{"id":2606,"date":"2013-11-15T21:44:01","date_gmt":"2013-11-15T21:44:01","guid":{"rendered":"https:\/\/journal.c2er.org\/?p=2606"},"modified":"2018-04-30T22:09:54","modified_gmt":"2018-05-01T02:09:54","slug":"the-road-less-traveled-for-economic-developers-who-have-the-courage-to-be-different","status":"publish","type":"post","link":"https:\/\/journal.c2er.org\/2013\/11\/the-road-less-traveled-for-economic-developers-who-have-the-courage-to-be-different\/","title":{"rendered":"The Road Less Traveled: For Economic Developers who have the Courage to be Different"},"content":{"rendered":"

\"Which<\/a><\/p>\n

As an economic developer you’re not supposed to do it–pick winners, that is!<\/p>\n

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\u00a0one cannot consistently pick winners and avoid losers.\u00a0 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.<\/p>\n

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;\u00a0those that\u00a0are eligible for\u00a0a loan or tax abatement\u00a0and those\u00a0that cannot is a form of picking winners. “Targeting” is another. Preferring theme-based groups such as “Small business” or “Green”\u00a0are yet\u00a0another form\u00a0of picking winners–avoiding losers, like retail, restaurants\u00a0and personal services\u00a0are 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?<\/p>\n

\"Churchill<\/a><\/p>\n

Almost always, economic developers wind up using large inclusive sexy, hot\u00a0(often covertly ideological) concepts to justify their\u00a0decision to pick winners. Examples are “high growth”, “innovative”, “gazelles”, high-technology,\u00a0\u00a0and “green”. The usual suspects associated with these concepts are \u00a0“bio-med”, data storage, applied bioinformatics, alternative energy,\u00a0“life sciences”\u00a0and if we must “Wi-Fi”.\u00a0These themes\u00a0and sectors\u00a0are very much in vogue–common place in academic stuff– but,\u00a0are also\u00a0pervasive in\u00a0state and community-level economic development as well and have become the conventional wisdom of economic development.\u00a0Everybody chasing these themes and sectors\u00a0inevitably results\u00a0\u00a0in is the infamous “herd” behavior where literally thousands of jurisdictions, regions and marketing programs chase and subsidize the same companies.<\/p>\n

At a gut, common sense level, how can literally thousands of communities, regional EDOs, and states successfully\u00a0chase after, attract or create, the same set of\u00a0firms 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?<\/p>\n

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.\u00a0There’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\u00a0its lack of success–it is just the nature of the gazelle beast chase.Why?<\/p>\n

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 m\u00e9lange of academic and think tank thought,\u00a0asserts arrogantly that economic developers can (1) change their community’s economic base, (2) create large numbers of jobs, and\u00a0(3) shove their community’s economic base into the new age economy–how? This remaking of an economic base results from successful\u00a0chasing of the various gazelles which inhabit\u00a0these dominant approaches–conventional wisdom. Hence the herd heads off in one direction chasing the same\u00a0few target-critters.<\/p>\n

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\u00a0pursuing knowledge-based sectors and people, innovative and creative sectors\/classes\/ clusters, third (and fourth, and fifth) wave sectors, and sustainability\/green futures. All\u00a0develop their own\u00a0“special” gazelles–usually with considerable overlap.\u00a0\u00a0Even advocates of high rates of\u00a0small business formation\u00a0 call special attention to high-impact firms. \u00a0Our attraction and recruitment programs, more attuned to the\u00a0“kill” than what is killed,\u00a0chase gazelles in whatever form they can catch. Chronically declining communities attempt to replace terminally broken clusters by grafting onto their imploded\u00a0economic base these new and vibrant sectors of the future. Success is virtually inevitable and may well be perpetual. The “Geography of Jobs”, for example,\u00a0explains why certain types of people (highly educated and creative)\u00a0create entire regions of spectacular growth and near-inevitable prosperity.<\/p>\n

\"I"ve<\/a>

I’ve got a cat that looks more formidable than this gazelle!<\/p><\/div>\n

Thus gazelles and changing one’s economic base accompany each other.\u00a0That is what economic developers seem to be about these days. The motto of much of conventional economic development \u00a0is “Our community’s current economic base sucks and we know how to make it better: gazelles”.<\/p>\n

Even leaving aside our gut and common sense,\u00a0 picking winners is hard to do–and more risky than sometimes evident. Picking winners, for instance, \u00a0is no guarantee of public acceptability–picking winners\u00a0can still be\u00a0very\u00a0controversial–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\u00a0come to mind–sexy target firms should have three, preferably four, vowels in their name or at least three “t’s”).<\/p>\n

Troubles that come with picking winners also occur in\u00a0other ways.<\/p>\n

Favoring gazelles is, despite the assurances of academic and think tanks,\u00a0not guaranteed\u00a0to be successful. Even the formerly Teflon-like Obama administration got its proverbial\u00a0clock 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.<\/p>\n

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\u00a0 in real life seemingly fast gazelles can somehow turn into bankrupted turtles.\u00a0What’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\u00a0was faced with taking an equity position in a\u00a0young, one person,\u00a0medical device start up whose technology\u00a0required the patient to swallow a small camera. Sounded ridiculous to him\u00a0at the time,\u00a0but we funded the firm over\u00a0the Curmudgeon’s\u00a0dead body.\u00a0The firm\u00a0now trades on NASDAQ. In real life, gazelles often look like turtles–and economic developers\u00a0possess no innate\u00a0or special talent for understanding specific technologies and what is the sector of the future. Only think tanks and economists can do that.<\/p>\n

\"Churchill<\/a>\u00a0The Curmudgeon\u00a0believes\u00a0those economic developers with confidence in themselves and their community can do better.\u00a0Working in a community and not striving to do one’s best is a job not worth doing\u00a0.We do not have to be an invisible part of the herd. How?<\/p>\n

By working to develop the most from\u00a0your existing economic base\u00a0by increasing\u00a0the capacity and willingness our existing firms and sectors to successfully confront the\u00a0\u00a0profitability and market challenges they\u00a0face! 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.<\/p>\n

The thing is the conventional wisdom–catch phrases, theoretical-ideological concepts and\u00a0sector groups, even\u00a0NAICs codes–can be\u00a0a poor\u00a0starting 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\u00a0are more identifiable\u00a0in a database than on the streets of your community. Most firms of any size operate in several NAICs codes.<\/p>\n

In fact, the category “losers”, or\u00a0non-gazelles,\u00a0is misleading and possibly unhelpful to your community\u00a0in\u00a0developing a prosperous \u00a0economic base. Included in loser category\u00a0are 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\u00a0include\u00a0on their payrolls\u00a0a 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.<\/p>\n

Losers tend to come in several categories: declining or mature (commoditizing) sectors, mediocre job creators, or poor multipliers (don’t get me started on\u00a0multiplier 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\u00a0and 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.<\/p>\n

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,\u00a0if we must,\u00a0pick winners, i.e. select which\u00a0firms to assist and assist them with programs relevant to their needs and opportunities.\u00a0He 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.<\/p>\n

\"RaVHuOx2IKmqOSUTJxys08c069\"<\/a> 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<\/strong> (Cambridge, MIT Press, 1985).\u00a0 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\u00a0electricity, 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.\u00a0Classics are usually better than the newer remakes.<\/p>\n

The Dynamics of Regional Development<\/strong><\/p>\n

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\u00a0does not simplify life into a couple of variables and\u00a0R 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\u00a0of the Sunbelt was a\u00a0fairly\u00a0recent phenomenon and she wanted to see how industry-sector shifts\u00a0contributed 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).<\/p>\n

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\u00a0follows a “profit cycle” over time. [The profit cycle is not the same thing as\u00a0the macroeconomic\u00a0business cycle]<\/p>\n

Each firm in a specific\u00a0industry sector\u00a0shares a\u00a0profit\u00a0cycle 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\u00a0cycle 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\u00a0dynamics\u00a0do not determine, the decision of each firm in that sector. Firms in an industry in a given stage of the\u00a0profit cycle may share common\u00a0dynamics acting upon them–but they do not have to make\u00a0identical decisions on how to react to these dynamics. An economic developer with some understanding of the sector\u00a0dynamics 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.<\/p>\n

Just What is this Profit Cycle?<\/strong><\/p>\n

\"redlinegraph\"<\/a><\/p>\n

Markusen asserts that each sector goes through a four stage profit cycle–actually she specifies a five stage cycle. The timing and duration\u00a0of each stage, of course, rests on a number of interrelated\u00a0factors 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\u00a0market 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.<\/p>\n

At this point, perhaps, many economic developers are beginning to grasp that in\u00a0using 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\u00a0consider trying to assess at which stage companies are at a particular point in time. Markusen, however, does\u00a0operate out of a sector perspective and she assumes a given sector goes through this profit life cycle with its four (five)\u00a0characteristic stages.<\/p>\n