Origins of Silicon Valley

How many of you know the real story of how the Silicon Valley (SV) started?

I did a little research and found that basically the SV developed, not surprisingly, because certain people in history did certain important things there. And yes, having Stanford and other leading research universities nearby was a big help, but it all comes down to specific people who made it happen. That just might be a lesson all of us should heed as we try to re-create the SV miracle in other industries elsewhere.

Here are some insights into the early people who made it happen.

Notes on: Gene Bylinsky's "California's Great Breeding Ground for Industry," Fortune June, 1974, pp. 128-135f. Found at: Thayer Watkins' website at San Jose State University.

Although the high technology industrial complex known as "Silicon Valley" did not develop until after World War II there were some early episodes that indicated something of the involvement of this area in the development of electronics. In Palo Alto there is a house with a plaque that labels it as the birthplace of electronics. It was in that house in 1912 that Lee de Forest and his collaborators first successfully utilized the vacuum tube to amplify sound. This technology became the basis for radio, radar, television, tape recorders and ultimately electronic computers. De Forest and his associates were working for the Federal Telegraph Co. which had be established in Palo Alto in 1909 by peopple associated with Stanford University.

Federal Telegraph became the source of other companies in electronics. Two employees who left Federal Telegraph invented the loud speaker and formed a company that eventually became Magnavox. Charles Litton left Federal Telegraph to create Litton Industries of Redwood City.

The first commercial radio broadcast were from downtown San Jose at San Fernando and First Street. Later, in 1927, the first all-electronic transmission of television was achieved in San Francisco.

But the broadscale development of the electronics industry would not come until much later. The key figure in this development was Frederick Terman. Terman did his undergraduate work at Stanford but went to M.I.T. for his Ph.D. in electrical engineering. He returned to Stanford to join the faculty and in 1925 was teaching a course in radio engineering. Terman worked to build up Stanford's program in electronics and electrical engineering. He was successful but the after receiving a topnotch education at Stanford graduates had to move to the East Coast to find suitable jobs.

In 1937 Terman began encouraging Stanford faculty and graduates to start businesses locally. The first and most famous firm founded in this way was Hewlett-Packard. H-P was founded on the basis of an audio-oscillator invented by William Hewlett under the guidance of Terman. David Packard was a former faculty member of Stanford whom Terman encouraged to work with Hewlett on the development of the audio-oscillator. One of the first big contracts of H-P was to provide the audio-oscillators used by the Disney Corporation in making its classic cartoon movie, Fantasia.

Another firm founded with the encouragement of Terman was Varian Brothers. The product, in this case, was a device for generating microwaves that could be used in radar, among other things.

During World War II Terman left Stanford to head a research project in anti-radar research at Harvard. In 1946 Terman returned to Stanford as the dean of the engineering school. In this capacity Terman continued to encourage the development of local businesses in electronics.

Stanford University was founded by Leland Stanford in memory of his son who had died while in Europe where he had gone to get a high quality university education. Leland Stanford endowed Leland Stanford, Jr. University with a gift of money and a cattle ranch he owned in the Palo Alto area. The ranch was large, 8,100 acres, and the terms of Stanford's gift precluded the University from selling any of it.

Terman created an industrial park on 660 acres of Stanford's land where the land was leased to electronics and other high technology companies on long-term leases. Hewlett-Parkard and Varian Brothers were among the first tenants. This provided income to Stanford and created an agglomeration in high tech industry. At first industry came to Palo Alto to have access to the expertise at Stanford. Later the level of technical expertise in industry in the area exceeded the academic expertise of Stanford. At that point the electronic industry expanded to cities near to Palo Alto, first Mountain View and later Sunnyvale.

California’s Manufacturing Job Loss

The California Employment Development Department reported in June 2003 that California lost another 4,000 manufacturing jobs in June, bringing the total loss to 293,000 since January of 2001. A total of 1.59 million manufacturing currently exist in the state, which is roughly 8% of the nation's total.

A 2002 report by the Milken Institute found that the cost of doing business in California was 32% higher than the national average. States like Arizona, New Mexico, Utah and Nevada had business costs that were 85% or less of the national average, which means that California's costs are nearly 50% higher than its border states in some industry sectors.

Small and Medium Sized Manufacturers Face Import Competition

Import competition is a growing issue for American manufacturers, especially small and medium sized manufacturing firms.

Which countries pose the greatest competitive threat?

Here are some insights from a recent National Association of Manufacturers’ survey.

49.7% China
27.9% Mexico
21.8% Other Asian Countries
21.4% Canada
16.2% European Union
9.6% Other
7.8% Japan
3.3% Other Latin American Countries

Source: National Association of Manufacturers, 2003

Nearly one-half of SME's surveyed by NAM said that China was a growing import factor today, and this threat is expected to become even larger in the future. Mexico, ala NAFTA, is seen as a significant import threat as well.

Two types of SME manufacturers exist: 1) those producing proprietary products; and 2) those working at their customer specifications. While both are impacted by imports, those producing more commodity type products are the most susceptible at this point. Many suppliers to the automotive, machinery and other large equipment markets express concern that the "herd continues to thin at home" as more and more large cuctomers look to foreign suppliers.

Excellence Still is a Household Word in U.S. Manufacturing

Take a look at the Industry Week Rankings of Best Manufacturing Plants to get an idea of what is actually going right with American manufacturing. The answer is that plenty is going right and we need to understand that manufacturing does have a competitive future in American communities.

For one example, click here to read about how Dana Corporation’s Stockton, California plant became a leader.

You can read about all of the IW Best Plant winners by clicking here.

Concern Mounts About U.S. Manufacturing Leadership

A recent series by Industry Week Magazine raises some vitally important questions about the future of manufacturing in America. Here are a few excerpts.

The fast entry of China into manufacturing, and especially into the semiconductor industry -- and China's aggressive strategy to encourage manufacturing growth -- has renewed the debate: Are U.S. businesses and the government doing enough to retain leadership in manufacturing innovation? This is a very important issue for many local economies across America that depend upon manufacturing both directly and indirectly.

Reports from the National Association of Manufacturers (NAM) and the National Coalition for Advanced Manufacturing (NACFAM), both in Washington, D.C., suggest earlier fears were well-founded. These reports say that U.S. leadership in several critical industries is falling along with market share, and high-skilled jobs and innovative research are now following production jobs. Further, the reports highlight that stakes are higher this time, with the entrance of China.

The NACFAM report, for example, notes that while Japanese, Taiwanese and South Korean wages rose as those countries developed, the sheer size of China's population means its labor surplus, and thus low wages, will put pressure on U.S. manufacturers for a long time to come.

Three key questions need to be answered according to experts:

· Can U.S. companies retain high-technology manufacturing preeminence without maintaining strong U.S. ties to both R&D and production?

· Can U.S. companies justify and retain U.S. production capacity in spite of startling disparities in global wages?

· What, if anything, should the U.S. government do to ensure an innovative manufacturing economy remains strong in the U.S.?

I recommend reading the IW series if manufacturing is even remotely important to your area economy. Go here for the details.

Greater Baltimore Alliance Releases Scorecard Under Pressure

The Greater Baltimore Alliance (DBA) took a reluctant step earlier this week toward building its credibility as the lead partner in economic development in the Baltimore region. It released a new scorecard intended to assess its effectiveness and pinpoint the region's strengths and weaknesses. Up until now, the organization has not released much information about its performance to the public, even though the GBA Board is well informed about what the organization is up to.

According to the Baltimore Sun, “the public has known relatively little about just how the nonprofit business organization works to attract companies to Baltimore, how successful it has been in that effort, or what regional strengths or weaknesses it has discovered in the process. Not surprisingly, the GBA scored itself high on the first scorecard. Producing independent objective judgments may prove more difficult, experts say.”

In my assessment, all EDO’s, whether funded by public or private money, will need to keep their stakeholders, including the general public, better informed about their activities. This only makes sense since the decisions of EDO’s have an impact on a wide cross-section of people in the community.

The past three years have been unkind to local economies everywhere. Results are down in all states, including the growth hotbeds in the West and the South. The economic skies are clearing, which will hopefully bring more development opportunities to communities everywhere.

Article link.

Maryland Strengthens International Partnerships

Maryland economic development officials are working with South Korean venture capitalists and other investment sources to spark greater investment in Maryland biotech companies.

With venture capitalists hesitant to invest in biotechnology companies because of the risks and costs involved in bringing drugs to market, and government support limited, county and state economic development officials have turned to colleagues from across the globe for help in bringing more investments to Maryland.

"We hope this becomes a tradition of hands across the water," said John W. Holaday, chairman of the Maryland Bioscience Alliance and co-chairman of the U.S.-Korea Bio-Business & Partnering Forum, which was held earlier this week.

This is the sort of partnership I have been talking about for sometime. We need to do more of this. Congratulations Maryland economic developers.

I worked in Korea for almost two years in the early 1980s. My advice on this one is to be sure that you have a sound agreement on both the process and outcomes of this collaborative project. Don’t leave much to imagination. Nail down the details of what parties expect of each other, and who owns what at the end. Legal contracts are a pain in Korea—they always have been.

Article link.

Career Pathways

An elderly man sits down next to a young boy on a park bench. The old man inquires with a smile "So, what do you want to be when you grow-up little boy?"

The young boy's eyes light up "An economic developer sir. That's what I'd like to be. I want to roam the world in search of economic opportunities for communities and help businesses and people become rich."

The old man replies "Good choice son. I know many highly successful and well paid economic developers in the world. You will need to complete your degree in economic development and start at the entry level and work your way up to a CEO level job. Just look at Joe Beans' career path. Follow his strategy and surely you will be a successful economic developer. Son, you may want to read the International Economic Development Council's book, " A Guide to Economic Development for Children." It's really interesting reading and offers lots of practical advice on how to get into and advance in the field."

Don't we all wish it was that simple? Duh. When I was growing up, the old man's eyes would have crossed and he would have patted me on the head, saying "Interesting. Very interesting son. This world needs more good economic developers...Whatever that is."

Perhaps you are like me and you get so caught up in the day to day adventure of work in the economic development field that you forget to do some career planning for yourself. I know I do.

I think most of us would agree that we need to think about our career pathways in economic development. I don't think we have a handle on the issue as far as I can tell. Even though our national association has grown stronger and more professional education and training programs are available, we still lack a clear vision of career pathways in the field. Chances are that those who hire you and pay your salary don't have the foggiest idea either.

I look at my own adventurous and fun, but very unpredictable, 27-year career in economic development. I started as a regional planner, moved into a business development and marketing role for a chamber, went out on my own and consulted for two years in the Far East, started up and managed a new countywide public-private partnership, ran a university-based economic development center, and now I consult in the field. What's next? Consult until I retire? Return to the world of practice? Become a monk and meditate atop a mountain?

Let's turn back the clock to the early 1960's. What other career options did I consider during my 52 years? As a child and adolescent, I thought my calling was the "mission fields." Yes, I wanted to be a missionary. I wanted to save souls worldwide.

Then, in my first four years of college, I wanted to be an archeologist like Indiana Jones. Can you dig it?

Then in graduate school, I wanted to be an organizational change agent...that is an organizational development consultant, freeing people from the shackles of the organizations they work for.

Then, reality happened and my first son, Jeff, came along and my wife said "You need to get a job, Don." A job in regional planning opened up. I took it, and discovered this amorphous field called economic development, which spanned the worlds of business and government. The next thing I knew I was hustling businesses and jobs for Greater Cleveland.

Being a consultant seems to come natural to me. Of course, my own style of consulting is an alchemy consisting of soul-saving, digging in the dirt for buried treasure, and trying to perform miracles on organizations and the people that live in them. Actually, I think most economic developers are really consultants. That seems to be an emerging role practitioners are playing in the field.

What are some concrete steps we can take individually and collectively to get a better handle on where careers in the field are headed?

1. Those working in the field, regardless of their current position and longevity in the field, need a career plan that is updated annually. Why? Because that plan will force us to continuously think about where we are headed and how we are going to get there.

2. We need to take stock of the core talents and knowledge we possess as economic development professionals. What do we really know how to do exceptionally well? We need to think in a more flexible way about these abilities and how they get used. Don't be afraid to think outside the box about future opportunities for yourself.

3. We need to continuously explore new ways to apply our talents and get paid more to do these things.

4. We need to think long and deep about the role of the economic development organization as an "emerging institution" in society. Right now, we do not have an institutional identity and we need one. To our credit, we are thinking about and working to advance our professionalism, but we are not seen as a part of society's institutional fabric like many other professions are.

5. We need to invent new industries in which economic developers can work. Why shouldn't every major corporation in America have an economic developer? I believe they should as part of an "embedded model of ED practice." Maybe we would get more done by working inside a company as opposed to working on the outside.

6. We need to challenge ourselves to think globally about the jobs we do and how our jobs in one community and nation affect economic development jobs in other communities and nations. We need to work together in helping local economies worldwide stay afloat and prosper.

7. So, I've given you six days of work to build a stronger career for yourself. Even God rested on the seventh.

Older workers staying in the labor force

Working longer and enjoying it less? That could be the way many of America's senior citizens are feeling these days as they find themselves re-entering the workforce after retiring.

A recent labor market trend is that more and more older people are remaining in the labor force. By the end of 2002, the share of those between the ages of 55 and 64 who were in the labor force-either working or unemployed-rose to 62.9%, its highest level during the post-war era.

Although there has been a steady increase in the share of the near elderly (those between the ages of 55 and 64) in the labor force since 1985, their share has grown rapidly in recent years. From the end of 2000 to the end of 2002, the number of near elderly in the workforce has increased 3.1 percentage points—1.6 percentage points per year. In the previous 15 years, the increase in the number of near elderly in the workforce totaled only 5.5 percentage points, or 0.4 percentage points per year.

The acceleration of the share of the near elderly in the labor force has been attributed to a loss in retirement savings as the stock market crashed in early 2000, decreasing access to health insurance for early retirees, and rising health care costs for the near elderly and the elderly.

More of the near elderly are in the labor force because older workers are staying in the labor force longer instead of retiring, not because people who had already been retired are returning to the labor force. While there has been a clear trend of rising numbers of near elderly in the labor force, there has also has been a gradual trend toward a smaller share of near-elderly reentrants into the labor force (see figure). Thus, the loss of retirement wealth, and more importantly, the loss of access to retiree health insurance, keeps older workers in the labor force longer than before.

What should we be doing about this issue? It is a problem in the way most senior citizens see the situation. Who wants to work up until the day you drop? Well, maybe a small percentage of the population, but the largest percentage want some time off to relax and do other things with their lives. Here are a few thoughts to consider.

1. Educate people about the risks of putting all their eggs in one basket; that is investing everything in fast-growth stocks. Create a balanced portfolio that grows at a reasonable and more predictable rate over time.

2. Invest in more real estate development projects and small growing businesses in your hometown, if these opportunities exist. If not, invest somebody else's hometown. Why not put some of your money in "senior-friendly communities" that offer a positive living environment for senior citizens. This one needs to be thought through some. I'm not convinced that senior retirement meccas in the sun are the answer.

3. Create senior work networks that allow senior citizens to combine their skills to provide services to various industries. A "seniors work cluster" might make some sense.

4. We need to explore some alternative ways to protect retirees' nest egg. This is a matter for the Federal Government to look into. There is relatively little protection as things stand now. Maybe there is a new insurance product that could help. Why not insure your retirement? Is there an insurance company out there willing to do it?

These are some starting thoughts. Oh, one final bit of advice: "Live within your means!" Don't overspend and make too many investments once you hit your mid-50's.

Source: Economic Policy Institute

Cleveland Area Development Groups Explore Re-Organization Options

The Cleveland Plain Dealer reported yesterday that the Greater Cleveland Growth Association, Cleveland Tomorrow and the Greater Cleveland Rountable are exploring new relationship and organizational options. Why? Because the economic development environment has shifted radically and a new business model is needed to respond more effectively. Amidst all this, the new Team NEO is coming on stream.

For those of you who read ED Futures regularly, you know that we have been talking about the need for a new partnership-based "network" economic development model for sometime, especially on a regional scale. This would seem to be a logical move for Greater Cleveland. Pittsburgh has already gone down this path, and so has San Diego. Baltimore considered consolidation, but decided against it. Restructuring is going on everywhere.

Does that mean a merger and strict amalgamation of these groups is the best solution? Probably not in my judgment. Does it make sense to tighten up links in the network and re-focus attention and resources? That is what I would recommend as an outside observer to this situation.

Here is what I would suggest:

1. Finalize the new regional economic development agenda. There has already been considerable thought given to it by the groups mentioned above, as well as area foundations and other organizations likely to weigh in on these decisions.

2. Define realistic outcomes that the region can achieve over the next 24-36 months in light of the economy, available resources, the changing competitive environment, political considerations and other factors.

3. Look at existing organizational capabilities (core competencies) and build "teams" that span the three organizations and other players (including Team NEO) to achieve these outcomes.

4. Build the new network with the team model. Set the teams into motion. They will need to grow into their new roles and responsibilities. While it may be tempting to define things to the "nth degree," avoid that temptation. The new economic development model is all about "strategic relationships." Greater Cleveland needs to move beyond itself and build new national and global ties that relate to funding resources, new business opportunities and other assets that matter to our ability to compete.

5. Retain flexibility in "how" you approach things in the future. Experiment with new strategies. Build tighter relationships to key actors, decision-makers and information sources in each of the region's strategic industries.

6. Encourage the State of Ohio to create a set aside within each of its economic development funding programs, including Third Frontier, to provide funding for joint ventures among regional, state, national, and global organizations. The new strategy should reward organizations and organizational networks that collaborate and work together in achieving "team results." That is the best thing the state can do for NE Ohio and other Ohio regions at this point in time.

Your Global Competition and What to Do About It

Your competition for technology and non-tech businesses and jobs is g-l-o-b-a-l. Write that down and never forget it.

ED Futures has been pointing in this direction since we started. For a recent assessment of this global competitive reality, read this article in Business Facilities Online.

In my estimation, the competitive environment for new business investment is only going to intensify. Here is the scenario that I see unfolding over the next two years. There will growth opportunities for U.S. communities, regions and states, but maybe not the type you have been thinking about.

The U.S. economy continues to improve. The world economy gathers momentum. Hopefully for everyone's sake, everything everywhere stabilizes.

Merger and acquisition activity grows in the U.S. as more foreign firms buy their way into the U.S. market. Consolidation of capacity in these U.S. facilities escalates, creating more facility closings and job losses. More U.S firms locate production, office and research operations abroad to take advantage of cost and market advantages.

More joint ventures develop between U.S. and international companies in foreign markets like China and India. The demand for business incentives will grow across the board as all firms seek to cover their investment risks.

A shakeout is likely to occur in both the tech and non-tech sectors within the next 18-24 months, if this scenario occurs. Automotive will be very susceptible to this shake-out, as will be financial services and insurance and professional services (law, accounting, consulting, IT services, others).

What do we do?

First, get smart about the big picture that is taking shape real quick. Keep reading ED Futures and other sources that give you the straight skinny on what lies ahead.

Second, take your blinders off and stop pretending that you can return to your pre-2000 growth engine "business model." It won't work because new factors will be driving the next global growth wave.

Third, put more energy into educating and helping your small and medium-sized businesses in strategic industry sectors to understand and cope with what is coming.

Fourth, anticipate that there will be fewer industry leaders in all the "big" sectors, like automotive, chemicals, metals, finance, etc.

Fifth, be prudent in what plans you lay to bring new public real estate capacity online. Competition for tourism and convention is going to grow much more intense. Create only the capacity you need in this regard.

Finally, forge partnerships with EDOs in other regions, states and countries that align with your future opportunities. Plan on developing them jointly and not separately. Build intelligence and assistance networks that parallel what your major companies and industries are doing.

It's a new ballgame and you will need to shift strategies to survive and thrive.

Practical Advice on Developing the Life Sciences Sector

There is a lot of hoopla out there about biotech and the life sciences sector. If you want a practical view of how and where firms in the sector locate, grow and startup, you might find this article "Bumper Crop: the New Life Science Clusters" in the May 2003 issue of Site Selection Magazine to be worthwhile reading.

The article talks about how the leading centers, like Washington DC, San Diego and others, started early in developing a presence in the field. It also discusses how new centers like Iowa have jockeyed their way into position with innovative, but practical, strategies that build on their core industry strengths.

This article offers some clear headed thinking for those trying to increase the commercial presence of the life sciences sector. Much of what is developing is only in the R&D phase, which is fine if you have 10 years to allow for the research to blossom into real businesses.

Workforce: Secret to Canadian Business Growth

Here is the major conclusion of Canada's 2003 PROFIT 100 fastest-growing companies rankings: "The message is clear: a workforce built on a foundation of value and trust has given PROFIT 100 companies a competitive edge — and it shows. By investing in people, these growth champions are creating an innovative array of world-beating products and services, from portable hot tubs to surveillance systems and computer games to Internet fax services. What's more, they are successfully selling them around the world. The result: average five-year growth of 1,976%."

To learn more about how Canadian companies are using their human capital to compete, click here. You can also access the list of Canada's 100 fastest growing companies.

Canadian EDO Best Practices Assessment

Here are the highlights of a recent best practices study of selected rural Canadian EDO's. It was conducted by the University of Guelph. It provides some useful insights into what makes a "good" EDO. Download the full report here.

POLITICAL COMMITMENT

· Political commitment to local economic development was firm and characterized by the allocation of resources specific to this purpose.

· The Municipal Council and the Board of Directors adopted a “hands off” approach in that it gave the designated economic development person(s) and departments the freedom to operate. Council and the Board did not micro-manage the economic development process in any of these communities.

INVESTMENT IN LOCAL ECONOMIC DEVELOPMENT

· Every community had an Economic Development Officer (EDO) or equivalent. Not only was a designated person an indication of the high priority accorded to local economic development, but was also a necessity. It was necessary to assign someone to this function because economic development was a full-time job that required dedication and effort, an impossible feat for someone wearing multiple hats or for volunteers who eventually suffer from burn-out despite their best efforts and intentions.

· All of the best practice interviewees pursued multiple funding sources for preparing Plans or Strategies and for project implementation.

· While there is considerable variation in terms of the investment, “best practice” Municipalities and organizations were characterized by a willingness to invest in some research and analysis to acquire or confirm the ‘facts’, to examine possible futures and get a better understanding of their communities and their local economies.

THE PLAN OR STRATEGY

· Each had either a Plan or a Strategy. Local economic development was not pursued haphazardly.

PARTICIPATION

· Intensive and diverse participatory processes characterized the preparation of Plans and Strategies. Broad-based public engagement went beyond the rhetoric of gestures and passive information dissemination, and was encouraged to ensure that the final document was reflective of what the community wanted. This approach engendered support and ownership from the Municipal Council, the business sector, community groups and the public at large.

COLLABORATION

· There was a high degree of horizontal and vertical inter-agency collaboration between the Municipality or organization and other organizations, groups and individuals within the community. They partnered with various organizations within the community and drew on existing expertise and other resources. The depth of interaction was such that partners sat on each other’s board, and shared responsibilities and information. They also partnered with other levels of government and benefited from various forms of assistance, financial and otherwise.

· Horizontal and vertical collaboration within their organizations consolidated the ‘hands-off’ approach by the Council or Board of Directors with the reduction of red-tape. Economic development personnel were given freedom to do their jobs yet remained accountable to their organizations. Having the authority to liaise with other departments without strict adherence to the bureaucratic chain of command reduced the time spent on decision-making and implementing initiatives, and enabled personnel to move into action when a window of opportunity presented itself.

· Inter-municipal collaboration resulted in a more efficient use of resources, reduced duplication and insularity, built good inter-community relations, provided willing and able partners for joint initiatives and had the potential for positive spin-off effects for a much larger area.

TRANSFERABILITY

· These “best practice” rural Municipalities and the community development agency pursued initiatives in a manner that was actually not radically different from mainstream practice. They differed more in terms of the degree and intensity, or in some cases the aggressiveness, with which they pursued participation, partnerships and local and community economic development, including tourism development.

· In most instances, interviewees indicated that their local economic development process and their approach to practice were readily transferable to other contexts in rural Ontario.

State Fiscal Crisis Insights

Most states are struggling under the weight of serious financial crises. These problems are likely to impede state efforts to support economic development in the future.

Here is the essence of a recent analysis of the state situation by Nicholas W. Jenny, a Senior Policy Analyst of the Nelson A. Rockefeller Institute of Government.

* State budget deficits are larger than they have been in at least a generation. For the most part, this was due to the revenue crash of 2001-2002, which was more severe than that of recent recessions and out of proportion to the severity of the 2001-2002 recession.

* Much of the crash was due to the same factors that created a revenue boom in the 1990s: capital gains, wages for top executives, some taxed stock options, bonuses, and other kinds of income that were related to investment. Because the economy and stock market are recovering slowly and because high levels of personal consumption cannot be sustained, it is likely that the states face a painful fiscal future for some time to come.

Article link.

Capital Spending Rising

A recent survey by the National Association of Business Economists (NABE) contains some better news about capital spending, which is a good omen for future business investment. Here are a few highlights:

* After eight quarters of decline, capital spending expanded, posting a small positive Net Rising Index (NRI 3). The increase was due solely to strong investment by the finance industry, as goods producers, the TUC industry, and the service industry reported mild contractions. The outlook for capital spending over the next 12 months remains positive, however, as all industries except the TUC industry plan to increase spending. The outlook is particularly strong for computers and communications equipment, as firms expect to increase tech spending at almost twice the rate they expect to increase total capital spending.

* Weak product demand continues to be the most important factor hampering business capital spending over the last three months. The most important factor that panelists cite as a stimulant to investment spending over the last three months has been the need to replace or update their existing capital stock. Lower interest rates have also helped, though the rebound in equity markets does not appear to have been a significant positive influence.

* Looking forward, firms expect to boost their capital spending over the next six months in response to reduced levels of uncertainty and some features contained in the recently enacted tax package. In general, though, the rise in capital expenditures relative to the current baseline is expected to be modest, with increases of between 0 and 5 percent more likely than increases greater than 5 percent.

Incentives Work in Luring Industrial Plants

Every community or state that uses incentives for economic development and wants to keep their programs will want to read this interesting study by the National Bureau of Economic Research (NBER). Why? Because the study says that these programs work for companies and government.

Here is the summary. You can buy the full report for $5.00 by clicking here.

"Increasingly, local governments compete by offering substantial subsidies to industrial plants to locate within their jurisdictions.

This paper uses a novel research design to examine the consequences of successfully bidding for a plant on county-level labor earnings, property values, and public finances. Each issue of the corporate real estate journal Site Selection includes an article titled The Million Dollar Plant that describes how a large plant decided where to locate. These articles report the county where the plant chose to locate (i.e., the 'winner'), as well as the one or two runner-up counties (i.e., the 'losers'). The losers are counties that have survived a long selection process, but narrowly lost the competition. We use these revealed rankings of profit-maximizing firms to form a counterfactual for what would have happened in the winner counties in the absence of the plant opening. We find that a plant opening is associated with a 1.5% trend break in labor earnings in the new plant's industry in winning counties (relative to losing ones) after the opening of the plant (relative to the period before the opening).

Property values may provide a summary measure of the net change in welfare, because the costs and benefits of attracting a plant should be capitalized into the price of land. We find a positive, relative trend break of 1.1% in property values. Further, we fail to find any deterioration in local governments' financial position. Overall, the results undermine the popular view that the provision of local subsidies to attract large industrial plants reduces local residents' welfare."

Mergers & Acquisitions and Wealth Formation (Destruction)

Mergers and acquisitions are an inevitable reality in the corporate world. M&A activity is the single biggest vehicle for foreign direct investment in the United States.

Economic developers across America have had to deal with the direct and indirect effects of M&A decisions. Many communities have come up on the short end of the stick when a major company in the community merges with or is acquired by another company.

How does it impact stockholder wealth? The National Bureau of Economic Analysis (NBER) has investigated this issue and you may find the study insightful. I know I did.

Mergers and acquisitions destroy shareholder wealth in the acquiring companies. New research from the NBER shows that, over the past 20 years, U.S. takeovers have led to losses of more than $200 billion for shareholders. However, this result is dominated by the big losses experienced by shareholders in big companies. Small companies that make acquisitions create value for their shareholders.

Go here to read more.

More on the Economics of Aging

Last week I posted an article describing what the OECD was finding about the economics of aging issue, especially in Europe. You may find this recent analysis by the National Bureau of Economic Research (NBER) to be of interest as well. Download the NBER paper here.

In short, here is what it says. Population aging, early retirement, limited but increasing retirement saving, more expensive medical practice patterns, and an established national entitlement to income and health care support after age 65 -- all of these factors largely define the economic environment of the United States (and much of the world) at the beginning of the 21st century.

Over the past 30 years, life expectancy has increased from age 71 to age 77, while the most common age of retirement has decreased from age 65 to age 62. Retiring at age 62, the typical American retiree today faces another 20 years of living, consuming and, at one time or another, and in many cases regularly, needing expensive health care services. These trends already have placed significant financial pressure on the public and employer-sponsored programs that provide income and health care support to older Americans.

Meanwhile, the massive demographic bulge in the population -- the baby boom generation -- begins turning age 62 in 2008. Going forward, the number of Americans age 62 and older is projected to double from 40 million today to 80 million 30 years from now, while the working age population is projected to grow by just 12 percent over the same period.

Compounding the demographic situation is the continuing rise in medical costs. National health care expenditures have grown from $250 billion annually in 1980 to $1.4 trillion today, and show little sign of slowing down. The combination of economic, labor market, health and demographic trends points to any number of social and economic challenges in the decades ahead. Understanding the complexities of this situation, and the relationships between demographics, policy, behavior, economics, and health -- this is the substantive aim of the NBER Program on the Economics of Aging.

Once again, this is an issue that local and state economic developers need to be thinking about now. It affects every community in America.

DHL Looks at South Florida

As many as 10 sites could be under consideration for the new DHL headquarters, which includes sites in Broward County, but also some in Miami-Dade and Palm Beach counties are in the mix, several real estate sources familiar with the search said.

The company is looking at 150,000 to 300,000 square feet. Using a general ratio of 150 square feet per employee, that could accommodate 1,000 to 2,000 employees.

The facility will house at least 500 DHL staffers, perhaps substantially more if DHL opts to bring the Seattle-based headquarters of Airborne Express, a pending acquisition, to South Florida, the sources said. Previously, the company only talked about 400 jobs as it relocates its U.S. headquarters here.

DHL has tapped Cushman & Wakefield to scout for a site on which to build a 150,000- to 300,000-square-foot headquarters, said five sources familiar with the search, who asked not to be identified.

Article link.

Telework Works

Telework is working and it is a viable economic development strategy for many places. Click here and read the story on how it's working in Bremerton, Washington. Ok, so it's not for everyone, but there are many employees who both enjoy working at home and are quite productive in doing so.

Telework points to how the labor market is innovating in response to new employer and employee needs.

We're Looking for a Few Brave EDO's

Does your organization have working alliances with other economic development organizations, foundations, technology centers, major corporations, industry associations and other strategic partners nationally or internationally? If so, we would like to know more about them.

ED Futures is planning a future series describing these efforts. We believe that community, regional and state EDO's need to do exactly what their companies do, which is strengthen their strategic alliances on a global basis.

This is "next gen" economic development that we are talking about. These partnerships are a future reality that every city, region and state will need to deal with. Are you ready? Looking for benchmarks and ideas? If so, contact Don Iannone at 440.449.0753, or email him by clicking here.

Latest Foreign Direct Investment Data

If your business recruitment program has a focus on international companies, then the Survey of Current Business' July 2003 report has some important data for you to see. In this issue, BEA presents a summary of foreign direct business investment activity in the U.S., as well as an analysis of U.S. business investment activitis guess.

Guess what? The balance between the two has shifted and last year U.S. companies invested more abroad than foreign companies invested in the U.S. Get the whole story here.

What will happen as the economy continues to improve? Will more U.S. investment head to places like China and India? Will investment by international companies grow or decline in the wake of the economic recovery? These are vital questions that should be considered as you fashion your business recruitment strategies for the rest of 2003 and into 2004.

Track Regional Economic Output

While good data is scarce at the local level, economic output is the best overall measure of economic performance. Economy.com assembles data on metropolitan economic output (MEO) annually.

In 2002, the NY City region had the largest economic output, which was valued at $523 billion. The Phoenix metro area, by comparison, had a MEO of $133 billion. The Cleveland region weighed in at $88 billion. Meanwhile, Fort Wayne, IN was $17.1 billion. Finally, Enid, Ok was the smallest of the 318 ranked metro areas with a MEO of $1.6 billion.

If you subscribe to Economy.com, go here to see the rankings.

Manufacturing Growth Outlook

According to Economy.com's latest industry outlook, manufacturing industries are poised for a moderate recovery during the second half of 2003. Although conditions vary across industries, overall manufacturing production has turned up modestly over the past two months, after falling since the middle of last year.

Producers of computer equipment, military goods and processed foods are seeing the strongest gains. Production in most other industries has bottomed out, although it continues to fall in a handful of industries, such as textiles, apparel and paper. Heralding further improvement in the near term, orders for durable goods increased a solid 2.1% in June, the biggest advance since January; moreover, the increase was broad based across most industries.

Revenue growth is just beginning to pick up as pricing power remains poor for most manufacturers. Computer manufacturers are experiencing the strongest rebound as industry revenues were up by 17% in the first quarter compared to a year ago. Industries, such as industrial machinery, are benefiting from higher revenues from foreign sales thanks to the weaker U.S. dollar, even though unit sales abroad have not strengthened. Persistent cost cutting is still the main source of stronger profits, although profit margins are below historic averages for most manufacturing industries. Profitability should strengthen through the remainder of this year into 2004.

Among the strongest manufacturing firms are defense contractors and manufacturers that supply the military, such as electronic equipment manufacturers. Federal defense procurement for aircraft, ships and related equipment, and munitions continues to expand. Companies that supply the military are posting double-digit sales growth, and their order backlogs are rising. Procurement spending is expected to rise by about 5% annually over the next few years, accelerating to a peak growth rate of 12% in fiscal year 2007.

Several manufacturing segments are experiencing weaker conditions this year despite the recovery in the national economy. This is the part that hurts states like Ohio and other Great Lakes states. In particular, autos and auto parts makers are coming off a period of strong sales and are cutting back this year. This also harms suppliers of steel and rubber, plastics and fabricated metals. However, vehicle manufacturers, particularly domestic companies, are desperately trying to stem the erosion in sales—off 2% through June, compared to a year ago—by stepping up incentives spending. This strategy is losing its effectiveness and vehicle manufacturers are losing money. As sales are expected to be flat through year end and manufacturers cannot risk reducing incentives, the industry will need to implement more cost-cutting measures to re-energize profits.

If you subscribe to Economy.com, go here for more.