State Economic Development Efforts Need a New Business Model

As I look across the nation, I observe that most state economic development efforts need a new business model--one that relies more on the marketplace for economic development and helps communities and businesses to build global ties and in-roads. Most existing state efforts are under attack and they don't have a plan to respond effectively.

Economic development is clearly political economy. It always has been. Unfortunately, most state economic programs are 75 percent political and 25 percent about economics. Just the opposite should be true.

Here is exactly what is happening. Most state development agencies are at the mercy of the governor's office and state legislature. They have been created for the most part to serve political purposes. Is it little wonder they cannot provide sufficient evidence of their "economic impact," when they have been created to primarily have a political impact? It comes as no surprise to me that these organizations are as vulnerable as they are right now. Does this really surprise you?

We need new models of state economic development. The new models should be 75 percent economic and 25 percent political. The marketplace already drives economic development. Only a fool would actually believe that government drives economic development. Government drives just one thing in society--politics! My estimate is that 75 to 80 percent--and in some cases even more--of what happens in state and local economies is driven by the national and global marketplaces. The real issue deserving our attention is how do we focus the vast majority of our economic development resources on that 20-25 percent that we can influence in some positive fashion?

Michigan is an interesting case in point for us to learn from at the moment. The state-run Michigan Economic Development Corp. is tentatively scheduled to get $35 million less in annual funding beginning in October. There's also a movement in the Michigan Legislature to cut the funding even more sharply or eliminate the agency altogether. Go here to read about the Michigan situation.

While most Michigan local economic developers support MEDC, the Midland-based Mackinac Center for Public Policy, which has a fair amount of pull among Republicans, who hold the majority of seats in the Legislature, says the state agency is doing more harm than good because it benefits a few businesses at the expense of others. "If they create jobs in Battle Creek, that means somewhere else a job had to be destroyed," said Michael LaFaive, fiscal policy director of the Mackinac Center. In my judgment, the MEDC does a pretty good job at what it does, given the nasty economy we've had over the past three years, the War in Iraq and other external events that have crippled economic activity in most places.

Funding attacks on both state and local EDOs are commonplace across the country. Some of these attacks are probably well-deserved since the organizations in question are not getting the job done, especially the highly politically-driven organizations. In many other cases, these assaults are totally unwarranted.

The truth is that most economic development organizations don't really know whether they are making enough of a difference to justify their budgets. Most still have not instituted effective performance monitoring and assessment systems. Until this occurs, these organizations are going to remain under attack.

Most economic developers at this very moment are spending more time trying to justify their budgets than spending time developing their local economy. In this sense, it is a terrible time for everyone everywhere.

I just returned from the California Association of Local Economic Development (CALED) annual conference and listened to the debate about the future of California's state economic development agency. Major cutbacks have occurred and some say the California Department of Technology, Trade and Commerce should be eliminated. For being a highly regulated state, California remains a huge economic generator for itself and other states. California has exceedingly complex state and regional economic environments to contend with. These complexities parallel those of many nations across the world.

Budget cuts are the case in many other states. Ohio officials barely survived an assault on their state incentive programs--that fight is far from over. Ohio's economy remains in recession and our state development agency needs a new more performance-based strategy to guide its future efforts. At the same time, Ohio has exceeded many people's economic expectations over the last decade, in part because it has followed an aggressive economic development approach.

Money is only part of the issue I hear in the current debates about economic development. We need to pay attention to two others: 1) ideology; and 2) the perceived value of economic development.

The debate in Michigan is clearly an ideological battle about whether government should play a role in economic development, or whether we should simply step aside and let the market decide. Similar ideological movements are afoot in other states. The conservatives are trying to make a point right now about the inability of government to contribute much to our economic progress through economic development policies and programs. This is an ideological debate, reflecting George Bush's "cowboy economics." What do the conservatives say should be done instead? They say simply cut taxes and get government ot of the way. That's not enough!

As far as I am concerned, both the conservatives and liberals are wrong about economic development. Neither has a viable answer. I think we need to take the best from both camps and fashion a strategy that makes much needed business climate improvements and also refocus and strengthen state and local economic development programs that really matter. I agree with the conservatives that we need state business tax policy reform. I disagree with those who are unwilling to see the necessity of a state and local government role in supporting and stimulating economic development. I agree with those who also say that many existing economic development programs do not make enough of a difference. The economic development field is full of ineffective programs and initiatives that get carried from one budget to the next without adding anything of real value to local economies, businesses or people.

We need to focus greater attention on the "value" issue. Economic development organizations need to become economic value chain managers. They need to change what they do and how they do it. That is the speech I gave at the CALED meeting earlier this week. Email me if you would like a copy of the presentation. Don's email: dtia@ix.netcom.com.

There is no one-size-fits-all solution to these problems. Each state must design a program that addresses its own problems and opportunities. I do see three common issues that need to be addressed in all states however. These are:

1. Make the shift from being 75 percent "political" to being 75 percent "economic." Most state development agencies need to become public-private partnerships with greater attention to how the market can be encouraged to stimulate economic development.

2. Institute real performance monitoring and measurement systems that focus on goals and outcomes. Most programs do a bare minimum job and fail to challenge states, regions and communities to achieve more.

3. Raise the level of collaboration and teamwork within and between states. Move away from the "zero-sum" model of economic development and move to a new model that allows us to account for economic results across states and not just within state borders. We need to pay more attention to the national and global economic "wholes" that sustain all of us.

If we do these three things and nothing else, future budget justifications will be a lot of easier.

Will Clusters Survive Concerns About Terrorism Threats?

As the War in Iraq appears to be pulling to a close--at least the initial phases of our involvement, site locators are thinking long and hard about how to minimize the threat posed by future terrorist attacks on business facilities. A recent article in Bizsites.com raises some serious concerns about returning to old business-as-usual location strategies of clustering business operations in densely populated areas. The article points to evidence that the relocation of business offices out of Manhattan's central business district may not be a short-term course correction. Other site location experts are weighing in with the view that it pays to be cautious about locating too much in one place. Many of their clients are showing a preference to be outside the urban core for security reasons.

So, where does this leave industry clusters, which is the buzz in economic development across America and worldwide? The Bizsites article says that economic development officials are moving ahead with their cluster strategies, even with the apparent business concerns out there. What's our view? At this moment in time, we do not see a major threat to cluster efforts posed by terrorism and related security concerns. However, it is entirely possible that some big cities will lose some office deals in the future if security concerns remain out there. Also, we are not ignoring corporate security concerns that are out there.

Yesterday, I heard Joel Kotkin speak at the California Association on Local Economic Development (CALED) conference in Monterey. Kotkin has been harping for sometime that clustering is dead and instead we will see a major trend towards "de-clustering" across America. Kotkin's prediction was formulated pre-9/11. One conference attendee jokingly referred to Kotkin as the "cluster-buster."

Kotkin contends that people and businesses will be driven to places that offer greater affordability and high-quality of life--neither of which are found in his opinion in the congested big cities. He was asked yesterday about his view of the future success of industry cluster initiatives. His outlook was not very hopeful. Instead, he foresees more businesses locating in smaller towns and cities, where life is more manageable. Go here to read about Kotkin's new book, The New Geography.

In research for a new international study of industry clusters, I have uncovered several academic studies that point to some challenging problems with the industry cluster approach to economic development. One study, done by the London School of Economics, found that the majority of manufacturing location projects in the U.K. over a 7-year time period had no positive correlation to industry cluster theory. Instead, these locations were random. Because of the amount of attention clusters is receiving, more research is being conducted to assess whether economic development's latest craze is well-grounded and will be able to deliver on its promise of economic revitalization.

In my judgement, expectations are too high about the prospects of cluster-based growth, but I think people tend to expect miracles from economic development in most cases.

I hope to shed some new light on the future of clusters in my new study, which should be available sometime this summer. In the short term, economic developers remain committed to the cluster course. We do foresee a time of deeper questioning of clusters ahead. This questioning will continue until cluster advocates can show the hard economic results that most communities are hungry to see. My advice is to allow knowledge to prevail and economic developers should be willing to listen to the new research focused on these important issues. The worst thing to do is to stick your head in the sand at this time.

Athersys Update: Playing Field Narrows

If you had $75-100 million to spend, would you invest it in Athersys, the Cleveland-based biotech startup, which is playing off its hometown against competing locations in North Carolina, Minnesota and other states? That remains the question on the minds of development officials in several states trying to woo the company.

Pittsburgh backed out of the race a week ago, announcing the deal was too rich for their blood. Recent reports from Research Triangle Park and Minneapolis point to similar concerns about whether Athersys is really worth it.

North Carolina officials equate the deal to the competition that Gliatech, another Cleveland biotech company, started five years ago when it was searching for greener pastures before the FDA nailed the company for misreporting information about its products to the Federal regulatory agency.

Cash-strapped Minnesota officials say they're not about to break the bank for Athersys, though they are still aggressively searching for other ways to lure the company.

Stay tuned.

Qwest Invests in Nebraska ED Infrastructure

In the face of rising telecom and Internet competition, Qwest has stepped up it economic development efforts in Nebraska and other states. As part of its recommitment to economic development in Nebraska, Qwest has rejoined a number of chambers of commerce across the state, along with restarting the Qwest Foundation.

Qwest has invested $20 million in the Grand Island community during the last five years to keep the community's telecommunication infrastructure state-of-the-art.

Qwest is also working with the state Public Service Commission in providing the infrastructure for the distance learning network facilities in the state's communities. Improving educational opportunities for Nebraska students is see as an important component of economic development. Nebraska has 130 schools on the distance learning network, which provides commercial video quality distance learning applications.

Finally, Qwest is spending $75 million this summer in Nebraska to provide high-speed Internet access digital subscriber lines called DSL.

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American Airlines Dodges the Chapter 11 Bullet

American Airlines has the final labor concession approval it needed to stay out of bankruptcy, but American, the world's largest airline still faces widespread resentment from its employees and difficult financial fundamentals for its segment of the airline industry. Nearly half of the airline's unionized employees voted against concession pacts despite support for the agreements from union leadership and threats of deeper cuts if airline filed for bankruptcy.

What are the concessions worth to the company? American should see a total of $1.8 billion in annual labor cost savings from the agreement with the flight attendants, coupled with the deals approved Tuesday by the other unions. But while demanding deep sacrifices from rank-and-file union employees, the airline was building in some guarantees for its top executives, according to a report in the Wall Street Journal Thursday. This part of the deal ain't pretty.

Stay tuned. We have not heard the last of this situation.

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Most Recent Regional Economic Outlook

Here are a few tid bits from Economy.com's latest regional economic outlook released just this morning:

* The South and West are leading in the not so stellar job rebound.
* Four of the five Great Lakes states, including Ohio, are in recession.
* Manufacturing is still barely treading water.
* Airline cutbacks are being felt in the major hub cities.
* Smaller and mid-sized metros are faring better than the large ones right now.
* Regional drive-in tourism is the only segment of travel and tourism seeing any advances.
* Defense spending impacts are not yet registering in the defense states and metro areas.

Article link. (If you are an Economy.com subscriber.)

Oregon Economic Developers Say SARS is Having an Economic Impact

Here is another story that points to the impact of SARS on local economic development. The SARS scare in Asia is an unfamiliar problem for Oregon business and the state’s export-dependent economy. Trade missions to promote Oregon agricultural products are being canceled. The state’s agriculture department won’t send a trade officer to an upcoming seafood seminar in Taiwan because of the SARS outbreak, state officials said. Representatives of the Oregon grass-seed industry, which steadily has increased sales to China, have called off a trip to the nation.

Oregon officials point to these reactions and developments:

* "Companies have restricted travel to SARS hotspots, such as China, Singapore and Vietnam. For employees at Intel Oregon, only “mission critical” trips are permitted to China, a company official said.

* Hewlett-Packard in Corvallis is asking employees returning from Asia to work at home for 10 days to reduce the chance of spreading the contagion, a company spokeswoman said.

* The majority of American staff members in the commercial section of the U.S. Embassy in China are returning to the states, said Scott Goddin, director of the U.S. Commerce Department’s Export Assistance Center in Portland. That means that businesses will have a tougher time getting help."

Collaboration Key to European Success in Life Sciences

Commissioner for Enterprise and the Information Society Erkki Liikanen has admitted that the Commission is 'anxious' about the state of the European biotechnology industry, and has called for further cooperation between policy makers and the private sector to solve the problem. In an attempt to meet this challenge, Mr Liikanen identified several key issues which he said require 'decisive actions'. Important progress has already been made in two of the areas, the fragmentation of research and the need for increased protection for intellectual property rights. I would take this even one step further. The Europeans should be cooperating with the U.S. biotech industry to ensure a smooth flow back and forth of U.S. and European biotech companies.

This same recommendation could and should be said for the U.S. biotech industry and the many regional and state campaigns to harness a piece of the industry across the nation. Yes, local initiative is a very good thing. No, underfunded and uncoordinated efforts are not a good thing. What's the answer? Let's all say it together--"national and global partnerships" that draw upon and couple the unique strengths of individual centers belonging to this growing network of life science and biotech initiatives. Most biotech centers cannot be successful with a "go-it-alone" strategy. Write that down.

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SARS and Economic Development

Not much has been said about the impact of SARS on economic development efforts, but a recent Buffalo News article reminds us that is having an impact.

The Buffalo Niagara Enterprise has canceled a major marketing event in Toronto because of the SARS virus and lower projected attendance. The BNE, a regional marketing office, was scheduled to host a party May 2 at the York Event Theater for business people attending the CoreNet Global summit. Toronto has suffered the largest Severe Acute Respiratory Syndrome outbreak outside of Asia. Canada has reported 13 deaths.

Oneida Bingo & Casino Add to Green Bay Economy

Not everybody is convinced that gambling is a good strategy for economic development, including those who compete for the same tourism and recreational dollars in a regional economy. But according to a recent survey of Green Bay Wisconsin area residents, the Oneida Casino contributes in a positive way to local economic development.

The survey indicates that 71 percent of residents believe that the Oneida Bingo & Casino has helped develop more business and create jobs in Green Bay for American Indians and non-Indians. Oneida gaming accounts for 3,442 jobs in the state, according to a 2001 survey conducted by a Florida economist last year. The average wage for an Oneida Casino worker was $27,928 including wages, salaries and tips and $36,528 including fringe benefits. More than half of those employees are non-tribal citizens.

In our work with tribes over a three-year period, we found more good than bad when it came to Indian gaming and its local economic impacts. The richest casinos tend to be those located near a major city or metro area, where ready market access exists. Some of the gaming facilities in more rural areas have struggled with profits, but remain an important source of jobs and income to tribal and non-tribal citizens. Having worked a little with the Oneida in the Green Bay area, I am impressed with what they have done in variety of areas, including gaming.

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U.K. Clusters to Get a Boost

Cluster activity continues to grow in Europe. A multi-billion pound inward investment windfall built around the development of 12 hand-picked business clusters has been targeted by the three Regional Development Agencies piloting the new Oxford2Cambridge Innovation Arc. The 12 clusters within the Arc being used to leverage investment capital are:

• Biotech/Life Sciences
• Medical Equipment
• Horse racing & bloodstock
• Engineering
• Environmental business
• Motor sports
• Advanced automotive
• Multimedia
• Film
• Plant, bio and crop science
• Aerospace

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Michigan Governor Says She Will Fight to Keep Pfizer/Pharmacia Jobs

Michigan Gov. Jennifer Granholm's team for maintaining Pfizer's jobs throughout the state is made up of officials from Southwest Michigan First and the Michigan Economic Development Corporation (MEDC). Its goal is to encourage Pfizer, the world's largest pharmaceutical maker, to not only keep the already existing 8,500 Michigan jobs through Pfizer and Pharmacia, but to also expand the existing Kalamazoo County operations.

What is Michigan willing to give to make the deal happen in Kalamazoo? The Michigan team's incentive plan is valued at up to $635 million over a 20-year period based on the company investing $784 million in four expansion projects and creating 2,100 new jobs in the Kalamazoo area. The majority of the incentives offered are only available to Pfizer if it maintains all 8,500 jobs in Michigan, including 5,000 in research and development, 2,000 of which are in Kalamazoo.

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Bush Administration Says Private Sector Should Do Rebuilding in Iraq

Not only is the UN feeling snubbed in the Iraqi rebuilding effort, but so are the many nongovernmental organizations (NGO) that often play a role in this arena. According to the LA Times, "the U.S. Agency for International Development is expected to rely almost exclusively on for-profit corporations to rebuild Iraq's social institutions, angering nonprofit organizations that claim they can do the work more effectively."

This will be one to watch. Can you imagine if some version of the same approach was adopted in state and local economic development across America? Talk about a radical shift in the economic development paradigm? Is this possible? Probably not, but it might be worthwhile to explore some new strategies to mobilize the private marketplace in accomplishing our economic development goals. Add that to your radical thinking pile.

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Network Organization Way to Go, Says Kaua'i, Hawaii

A new network-based organization that will serve as a communications hub for the dozens of community groups on Kaua'i. The new organization hopes to have offices and a paid staff by the end of the year. The alliance is an outgrowth of the process of updating the county's general plan for development, and it hopes to provide a way for the island's broad range of interest groups to coordinate activities, avoid duplication, develop goals and work together in other ways.

Flexible network-based organizations are effective in improving interaction, connectivity and creative collaboration among community organizations. Economic development will be just one component of the new organization.

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Northeast Ohio Retains OEConnection

OEConnection, a leader in online and ecommerce automotive parts locating and fulfillment, has outgrown the space in its current Richfield, Ohio location, and will relocate its headquarters to a new building just one half mile down the road.

The company will receive incentives that include a job creation tax credit and worker training assistance from the state .

Learn more about the company by clicking here.

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Florida Leads States in February Job Growth

In case you were wondering...Florida led the states in job growth in February 2003. The state added 109,000 new jobs since February 2002, including 36,500 new jobs in the professional and business service area.

In related news, Governor Jeb Bush outlined three efforts he said will further help diversify the economy and help the Florida economy: securing the permanent secretariat of the Free Trade Area of the Americas in Miami; protecting the state's military installations from the proposed 2005 round of federal base realignments and closures; and fostering development of emerging technologies, in part, at state university technology centers.

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The Next 25 Years

The April issue of American Demographics Magazine contains a fascinating forecast covering the next quarter century. The article gives us much to think about. Here are a few nuggets from the study:

* The U.S population is expected to grow from its current 282 million level to over 350 million in 2025, adding nearly 70 million people for a 25 percent growth.

* Because of expected changes in our demographic makeup, more niche markets, defined along age, ethnic and other lines are likely.

* Environmental concerns are expected to grow as we stretch our available natural resources, including water, clean air and energy to support a much larger and more active population.

* The graying of America will continue as people 65 years and older increase from 35 to 70 million people by 2025. The senior market will be the largest segment of our consumer marketplace.

* With the birth rate dropping, younger people will constitute a much smaller portion of our total population.

* By 2025, Hispanics will account for 20 percent of the population and Blacks another 13 percent of the total.

* Metro areas with high diversity ratios or large numbers of seniors will likely see the greatest population growth, which means the West, Southwest and South will continue to prevail in the population and market growth race.

What are the possible implications of these trends for economic development? Here are a few to think about:

* Worker shortages among younger population segments will grow.

* More seniors will remain in the workforce, as they live longer and changes in retirement plans and benefits force them to work longer.

* Non-whites will constitute a larger piece of the overall workforce pie.

* Industries serving the senior and ethnic markets will see the most growth in the South, Southwest and West.

* Economic development concerns will shift to include those issues considered most important by seniors and various ethnic/racial groups.

* Education, training and other human resource strategies in economic development will shift to reflect the new world we will be living in 25 years from now.

* More products and services produced by companies will reflect the new population mix emerging. This will put additional pressure on companies to re-design products more often and in line with more different market segments.

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Concern Grows in Connecticut About Overseas Outsourcing of White-Collar Jobs

“Everything that can go digital, wireless or Internet is going overseas: computer software development, financial analysis, copy-editing, architecture, engineering, human resources, even payroll and other back-office functions.” That is the view taking shape in Connecticut and many other states as local and state officials see a growing number of companies exporting information and knowledge jobs to places like India, China and other low-wage countries.

Nationally, more than 3.3 million jobs and $136 billion in wages will be lost to offshore outsourcing in the next 15 years, according to the Forrester Group, a consulting firm in Cambridge, Mass. Some think that could actually be a conservative estimate of these losses to the economic development upstarts sprouting across the world.

According to the Washington-based Economic Policy Institute, the job exporting problem is likely to get worse in the future as educational levels and skills rise in developing countries.

There is a growing awareness of this problem among U.S. economic development officials, although most are not sure what, if anything, they can do about it. Lowering wages and other business costs to match the cheap labor deals abroad is not the answer. Many communities, regions and states are pinning their future economic hopes on clusters and other knowledge economy development strategies. How much will they help? That remains unclear as most of these efforts are only in their early stages of development.

I would hold out “stability” as part of the answer for U.S. communities. Despite our recent challenges and uncertainties, the U.S. remains the most stable place on the planet from an economic, social and political perspective. While many international locations may be cheaper places to do business and offer many other business advantages, political risk remains a much greater issue.

We need new strategies. A second possible part of the solution could lie in developing new types of economic development strategies that confront the international division of labor issue directly by offering companies with networked labor strategies that connect work activities in the U.S. with those abroad. This suggests that most U.S. business locations must increase their “globally connectivity” to link jobs in let’s say Connecticut with those in India.

One thing is certain. The knowledge economy is no longer bound to the U.S. and other developed nations. American economic developers will need to become international economic developers if they are to find true solutions to this problem.

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