Nine Rules for the Practice of Economic Development

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Nine Rules for the Practice of Economic
Development

• Edward W. (Ned) Hill
• Professor and Distinguished Scholar of Economic
• Development
• Center for the Study of Innovation
• Levin College of Urban Affairs
• Cleveland State University

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Acknowledgements
The Center for the Study of Innovation at
Cleveland State University
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Six parts to the talk

1. Framework Demand and supply in the factor
   markets (factors of production)
2. Economic development attraction
3. Two structural failures in the practice of
   economic development
4. Economic development practice and strategy
5. Nine Rules for the practice of economic
   development
6. Questions to think about

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FrameworkDemand and supply in the factor markets
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Why practice economic development?

• Job creation
• Better incomes
• Improved tax base
• Wealth creation
• Less cyclicality in employment
• Greater diversity of the economic base

Lesson In economics desirable outcomes are
frequently a byproduct of market activities. The
best route to those outcomes is often indirect
Lesson Employment is derived from product demand
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Two parts to the practice of economic development

• Demand side of the factor markets (land, labor,
  capital, and technology/knowledge).
• Dominates the short and medium terms of the
  market place
• Purview of the Economic Development Department
• Supply side of those same factor markets in terms
  of the quality, quantity, and flexibility of the
  factors
• Dominates the long run development horizon
• Outside the purview of formal economic development

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Goals for regional economic development
Economic Development Goals Growth Generate
demand for under-used resources (Exogenous factor
demand) Development Implement production
efficienciessqueeze middle lines of cash
statement (cost efficiency) Development Produce
higher valued productsgrow the top line of the
cash statement (Endogenous factor demand)
Economic Development Outcomes Increase Per Capita
Income Improved distribution of income Improved
income stability
Lesson Practice economic development through the
firms cash statement
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Three Parts of Successful Economic Development
Practice
Local Leadership Context
Development Theory
Development Practice
Economic Base Resources History/Culture
Economic Outcomes
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Supply-side Context The building blocks of an
economy are on the supply side of the product
markets
Arrayed From Hard to Easy to Change
Sources of comparative advantage
Product Competitive strategies, product cycle
position, and resources of regional
establishments
Sources of Competitive Advantage
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Five Parts of Formal Economic Development Practice
The Buffalo Hunt Deepen the base of export
products (Exogenous Growth)
Protecting Endangered Species Political crisis to
save existing job (Lemon socialism)
Trapping Foxes Lower operating costs Invest in
resource base (Squeezing the middle lines)
Searching for Gazelles Search for fast-growth
firms
Breeding Rabbits Product Development Process
Innovation (Endogenous Growth)
Lesson Five short run practices that operate on
the demand side of the factor markets that
dominate practice. The supply side is not
formally a part of the practice of economic
development.
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Endogenous Development Breeding Rabbits
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Economic development attractionThe Great Buffalo
Hunt and Helping the Gazelles The purview of the
technician

• The Demands of the Commercial and Industrial
  Marketplace
• Exogenous
• Competitive benchmark
• Focuses on operating costs

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Competitive Site Selection Process is Short
90-120 Days
Define Client Search Criteria Regions
Selected for Initial Analysis Information
Compiled/Data Accessed Talent/HR,
Industry Profiles, Regional Demographics
Market Analysis Infrastructure. Logistics,
Competitive Analysis, Financial Analysis, Site
Development, Livability
Team NEO Needs to improve quantity of deals that
make it past this phase. Detailed timely
baseline information is key.
Lessons In economic development external
investment typically follows internal
investment. Competing for exogenous investment
serves as a benchmark.
Regional Screening Against Musts
Wants Regional Rankings Reviewed Proposal
Requests Screening Comparative Assessment
Negotiations RE, Incentives
Team NEO Chamber PartnersNeed to respond
collaboratively and seamlessly. Shorten cycle
and improve depth of information content.
Risk Analysis Site Visits Site Decision
Point of contact to follow up and stay engaged.
Marketing gets more localized and site specific.
Source TeamNeo
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Requirements of Todays Decision Makers

• Speed - Faster Time to Market
• Shorter decision cycles - added time pressures
• Strong commitment to improvements in logistics
  infrastructure
• Greater Market Flexibility and Responsiveness
  Access to Networks
• Ability to gain access
• Conduct business with both the public and private
  sectors on the customers schedule - any time,
  any where
• Going global - instead of a singular focus on
  domestic markets, look globally and
  multi-dimensionally
• Linkages within their industries and across
  communities
• Opportunities for New Partnership
• Innovation
• Collaborate
• Faster idea transformation to commercialization
• People/research connectivity
• Not just technology transformation
• Access to New Knowledge
• Tacit versus learned
• Heightened requirement for management talent

Source TeamNeo
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Changing trends in location factors
There is new pressure on regions to address
location issues quite differently than in the
past. These location factors should be the
regions priorities for attracting, growing and
retaining companies. Do not fall prey to the new
panaceas.
Milken Institutes list of new business needs

• Traditional Business Costs
• Tax Structure
• Compensation Costs
• Space Costs
• Capital Costs
• Business Climate Alone

• Todays Business Needs
• Proximity to excellent research Institutions
• Access to venture capital
• Educated, skilled workforce
• Networks of industrial groups suppliers
• Business climate and quality of life

Lesson The list is limited and biased toward a
specific set of industries. What is critical
(1) build from strengths (2) address weaknesses
and (3) act through cash statement
Source - Milken Institute Americas High Tech
Economy Report 1999
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Two structural failures in the practice of
economic development The opening for leadership

• Mismatched federalisms
• Mismatched time frames

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Economic development is complicatedMust respond
to the two failures

• Mismatched federal structures
• Governmental federalism
• Economic federalism

Lesson States need to recognize that the real
economy is regionally based. The State is an
administrative and political geography not an
economic geography.
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Economic development is complicatedMust respond
to the two failures

• Mismatched time frames
• Business time the length of the deal cycle
• Economic time the length of the business cycle
• Political time the length of the election cycle
• Economic development time the length of the
  investment cycle (time to change the product mix)

Lesson Importance of converting political time
to economic development time
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Economic development practice and strategy
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What is Context and APPLE ?

• Competitive strategies of local establishments.
• Position of their products in the product cycle.
• Political and business cultures (Apple)
• Attitudes toward risk-taking,
• Personalities and motives of those who maintain
  the
• civic agenda (leadership styles).
• Public sector efficiency effectiveness
• Labor management relations (formal and informal)
• Elastic civil societystrength, flexibility, and
  permeability of social structure. Are you plug
  and play?

Lesson Half of a successful economic development
strategy is driven by context.
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Tactics Have FAITH

• Focus on economic development fundamentals
• Act opportunistically within a loose strategic
  framework
• Take advantage of crisis
• Be deal or project oriented
• Invest in your assetsall types of capital
  depreciates
• Think in portfolio terms
• Harness financial, political, and community
  catalysts who participate based on self-interest
  (economic, political, ethical)

If you want to find out if there is demand for a
milk in Tibet do not start with a market study
start with a cow. Jeremy Nowak, The
Reinvestment Fund, 2004
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The contradiction of good economic development
practice A widely shared vision coupled with
transparent practices while maintaining client
confidentiality
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Nine rules for the practice of economic
development
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The practice of economic developmentNine rules

• Economic development is about products Not jobs
• Employment is derived from product demand
• The Product Cycle is real and affects strategy
  and implementation
• Economic development is practiced through the
  cash statement of the business
• Top line
• Middle lines
• Or else either inertia or the value of CEO real
  estate and social capital binds the company to
  the region

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The practice of economic developmentNine rules

• Economic development is a generative Not
  redistributive
• Asset-based not need-based
• Build economies from areas of strength while
  intentionally addressing weaknesses
• Encourages community development, but is not
  community development
• Short term economic development policy works on
  the demand side of asset market
• Long term economic development policy works best
  on the supply side of the asset markets

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The practice of economic developmentNine rules

• The economy is regional
• The region is the labor market
• Most regions have effective
  competitors
• All municipalities have effective
  competitors
• Are the rules
• Necessary
• Efficient
• Predictable
• Transparent
• Practice the habits of growth, rather than manage
  decline
• Markets will beat politics into submission over
  time, regions will either work effectively or the
  economy (investment) will vote with its feet

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The practice of economic developmentNine rules

• Productivity is the basis of sustained higher
  incomes
• The measure of economic development success is
  change in per capita income.
• Increases in earnings come from increases in
  productivity
• Government must be concerned with the
  distribution of income and social mobility

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The practice of economic developmentNine rules

• Avoid rubeaphobia Think for yourself Avoid
  silver bullet thinking
• Successful economies are constructed from
  strength and achievement not conjured from
  weakness, entitlement, desire, embarrassment,
  jealousy, envy, or stupidity (seven deadly
  economic development sins)
• Skepticism is good. Do not assume or assert
  competitive strengths
• Avoid the public sector version of
  not-invented-here syndrome
• Think of technology and product development as a
  portfolio

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The practice of economic developmentNine rules

• Economic development investment requires a long
  term strategy
• Widely shared transformative vision
• Responds to near term political-economic crisis
  (the catalyst)
• Flexible so that respond to opportunity
• Answers the question Who maintains the long-term
  civic economic development investment agenda?
• Visible, bricks and mortar, transactions so you
  have visible successes and do not forget the
  habits of growth
• Do the hard stuff Focus on the basics
• Innovation is the key to long term prosperity
• Education is at the foundation of economic
  success
• Invest do not spend

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The Economic Development Formula

• Productivity is the basis of economic
  development
• Increases in earnings come from increases in
  productivity through the sale of goods and
  services
• Formula to economic success maximizes regional
  value added
• Produce highly valued products
• With a great deal of capital
• Mix in technologically sophisticated occupations
  with scarce knowledge-based regional resources
  that make the economy sticky

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Everyone wants high-tech operations
Silicon Island Silicon Rain Forest
Silicon Sandbar Dot Commonwealth Silicon Mountain
Silicon Orchard
Silicon Glacier
Cyber District
WebPort
Silicon Valley
E-Coast
Silicon Forest
Silicon Tundra/ Silicon Valley North
Silicon Plains
Silicon Mountain
Silicon Necklace
Silicon Vineyard
Silicon Mountain
Silicon Snowbank
Silicon Hill
Silicon Village
Automation Alley
Silicon Island
Silicon Gulch
Silicon City
Silicon Alley
Silicon Valley
Telecom Valley
Silicon Valley Forge
Multimedia Gulch
Silicon Island
Philicon Valley
Silicon Holler
Silicon River
Silicon Beach
Silicon Seaboard
Silicon Mesa
Silicon Prairie
Digital Coast
Silicon Dominion/ Silicon Plantation
Media Del Rey
Silicon Hollow
Silicon Triangle
Silicon Desert
Cyberchella Valley
Telecom Corridor
Silicon Seaboard/ Internet Coast
Silicon Freeway
Silicon Gulch/ Silicon Hills
Silicon Swamp
Biotech Beach
Silicon Bayou
Silicon Beach
fight the allure of economic development fads
do not lose sight of true competitive advantage
Source Deloitte Fantus
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One persons pork barrel project is another
persons wise investment in the local
infrastructure. -- Thomas Foley, Speaker of
the US House of Representatives, 1989
Town sees salvation in huge lava lampBuild a
giant lava lamp and they will come?
After all, look what the Eiffel Tower did for
Paris and the Space Needle for Seattle. "Whether
it will ever be finalized, I don't know, but a
lot of people are interested in it," Mayor Ken
Lee told Reuters by telephone. "I'm for anything
that will bring tourism back into our city."
Tuesday, January 14, 2003 Posted 1005 AM EST
(1505 GMT)CNN.com
 There is a market for the unusual and unique,"
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Questions to think about
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Questions about the long-term investment agenda

• Can you describe the regions long-term economic
  development investment agenda?
• Are there any key catalytic people or
  organizations who can make civic activities take
  place or cause economic development investments
  to be made?
• Differences in leadership styles
• Private sector leaders think that they have
  control over their organization when it is
  really their customers who control through
  investment decisions. They hate process.
• Public sector there is no immediate, or visible,
  customer to act as a check on the leader and
  their investment decisions. After all, whos
  money is it? They survive by process.

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Questions about the long-term investment agenda

• Who, or what institutions, can maintain the
  long-term civic economic development investment
  agenda?
• How catalytic are they?
• What is their institutional legitimacy?
• Are they check writers, check takers, revenue
  generators?
• What is their expected tenure?
• What is their institutional capacity?

No one would remember the Good Samaritan if he
only had good intensions. He had money as well.
Margaret Thatcher, Prime Minister, United
Kingdom, 1980
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Questions about the long-term investment agenda

• Does the economic development investment agenda
  confront basics of economic performance, or is it
  a fad-driven exercise in thinking by either copy
  machine or economic development policy peddler?

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Questions about the fundamentals

• Are there any barriers to effective action in
  addressing the regions economic development
  success?
• How does the local political culture influence
  economic development activity? Are there any
  particular cultural strengths or weaknesses?
• Are the economic fundamentals in place to make
  the agenda feasible? If not, can they be put
  into place?

There is nothing fundamentally wrong with
Americas cities that money cant cure. Carl B.
Stokes, Mayor of Cleveland, January 1971
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Questions

• Is the decision making Politically based?
  Focused on greatest need? or, Responsive to
  opportunity?
• Are there any key investments that can leverage
  economic development, as measured by increased
  average regional income?
• Are there any civic or cultural activities that
  might help encourage economic development?
• How broad is the support for the economic
  development agenda? Who supports the agenda?

Every time you do a favor for a constituent you
make nine enemies and one ingrate. John Michael
Curley
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