Northrop loss raises questions of business environment in Maryland

In the end, the money wasn't enough.

Maryland and Montgomery County economic development officials offered Northrop Grumman $22.5 million in incentives to win the headquarters of the defense contractor — one of the most lucrative financial packages ever for a state not known for ponying up big dollars to win business.


But last week, Maryland still lost out to neighboring Virginia, where state officials offered $12 million to $14 million in addition to undisclosed local incentives.

Northrop Grumman Corp. said it made its choice based on the selection of buildings in Virginia, not the states' business climates.


But that was no consolation for politicians and business leaders in Maryland who wooed the company. The decision brought out old frustrations from the business community and renewed long-held criticism that the state isn't friendly to business. It led some to question whether Maryland has deep-seated policy and regulatory issues that even millions of dollars in incentives can't overcome.

Northrop's choice was another in a string of corporate headquarters losses Maryland has suffered over the years, most recently Black and Decker's sale to Connecticut-based Stanley Works, which removes a Fortune 500 corporate headquarters. Sweetheart Cup Co, U.S. Foodservice and Noxell Corp — the former owner of Cover Girl cosmetics — are other corporate HQs that have left the state or been swallowed up by mergers.

"There is no question that if states are going to attract [business] venues, they are going to be aggressive and create a friendly environment," said Norman R. Augustine, retired chairman and chief executive of Lockheed Martin Corp. "Maryland gets a big plus for its corporate governance laws. There are other areas where we don't have any advantage, and we will have to address those."

Augustine led a committee of high-profile business leaders, educators and politicians in going after Northrop. He said the state put together the most aggressive effort that he's ever seen it produce to lure a business. He believes Maryland's package was competitive with Virginia's, but the state simply didn't have as many buildings available.

Maryland has made strides. There was a time when the state wouldn't have aggressively sought businesses — the state's political climate didn't allow it. And the state has amenities that businesses find attractive, corporate location experts said. There is a major airport, good schools, a highly educated population and the nearby federal government and its tens of billions of dollars in annual spending in Maryland.

Business leaders also give Maryland credit for its incorporation laws, which give companies flexibility in appointing directors and allow strong defenses against hostile takeovers.

Yet fundamental issues, such as tax rates, labor costs, cost of living and construction costs still cause some businesses to think twice about calling the state home. After all the incentives, companies want to know what it's going to cost to do business in the long term.

"Companies want it all, they want everything," said John Boyd, a principal with the Boyd Co., a site-selection firm based in New Jersey. "But the reality is, we counsel our clients to focus on the fundamentals — the fundamental cost structure they have to live with for the next 50 years."


Political controversy can also color a state's business climate. Maryland attracted national attention in 2006 when the General Assembly approved a measure that required Wal-Mart Stores Inc. to pay more for its employee health care. Gov. Martin O'Malley's criticism of the pay package of Constellation Energy Group CEO Mayo Shattuck was a deterrent to executives thinking of moving to Maryland, business leaders say.

"Many business people that I have talked to have indicated that even discussions of public policy here in Maryland — even if these bills aren't passed and aren't signed into law — does give the impression that Maryland is not as business-friendly as Virginia or other states," said Kathleen Snyder, CEO of the Maryland Chamber of Commerce. "We have a great location, one of the most highly educated work forces in the country, a great transportation network. But we also have some tax issues and regulatory proposals that stand in our way of being 1, 2 and 3."

Virginia passed a $50 million economic development package this year that included programs to lure businesses to the state and provided incentives to encourage energy research and economic development at universities.

Maryland's budget, meanwhile, included $1.1 million in cuts at the Department of Business and Economic Development.

The state constantly ranks well below Virginia in independent rankings that look at the cost of doing business by state.

Forbes magazine ranked Virginia as the best state in which to do business and Maryland the 12th-best place. It costs a corporation $24.7 million a year to operate a corporate headquarters of 325 people in metro Baltimore, compared with $21.8 million in Virginia Beach, Va., according to analysis by the Boyd Co.


The Northrop deal has come up as an issue in the gubernatorial race. Republican hopeful Robert L. Ehrlich Jr. said at a campaign stop Thursday that Maryland was used as leverage and was never really in the competition because of its business policies.

"I don't want Maryland to be used as the junior varsity team," Ehrlich said.

O'Malley, a Democrat, said the choice was dictated by real estate, not taxes or regulation, a contention supported by the company.

Northrop officials said they looked at three main factors in making their choice: proximity to the federal government, real estate and "overall economics." They described Maryland's incentive package as competitive but said that Virginia had a larger selection of office space.

"There was a dearth of facilities in Maryland because of the good market" and low vacancy rate, said Gaston Kent, Northrop's vice president of finance, who led the company's search. "We just had less to look at."

Kent said the different tax rates in the two states didn't influence the company's choice because it would be a corporate office that doesn't generate income. He also said that Northrop doesn't view Maryland as being anti-business, noting that the company has a large presence in the state.


"As far as I know, we are the largest industrial employer in Maryland, and we are quite happy being there," Kent said. "The environment is good."

Dennis Donovan, a principal at New Jersey site-selection firm Wadley, Donovan and Gutshaw Consulting, said that factors such as cost of living might not have played a role in Northrop's decision because it was coming from much more expensive California.

But Maryland could have been at a disadvantage because Baltimore-Washington International Thurgood Marshall Airport doesn't have as many international flights as Washington Dulles International Airport, he said. He also said companies tend to look at how states have treated companies. Virginia's congressional delegation is viewed as being more defense-friendly.

"Maryland needs to continue to improve its business climate; its environmental regulation and tax policy; and taking a fresh look at incentives," Donovan said.

Maryland economic development officials said they devoted more resources to attracting Northrop than on any project in recent history. They gathered an arsenal of company CEOs and political leaders from both political parties to reach out to personal contacts at Northrop.

But Christian S. Johansson, Maryland's secretary of business and economic development, said Virginia had plenty of advantages going in, including being home to the Pentagon.


The loss wasn't a reflection of Maryland's ability to attract other businesses, Johansson said.

"Companies are bought and companies are born," he said. "What matters most is how we're doing creating jobs and economic opportunities in the state, and on that scorecard we have outperformed much of the rest of the nation."

Steven Silverman of the Montgomery County Department of Economic Development said the state improved its business image by going after Northrop Grumman so aggressively.

"I think it's an overarching perception which we're doing everything we can to change," he said. "It was a very competitive environment, and Maryland came to play, so I don't think there is any mark against Maryland that we didn't get Northrop Grumman."

But others said aggressive courting with incentives doesn't matter if the general climate is different.

Maryland has "an intrinsic negative business environment that is essentially permanent," said Robert O.C. Worcester, president emeritus of Maryland Business for Responsible Government. The group is often critical of the state's business practices.


Maryland's personal income tax rate, which approaches 10 percent when the local "piggyback" tax is included, is often cited as a deterrent for high-salary executives who make location decisions. Numerous small businesses are also taxed at personal rates. Virginia's top personal income tax rate is 5.75 percent.

Richard P. Clinch, director of economic research at the University of Baltimore's Jacob France Institute, said there are definitely "regulatory barriers toward business" that the state should look to change. Maryland's corporate income tax and utility costs are higher than those in other states, he said.

But he also said there are assets Maryland should use to its advantage. High education levels can help to attract biotech companies, government contractors, information technology companies and other high-tech businesses, he said.

A major health company may choose to move to Maryland to be near the National Institutes of Health, he said.

"This decision is not one I would wring my hands over," Clinch said. "The headquarters of Northrop Grumman appears to be a win. It makes [Virginia] look good, but there are only 300 jobs."

Business observers say they expect there to be more duels between Maryland and Virginia — and more chances to show just how well, or badly, Maryland can compete.


Many expect more businesses to move closer to Washington in the near future to be closer to the federal government.

"There will be other opportunities," Augustine said. "I think both are attractive places. In some cases we will have a natural advantage and others will have the natural advantage in other cases. In some cases we'll just battle it out."

Maryland's business pluses

No. 2 state in college graduates


No. 2 state in start-up company growth

Baltimore is No. 8 "most-wired" region

And its minuses

High personal income taxes

High labor costs

Democratic legislature seen hostile to business