It’s always risky to think that things were better in the past, but for city and county officials involved in economic development it might seem like that. The world of economic development has changed dramatically in the past decade or so, and in many ways for the worse.
Not only is there more demand, with more jurisdictions both in America and outside its borders engaged in economic development, but there also is less supply that includes fewer company relocations, less corporate investment, and fewer business startups. As a colleague from North Carolina long ago quipped about his state’s economic development strategy, “We shoot anything that flies and claim anything that falls.”
Today, there are more “shooters” and fewer “ducks.” This article first explains why this is the case, considers the implications for economic development practice, and offers some insights on how cities and counties can respond.
The New Economic Development Environment
After World War II, when Northeast and Midwest states and local governments realized their factories could relocate anywhere in the country, they began to compete fiercely to retain and attract those “smokestacks.” By the 1970s, virtually every state had established an economic development agency whose mission was to go out and compete with an arsenal of tools ranging from tax breaks, to free land, to workforce training programs.
During this era, higher income areas, mostly in the Northeast, the Midwest, and California, served as “seedbeds” for the development of new innovations, companies, and industries. But once new product and process innovations matured, they no longer needed to be near corporate headquarters and R&D labs.
They could be produced in lower-cost rural or metro regions, often in the South and West. New products might be developed in Boston or Chicago, but once their technology and production systems matured, that production would be moved to a place like North Carolina where costs were lower.
Changes of the 1970s
By the late 1970s, the process began to change, slowly at first, and then much more rapidly in the past decade as globalization took hold. As technology enabled more globally integrated trade and production systems, standardized production could now locate in low-cost nations, not just in low-cost areas of the United States.
Indeed, low-cost U.S. areas were not all that low cost anymore. Offshore locations, particularly in emerging developing economies, were made all the more attractive by the lack of unions, generous investment incentives provided by governments desperate to attract foreign investment, and a relatively strong U.S. dollar that made offshore production cost less.
At the same time, the challenge to the U.S. economy from developed economies grew. For most of the post-war era, the United States led the world economy and produced a vast array of new companies, many of which grew to become global leaders, bestowing the country with new factories, offices, and job growth.
Competition from other countries like Germany and Japan was either relatively slight or nonexistent. Most other nations were too small to attain the economies of scale firms needed to succeed. Still others were effectively isolated from the global economy, located behind the Iron Curtain or constrained by similar policy barriers.
Others mistakenly put in place a host of antigrowth policies that kept them on the global economic sidelines. Metaphorically, the United States was fielding a “dream team” while others were playing in the minor leagues.
Upheaval Starting in the 1980s
U.S. manufacturing jobs peaked in 1979, and declined gradually through the end of the 1990s. But production jobs hemorrhaged in the 2000s when one-third of U.S. manufacturing jobs were lost.1 Moreover, rural U.S. manufacturing was hit as hard as urban, and the South as hard as the North.
During the 1970s, rural factory jobs increased three times faster than urban factory job growth as high-cost urban manufacturing migrated to low-cost rural areas.2 But in the 2000s, rural and urban areas lost factory jobs at the same rate since they were now both part of the higher-cost core region (the United States).
And of the top 10 states in terms of the share of manufacturing job loss in the 2000s, four (Mississippi, North Carolina, South Carolina, and Tennessee) were in the South, a region that lost more than 37 percent of its manufacturing jobs.3 Low costs no longer provided immunity to disruption.
We also see this decline in manufacturing investment in the dramatic fall in the number of major relocations or new facilities in the United States. These are the major facilities—new factories, corporate and regional headquarters, and more—for which states and cities intensely compete.
From 1995 to 2000, the average number of new or expansion facilities per year was 5,139. At this rate, the typical state could expect to see 102 new or expanded facilities per year. From 2000 to 2005 these fell to 3,896 per year on average, and from 2005 to 2011, they fell even further to an average of just 2,824 per year.4
As a result, the average state can now expect to see an average of just 56 new or expanded facilities a year. Also, similarly striking declines have occurred in fixed capital investment as well: Between 2000 and 2009, the domestic capital investment of American multinational firms declined by 48.5 percent as a share of gross national product (GNP), while the overseas capital investment by these same American companies increased by 9.1 percent.5
And as the Brookings Institution has found, we have seen a decline in the rate of new company formations over the past 30 years.6
The Race for Innovative Advantage
A major reason the “supply of economic development” has fallen is that the U.S. economy faces much more competition now. Indeed, it is this intense race for global innovation advantage that most clearly distinguishes today’s global economy from the collection of regional and national economies that competed to attract “smokestacks” a generation ago.7
As a February 2012 Washington Post article noted, “Europe, as well as Asia and Latin America, is offering ever stronger competition to the United States, even in its strongest sectors, such as Internet technology, aerospace, and pharmaceuticals.”8 And it’s not a competition for the faint of heart.
In fact, it makes the World Cup look like a kids’ playground game, for the struggle for innovation advantage is being fought with all the tools at nations’ disposal. Nations around the world are establishing national innovation strategies, restructuring their tax and regulatory systems to become more competitive, expanding support for science and technology, improving their education systems, spurring investments in broadband and other IT areas, and taking myriad other pro-innovation steps.
So while the competition has ratcheted up for economic development, the competitive advantage of the U.S. economy—and, by extension, the focus of economic development—has also changed.
Emblematic of efforts of the old economy, a 1954 issue of Fortune magazine included a full-page ad from Indiana that touted its benefits as a location of corporate investment, including such attractors as “no government debt,” a labor force that was “97 percent native” (with the implication that native-born workers were less likely to strike than immigrants), low taxes, and ample supplies of raw materials, calling itself “the clay capital of the world.” In other words, the key to success was low costs and proximity to markets and raw materials.
Today, in contrast to states competing by “smokestack chasing,” most states now compete by “innovation chasing,” trying to grow and attract the highest-value-added economic activity they can: the high-wage, knowledge-intensive manufacturing, research, software, information technology (IT), and services jobs that power today’s global, innovation-based economy.
Indiana is a case in point as it no longer touts its abundant clay. Fortune ads now tout the state as a place “where innovation, discovery, and success are nurtured,” and “that provides a pipeline of bright minds and new thinking.”
A Shift in What Matters
Related to this is that cost has become a less important driver for economic development. In the old economy, low-cost regions and communities touted their advantages for attracting cost-based manufacturing and services. Now, even the lowest-cost regions in the United States are high cost compared to nations like China, India, and Vietnam.
U.S. costs overall also are actually significantly lower than many of our competitors. Total hourly manufacturing costs in Germany, for example, are 60 percent higher than U.S. costs in dollar terms. In fact, U.S. manufacturing costs are now less than 20 percent higher than South Korean costs.
Now what matters are not just costs but factors like innovation, productivity, speed to market, and entrepreneurship. Given the importance of knowledge workers—workers with at least some college education—to regional economic growth, quality of life now matters more than ever.
In the past, when cost reduction was king, places might be able to afford not investing in good schools, a good physical environment, and an appealing quality of life. But these are things that mobile knowledge workers value; without them, companies seeking knowledge workers will have a difficult time attracting them.
Implications for Economic Development
So what are the implications of these tectonic changes in the economic development environment? One implication is that economic development officials—now more than ever—will need to get the fundamentals of innovation-based economic development right. These four principles are a place to start.
Businesses that export goods or services out of the region are the ones that matter most. If such a local-serving firm as a barber goes out of business, another one will generally emerge or existing ones will expand because local residents’ economic consumption will create the demand.
In contrast, demand for cars and computers or even banking and insurance services by a state’s residents doesn’t create more supply in that state. That demand can be met just as easily by supply located outside the state’s borders that either ships in its products by truck or provides services over the Internet.
If a large exporting establishment— say an automobile assembly plant or a regional insurance processing facility— closes, the workers at that plant lose income, and so do the resident-serving firms where they spent their money, like the barber shops.
It’s not just the number of jobs in the export sector, it’s the innovation, value added, and wage level of the jobs. To be sure, in today’s tough economic times with high unemployment, job creation is important; however, fundamentally, communities need to be strategic about where they invest and what kinds of jobs they want to support.
The days of strategies being based on “shoot anything that flies and claim anything that falls” should be banished to the 20th century. Communities should target their scarce economic development resources on programs and policies that help companies paying above the median wage.
But it’s not uncommon for states to provide incentives to firms paying wages below the median wage. Unless the jobs are created in a region with high unemployment, however, such incentives will not raise living standards.
The economic future of communities depends on innovation and entrepreneurship. In a global economy where low value-added, commodity production of goods or services can and does locate in nations with low wages, communities are fighting a losing battle by competing on the low end.
This does not mean that there are industries that should be abandoned. In every industry, regardless of the overall value-added average, there are segments and firms competing on the basis of innovation, value added, and high productivity.
It does mean that a state’s or local government’s future is dependent on companies that see their future as tied to innovation, value added, and high productivity. In many instances, this will mean supporting new firms. In all cases, it means supporting new ideas and innovations, regardless of the age of the firm from which they come.
States should do everything they can to create the kind of environment that enables these kinds of companies to emerge, grow, and prosper. In particular, states can target their efforts even more to the small number of firms that are high growth. These “high-impact” companies are especially important to state economic development because most small businesses are not growth businesses, and most jobs are created by a relatively small number of high-impact firms.9
You can’t do it alone: Washington needs to do its job. In the old economy, communities competed for economic development success as a rising tide of national economic success helped lift all boats.
Today, that tide is no longer rising, at least not quickly. This means that unless the federal government also acts and develops an effective national innovation and competitiveness strategy, all the state, regional, county, and city actions in the world will not be enough.
This is true for two reasons. First, tax and investment policies at the federal level dwarf those at the state and local levels. At 35 percent, the federal corporate tax rate is the highest in the world and almost 10 times higher than the average state corporate tax rate. And while states might invest several billion dollars in research and development, the federal government invests significantly more.
Second, addressing the competitiveness challenge will also require action to reduce unfair and protectionist foreign trade practices. Only the U.S. federal government can champion a more proactive trade policy that fights foreign mercantilist actions, including currency manipulation, closed markets, intellectual property theft, and other unfair practices.
As the Information Technology and Innovation Foundation has detailed in its report “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” Washington can and should enact an array of policies so that the national economic development “tide” rises.10
The problem, of course, is that Washington is trapped in ideological gridlock, with one side rejecting government and the other suspicious of anything that might help business, especially big business. State and local economic developers and other public officials need to explain to their local congressional delegation that you can’t do your job—growing good jobs in your region—unless Washington does its job of enacting policies to enable America to start to win again.
And that while issues like health care, abortion, and immigration divide us along partisan lines, if we let federal economic development and competitiveness policy divide us, we will truly fall as a nation.
In summary, today’s environment for economic development is not for the faint of heart. But with the right policies at the national, regional, and local levels, the U.S. economy can once again thrive—with robust, good job growth—but it will require everyone doing their part.
Endnotes and Resources
1 Robert D. Atkinson, Luke A. Stewart, Scott M. Andes, and Stephen J. Ezell, “Worse than the Great Depression: What Experts Are Missing About American Manufacturing Decline,” (ITIF, March 2012), http://www2.itif.org/2012-american-manufacturing-decline.pdf.
2 Jason Henderson, “Rebuilding Rural Manufacturing,” Federal Reserve Bank of Kansas, no. 2 (2012), Chart 1, “ Rural Manufacturing Employment and Earnings,” www.kansascityfed.org/publicat/mse/mse_0212.pdf.
3 Atkinson, et. al., “Worse Than the Great Depression: What Experts Are Missing About American Manufacturing Decline,” Figure 18.
4 “Editorial Archive,” Site Selection, March issues, accessed September 26, 2012, http://www.siteselection.com/pastissu.cfm; Robert D. Atkinson and Daniel K. Correa, The 2007 State New Economy Index (Washington, DC: Information Technology and Innovation Foundation, 2007), http://www.itif.org/files/2007_State_New_Economy_Index.pdf.
5 Bureau of Economic Analysis, Direct Investment and Multinational Companies (U.S. direct investment abroad, majority-owned nonbank foreign affiliates, capital expenditure; U.S. direct investment abroad, majority-owned foreign affiliates, capital expenditure; U.S. direct investment abroad, nonbank U.S. parent companies, capital expenditure; U.S. direct investment abroad, all U.S. parent companies, capital expenditure; accessed February 14, 2012), http://www.bea.gov/iTable/index_MNC.cfm; Bureau of Economic Analysis, National Income and Product Accounts (table 1.7.5, relation of gross domestic product, gross national product, net national product, and personal income; accessed February 14, 2012), http://www.bea.gov/iTable/index_nipa.cfm.%20Author’s%20analysis.
7 Robert D. Atkinson and Stephen Ezell, “Innovation Economics: The Race for Global Advantage” (New Haven, Yale University Press, 2012).
8 Paul Glader, “To Europeans, U.S. is a Puzzling Economic Giant,” Washington Post, February 23, 2012, http://www.washingtonpost.com/conversations/to-europeans-america-is-a-puzzling-economic-giant/2012/02/19/gIQAlhRXWR_story.html.
9 One study estimates that such gazelles (termed “high expectations entrepreneurs”) are responsible for 80 percent of the jobs created by entrepreneurs. Erkko Autio, 2005, op. cit. See also Zoltan J. Acs, William Parsons, and Spencer Tracy, High-Impact Firms: Gazelles Revisited (Washington, D.C.: U.S. Small Business Administration, June 2008) <www.sba.gov/advo/research/rs328tot.pdf>.
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