Economic Trends

WHEN COMPANIES PULL UP STAKES

Lower costs nearby are the draw

Companies that decide to move to another state usually leave a lot of investment behind--in time, effort, contacts, customers, and human and physical capital. That's why such moves are a particularly hot issue in the competitive battle among states to attract new businesses. And that's why Dun & Bradstreet Corp.'s latest study of business migration is so revealing.

In the study, which covers business migration in the U.S. from 1991 through 1995, D&B reports that more than 56,000 businesses moved across state lines over the five-year period, resulting in the relocation of more than 1 million jobs. The biggest winners in the migration sweepstakes were the South Atlantic and Mountain states. The biggest losers were New York, California, and the District of Columbia, which together posted a net loss of some 7,675 businesses and 186,917 jobs (table).

What made the difference for the winning states? "The low cost of doing business in many southern states was a big incentive in that region, particularly when compared with the high costs of New York and California," says a D&B spokesman. Manufacturing accounted for most of the employment gains in low-wage South Atlantic states such as Georgia, South Carolina, and North Carolina, while Virginia and Maryland captured jobs from Washington, D.C.

The Mountain states, by contrast, offered a variety of different incentives to migrating businesses. Colorado boasts the best educated work force outside of the Northeast, Nevada has the lowest tax rate in the nation, and Arizona offers low taxes and low wages.

The concentration of major job losses among a few states suggests that it is often onerous local conditions, more than brighter opportunities elsewhere, that inspire moves. And it is often neighboring states--the Mountain states and the Pacific Northwest in the case of California, and Connecticut and New Jersey in the case of New York--that reap the benefits of such disaffection.

For now, California can take comfort in the fact that it suffered its biggest losses in 1991. New York's situation seems more problematic. Its greatest job losses occurred in 1995.By GENE KORETZReturn to top

TABLE

How U.S. Jobs Have Migrated in the 1990s

Net change from business relocation 1991-1995

BIGGEST WINNERS

JOB GAINS

GEORGIA 35,064

TEXAS 17,628

TENNESSEE 15,990

COLORADO 13,908

DELAWARE 13,501

VIRGINIA 13,444

OHIO 13,212

NEW JERSEY 12,890

BIGGEST LOSERS

JOB LOSSES

NEW YORK -83,489

CALIFORNIA -79,838

WASH. D.C. -23,590

ILLINOIS -8,250

PENNSYLVANIA -6,568

LOUISIANA -5,408

MAINE -4,816

W. VIRGINIA -3,738

DATA: DUN & BRADSTREET CORP.

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HOW RECALLS SHAKE STOCKS

U.S. carmakers take a bigger hit

According to efficient market theory, stock-price movements instantly reflect information regarding developments likely to affect future earnings. So what about recall campaigns by motor-vehicle manufacturers? Besides the direct costs of notifying car owners and correcting defects, vehicle recalls influence a company's reputation for reliability, so they can exact an even heavier penalty via reduced sales and/or prices.

To assess the stock market's reaction to recalls and their possible costs, economists Brad M. Barber and Masako N. Darrough of the University of California at Davis recently analyzed the market's reaction to 573 recall campaigns--involving nearly 141 million vehicles--that were reported in the Wall Street Journal from 1973 to 1992. The data covered recalls by the Big Three U.S. auto makers and by three major Japanese carmakers--Honda, Nissan, and Toyota.

Weighed against broad stock-market movements on the days surrounding recall announcements, the researchers found that the recalls caused significant equity losses for all the companies involved. On average, the relative losses came to 0.32% of market value per recall for the U.S. companies and 0.69% for the Japanese companies.

For the U.S. companies, average losses in equity value per recall over the 20 years ranged from $14.8 million in 1990 dollars (General Motors Corp.) to $47.54 million (Chrysler Corp.). For Japanese companies, per-recall losses ranged from $5 million (Nissan Motor Co.) to $250 million (Toyota Motor Corp.).

Over the long run, the U.S. companies suffered far larger cumulative losses. The Japanese, however, often had a larger reaction to individual recalls. Why? Barber and Darrough note that they announced only 66 recalls over the period studied, compared with 507 campaigns by U.S. carmakers. Thus, the market has probably tended to anticipate future recalls for U.S. auto makers but not for Japanese companies.

Indeed, the researchers find that the negative reaction to recalls by U.S. companies has been muted in recent years, indicating that the market may now be anticipating their recalls on a regular basis. Despite the much ballyhooed improvement in the reliability of American cars vis-a-vis Japanese cars, the data on recalls, at least, suggest that the gap may be as large as ever.By GENE KORETZReturn to top