The Road Less Traveled: For Economic Developers who have the Courage to be Different

Which Way

As an economic developer you’re not supposed to do it–pick winners, that is!

Can’t really be done, we’re told–just like timing the stock market. This advice is a truism and like all truisms, it’s true up to a point. No doubt it is correct that one cannot consistently pick winners and avoid losers.  There’s one problem with this sage piece of advice, however–an economic developer is paid to pick winners. Picking winners is part of our job description.

It is a rare economic development program that in some way does not require us to pick winners. Most commonly, picking winners comes in the form of setting eligibility for our programs; those that are eligible for a loan or tax abatement and those that cannot is a form of picking winners. “Targeting” is another. Preferring theme-based groups such as “Small business” or “Green” are yet another form of picking winners–avoiding losers, like retail, restaurants and personal services are just the flip side of the picking winner’s coin. So if we have to pick winners how do economic developers usually go about it?

Churchill and Strategy

Almost always, economic developers wind up using large inclusive sexy, hot (often covertly ideological) concepts to justify their decision to pick winners. Examples are “high growth”, “innovative”, “gazelles”, high-technology,  and “green”. The usual suspects associated with these concepts are  “bio-med”, data storage, applied bioinformatics, alternative energy, “life sciences” and if we must “Wi-Fi”. These themes and sectors are very much in vogue–common place in academic stuff– but, are also pervasive in state and community-level economic development as well and have become the conventional wisdom of economic development. Everybody chasing these themes and sectors inevitably results  in is the infamous “herd” behavior where literally thousands of jurisdictions, regions and marketing programs chase and subsidize the same companies.

At a gut, common sense level, how can literally thousands of communities, regional EDOs, and states successfully chase after, attract or create, the same set of firms and sectors simultaneously? What possesses us to think this will lead to revitalized communities? Do we really think we all can be successful or do we arrogantly think our community (i.e. the brilliant economic developer) is “special”? Or even worse, maybe we just are told that is what we should do and we thoughtlessly do it?

Probably all of the above–but chase herds is what most of us do. Sadly, economic developers often take comfort in following the herd–and if everybody is doing it, you’re never wrong. There’s safety in being part of the herd–and mediocrity as well. There’s no shame in failing–if everybody’s doing it, no one can blame or yell at you for doing precisely what it is they are doing. Herd behavior is almost guaranteed to fail, but no one gets criticized for its lack of success–it is just the nature of the gazelle beast chase.Why?

Our simple answer that we have discussed in a number of our past reviews is that the conventional economic development wisdom, derived from the current mélange of academic and think tank thought, asserts arrogantly that economic developers can (1) change their community’s economic base, (2) create large numbers of jobs, and (3) shove their community’s economic base into the new age economy–how? This remaking of an economic base results from successful chasing of the various gazelles which inhabit these dominant approaches–conventional wisdom. Hence the herd heads off in one direction chasing the same few target-critters.

So one community after another, one economic developer after another, goes on the same safari and down the same trail. They conduct economic development by pursuing knowledge-based sectors and people, innovative and creative sectors/classes/ clusters, third (and fourth, and fifth) wave sectors, and sustainability/green futures. All develop their own “special” gazelles–usually with considerable overlap.  Even advocates of high rates of small business formation  call special attention to high-impact firms.  Our attraction and recruitment programs, more attuned to the “kill” than what is killed, chase gazelles in whatever form they can catch. Chronically declining communities attempt to replace terminally broken clusters by grafting onto their imploded economic base these new and vibrant sectors of the future. Success is virtually inevitable and may well be perpetual. The “Geography of Jobs”, for example, explains why certain types of people (highly educated and creative) create entire regions of spectacular growth and near-inevitable prosperity.

I"ve got a cat that looks more formidable than this gazelle!

I’ve got a cat that looks more formidable than this gazelle!

Thus gazelles and changing one’s economic base accompany each other. That is what economic developers seem to be about these days. The motto of much of conventional economic development  is “Our community’s current economic base sucks and we know how to make it better: gazelles”.

Even leaving aside our gut and common sense,  picking winners is hard to do–and more risky than sometimes evident. Picking winners, for instance,  is no guarantee of public acceptability–picking winners can still be very controversial–especially when the winning firm-industry receives a big tax incentive deal with a lot of “000’s” and has a sexy name (Google, Amazon, Facebook come to mind–sexy target firms should have three, preferably four, vowels in their name or at least three “t’s”).

Troubles that come with picking winners also occur in other ways.

Favoring gazelles is, despite the assurances of academic and think tanks, not guaranteed to be successful. Even the formerly Teflon-like Obama administration got its proverbial clock cleaned when it “targeted” over thirty alternative energy firms (lithium battery-makers usually) and watched a good number of them head into some form of bankruptcy–well covered by the media and Republican Party. It didn’t help that Obama “targeting” somehow got mixed up with campaign fund-raising–a not too uncommon situation in economic development, and that too many battery firms came on line at the same time and crushed the supply-demand curve. The logic of herds is that they flood the market and crush the price-profit curve as well as supply-demand curve (they kind of go together). The herd as a whole cannot be economically successful; it defies what little we know about capitalist economics.

Further, the core problem with gazelles, which almost everybody acknowledges, is there ain’t very many of them to begin with–they are by definition the cream of the crop, the exceptions. Figuring out which firm or which gazelle will be the best is not easy and  in real life seemingly fast gazelles can somehow turn into bankrupted turtles. What’s more, growing your own gazelles seems to be as difficult as catching them. The Curmudgeon, as president of a small venture capital subsidiary once was faced with taking an equity position in a young, one person, medical device start up whose technology required the patient to swallow a small camera. Sounded ridiculous to him at the time, but we funded the firm over the Curmudgeon’s dead body. The firm now trades on NASDAQ. In real life, gazelles often look like turtles–and economic developers possess no innate or special talent for understanding specific technologies and what is the sector of the future. Only think tanks and economists can do that.

Churchill and Quote The Curmudgeon believes those economic developers with confidence in themselves and their community can do better. Working in a community and not striving to do one’s best is a job not worth doing .We do not have to be an invisible part of the herd. How?

By working to develop the most from your existing economic base by increasing the capacity and willingness our existing firms and sectors to successfully confront the  profitability and market challenges they face! Warning! Leaving the herd is no guarantee of success, there is risk, and we have little to offer other than “blood, sweat, toil, and tears”. Masochists only need apply.

The thing is the conventional wisdom–catch phrases, theoretical-ideological concepts and sector groups, even NAICs codes–can be a poor starting place for picking winners and avoiding losers. All these themes are not so easy to define and see in real life and the sectors. NAICs codes are more identifiable in a database than on the streets of your community. Most firms of any size operate in several NAICs codes.

In fact, the category “losers”, or non-gazelles, is misleading and possibly unhelpful to your community in developing a prosperous  economic base. Included in loser category are stable firms, in mature or maturing industries, that do not grow a ton of jobs–but also don’t lose a ton of jobs–and these firms probably include on their payrolls a hefty majority of your community’s employed workers. For the visible future they seemingly just plod along and for much of the economic development literature that plodding along is actually bad. So, one guesses one should ignore the firms that employ the bulk of your workforce. The key to the road less traveled is not to ignore these firms–but to learn how to better work with them.

Losers tend to come in several categories: declining or mature (commoditizing) sectors, mediocre job creators, or poor multipliers (don’t get me started on multiplier and multiplier methodology). The problem for an economic developer is that some of these losers fit very nicely into the community’s economic base, make quite acceptable anchors for real estate projects, neighborhood and commercial revitalization schemes, and flesh out quite nicely some cluster or agglomeration. Understanding the “cycle” that industries and firms go through is a much better method of figuring out their utility in your economic base–as well as estimating their future and present vulnerability so that you might be able to craft retention and “MEP” style programs customized to the firm and its needs. A NAIC’s code focus and targeting gazelles and big multipliers just doesn’t cut it if you want to develop a community economic development program that avoids “picking winners” in favor of assisting firms as they cope with problems and opportunities.

To be successful in our go it alone, relying on your community’s existing economic base, is to know “yourself”, i.e. better understand the current firms in your community. It seems to the Curmudgeon that we need a more sophisticated, and proven, method of identifying and understanding how to target, determine program eligibility and, if we must, pick winners, i.e. select which firms to assist and assist them with programs relevant to their needs and opportunities. He has a great approach in the back of his mind. It’s not his approach, of course; it was an approach stolen lock, stock and barrel from one of the best in economic development: Ann Markusen.

RaVHuOx2IKmqOSUTJxys08c069 Dr. Markusen published a slew of books over the years, but we shall concentrate on two or three in our attempt to contextualize how economic developers can make choices in their programs and strategies. The core book we shall use is Profit Cycles, Oligopoly, and Regional Development (Cambridge, MIT Press, 1985).  Young whippersnapper readers, especially planners, will say “wait a moment, these books are nearly thirty years old–they must be terrible and worthless”, probably written in a cave before electricity, smartphone and nook were invented. To the contrary, the old man blathered. These works have stood the test of time. They are still quite valuable. Just be patient. Classics are usually better than the newer remakes.

The Dynamics of Regional Development

A principal reason why the Curmudgeon likes Markusen’s approach to economic development is that she incorporates a number of perspectives and dynamics into her overall approach. There are a lot of moving parts and compared to some economic development approaches Markusen et al does not simplify life into a couple of variables and R squares. One dynamic which she builds into her thought is the geographic (regional in this instance) implications of how her model plays out in real life. When she originally wrote Profit Cycles, the rise of the Sunbelt was a fairly recent phenomenon and she wanted to see how industry-sector shifts contributed to our understanding of that quite disruptive regional change. We have moved on, of course, but the profit cycle of which she speaks still has some geographic consequences (The Geography of Jobs is a best seller for precisely that reason).

Markusen adopted a rather startling initial position for the time period: “regional shifts in production and employment are not simply the product of changing factor endowments (wage rates, transportation costs etc.) or shifting consumer demands but of disparate strategies undertaken by corporations experiencing different historical moments of longer-term profitability cycles” (p. 1). Good grief, Charley Brown, what does that mean by that? Markusen believes each industry and sector follows a “profit cycle” over time. [The profit cycle is not the same thing as the macroeconomic business cycle]

Each firm in a specific industry sector shares a profit cycle with other firms in the industry sector. This profit cycle stretches from firm-industry birth, to maturity, and inevitably to decline. In each stage of this profit cycle there are specific and different dynamics which affect the level of profitability of firms in that sector at that stage in the profit cycle. Employment, at least the propensity to hire workers (and reduce workers) is tied to the stage in the profit cycle. However, these specific shared industry-wide dynamics do not determine, the decision of each firm in that sector. Firms in an industry in a given stage of the profit cycle may share common dynamics acting upon them–but they do not have to make identical decisions on how to react to these dynamics. An economic developer with some understanding of the sector dynamics and the firm’s willingness or incapacity to deal with them will be in a better position to plan for future effects on the community and to its customize programs to deal with likely consequences and opportunities if they stay in contact with both the firm and the industry sector dynamics.

Just What is this Profit Cycle?

redlinegraph

Markusen asserts that each sector goes through a four stage profit cycle–actually she specifies a five stage cycle. The timing and duration of each stage, of course, rests on a number of interrelated factors which are unknown even to the smartest sector gurus. The intrusion of “black swans”, and product innovations (often in other sectors), plus changes in consumer demand and national economy all combine to shift the sector deck of cards in unpredictable ways at unknown times. In effect, sector market dynamics are themselves volatile–at least over the short and intermediate term–but over the long haul each sector will roll from one stage thru the other three. Back to the four stages of the profit cycle… Each of the four Markusen stages specifies a distinctive profitability “picture”, distinctive competitive pressures and different responsive strategies by management.

At this point, perhaps, many economic developers are beginning to grasp that in using Markusen’s approach an economic developer might be looking at their respective economic base through a different lens and seeing things in a different way. Instead of a NAICs classification, one might consider trying to assess at which stage companies are at a particular point in time. Markusen, however, does operate out of a sector perspective and she assumes a given sector goes through this profit life cycle with its four (five) characteristic stages.

  •  Stage 1–Zero Profit:     Initial birth of the sector-industry and its firms. This is a stage of experimentation, development of proto-types, pre-entrepreneurial (according to Markusen but here, we suspect, she may depart from other small business approaches such as Kauffman’s). The individual firms in this embryonic sector might be a department attached to an existing firm, or the pre-entrepreneur tinkering in his garage. Output is low and financing is non-existent. Innovation may be knowledge intensive, and in some instances, may await a technological-process leap to be discovered or acquired. There is, at this point, no real sector and competition is vaguely sensed–depending upon how paranoid the pre-entrepreneur might be. In the Kauffman world, this is definitely a young incorporated firm, probably with no employees–many Markusen stage one firm’s will not make it into the small business methodology but they might fit into the entrepreneur framework.
The Young and Strong Gazelle

The Young and Strong Gazelle

 

  • Stage 2–Superprofit: “Once a new product or service is successfully innovated, it becomes a new sector” (P.30). Well then…!  You’ve got to start someplace, but this starting point is a bit clumsy we admit. In updating this stage two to current world, we should assume that firm incorporation has occurred, patents filed, financing obtained, markets identified and something is being produced and sold. Needless to say, we covered a lot of ground between stage one and two. Still, let’s play fair here–Markusen’s point is that stage two is the “stage of dramatic growth in which profits rise well above the economy-wide level” (p. 30). We have entered into Markusen’s version of the land of the gazelles. We shall talk about this in a later section in greater detail, but it is this stage that really gets at where much of current economic development  thinking is focused. We [the Curmudgeon] will only observe here that (while not mentioned by Markusen) a lot of firms do not make it to this stage and many a sector is, in effect. still born.

 

  • Stage 3–Normal Profit: “Eventually the entry of new firms into the market and the expansion of existing ones result in the chipping away of superprofits until an average rate of return is achieved. This is the infamous convergence to the mean. [the Curmudgeon would alert the reader, that some innovation-knowledge economy advocates seem to reject any convergence to the mean–i.e. some firms (sectors) will continue, seemingly forever, constantly reinventing themselves and successfully innovating–the geographies in which they reside will prosper accordingly–and losers will lose forever as well. This lack of convergence is more or less cheerful depending in which geography one resides.] In any case output is growing, but production rates are slowing; there is more intensive price competition [or product differentiation]. Markets are approaching saturation and production costs are increasing (“efforts at unionization may be widespread at this stage” (p. 32) and the greatest attention is paid toward cost minimization. [Cost minimization strategies, i.e. tax abatement for instance, are a major goal of many popular economic development strategies and it would seem to be especially relevant to firms and sectors at this stage] Productivity enhancements become especially dominant  and this has implications on job creation-expansion-contraction.

 

  • Stage 4–Normal-Plus and Normal-Minus Profit: “The normal profit stage will, for most firms, continue until there is some destabilizing feature [at this point we get into “creative destruction” kinds of change] Markusen suggests several key forms of destabilization which cause firms and sectors to enter stage four: concentration in the industry, predatory competition (i.e. movement toward commoditization), substitute products (which can mean technological innovation), process innovation, market saturation and, logically [though not mentioned by Markusen] loss of consumer-market demand (she asserts instead that “in the long run the innovative drive of capitalist economies ensures the obsolescence of most products, if not sectors” (p. 33). Once reaching this stage a sector can (1) develop into an oligarchy (domination of the market by a few sellers will permit these corporations to reinstate greater-than-normal profits” (p. 33) or (2) decline. This last evolution, of necessity, involves shrinkage and consolidation in its many forms. In this scenario cost minimization goes on steroids–hyper cost minimization occurs and this is when plants close and move to lower wage, for example, locations. This seems to overlap with a phenomenon, deindustrialization (and disinvestment), which was a very hot topic at the time of Markusen’s book.

destressed

  • Stage 5–Negative Profit: “In the final stage corporate producers will be taking absolute losses on production and trying to liquidate a plant as fast as possible” (p. 35). Firms and sectors at this stage are the “walking dead” of capitalism. They are usually too far gone and too obsolescent to find any product level output which is sustainable. Macro economic recessions, exhaustion of debt financing alternatives, and an inability to uncover a politician or an economic developer willing to inject resources are the usual suspects of their inevitable death.

In Markusen’s reasoning, as a firm or sector ages (matures) “the potential for oligopoly and the tendency toward greater labor productivity through mechanization (productivity) combine to shape levels and rates of change in output, employment and investment. It shows how both employment and output rises through the initial stages of the profit cycle, but how later, as the production process becomes standardized and mechanization (productivity) becomes more common, gains in labor productivity increase the ratio of output to jobs” (fewer workers) (p. 38).

Today, this evolution is fairly conventional wisdom (with some exceptions as we shall discuss) and Markusen seems to embrace that the highest rates of job creation are with the YOUNGest firms and sectors. At the time she was living in an age when the “SMALLest” firms were the best job creators. Perhaps obviously, the major exception to all this is Oligopoly which would allow a few select older firms to become quite large–but it is more likely that the sector as a whole is still shedding jobs.

The Geographic Effects of Oligopoly and the Profit Cycle

Moretti’s Geography of Jobs (see a Curmudgeon review) was so successful, we think, because it tackled the difficult subject of job creation and the geographies of where the jobs are or aren’t. Markusen is trying to deal with this topic as well. Each of her stages has logical geographic consequences. For her:

Each (stage) of the profit cycle eras is marked by distinctive locational behavior on the part of its industry members. Five parallel spatial (geographic) patterns are hypothesized to correspond to profit cycle stages: concentration, agglomeration, dispersion, relocation and abandonment. (p. 4)

Basically ( the Curmudgeon loves that word) Markusen is saying, among other things, that regional shifts in production and employment are the geographic expression of (1) the tendency of  those industries and sectors which are mature and profit-challenged to rely on productivity enhancements to cheapen production (reduce costs) and (2) the tendency of “young and superprofit” sectors-industries (gazelles) to innovate in concentrated areas (call them clusters if you must) and “virgin sites”.

In other words, older mature less profitable firms and sectors tend to locate in a particular group of “places” and young, innovative hugely profitable firms tend to locate “somewhere else”. If one works in the latter high growth-high profit geography this is great news; but if one works in the other place (call it economic developer hell) not so great. Doesn’t this sound a lot like Enrico Moretti’s recent best seller: the Geography of Jobs? Hint, Hint (we have a review, click here to see it) Markusen also believes that innovating firms and sectors tend to locate near each other, i.e. proximity to each other and to specialized “pools” of potential employees.

Wordcloud

This suggests that young innovative sectors concentrate geographically–naturally (that is without you the economic developer).

[The potential exists, the Curmudgeon injects, for some distortion in a natural tendency of young innovative firms to agglomerate may be partially disrupted by the herd-like incentive laden programs of thousands of economic developers who chase, excuse me, attract and recruit these gazelles–if so the herd behavior so common to economic development might even exert a harmful effect on young innovative industries by diverting them from forming a market-driven cluster. Just a wild thought. [Whether or not that means that no one and no particular region will ever again be able to amass an agglomeration is, of course, not known–we suspect the natural forces will, over time, win out. But it is not at all clear whether we do these young and innovative firms any favors in spreading them across the nation and artificially magnifying their numbers?]

[An further interesting tangent-feature of the Markusen approach is to plug in, what for many economic developers is their principal goal and performance measure), job creation. Obviously, job creation works quite well for those geographies with a lot of Stage 1 and 2 firms and sectors. Less so if age of your firms and sectors tends toward middle-age. To the Curmudgeon this only reinforces his belief that job creation is a terrible default economic development goal or program measurement indicator. The lust to create jobs underlies our selection of gazelles and young sectors as our principal targets–and accounts for our herd-like behavior]

Using Markusen we can now better understand this obsession with gazelles and young firms in our contemporary popular strategies–that is where the job growth is most likely. The obsession with job growth and creation also accounts for present bubble-like obsession with innovation which is, we are told, totally linked with knowledge (measured by education level) and skilled knowledge workers1. It really isn’t the education-knowledge aspect that creates the growth, in this we differ from Moretti; it is the youth of both firms and sectors that is the key dimension]To avoid at all costs any specter of convergence to the mean–which for most firms and sectors lead eventually to stage five–means somebody (usually a Steve Jobs type messiah entrepreneur, an entrepreneurial culture (like Silicon Valley), or preferably government-university, must step in and inject resources-knowledge and make firms (and the sector) a perpetual innovation platform. Other that or San Francisco will become a Buffalo or Detroit. And that is the problem with Markusen–just what is it that we can do with and for Stage 4 firms?

As Firms and Industries Mature: the tail end of the profit cycle emerges!

Anyway, as the sector matures past the innovation stage, “commodity standardization and the emergence of widespread competition force the twin disciplines of market penetration [and saturation-and shifting consumer demand curves] and cost-cutting on surviving firms” (p. 4). To the Curmudgeon, this suggests that firms at this stage require a different mix of useful economic development programs. Gone is venture capital and now we are talking about fixed and working capital financing–IDBs, SBA and RLFs and new facilities and equipment (that is real estate related and commercial-industrial redevelopment projects).

Older Gazelles Hard at Work

Older Gazelles Hard at Work

As cost minimization assumes greater importance, we get into more touchy areas of tax abatement, right to work, incentives and all that good (business climate) stuff. The interesting, and subtle backdrop, however, is that for these stage three or above industry sectors and firms, the huge new job growth days are now over and, ugh, we are talking about consolidation and right-sizing as companions to new product lines and extra shifts to satisfy any sales resulting from increased market penetration. This middle stage is a complicated one and in line with Curmudgeon thinking. One wonders whether job creation as the default measure of economic development success or failure is suitable for firms in this stage as a benchmark. Sometimes it might work–other times much less so.

Geographically, this third  or middle stage of the profit cycle, suggests a potential dispersion from the early stage dominated by agglomeration-clustering-concentration.  It could also mean that locally grown firms get bought up by larger firms in the industry sector. This, of course, can happen at any stage, but by stage 3 a firm has been around for awhile and has become part of the community fabric. Another dynamic that could occur as firms in a stage 3 industry cast their eyes about the nation for potential market penetrating or cost minimization sites, a state business climate agency and state incentives may enter the picture as well. Different industry sectors will likely disperse at their own sector rate or speed. For instance, consumer goods sectors “may decentralize sooner in their evolution” and natural resource industry sectors (say for instance oil and gas exploration–fracking–will exhibit more volatility in their growth pattern.

The existence of an oligopoly in a industry sector could have significant geographical implications. To shortcut this important point, we would suggest as an example the post-1920 history of the American auto (and parts) industries. Detroit is not called “Motor City” (Pittsburgh’s Steel City”, or Lowell Massachusetts “Shoe City”) without reason. Southern Michigan is saturated with all sorts of (now closed) auto and auto parts facilities. Markusen explains this lack of stage 3 dispersion by observing that “If an oligopoly is engineered in relatively early stages (of an industry), however, this dispersal will be concentration retarded; capacity will be underdeveloped in peripheral regions and overly concentrated in regions of origin (the original agglomeration geography)”. (p. 4)Churchill and Courage

So there economic developers–if you want to maintain the agglomeration of a young, innovative industry sector in your neighborhood, start working to get it to evolve into an oligopoly! Then make sure you get out of there before the cluster-agglomeration breaks down. As Markusen will warn you, over concentration by one industry sector is a feast or famine affair. Finally, we have stage 4 and, god forbid, stage 5. It goes without saying, if the economic developer works in an area where a disproportionate element of their economic base has firms and industries in these stages–KEEP YOUR RESUME UP TO DATE, network a lot,  and save a good deal of your paycheck for future transition periods. The Curmudgeon has been there–he knows of what he speaks.

Anyway, Markusen refers to these two terminal cycles as “profit-squeeze” periods and she warns (in 1986) “If a highly concentrated oligopoly enters a point of profit squeeze, the subsequent restructuring may have devastating consequences–from job loss and tax base erosion–for local communities. Silicon Valley take warning! Detroit–it’s too late! The over-concentration of oligarchic firms retards their “dispersion of production” (i.e. ) which means they tend not to establish branch production facilities in new, more distant geographies and that means these big oligarchic firms eventually come to dominate the geographic regions and economic base of their birth. They become a cluster for the region. So long as these oligarchic behemoths are growing, or at least stable, that geography is doing great and prospering. When the oligarchic behemoth loses market control, however, watch out below.

Beware of broken clusters–when they break they take the regional economic base down with them and your community is a candidate to become a legacy city.

If You Think About It: There are implications relevant to economic developers implicit in Markusen

Stern Churchill

Economic development plans and planning-related initiatives tend to stress the “how to” of the planning initiatives and the process by which they are implemented.  Because such plans tend to be data-driven and follow the latest and greatest, planning initiatives more typically center around creating a “new and improved” economic base.  Almost invariably that means chasing after some gazelles. The “suitability and fit” of any proposed new economic development initiatives to the community’s existing economic base is usually quite secondary.

If so the community has found yet another way to join the thousands of communities already in hot pursuit of a very rare breed. We suggest that using Markusen and working with your existing economic base is an effective alternative strategy which will be more doable, more actionable, and could yield more tangible and timely benefit to the community than gazelle chasing. Using Markusen the economic developer works with firms and sectors already resident in the community and in its current economic base. While the profit cycle is certainly a headwind pushing sector firms in a given direction, Markusen believes the individual firm within the sector has some say, both  in where it locates and how it responds to the threats and opportunities of the profit cycle.

Corporate strategy and ability to execute is critical and remains critical in differentiating the individual firms within each sector. This variability and differentiation creates opportunities for the economic developer–but only if he or she is aware of what is going on (1) at the firm in question and (2)has some level of understanding of what is going on in the larger sector or industry. Since the strategy of the firm and the decisions by its managers and corporate elite matter, business location is not “dictated by the market” or by market drivers over which the firm and its leadership have no control. The propensity of the firm to take risks, local political and cultural factors, and simple mistakes in strategy and corporate decisions can occur and each have consequences on the firm and the local economic base. Addressing the concerns and opportunities of key sectors and dealing with the variable needs of the individual firms within these sectors can become a productive and meaningful focus for the community’s economic developer.

Summing Up: The Need for Flexibility in Economic Development Practice

To the Curmudgeon, this individual firm variability raises the importance of an economic developer spending the time and effort to understand industry and sector dynamics of key firms in your economic base and keeping touch with these firms on a regular basis. Helping your firms cope with these sector dynamics may provide them opportunities to positively separate themselves from the sector rank and file and innovate. In the Markusen framework, innovation and path-setting decisions are not restricted to young or small firms only. Old gritty firms can rise from sleep, usually with new corporate leadership, and reinvent themselves. These are opportunities for an economic developer.

path

The economic developer, however, will be of little use to anybody if he or she knows little to nothing about  the nitty-gritty of the sectors and industries with which she/he wishes to work. If all the economic developer is doing, however, is making media placements and working with site selectors to attract gazelles, then industry and specific firm knowledge is a rather useless commodity. Industry and specific firm knowledge-visitation programs are usually not stressed in the high impact, Beltway-style, economic development literature. Industry and firm understanding seldom penetrates economic development program decisions and plans. Just the opposite!

The conventional wisdom which almost inevitably results in a national herd behavior requires that any economic developer considering some form of innovative departure from the herd possess a bit of “curmudgeon” and risk-taking that appears not very typical of the profession as a whole. If we decide to work with firms and sectors already in our community’s economic base, however, the differences between sectors and the variability potential within firms of each sector makes an economic developer’s job more complex (maybe more interesting as well).

It also challenges the more traditional notion of a common goal for all firms served by a particular economic development program-strategy. A stage 1 firm is more conducive to job creation, for example, than a state 3 or 4 firm. The appropriateness of financing programs vary across stages as does the need for more micro-economic cost reduction strategies. Any single economic development program, if sensitive to sectors and the profit cycle stage dominant for the sector, will build in different goals and tools appropriate to the sector and the stage and which can cut across sectors (and presumably stages as well). One size, one goal type programs will need to be tinkered with, and sensitized to, profit cycles and sectors dominant in one’s economic base.

So there we have it–an alternative path to the herd. One advantage that might not be evident at first glance is that our approach would be more useful, better appreciated and more likely doable in our smaller communities. Metropolitan-size jurisdictions may well be overwhelmed with the “getting to know you” and the flexibility in program design. Frankly, the media in these more densely populated areas would be more receptive to the themes associated with herd economic development. Just the reverse is more likely for jurisdictions under 50,000 or so. If this line of thinking sounds useful, the reader might want to pick up a copy of Markusen, Yong-Sook Lee, and Sean DiGiovanna (eds), Second Tier Cities (Minneapolis, University of Minnesota Press, 1999). Our approach is also quite compatible with “economic gardening”. There is no doubt that our profit cycle approach is challenging and forces the economic developer out of the herd and into the wild. And again, there are no guarantees other than the need for flexibility, creativity, hard work and perhaps a little luck. But if you are tired of chasing gazelles and the latest and greatest sexy sector–it might be worth some thought?

A final thought. Perhaps because of his inherent contrary nature, the Curmudgeon does not like herds–and that is no reason for someone else to head down his contrary and lonely path. That lonely path may, in fact. be as unsuccessful as herd behavior and a lot more risky. But for the Curmudgeon, truth be told, the current conventional wisdom, especially the arrogance epitomized in a belief that a community’s economic base can and should be changed by professional (usually governmental) actions is a step too far. The Curmudgeon has no wisdom as to what the world will look like twenty years from now, and he is now so old that he has buried many a commentator who told him what the present world would be like–and they were wrong as humans tend to be. Gazelles get old, that’s why the Curmudgeon likes Markusen. Clusters age and break and the Curmudgeon worked almost fifteen years in a community with several broken clusters-and a ton of Stage 4 and 5 firms. The conventional wisdom looks foolish in that kind of environment. Schumpeterian creative destruction is a two-way street and today’s conventional wisdom implies that it is a one way street. It’s not.

Frankly, as an economic developer I would rather try to work with the firms and people in my community. They are the ones that hired me and they didn’t hire me to forget about them. Can you chase after a few gazelles from time to time. Sure. Why not, it is part of the solution. Chasing gazelles by itself is not the solution or even a big part of the solution.

 

Footnote: 1. The principal alternative to this is the Kauffman approach which focuses on creating or forming large numbers of young firms on an annual basis. These young firms create a great number of new jobs and then over a period of time, bleed them away (for the most part) and young firms age or die. The economy to produce new job growth in a given year must therefore form a considerable number of brand new firms annually.

An Optional Digression

Something we don’t talk a lot about these days in oligopoly (several firms dominate an industry-sector). Back in the 1980’s oligopoly was on the tip of everybody’s pen. Oligopolies haven’t gone away–quite the opposite. Oligopoly has become a way of economic life; its called firm concentration and our various sectors and industries today often tend to evolve into some degree of oligopoly, almost normally. Oligopolistic evolution is a real possibility in young industries and sectors–a home run in economic development land. But oligopoly also creates threats (mergers and acquisitions, plant close down through consolidation) for some communities and as well as potential opportunities  in other communities. But, again, oligopolies are still a two edged sword.

The market power of an oligarchic firms is no longer quite as stable as it used to be.  The recent experience of Nokia, for instance, from number one  producer in the cell phone industry–to near bankruptcy in a matter of five years–exposes the power (and speed) of a shift in the profit cycle. Blackberry and RIMM is another example of oligopoly to rags and J.C. Penny and Sears may be next on the list–Barnes and Noble and Best Buy might have escaped but only by a whisker. The lesson to be learned in the case of oligopolies is that there is probably little that can be done at the local level to help an oligopoly survive or, conversely, to hurt an oligopoly. But these days a successful oligopoly cannot be automatically assumed to be stable and a fixed piece of one’s economic base.

Comments

No comments yet. You should be kind and add one!

By submitting a comment you grant Journal of Applied Research in Economic Development a perpetual license to reproduce your words and name/web site in attribution. Inappropriate and irrelevant comments will be removed at an admin’s discretion. Your email is used for verification purposes only, it will never be shared.