The Path Less Traveled
Two roads diverged in a yellow wood,
I shall be telling this with a sigh
— Robert Frost
Targeting Industries & Cluster Targeting: Picking Winners by Any Other Name
Rather than choose any one book or article in which the Curmudgeon will dutifully at least attempt to summarize– before burying it in skepticism if not outright hostility, the Curmudgeon will drop all pretenses of objectivity and offer what he can best describe as an essay. An essay is a pre internet blog for the young whippersnappers. To be frank, which is not necessarily being honest, the monthly topic, at least in the manner the Curmudgeon wants to approach it, lends itself more to essay. Enough with the suspense, what is the topic?
Today the Curmudgeon has decided to ramble on about how economic developers choose which sectors and industries to TARGET for their programs, especially attraction and cluster programs. This so-called targeting is more professionally known as picking winners.This month the Curmudgeon has decided to ramble on about how economic developers choose which sectors and industries to TARGET for their attraction and cluster programs. Targeting is professionally known as picking winners, except when it’s called cluster building. There are several “aspects” of targeting which we will obsess upon on the following pages. First, is the commonly accepted reality that most everybody targets the same industries and clusters. We will label that the herd effect (as opposed to the lemming effect—mainly because no one except the Curmudgeon knows what a lemming is or what it does). Secondly, the Curmudgeon wants to offer his two cents of commentary regarding targeting and attraction and how we choose our targets.
The Herd Effect Exposed – Different Styles: Academics and Usual Suspects
To explain why we all embrace the herd effect (there’s got to be an oxymoron in there somewhere?), the Curmudgeon will compare two alternative decision-making styles that shape the targeting and attraction choices of most economic developers. In the first style, the economic developer turns to the academic literature and the second style is to call/text/email, smoke signal or survey the State or EDO next door and see what they are up to. We will label the latter style, the “usual suspects” and the former, amazingly, academic. In the Curmudgeon’s opinion they both travel the same path and wind up at the same end point—herd behavior and likely failure!
What is more problematic is that academics tend to write to like-minded academics. They usually write to each other (or more cynically to the Editor and/or the panel of reviewers that reviewed the article or book). In this world, footnotes, nuances and methodologies are a very big deal. Surprisingly, these secondary aspects may be more important than the findings themselves.Our starting point is that if we are to understand how the herd effect is created, the reader should walk a bit in the shoes of each style. Each marches to different drums. And the beat of the drums is quite different for the academic or the economic developer in the trenches! Unsurprisingly, each style exhibits certain characteristics and reflects some bias. These can (and will) affect the targeting schema they will end up recommending. In any case, Academics will turn to the academic literature and practitioners, well, will turn the corner and look down the street. First the academic style.
Academics publish because they want to, and publishing is really what they’ve been trained to do—and if they didn’t they probably wouldn’t get tenure, promotion or a decent pay raise. Further, without publishing, they would enjoy the lowest possible status in higher education: being a mere teacher. Journals and Editors are their natural enemy but both are absolutely necessary if an academic is going to publish. Academic journals can and often do reflect a consensual approach to their topics which is reinforced by their reviewers and their editorial advisors. Submitted articles are usually peer-reviewed and suffice it to say articles that challenge this consensual orthodoxy in some manner may never get recommended for publication.
A violation of the consensual orthodoxy is usually not much of a problem because few academics depart from the standard themes and paradigms. They are trained in graduate schools to embrace one or another of the consensual orthodoxies. Academic researchers, in the Curmudgeon’s experience at least, write for a small, selected group of fellow academics who already agree with their approach and content. They do not usually expect non-academics to read their stuff and they certainly do not write to convert those with whom they disagree. Certain journals reflect their consensual orthodoxy, others do not, and that guides their publication behavior. The academic publishing system, in itself almost, guarantees academic herd behavior.
It is worth note that some academic researchers, however, enter into the policy recommendation or consultant sectors. In these situations they can, in the words of a stock market trader, sell their “book” (canned methodologies and orthodox approaches) to the retail consumer (You!). The point of this tangent is that academics can have a very business-like agenda and it does affect their recommendations. This is not bad; it is not the business aspect of the academic-practitioner relationship that is most troublesome.
What is more problematic is that academics tend to write to like-minded academics. They usually write to each other (or more cynically to the Editor and/or the panel of reviewers that reviewed the article or book). Their research usually stays well within the consensual orthodoxy and typically alters them only in subtle ways (at least to the non-academic) or finds new techniques (methodologies) to prove their findings. The findings themselves reflect the consensual orthodoxy. In this world, footnotes, nuances and methodologies are a very big deal. Surprisingly, these secondary aspects (to an academic outsider) may be more important than the findings themselves. Peruse a typical twenty page article and the conclusion is often one or two pages (almost always qualifying the applicability of the findings and calling for additional research). This is because social science today tends to emphasize methodologies rather than the conclusions and since few researchers actually depart from a consensual orthodoxy, the thrust of academic research is on technique, not critique (unless of course, the research wants to inject testosterone into the research by attacking an opposing consensual orthodoxy).
At the moment the publishing rage (paradigm) of academics are clusters, regions, gazelles, and “knowledge-based” and innovation economies. Few depart from these topics and those that do will never be discovered by the non-academic. Conclusions and their recommendations are usually automatically derived from these approaches, with a nuance or two depending on how adventurous the academic feels that day.At the moment the publishing rage (paradigm or consensual orthodoxy) of academics are clusters, regions, gazelles, “knowledge-based” and innovation economies—the so called Third Wave approach. Few depart from these topics (for instance Joel Kotin) and those that do are not likely to be discovered by the non-academic. Conclusions and their recommendations are usually automatically derived from these approaches, with a nuance or two depending on how adventurous the academic feels that day.
This raises a key point: the findings/recommendations that will follow to a considerable degree reflect the values of the researcher and his paradigm. Research, even with tons of tables and correlation coefficients, still reflect values and assumptions made by the researcher and which often are vaguely expressed or simply assumed that the reader will know (remember the academic is writing to his/her professional colleagues).
As he quickly reviews the literature on smokestack chasing, he finds citation after citation, going on for pages, not one of which is positive. Apparently no one ever smoke stacked successfully. The strategy appears to be a total disaster. Yet, our economic developer also observes that these article citations go back to the 1950’s and continue through 2011. What is so wrong with this approach and why, if it is such a total failure is anybody still going it? The answer to this largely semantic difference lies in which consensual orthodoxy one believes in and it is far from apparent to the non-academic.
But the non-academic reader takes academic research at face value, thinking this is more or less scientific observation. The numbers are what the numbers are, aren’t they?!No! They are not! The sad reality is that the “numbers” are drawn from, and reflect, the consensual approach embraced by the researcher. That’s why cost/benefit analysis, for instance, is at best a vastly disputed methodology. Academic research is NOT pure science, despite the math and the modeling equations; economic development is social science. The math and statistics, and findings that follow, are not NEUTRAL and VALUE FREE. If the reader does not understand or appreciate the value bias contained in ALL, including the Curmudgeon’s of course, research, the reader is in no position to judge its suitability and appropriateness to a given situation.
If the reader accepts our contention that academics, writing to like-minded professional friends in a journal which seldom publishes anything that departs from the Editor’s perspective and the underlying paradigm, produce a literature and a cookie cutter packaged set of findings with relatively unimportant nuanced conclusions. In our present instance, their targets are always growing sectors, the speedy gazelles, in cutting edge, path-breaking, dynamic sectors and industries, usually green or sustainable which create knowledge-based (i.e. non blue and gray collar) jobs for your typical unemployed PhD, application programmer, chemist or engineer (or the GED Wal-Mart sales associate who has recently graduated from the local community college STEM program). This is Herd Targeting.
A Practitioner Attempts the Academic Approach
Appearing before his incredulous eyes are page after page of nothing but how cluster targeting is the best thing since sliced bread and outlining technique after technique on how best to achieve inevitably wonderful results. Everybody should do it. Nothing at all in the literature which is the least bit negative. But, he asks, if I want to target manufacturing why is smokestack chasing so bad, but targeting your cluster for manufacturing firms is great and wonderful. What is the difference?So if an economic developer wants to establish an attraction program and recruit firms from outside his region. How does he choose which firms to attract and which to say “No thanks”? So the practitioner turns to the academic research for guidance and direction. To start his search he googles manufacturing and comes up with two sets of articles, one on smokestack chasing and the other cluster targeting. As he quickly reviews the literature on smokestack chasing, he finds citation after citation, going on for pages, not one of which is positive. Apparently no one ever smoke stacked successfully. The strategy appears to be a total disaster. Yet, our economic developer also observes that these article citations go back to the 1950’s and continue through 2011. What is so wrong with this approach and why, if it is such a total failure is anybody still going it?
The economic developer then reviews “cluster targeting”. Appearing before his incredulous eyes are page after page of nothing but how cluster targeting is the best thing since sliced bread and outlining technique after technique on how best to achieve inevitably wonderful results. Everybody should do it. Nothing at all in the literature which is the least bit negative. But, he asks, if I want to target manufacturing why is smokestack chasing so bad, but targeting your cluster for manufacturing firms is great and wonderful. What is the difference between the two in terms of the type of attraction program to be designed? Wouldn’t advertising and incentives be about the same? Isn’t it likely that any firm recruited would be suitable for the set of real estate opportunities available in the community? Yet, if the economic developer says the firm is part of a manufacturing cluster it is ok; if it is not linked to a cluster it is called smokestack chasing, wrong and doomed to failure.
In this instance the economic developer has leaped with both feet into a theoretical and even methodological academic swamp. No academic in good standing would ever endorse the despised and certainly obsolete Second Wave recruitment and attraction programs, based on incentives to individual firms even if they are manufacturing. These smokestack chasing programs have been proven by the academic literature not to work and to inflict horrible expense and waste on the community.
Program managers, policy makers and CEOs of departments and agencies don’t have time to search, review and read the tons of stuff pouring out from academia or to sit and call fifty agencies for a survey. It’s just not realistic, so there is going to be a bit of bias in selecting what few pieces do get read and what agencies get called. Usually delegation is the customary answer. In fact the situation screams out “INTERN”!If an economic developer chooses to employ a cluster approach, she quickly discovers that cluster(s) are usually found and demarcated by external consultants and are normally derived from reports containing tons of pages, tables with lots of percentages and correlations, projections and estimates. And they usually throw in a bunch of assumptions on which they entire mélange ultimately rests. They are all explained in the language of math. How the multiplier et al is derived is usually known mostly to its compiler and the rest of us accept it on faith so long as it takes us where we want to go. What’s most important is that the media and the politicians usually fall into line when confronted with the rather safe choices supported by reams of paper and math. End of story. The consultant gets another contract, identifies the same gazelles with some adjustment suitable to the host community, ad infinitum.
But as we mentioned earlier, cluster analysis contains several biases. It is not interested in all job-creating industries; it seeks the gazelles or those that are expanding, rapidly expanding, export-focused, that create quality (high paying, knowledge-based) jobs, with a low carbon footprint. For instance, if our economic developer wants manufacturing then it must be “advanced manufacturing”, ideally making solar panels or lithium batteries which would, the economic developer thinks be ideal partners for the furniture manufacturers he is really looking for (notice sarcasm please). Actually, it is no problem because the cluster study has concluded that his cluster of furniture manufacturers is not a gazelle, as it does not create high paying quality jobs, nor is it a growing industry. So, instead of smokestack chasing, our economic developer now embarks on a safari chasing gazelles to serve as the core for a new cluster.
Now the Curmudgeon admits the above paragraph is a bit of a straw man; he tries to be fair but it is so hard sometimes. The thrust of what he is trying to say is that clusters focus their attention on a limited number and restricted types of firms. The actual firms will, of course, vary somewhat with the region (and the configuration of firms in the region’s economic base. These firms, however, while extending across many sectors and NAICS codes, will still be the fastest growing, high quality jobs producing, innovative and knowledge-based. There are only so many of these firms and they exist disproportionately in a precious few sectors. After all, the cluster approach also does not advocate targeting firms in industries which are stagnant or worse. In short, there is a sort of herd behavior that arises from those communities which embrace clusters—they really are looking for pretty much the same firms.
The Usual Suspects Approach
But as is the Curmudgeon’s way, a few disparaging words must be uttered about how a pure, more economic development practitioner might handle the above situation.
First, program managers, policy makers and CEOs of departments and agencies don’t have time to search, review and read the tons of stuff pouring out from academia or to sit and call fifty agencies for a survey. It’s just not realistic, so there is going to be a bit of bias in selecting what few pieces do get read and what agencies get called. Usually delegation is the customary answer. In fact the situation screams out “INTERN”! But delegation to an intern or subordinate staff almost inevitably leaves the person who does the actual calling with the best sense of how the data is reported and what it means. In real life delegation means adopting somebody else’s recommendation and being responsible for the consequences yourself.
So picking targets or winners in an attraction initiative, or cluster targeting is easy and without controversy, so long as you play it safe and select from among the Usual Suspects. Don’t over think it; just go with the usual suspects.Well, at least you avoid the work.
It is not surprising, therefore, that the Practitioner, left to her own devices “Usually” (notice the pun ahead) winds up with some targets which are drawn from the “usual suspects”. An economic developer can’t go wrong if he limits his choice to the long established consensus targets of traditional economic development which are followed by virtually every neighboring and not neighboring economic development organization. You know, those firms which are hot, sexy, or the current fad. The ones which everybody has targeted from time immemorial and the targets which are generally picked up in any survey of other economic development agencies.
The usual suspects generally include manufacturing (and exporting), technology (in all its wondrous variations), small business, and in the case of clusters—the gazelles (after all, it makes no sense to target a stagnant or declining sector). Conversely, traditional pariahs which are seldom chosen include nonprofits, retail, real estate, health care banking corporations, personal services, restaurants. The usual suspects are credited, often without proof, with providing the community more bang for the buck in terms of jobs or taxes. The pariahs are normally accused of simply redistributing the pepperoni from one pizza slice to another and not adding to the aggregate wealth of the community.
In the really old days (before cell phones and sushi) when the list of usual suspects was first compiled, knowledgeable folk differentiated between exporting and non exporting firms (the export base approach). The exporting firms were the big boys on the block, the wealth generators and were the heart of the local economy (this was long before the US economy evolved from a manufacturing to a service base). The economic base approach was linked to something called agglomeration economics (a precursor to modern clusters). The key operative concept/measurement which justified export base approach was the multiplier ratio and sometimes the shift/share ratio. The usual suspects flowed from these methodologies and approaches. Tried and true this approach has continued for seventy-five years or more.
So picking targets or winners in an attraction initiative, or cluster targeting is easy and without controversy, so long as you play it safe and select from among the Usual Suspects. Don’t over think it; just go with the usual suspects.
And that is why we have herd behavior with a zillion cities and programs doing the same thing, picking the same targets without regard for the region’s capacity, sector differentiation or the laws of supply and demand. Herd behavior creates few problems in that most economic developers are targeting the same critters and because your community is so very, very special and unique, your efforts in attracting the usual suspects will be far superior to that of your competitors. Even the media go along and support the targeting choice without their usual vitriolic “how dumb can these people be” editorial.
So, one more lemming off the cliff!
The Path Less Travelled
The principal points, the Curmudgeon is trying to make are that (1) the academic style and the bureaucratic style, perhaps with some modicum in target diversity, essentially covet the same types of firms, and even the same firms. Both reinforce herd behavior. (2) Herd behavior, aside from the crowded competition, ignores many of fundamental drivers which account for and create the necessary preconditions of future growth. In other words, Herd Targeting produces few consistent successes, but is “politically acceptable” and bureaucratically safe. If an economic developer sincerely desires to achieve the public policy goals associated with targeting, Herd Targeting is unlikely to achieve them.
Therefore, in this strange and wondrous world of the Curmudgeon, it does not really matter whether you smokestack chase, cluster target, just simply flip a coin, review and follow academic research or simply follow the path of least resistance by targeting the usual suspects. Everybody winds up targeting pretty much the same firms, for essentially the same reasons, expecting the same results. Two questions follow: (1) why does Herd Targeting almost always fail (with admittedly an occasional success? (2) Is there a way to break this vicious circle?
Why Cluster Targeting and the Usual Suspects Don’t Really Work Long-term
The obviously crowded competition associated with herd behavior means that too many economic developers are chasing after too few of the same firms. That is bad enough! Everybody wants life sciences and the cure for cancer or Alzheimer’s. Hundreds of firms and start ups, literally, will try. Guess how many will fail? The ones which succeed will likely follow the venture capital and will move, or be acquired (or license the technology) long before they produce any serious number of jobs for your community.
Herd behavior is like inflation; too many regions chasing too few firms. The scenario that could follow is that these regions chasing and fostering the same firms floods the emerging industry with too much capacity, too much supply, relative to the level of demand. Over capacity leads to lower prices for the product and the need for more artificial subsidies which if not available, eventually results in closed doors, boarded up windows, and the knowledge-based, high paying jobs out on the street.Equally important, cluster targeting and the usual suspects target picking ignore very critical forces which have huge effects on the targeted firm’s short and long-term success, their mortality rate, and the timing of their expansion and job creation. Fundamental drivers of growth, such as interest rates, exchange (currency) rates, cost of living, unemployment, availability of financing at affordable rates, energy prices, business cycle rotation, product cycle maturity, low barriers to innovation, unknown and unappreciated potential competitors, and a variety of industry-specific factors which either limit demand or obsolete segments of the industry, are seldom included in the attraction calculus. They go a long way in setting not only if a target firms grows, but the rate and timing of that growth.
Despite the confidence, the inevitable these sectors will grow like trees to the sky projections so often associated with these tried and true decision-metaphors such as usual suspects and cluster targeting, targeted firms are always subject to black swans such as natural disasters, changes in technology, and ill-timed appearance of competitors and legal challenges to patent rights are a bona fide strategy of competitors to slow innovative growth.
Finally, if we are correct in being adherents to the New Normal, and don’t forget its predictive success thus far has been excellent, what gazelle like opportunities are likely to exist in the low growth global economy, characterized by a fragile finance system, facing its own sovereign debt crisis with a crushed housing market and an extended period of low consumer demand. Our usual suspects will be swimming against the tide, and the past cluster growth data and projections which underlie cluster targeting may come under very serious pressure over the next few years.
Nowhere in either approach is there any serious due diligence of the firms being attracted. Get them in here and we will fix what’s broken later. Firms are mobile for many reasons, and some of them are not good. Firms do not always make correct decisions; they can make mistakes and being mobile and moving into your region could be one of them. Also, firms and products mature and they are always merging, consolidating in response to changing logistics and demand. Government regulation, especially in the form of the FDA, can have huge importance in bio and medical technology. None of these factors are remotely considered in an attraction effort.
The usual suspects rely on historical performance, and remembered analysis drawn from a half century ago; it risks being seriously out of step with the evolution of the national economy, changes in your region and the needs of your community. The cluster approach in its selection of gazelles minimizes, of all things, change– of the unexpected, dysfunctional kind and is also based on past data. Again, both tend to produce herd behavior. Herd behavior is like inflation; too many regions chasing too few firms. The scenario that could follow is that these regions chasing and fostering the same firms floods the emerging industry with too much capacity, too much supply, relative to the level of demand. Over capacity leads to lower prices for the product and the need for more artificial subsidies which if not available, eventually results in closed doors, boarded up windows, and the knowledge-based, high paying jobs out on the street.
The decision to attract firms and target firms comes from much too deep roots to simply abandon because it really doesn’t work well. In fact one is tempted to cynically over generalize by saying the real fundamental driver of attraction and recruitment is the need to produce visible political results—either for the economic developer himself/herself or for those he serves. Determining eligibility for programs is a technical decision which usually can be reversed or altered. Not so attraction and recruitment. Sector or target attraction, cluster or otherwise, is a long term risky enterprise. Firms attracted in this manner face considerable headwinds and the attraction program if ever honestly evaluated would not likely yield very pleasant or favorable results for most communities (there will always be a few victorious locations). But sector targeting and attraction, in the event it succeeds, produces headlines. It is the grand slam of economic development, the hat trick which makes careers.
Economic developers are not alone in liking to hit home runs; politicians, especially governors love them too.
From the Curmudgeon’s point of view, the world of sector picking is composed of two elements: (1) those True Believers who are convinced that the region they represent, and the trends they see will last more or less indefinitely without black swans or short-term fundamental drivers which are negative. These True Believers feel the statistics, printouts, demographics and the projections don’t lie or deviate from their present trends and the brave new world must have firms such as they chase; the second group (2) are those who derive some political benefit, either personally, for their career, or for the politicians they serve.
It should be no surprise that except for the largest of urban areas or the more successful growth areas of the nation, attraction and recruitment has very mixed results. Not that anyone really cares. Has anyone ever really read an overall, long-term evaluation of a community’s or state’s track record? You hear about the home runs, but seldom the strikeouts (except when the economic developer has been stupid enough to let the media watch).
Blind optimism is not warranted under these circumstances and this pessimistic scenario motivates the Curmudgeon to suggest another option in the decision to target firms for your region: Consider using a contrarian approach such as described in the following section of this article.
The Contrarian Approach: A Conclusion
The Curmudgeon has no magic bullet, but in this concluding section he will offer some thoughts on how targeting can potentially be more effective. But be warned. The Curmudgeon’s approach to target selection for attraction and recruitment involves choosing the path less traveled. It frankly requires the economic developer to bypass the academic research and to sidestep the normal bureaucratic, play it safe, conventional usual suspects. It is more risky to be sure, but you will be taking the “path less travelled” and that alone might offer enhanced prospects for success.
The Contrarian Approach consists of the following steps:
- Target contrarian sectors already important job providers in your existing community; Learn the Sector dynamics, visit the firms, lunch with key sector leaders. Identify the major players and the sector’s consensual leadership, read trade association literature;
- If support exists, form a sector trade council composed of whichever resident sector firms you can get to join. Sector leaders recruit fellow firms;
- Economic Developer acts as neutral and unpaid staff for the Council which then reviews the needs, gripes and opportunities of the sector as pertaining to your community-level (can’t do much about the dollar exchange rate!). The economic development role is facilitator and NOT the lead or leadership. Sector determines its leadership and its agenda.
- Working with sector leadership, identify opportunities for attraction and retention. Translate these into pilot or small scale programs which are implemented under the direction of the Sector Council;
- In regards to attraction opportunities, develop appropriate collateral material (under direction of Council) and a short list of specific targets; Sector Council makes contact and leads trade mission, staffed by Economic Developer, to targeted firms. Follow up and recruitment as appropriate;
- Sector Council continues indefinitely, and Economic Developer maintains presence so long as Sector Council desires it. To the extent the Economic Developer can create value for the Council, this could also be indefinitely.
The contrarian approach, one which the Curmudgeon has actually employed in his professional career, yields its chief advantage from being contrarian; it avoids crowded competition, and it relies upon prominent sectors already important to your community’s economic base, but sectors which are not gazelles and not in the list of usual suspects. The disadvantages are that everybody will think you an idiot because you are targeting firms which have low multiplier and growth rates and which are frequently thought of a pariah’s.
In an earlier issue of the Journal, the Curmudgeon suggested healthcare and hospitals, and this would be his first choice for most communities. Non-profits are an interesting candidate, as are hotels and tourist destination-related firms. Off the beaten track manufacturers and service sector firms are still another. If you are fortunate and do have some gazelles, organize them into sector councils. Make an effort to have the sector define its own membership because they will include firms which are not in the NAICs code. NAICs code lists make the most sense to those not in the industry—sector participants know who and what is important to their sector.
The contrarian approach departs from the cluster approach in that it is private sector driven and economic development/government is behind the curtain (which may drive the politicians to new heights of irritation and is contrary to the current fashion of having one’s chief elected as the area’s chief recruiter).
Also, the approach inherently combines both attraction and retention into one package. In key respects, this could be construed as an “economic gardening” strategy and if the cluster folk would get off their high public sector horse, bears some practical similarities to the cluster approach. Attraction becomes a sector priority to the extent that existing firms see a need for and a fit for new firms. It might be surprising to economic developers that the existing firms will identify candidates for attraction. They usually will. This is because to the extent there are missing pieces that can drive profitability and productivity they will generally embrace them and given a structure and economic development resources, they will recruit such firms.
A final fear of some economic developers is that the contrarian approach targets sectors which may be stagnant or even declining. These concerns are at least partially over-ridden by virtue of private sector leadership. Declining firms, despite an economic development literature which demands government –led innovation programs, are usually trying to innovative and reinvent their firm by discovering new markets, new products, and new opportunities. They know their assets and the strengths of their location, equipment, and workers; hence have the best feel for how to retool and revitalize their sector. Their cluster may not be terminal and in such instances sick or aging clusters can be used to revitalize themselves and the community.
If Dissatisfied with Herd Targeting…GIVE IT A TRY!