The Role of Private Sector Innovation in Local Government Financial Performance

• In Event: Innovation in the Public, Private, and Nonprofit Sectors

Abstract

Local governments frequently bid for corporate headquarters in anticipation of generating additional tax revenues, job creation, and knowledge spillovers that would lead to long-term fiscal benefits. However, the newly established firms in the region may also lead to increased expenditures. This is because local governments will have to expand infrastructure, social programs, and administrative capacity to meet the heightened demand for services. These costs could potentially erode or even surpass the anticipated gains. Empirical evidence on a headquarters’ net fiscal impact is mixed, and we know little about which kinds of firms matter, through which channels, and for which dimensions of fiscal health.

This study examines whether and how the presence of private-sector firms shapes municipal fiscal health. We argue that innovative human resources, including inventors, researchers, and other knowledge workers employed by research-intensive firms, serve as the primary conduit for the transfer of knowledge. Using a panel data of U.S. cities from 2000 to 2021, we link local-finance data to firm-level patents, R&D spending, headquarters moves, and federal-contract exposure. Fiscal condition is captured by established indices of service, budget, and long-term solvency.

We find that a greater influx of innovation from private firms, measured by patents or R&D outlays, is consistently associated with stronger service solvency. It indicates that local governments can provide day-to-day services more efficiently without raising residents’ tax burdens. The same innovative activity shows little systematic relationship with budget or long-term solvency, indicating that innovation chiefly enhances service delivery rather than the broader balance sheet. Headquarters gains and losses reinforce this pattern: attracting an innovation-oriented firm boosts service solvency, whereas losing one weakens it, underscoring the fiscal value of embedded human capital.

Federal investment amplifies these effects. Cities whose contract-rich firms plough federal dollars into innovation see an additional uplift in service solvency, whereas contract inflows unaccompanied by R&D generate no benefit and can even erode fiscal health. This asymmetry implies that national spending programs may flow unequally across communities depending on local innovation capacity.

By testing both the direct gains from private-sector innovation and the magnifying role of federal support, the study extends fiscal-federalism and urban-economics research. It shows that the fiscal benefits from headquarters recruitment depend not merely on firm numbers but on the innovative talent they attract and the way federal resources are deployed. Policymakers seeking durable fiscal benefits should therefore target companies that demonstrably invest in R&D and coordinate regionally to retain mobile human capital, lest federal funds widen rather than narrow municipal fiscal disparities.

Author

• Jiwoong Jung, University of North Carolina Greensboro
  Presenting Author