The Equipment Investment Case: What BRE Programs Are Missing
Most Business Retention and Expansion programs operate on a simple logic: keep the company happy, keep the company here. Relationship visits, surveys, problem-solving calls. It feels good, and it works — at least for the purpose it's designed for.
But there's a more powerful argument hiding in the background from the economics literature that most BRE practitioners have never encountered. This might change how you think about whether and how your program incentivizes capital investment.
What the Research Actually Says
In 1962, Kenneth Arrow published "The Economic Implications of Learning by Doing" in the Review of Economic Studies — one of the most cited papers in modern growth theory. Arrow's central finding was that productivity gains are not simply a function of time or labor. They are tied directly to cumulative investment in new capital equipment. When firms invest in new machinery, they don't just upgrade capacity — they generate learning, process improvement, and productivity gains that compound over time. The investment itself drives growth. And, there can be other social, or spill-over effects from this learning. The benefit does not necessarily accrue only to the investing business.
Three decades later, Bradford DeLong and Lawrence Summers tested this empirically. Their 1991 paper in the Quarterly Journal of Economics analyzed data across 61 countries from 1960 to 1985 and found that each additional percentage point of GDP invested in equipment was associated with an increase in GDP growth of roughly one-third of a percentage point per year. Critically, this relationship was stronger than any other category of investment — including structures, infrastructure, and human capital. They concluded that the social return to equipment investment in well-functioning market economies approached 30 percent annually.
That is not a marginal finding. That is a structural claim about how economies actually grow.
What This Means for Local Economic Development
EDOs have long justified equipment incentives as retention tools — a way to tie a company to a location. The company signals that they are doing well enough to make the investment. They have to train their employees on the new equipment, increasing productivity and, hopefully, their wages. A company making an investment like that becomes more bound to their location. That justification is real and it works. But it undersells what's actually happening.
When a manufacturer in your community upgrades its production line, it isn't just staying put. According to Arrow, it is generating productivity improvements that ripple forward — into workforce skills, process knowledge, and competitive position. According to DeLong and Summers, it is contributing to the kind of capital formation that the empirical record associates most consistently with economic growth.
The Practical Question for EDOs
Most EDOs have some version of an equipment incentive — some form of a direct cash incentive, a sales tax rebate on qualifying purchases, an abatement tied to capital investment thresholds. But few have examined whether those instruments are designed to capture the full growth potential of the investment they're subsidizing.
Some questions worth asking: Does your incentive structure reward incremental upgrades, or only large-scale expansions? Are you tracking capital investment as an economic development metric — not just employment? Are you actively surfacing equipment investment opportunities during BRE visits, or waiting for companies to bring them to you? Are you able to connect capital sources to your companies?
The research suggests this deserves more systematic attention. Equipment investment isn't just a retention tactic. It is one of the most empirically grounded levers an EDO has for generating real, compounding economic growth in its community.
That's worth building a program around.
