Trade Missions Are Expensive Alternatives
Having a good community is sometimes more of an incentive than financial help for companies wanting to relocate.
In the early 1990s, as business editor at a Florida newspaper, I spoke often with the man who was in charge of economic development for the local chamber of commerce. He was talented, knowledgeable and insightful. But I used to kid him about the local economic development effort’s single-minded focus on recruitment: The chamber and local EDC were constantly staging out-of-state trade missions to places like Long Island, creating position papers, grand visioning efforts and marketing campaigns aimed at snaring companies from other places. Those efforts always required a lot of meetings, funding demands on local government and, of course, a raft of incentives.
But in the course of reporting on businesses that actually moved to the county, I found many were arriving without having contacted — or been contacted by — the local economic development machine. I remember a small, aircraft parts repair operation that moved to town; the owner had vacationed in the area, or his parents had retired there, and at some point it occurred to him it would be a nice place to live and work. He and many others came without seeking or being offered incentives.
I joked with my chamber friend that instead of mounting marketing campaigns, he ought to just check the guest registers at the area’s upscale resorts or hang out in the bars and try to identify likely business owners. Chat ’em up and reel ’em in, I suggested — it might be just as effective and a lot cheaper than trade missions.
Meanwhile, the chamber put on a big press conference whenever it successfully recruited a business to town, even as its own data reflected the fact that the jobs generated by the new recruits were far outnumbered by expansions at existing businesses. It was impossible to ignore the disconnect: Most of the effort and money was going into luring businesses from elsewhere, but most of the growth was happening at businesses that were already there. The existing businesses had cause to grumble about not getting enough attention, and did.
Economic development philosophy evolves just like everything else. In the years since, there has been a shift both in Florida and nationally away from the recruitment-dominated approach. Based on early research by economist David Birch at MIT, a perception emerged — a myth, actually — that startups rather than recruited firms were the key to economic growth and the major source of job creation. Birch’s early work found that firms with 20 or fewer employees created 80% of all the net new jobs between 1969 and 1976 and that most of those firms were in business only four years or less. Small-business advocates loved Birch’s work, and it spawned a proliferation of small-business incubators aimed at fostering startups. Communities were sold on the idea that they could home-grow their own economic success if they could just generate enough startups.
The research wheel kept grinding, however, and the entrepreneur-centered development strategy has undergone some refinement. Because so many startups fail, net job creation by businesses in their early years isn’t as great as it seemed. It turns out that population growth prompts business startups, not the other way around. Birch and others subsequently found that most net job generation doesn’t come from a lot of business startups, but rather from a few small, fast-growing companies — only about 4% of the total — that he called “gazelles.”
Advocates of the revised entrepreneurial strategy march under the flag of “economic gardening.” Instead of startups, they champion so-called “stage II” businesses — fast-growing companies with 10 to 99 employees that have been in business for at least four years. Government can best help those companies with programs that offer sophisticated marketing research and management support, they believe. In January, the state Legislature even created an $8.5-million economic gardening program that will attempt to hook up fast-growing businesses seeking help with capital and third-party expertise.
But wait. Even as the economic gardeners go looking for fertilizer, others advise caution. New research cited by Taimerica Management Co. finds that the firms with the biggest economic impact in terms of jobs and sales aren’t necessarily small gazelles: “Branch locations and expansions are far more important in economic development than startups and are nearly equal in importance from a net jobs standpoint,” the company concludes. “Entrepreneurship matters in job generation, but the connections and path to success are not known so interventionist techniques are questionable policy tools.”
Earlier this decade, Nashville, a former home and still one of my favorite cities, attracted a whole roster of corporate relocations — companies including Caremark, Louisiana-Pacific and Asurion. Governing magazine, a sister publication of Florida Trend, reported that the relocations “occurred largely without generous state and local incentives.” The administration of then-Mayor Bill Purcell had focused on quality-of-life issues: Sidewalks, affordable housing, expanded greenways — and education, pumping some $150 million into the schools. Voters approved a property tax increase to pay for the improvements, showing once again that citizens will pay more as long as they feel like they’re not paying for more of the same.
Nashville — and most prosperous places — are good at marketing, but they succeed mostly because they’re even better at the much harder task of community building. Recruitment, startups, gazelles and gardening all have a place in a community’s economic development arsenal. But the days when Florida communities could rely on cheap land, cheap labor and a closing fund are over. Today, even the most carefully considered economic development strategy won’t succeed unless a community makes itself a good place to work and live.
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