Global Innovation Trends Impact the Business Location Process
With high unemployment rates and the critical need for job creation, performance indicators for economic development activity are needed now more than ever.
Richard A. Bendis, President and CEO, Innovation America (Fall 2011)

According to the U.S. government reports - specifically Business Dynamics Statistics (BDS), which is a fairly new approach to organizing job data - firms in their first year of existence add an average of three million jobs, whereas existing firms on average, when combined, loose one million jobs per year.

In analyzing the BDS report, Tim Kane, senior fellow in Research and Policy at the Ewing Marion Kauffman Foundation, comments: "States and cities with job creation policies aimed at luring larger, older employers can't help but fail.because they are not based on realistic models of employment growth. Job growth is driven, essentially entirely, by startup firms that develop organically."

Historically, this is nothing new - most new jobs have always been created by small business. However, during a time when new job creation is a headline event, economic development agencies are well focused on these statistics. As a result, marketing efforts, incentive approaches, and broad strategies are being developed to attract and organically grow these new enterprises and "win" these new jobs. This is an admirable effort on the part of those agencies; however, when this approach is taken at the expense of other tried and true attraction and retention programs, the state and local communities involved will be negatively impacted as a result - and run the risk of turning their backs on new jobs associated with more "traditional" industry.

Recent Experiences Are Tell-Tale
Using two actual project experiences as an illustration of current economic development agency attitudes will shed light on the current dynamic in policy application:

  • Example 1: The location consulting assignment involved over $100 million in capital investment and 1,500 new distribution-oriented jobs. Multiple states/communities, although somewhat responsive in attempting to "close" the sale, did not consider this potential project a high priority and were unwilling to consider monetary incentives and assistance beyond the minimal level because the jobs being created paid minimum wage.

  • Example 2: The subject employer was an embryonic high-tech video game creator projecting approximately 150 new jobs with minimal capital investment. This project piqued a very high level of economic development agency interest and response - and was provided exceptional incentive value. This high-tech organization clearly captured the attention of many communities based on their desire to gain bragging rights for capturing a sought after "new economy" employer.

The contrast between these two client location selections, which were performed during the same time period, illustrates a response that is not uncommon these days, when dealing with the policies and so called "target industries" of state and local economic development organizations. Although the broad policy attempted to identify and provide incentives to those employers who would create the highest-paying wage, the actual measured result after several years of operation showed that the distribution employer had achieved all growth targets - including 1,500 new jobs - while the video game employer never achieved projected employment levels and was, in fact, out of business. The economic development organization that granted the incentives to the video game employer would have served its community much better by providing stepped up assistance and incentives to the more traditional distribution employer.

Historically, a fundamental responsibility of economic development leadership is to set direction and create strategy and policy for its community's long-term ambition. Certainly every community - either on a local, regional, or state level - aspires to a higher level as measured by average wage or other metrics. However, it is also the responsibility of leadership to stabilize the short-term necessities. Economic development is indeed a difficult balancing act that requires a balanced portfolio of incentives and goals.

A 4th Leg on the Economic Development Stool
Traditional economic development efforts - whether public, private, or a hybrid - maintain resources focused on three categories of new job creation, i.e., "the three legs of the stool." These include attraction efforts (luring new employers to an area), retention efforts (keeping employers in the area and assisting them to grow), and reinvention efforts (providing assistance to employers undergoing change - think Bell Labs, Kodak, Polaroid).

During the past decade, job creation has been strongly linked to innovation - including either high-technology industries or the highly discussed new entrepreneurial enterprises. This trend has brought about an economic development effort focused on start-ups (focused on growing your own), the "fourth leg" of the economic development stool. This approach clearly recognizes the need to cater to small businesses, which after all, are the largest creators of new jobs, and also incorporates the need to embrace a new culture in attracting and assisting the modern-day entrepreneur.

Let's look at an example of how this approach may impact economic development policy and efforts. A recent column in the Washington Post (7/14/11) - "Industry Clusters: The Modern-Day Snake Oil" - cites a recent Norwegian think tank analysis of over 1,600 companies that reported this economic development approach is a thing of the past, i.e., it will not work in attracting major employers and new jobs in the future. According to author Vivek Wadhwa, senior research associate at Harvard University's Labor and Worklife Program, "The formula for creating these clusters is always the same: Pick a hot industry, build a technology park next to a research university, provide incentives for businesses to relocate, add some venture capital, and then watch for the magic to happen. But the magic rarely happens. Most cluster-development projects in the United States and around the world have died a slow death. Politicians who held press conferences to claim credit are long gone. Management consultants and real estate barons have reaped fortunes, and taxpayers are left holding the bag."

The study found that the key drivers of innovation now are "the communication channels that local entrepreneurs maintain to the outside world and their open-mindedness toward foreign cultures.and new ideas." Indeed, companies that rely on regional ties are four times less likely to innovate than those globally connected. Wadhwa challenges economic development leadership to adopt new approaches. "Rather than obsessing over clusters, start obsessing over people and connectivity. remove the obstacles to entrepreneurship - such as knowledge of how to start companies, fear of failure, lack of mentors and networks, government regulations, and financing," he advises.

Impact on Site Selection
So what does this mean to corporate site selectors and location advisors? Whether or not one is in agreement with the thinking of today's economic development pundits, advisors and corporate site selectors must keep in mind the current set of dynamics being utilized by these development organizations. These factors will most certainly effect what has been received as standard response and procedure in the past. Key changes include the following:

  • The resources of the ED groups are now diluted.

  • The focus of the ED groups should not strictly be aimed at attracting new companies to an area.

  • New employers to an area must compete for the ED groups' attention - in a manner not necessary in the past.

  • State, local, and federal governmental budgets are greatly constrained; therefore, incentive budgets as well as ED staffing are being cut back.

  • Ultimately, ED groups have to respond to a constituency, which is comprised of either politicians or involved businesspeople who live in a "sound bite" world, e.g., renewable energy projects are better than pick and packs. (Remember, in the `90s every community wanted a chip plant, and in the early 2000s they were targeting life sciences firms.)

  • Site selectors need to "position and sell" their projects, showing why these are important to an area, rather than just assuming that the old "jobs and investments" tale is enough.

  • Site selectors should not be turned off to the right community because its perceived priorities don't match their project; if the company's criteria are met, ultimately the community will appreciate the investment.

There are two sides to every coin. Communities should not forget the traditional industries for job creation while chasing the so-called "new innovation" economy. Many communities are electing to not pursue and "incent" certain types of job opportunities based on expected wages and other factors - regardless of the fact that some constituents may need these jobs. The most effective economic development policy will be one that is well balanced, which incorporates as many industries as possible. A long-term strategy and implementation plan is needed, where all legs on the stool must be the same length.

Area Development Online   All contents copyright © 2013 Halcyon Business Publications, Inc.