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Refocused Economic Development: Less Smoke, More Fire

Collaborative state economic development agendas may be better able to support businesses in locations where economic growth is not happening quickly enough.

Dan Levine, Practice Leader, Location Strategies and Economic Development, Oxford Economics, Inc. (2012 Directory)
Economists predict that slow economic growth, high unemployment, and stagnant incomes for a majority of Americans will be the economic norm for at least the next several years. Outside of a few gateway communities like New York City, Washington, or San Francisco, the pace of corporate real estate remains anemic.

With a weak labor market, uneven commercial real estate market, and projections of slow to modest economic growth for years to come, there is little reason to believe that the next few years will look a whole lot different from the past couple of years in terms of corporate relocation, foreign direct investment, or economic development.

Nevertheless, many communities and businesses have been doing very well recently (especially those connected to technology or energy); and many more are treading water or growing ever so modestly. Economic development programs that target a broader swath of companies, focus more on collaboration rather than competition, and concentrate benefits on the people and places where they are most needed will be better able to support businesses and communities in locations where economic growth is not happening quickly enough. Should our federal policy paralysis ever end, better state and federal policy and program alignment would make these same strategies that much more effective.

Slowing the Interstate Competition for Jobs
One of the most pronounced post-recession economic development trends has been the explosive growth in the interstate competition for jobs. Two main forces are fueling this accelerated competition.

First, there are simply too few new projects in the pipeline to come anywhere near close enough to creating a sufficient number of new jobs. Consequently, state and community leaders feel tremendous political pressure to compete for those projects that do come along.

Secondly, as the competition has heated up, many more states have started to make incentives available to "retain" companies that are threatening an out-of-state move. New Jersey and possibly Illinois have become extreme examples of states where it is now arguable that more discretionary incentive dollars are being awarded to companies threatening to leave the state than are being awarded to those that are actually choosing to come.

Subjecting state discretionary incentives to corporate federal tax is one way to reduce the (zero-sum) competition between the states. (See "It's Time to Referee Incentives and the Interstate Competition for Jobs," Levine, State Tax Notes, November 29, 2010). After all, why should taxpayers in one state be asked to subsidize another state's attempt to lure their jobs away (as is the current situation in federal taxation)? But whether the IRS steps in to impose some discipline or states simply find themselves fiscally exhausted by the competition, economic development programs that target more businesses and more workers, particularly those in distressed communities, will likely prove more effective at promoting real economic change than will the current reliance on incentives to chase one project after the next.

Developing Talent Through Regional Consortiums Almost every community with a major research university is promoting some form of a university-business partnership. In most cases, these "university-centric" partnerships are designed to help entrepreneurial faculty commercialize patents developed on-campus.

"Regional-centric" partnerships designed to support those companies in the community that are the bedrock of the regional economy are much more rare. Two outstanding examples of regional-centric partnerships are the Center for Manufacturing Excellence created jointly by the University of Mississippi and Toyota Motor Corp.; and the State University of New York at Albany's College of Nanoscale Science and Engineering, a partnership with a consortium of semiconductor partners that includes IBM, Global Foundries, and SEMATECH.

These partnerships do more than simply incubate new start-up businesses. They are designed to encourage enormous new local investments in plant and equipment by preparing a work force that is specifically trained in the new technologies expected to be deployed in local plants and labs. It is worth noting that in these two examples, funding for the partnerships came almost exclusively from the state (through its university) and its local business partners (with little to no federal contribution).

On the other hand, community colleges have a long tradition of working with local businesses to develop talent, and in these cases federal funding is often critical. Federal training dollars are usually awarded to companies working in a regional consortium that includes a local college and other local businesses. One obstacle to obtaining federal training dollars is that they often target a specific industry (lately "green technologies") as opposed to simply favoring consortiums that have the greatest potential to help the greatest number of workers. Nevertheless, for many companies (especially those in manufacturing), federally supported regional consortiums can be an effective way to reduce training and recruitment costs.
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