State tourism advertising poses tough question

May 18, 2009

If Indiana is to be marketed as a region, government will be the one to do it.

I received a call recently from a colleague in a neighboring state. In the course of the conversation, he reported that Michigan, which has been an economic basket case for some time, is planning a $50 million marketing campaign to attract businesses. The campaign will focus on ads by one of the state's silver screen luminaries attempting to depict one of the most business—(and resident—) unfriendly states in America as a fine place to do business. I predict it won't work. But, since this state has had the highest outward migration rate of the century, lots of former Michigan taxpayers will have a chance to wistfully view the spots as they air outside the state.

The call offered a rare chance for a good chuckle at Michigan's expense. This is less rare these days than it should be. It also got me to thinking about what states spend in advertising and promotion and, more important, what they should spend.

Advertising a region as a business-friendly place is good sport, but nothing more. Indiana even did so more than a year ago, spending only a few hundred dollars of donated funds to tout our business climate. The truth is that there is such an interest in optimal business location decisions that markets handle this matter quite believably and effectively. Michigan is trying to undo all the truthful but unflattering descriptions of the state. That $50 million won't be enough to convince anyone that the facts have changed.

I am less worried about advertising for tourism.

Marketing a region for tourists would, in a better world, be done by the businesses that benefit. That's what Nike does when it wants to sell shoes.

The case for government advertising of a region has a long pedigree. It is found in the argument most economists make for any appropriate government spending: Regional advertising is a public good. A public good is something only the government will produce because of what we call the 'free-rider' problem. Even if a business were to voluntarily pony up money for a marketing campaign, those that did not will benefit from the increased tourism traffic. There is no financially compelling reason to contribute. So, if Indiana is to be marketed as a region, government will be the one to do it.

I have read lots and lots of tourism studies by academics. I have also done several of my own. The consensus seems to be that every dollar spent marketing tourism returns $9 to $21 in tax revenue back to state and local governments. The differences are based on the type of location and the quality of marketing.

The amount we should spend on advertising a state is a tricky question. Long experience has made me loath to offer budgetary advice from the safety of my armchair. But, I am sure of two things. Michigan's $50 million is too much, and zero is too little.

Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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