Is It Time for Economic Development to Move On?

I was sitting at an economic development conference recently listening to the speaker talk about business climate in terms of incentives to recruit or retain businesses, cost of labor and tax structure. His conclusion was that five states in the Southeast United States and another five in the Great Plains/Mountain region were the most “Pro Business.” But when one looks at these states there seemed to be no clear correlation between these states and economic growth. It wasn’t that there was a negative correlation. Some of the states were growing faster than the national average and incomes were quite respectable but others were not. Certainly there were states that were doing better even though some of the states had landed on the top ten for five years running!

Two things hit me. Why should a state strive to be “pro business? Isn’t it better to be “pro” economic growth? Aren’t businesses just a vehicle to attain this growth? When we think in terms of “pro business we lose sight of what it is we are really trying to achieve. When we think of things in terms of pro business others get hurt. Tax credits get abused, Enron pops up or the environment suffers.

My second thought was, “pro” what business? For decades we have known that incentives to one business can be damaging to another. We also know that a tax code that may be advantageous to large corporations can place a burden on small businesses. In fact, study after study has shown that large incentive packages to select businesses have little or no impact on the long term economic growth of a state or region. It may have a significant local impact but is that what we really maters?

What we do know is that the vast majority of new jobs created in the United States are created by companies with less than ten employees and with companies that are less than ten years old. We also know that as technology and the service industries have become dominant in the U.S., traditional economic development practices have become less effective. Land and building costs, tax structure and infrastructure costs have given way to access to capital, educational services and quality of life.

In the past, it was thought that while new businesses accounted for most jobs, there was little an area could do to affect the formation and growth of these businesses. In the past decade or two this has changed dramatically and we know that states and regions that have emphasized this have grown at a much faster rate than those that have not. In fact, some of the states that have recently moved off the “Top Ten Pro Business” list referred to above, have done so intentionally, deciding instead to emphasize entrepreneurial growth.

During the recent economic downturn many economic development professionals tried to move toward assistance to entrepreneurs. In most cases, this has been ineffective because the ground work was not completed first, adequate financial resources were not provided and the economic development professionals did not have the proper training to deal with the entrepreneur.

Why has it taken so long, especially in certain areas of the country for the economic development community to adopt a new paradigm? It has been widely accepted for years that the old model was out dated. First of all, it is easy to keep doing what is comfortable, especially if every few months one can hold out the possibility of a big plant opening, how ever remote. Secondly, there are limited resources. To implement an entrepreneurial growth strategy resources must be re-directed from traditional economic development to the new strategy. Those that have taken advantage of the old system have fought this tooth and nail.

Finally, and probably most importantly, entrepreneurial development is a long term strategy. It’s kind of like using your farm system in baseball as opposed to trading for players, or waiting for underclassmen to mature in a college athletic program instead of brining in junior college transfers. One has at least the allure of a quick fix while the other is more sustainable.

Is it time for economic development to move on - To move from a 1960’s model to a 21st century model. I believe it is. What do you think?