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Does Community Size Matter in Business Success?

From new business incentives to hand-to-hand combat, smaller cities are competing in this recession; but a community's size - large or small - does not tell all.

Oct/Nov 09
Just five years ago, economic developers in small cities could argue that "smaller is better" for businesses looking for low costs and available labor. In 2009, however, the recession has changed the playing field. Industrial and commercial rents are down, and vacancies are up nationwide. Talented workers abound in big cities, and wages have leveled off as well. Nationally, state tax revenues are anemic, and legislatures have slashed economic development budgets. When the going gets this tough, economic developers are working harder and smarter to preserve and attract jobs and investment. Officials from Boise to Richmond have adapted to meet the challenges, innovating with new business incentives, marketing strategies, and old-fashioned relationship building.

Size is Not Destiny
The objectives of examining trends in smaller cities (Tier II and Tier III) versus larger cities (Tier I) are to identify particular challenges that smaller cities face and to understand how economic developers can make the most of their resources - and how companies can take advantages of those resources. For the purposes of this article, a Tier I city has a population of approximately one million within 20 miles; a Tier II city has a 20-mile population below one million but above 500,000; and a Tier III city has a 20-mile population under 500,000.

Of course, size is not destiny. Population numbers tell us nothing about the business climate, and say little of value about the labor market. Tier I Salt Lake City, Tier II Omaha, and Tier III Fargo all show unemployment rates well below the national average, for example. Tier I San Antonio defies the high cost stereotype attached to large metros and offers a cost of living more than 6 percent below the national average. Its strong business climate is responsible for attracting five new employers with 2,000 jobs in the second quarter of 2009 alone, according to the San Antonio Economic Development Foundation. Tier I Boston has certainly felt the effects of the recession - unemployment is over 9 percent and commercial vacancies are rising - but the region is poised to recover faster than others thanks to increasing business spending, strong financial institutions, a diverse mix of industries with a heavy focus on exporting, and a healthy housing market, according to the Federal Reserve Bank of Boston. Meanwhile, Tier II Richmond competes successfully for headquarters operations against much larger Tier I cities.

The most important predictor of where your company will be successful is not population size, but a combination of the diversity of the economy, presence of universities, skill sets of the work force, and business costs, among other factors. In this recession, housing markets once considered boring are now considered beautiful: cities with conservative bankers and bubble-free real estate sectors are steadier than the competition.

Low Costs + Diverse Economy = Stability
Oklahoma City and Omaha are Tier I and Tier II cities, respectively, whose similar stories show that size does not determine success. With unemployment at just 6 percent (compared to the national average of 9.7 percent as of August 2009) and personal income growth of nearly 7 percent in 2008, Oklahoma City "defied recession" according to USA Today, which named the city the top-growing large metro in the country. In Omaha, unemployment is just 5.3 percent. These areas offer a diverse economic base, including a strong military and government presence, alongside a range of private industries. Both escaped the housing bubble fueled by subprime loans.

"Oklahoma City has a much more diverse economic base today than during the oil bust of the 1980s," said Robin L. Roberts Krieger, executive vice president for economic development with the Greater Oklahoma City Chamber of Commerce. "Energy is important, but we are also the headquarters city for Sonic and Hobby Lobby, and we have a very large military and government presence with Tinker Air Force Base and the FAA. " 

According to Roberts Krieger, alternative energy is the next frontier in the economic diversification of the Oklahoma City region, located in the heart of the North American wind corridor. With 831 megawatts of installed wind capacity and 402 megawatts coming online, economic developers plan to capitalize on the technical skills of the existing aircraft maintenance work force to attract businesses to maintain and repair the wind turbines.

Omaha offers a similar tale of stable growth and progress in the alternative energy sector. With 10,000 jobs, the Air Force is the region's largest employer, and other institutional employers include the University of Nebraska. The city offers a favorable climate for financial services, and its telecommunications infrastructure makes Omaha an attractive home for data center facilities.

"Companies here find low rents, generous business incentives, and low power costs. Nebraska is the only public power state," said Rod Moseman, vice president of economic development for the Greater Omaha Economic Development Partnership. Generation and distribution of electricity are provided by a not-for-profit, quasi-governmental entity.

The Omaha region is aggressively recruiting in the renewable energy sector. In March, Denmark-based Novozymes broke ground in Blair, north of Omaha, on a $200 million facility to produce enzymes for corn-based ethanol and cellulosic ethanol production. The project will add 100 high-wage jobs. Novozymes chose the region after a worldwide search that included locations across the Midwest and in China.

Innovations in Incentives
While cities with diverse economies are holding their own, communities dominated by the auto industry are struggling with job losses, such as Tier III Bowling Green. Local leaders have responded to the crisis, focusing on building the logistics sector and the alternative energy sector, particularly hybrid battery manufacturing. Such business recruitment efforts may take months or years to pay dividends. In the short-term, according to Jim Hizer, president of the Bowling Green Area Chamber of Commerce, Kentucky's best move has been the streamlining and modernization of its business incentives programs.

"The biggest trend in the last two years has been consolidation. When business incentives are only geared toward new job creation, your region is at a disadvantage," said Hizer. "As employers look at various scenarios, they may not be adding jobs but may be reinvesting in a facility. Previously we did not have tools to give them the incentive to reinvest in their Kentucky facilities, and as they figured out how to move their pieces on the chessboard, Kentucky could become a candidate for closure. With these new incentives, we have the opportunity to be the winner."

The new Incentives for a New Kentucky (INK) program offers tax credits for employers who are re-investing in facilities but not necessarily adding new jobs, and for companies making only small gains in employment.

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