to lead to agglomeration econ-omies which in turn attract additional invest-ment (Isard),

    Firm location decisions were based on thesimple model of least-cost combination of in-puts and output (Weber; Webber). Recent re-search results, however, indicated that localwages, local environment, local taxes, localpublic utilities, environmental pollution regu-lations, services, fees, and quality of life arealso key factors influencing firm location de-cisions (Schmenner; Hekman; Newman;Steinnes; McPherson). Studies of industrial lo-cation and public policy provide examples andempirical support for the influence of publicpolicy on firms location decisions (Herzogand Schlottmann). Policy incentives and pack-ages in the form of subsidies and low taxes,as well as amenities and business climate,have been identified in the literature as factorswhich reduce short-run and long-run produc-tion costs, consequently influencing industriallocation (Blair and Premus). A study of themovement of companies to the South by Bark-ley and McNamara emphasized the contribu-tion of such factors.

    According to Knox et al. industrial locationis guided by the basic geographic principles ofdistance, accessibility, interaction, compara-tive advantage, and agglomeration. Locationalagglomeration with specific kind of social andpolitical process enhances regional productiv-ity and competitive capability (Scott). Bar-rington and Warf suggested that the basis forcomparative advantage were the existing re-sources enhanced and supplemented by vari-ous local government policies, including theprovision of supporting physical and social in-frastructure. Comparative advantage was acritical component to the firm in understand-ing past industrial location and future econom-ic growth. Comparative advantage and ag-glomeration economies influence industriallocation and at the same time set the stage forfurther economic growth. This observationsuggests that economic growth and the phys-

    ical location of plants were not independentbut inter-connected (Richardson, 1969) and re-flected the historical d