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Nine Rules for the Practice of Economic Development
Edward W. (Ned) HillProfessor and Distinguished Scholar of Economic
DevelopmentCenter for the Study of InnovationLevin College of Urban AffairsCleveland State University
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Acknowledgements
The Center for the Study of Innovation
at Cleveland State University
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Six parts to the talk
1. Framework: Demand and supply in the factor markets (factors of production)
2. Economic development attraction
3. Two structural failures in the practice of economic development
4. Economic development practice and strategy
5. Nine Rules for the practice of economic development
6. Questions to think about
Framework:Demand and supply in the factor markets
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Why practice economic development? Job creation Better incomes Improved tax base Wealth creation Less cyclicality in employment Greater diversity of the economic base
Lesson: Employment is derived from product demand
Lesson: In economics desirable outcomes are frequently a byproduct of market activities. The best route to those outcomes is often indirect
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Two parts to the practice of economic development
Demand side of the factor markets (land, labor, capital, and technology/knowledge). Dominates the short and medium terms of the market
place Purview of the Economic Development Department
Supply side of those same factor markets in terms of the quality, quantity, and flexibility of the factors Dominates the long run development horizon Outside the purview of formal economic development
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Goals for regional economic development
Economic Development Outcomes
Increase Per Capita Income
Improved distribution of income
Improved income stability
Economic Development Goals
Growth: Generate demand for under-used resources (Exogenous factor demand)
Development: Implement production efficiencies—squeeze middle lines of cash statement (cost efficiency)
Development: Produce higher valued products—grow the top line of the cash statement (Endogenous factor demand)
Lesson: Practice economic development through the firm’s cash statement
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Three Parts of Successful Economic Development Practice
Development Theory
Development
Practice
Local Leadershi
p & Context
Economic BaseResources
History/Culture
Economic Outcomes
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Supply-side Context: The building blocks of an economy are on the supply side of the product markets
Elements of ContextGeneral Specific Comment
History Neighborhood structure Status and inclusion vs. exclusionExisting economic base
Physical Environment Environmental constraints Airshed capacity & qualityWatershed capacity & quality
Amenity valueCivil Society Risk taking Business entrepreneurship
Style of civic leadership (collaborative vs. credit claiming)Public (government) administration Honesty
EfficiencyBureaucratic predetermination (vs. privatization)
Social mobility or permeability "Plug and play" social & economic structure?Cultural-civic institutional structure Civility/tolerance/inclusion vs. exclusionSocial Capital Neighborhood & politicalNegotiaitng style Cooperative or confrontational
Factors of ProductionLand Markets Housing Conversion (applies to both)
Business site locations New construction (applies to both)Labor Occupational availability Incumbent workers (applies to all)
Soft skills or work ethic New entrants by age, sex, or ethnicity (applies to all)Human capital (achievement not attainment) International and interregional migrants (applies to all)
Capital Built environmentFinancePlant and equipmentInfrastructureTechnology Embedded in existing base
Research & development capacityBusiness social capital Relationship between product cycle, firm organization and
business weak and storng linksOperating Costs Tax abatement
Negotiated cost reductionsReduced cost finance (subsidized finance)
Product: Competitive strategies, product cycle position, and resources of regional establishments
Sources of comparative advantage
Sources of Competitive Advantage
Arrayed From Hard to Easy to
Change
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Five Parts of Formal Economic Development Practice
Lesson: Five short run practices that operate on the demand side of the factor markets that dominate practice. The supply side is not formally a part of the practice of economic development.
The Buffalo Hunt
Deepen the base of export products
(Exogenous Growth)
Protecting Endangered Species
Political crisis to save existing job (Lemon
socialism)
Trapping Foxes
Lower operating costs
Invest in resource base (Squeezing the middle lines)
Searching for Gazelles
Search for fast-growth firms
Breeding Rabbits
Product Development Process Innovation
(Endogenous Growth)
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Endogenous Development: Breeding Rabbits
Economic development attractionThe Great Buffalo Hunt and Helping the Gazelles: The purview of the technician
The Demands of the Commercial and Industrial Marketplace
Exogenous Competitive benchmark Focuses on operating costs
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Competitive Site Selection Process is Short: 90-120 Days Define Client Search Criteria
Regions Selected for Initial Analysis Information Compiled/Data Accessed:
Talent/HR, Industry Profiles, Regional Demographics Market Analysis: Infrastructure. Logistics, Competitive
Analysis, Financial Analysis, Site Development, Livability
Regional Screening Against Musts & WantsRegional Rankings Reviewed
Proposal Requests & ScreeningComparative Assessment
Negotiations: RE, Incentives
Risk AnalysisSite Visits
Site Decision
Team NEO:
Needs to improve quantity of deals that
make it past this phase. Detailed &
timely baseline information is key.
Team NEO & Chamber Partners:Need to respond collaboratively and seamlessly. Shorten cycle
and improve depth of information content.
Point of contact to follow up and stay engaged. Marketing gets
more localized and site specific.
Source: TeamNeo
Lessons:
In economic development external investment typically follows internal investment.
Competing for exogenous investment serves as a benchmark.
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Requirements of Today’s Decision Makers Speed - Faster Time to Market
Shorter decision cycles - added time pressures Strong commitment to improvements in logistics infrastructure
Greater Market Flexibility and Responsiveness; Access to Networks Ability to gain access Conduct business with both the public and private sectors on the customer’s schedule - any
time, any where Going global - instead of a singular focus on domestic markets, look globally and multi-
dimensionally Linkages within their industries and across communities Opportunities for New Partnership
Innovation Collaborate Faster idea transformation to commercialization People/research connectivity Not just technology transformation
Access to New Knowledge Tacit versus learned Heightened requirement for management talent
Source: TeamNeo
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Changing trends in location factors
Traditional Business Costs Tax Structure Compensation Costs Space Costs Capital Costs Business Climate Alone
Today’s Business Needs Proximity to excellent research
Institutions Access to venture capital Educated, skilled workforce Networks of industrial groups &
suppliers Business climate and quality of
life
There is new pressure on regions to address location issues quite differently than in the past. These location factors should be the region’s priorities for attracting, growing and retaining companies. Do not fall prey to the new panacea’s.
Source - Milken Institute: America’s High Tech Economy Report 1999
Lesson: The list is limited and biased toward a specific set of industries. What is critical: (1) build from strengths; (2) address weaknesses; and (3) act through cash statement
Milken Institute’s list of “new business needs”
Two structural failures in the practice of economic development: The opening for leadershipMismatched federalisms
Mismatched time frames
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Economic development is complicatedMust respond to the two failures
Mismatched federal structures Governmental federalism
Economic federalism
Federal StructurePolitical EconomicGlobe GlobeNation NationState
RegionSpecial District
MunicipalityNeighborhood
Lesson: State’s need to recognize that the real economy is regionally based. The State is an administrative and political geography; not an economic geography.
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Economic development is complicatedMust respond to the two failures
Mismatched time frames Business time — the length of the deal cycle
Economic time — the length of the business cycle
Political time — the length of the election cycle
Economic development time — the length of the investment cycle (time to change the product mix)
Lesson: Importance of converting political time to economic development time
Economic development practice and strategy
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What is Context and APPLE ?
Competitive strategies of local establishments. Position of their products in the product cycle. Political and business cultures (Apple)
Attitudes toward risk-taking, Personalities and motives of those who maintain the
civic agenda (leadership styles). Public sector efficiency & effectiveness Labor management relations (formal and informal) Elastic civil society—strength, flexibility, and
permeability of social structure. Are you plug and play?Lesson: Half of a successful economic development strategy is driven by context.
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Tactics: Have FAITH Focus on economic development fundamentals Act opportunistically within a loose strategic
framework Take advantage of crisis Be deal or project oriented
Invest in your assets—all types of capital depreciates
Think in portfolio terms Harness financial, political, and community catalysts
who participate based on self-interest (economic, political, ethical)
If you want to find out if there is demand for a milk in Tibet do not start with a market study; start with a cow.
Jeremy Nowak, The Reinvestment Fund, 2004
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The contradiction of good economic development practice: A widely shared vision coupled with transparent practices while maintaining client confidentiality
Nine rules for the practice of economic development
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The practice of economic developmentNine rules1. Economic development is about products; Not jobs
Employment is derived from product demand The Product Cycle is real and affects strategy and
implementation
2. Economic development is practiced through the cash statement of the business
Top line Middle lines Or else either inertia or the value of CEO real estate and social
capital binds the company to the region
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The practice of economic developmentNine rules3. Economic development is a generative; Not
redistributive Asset-based; not need-based Build economies from areas of strength while
intentionally addressing weaknesses Encourages community development, but is not
community development Short term economic development policy works on
the demand side of asset market Long term economic development policy works best
on the supply side of the asset markets
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The practice of economic developmentNine rules4. The economy is regional
The region is the labor market
5. Most regions have effective competitors;
All municipalities have effective competitors
Are the rules Necessary Efficient Predictable Transparent
Practice the habits of growth, rather than manage decline Markets will beat politics into submission over time, regions will either work
effectively or the economy (investment) will vote with its feet
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The practice of economic developmentNine rules6. Productivity is the basis of sustained higher
incomes The measure of economic development success is
change in per capita income. Increases in earnings come from increases in
productivity Government must be concerned with the distribution
of income and social mobility
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The practice of economic developmentNine rules7. Avoid rubeaphobia; Think for yourself; Avoid silver
bullet thinking Successful economies are constructed from strength
and achievement; not conjured from weakness, entitlement, desire, embarrassment, jealousy, envy, or stupidity (seven deadly economic development sins)
Skepticism is good. Do not assume or assert competitive strengths
Avoid the public sector version of not-invented-here syndrome
Think of technology and product development as a portfolio
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The practice of economic developmentNine rules8. Economic development investment requires
a long term strategy Widely shared transformative vision Responds to near term political-economic crisis (the catalyst) Flexible so that respond to opportunity Answers the question: Who maintains the long-term civic
economic development investment agenda? Visible, bricks and mortar, transactions so you have visible
successes and do not forget the habits of growth
9. Do the hard stuff; Focus on the basics Innovation is the key to long term prosperity Education is at the foundation of economic success Invest do not spend
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The Economic Development Formula Productivity is the basis of economic
development: Increases in earnings come from increases in
productivity through the sale of goods and services
Formula to economic success maximizes regional value added Produce highly valued products With a great deal of capital Mix in technologically sophisticated occupations with
scarce knowledge-based regional resources that make the economy “sticky”
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Everyone wants high-tech operations…
Silicon Seaboard/Internet Coast
Media Del ReyMedia Del Rey
Silicon ValleySilicon Valley
Silicon MountainSilicon Mountain
Silicon HollowSilicon Hollow
Silicon ForestSilicon Forest
Silicon Gulch/ Silicon Hills
Silicon Gulch/ Silicon Hills
Silicon VillageSilicon VillageSilicon VineyardSilicon Vineyard
Silicon GulchSilicon Gulch
Silicon ValleySilicon ValleyMultimedia GulchMultimedia Gulch
Silicon IslandSilicon Island
Silicon BeachSilicon Beach
Digital CoastDigital Coast
Silicon DesertSilicon Desert
Cyberchella ValleyCyberchella Valley
Silicon MesaSilicon Mesa
Silicon CitySilicon City
Silicon PrairieSilicon Prairie
Telecom CorridorTelecom Corridor
Silicon FreewaySilicon Freeway
Biotech BeachBiotech Beach Silicon BayouSilicon Bayou
Silicon BeachSilicon Beach
Silicon SwampSilicon Swamp
Telecom ValleyTelecom Valley
Silicon TriangleSilicon Triangle
Silicon RiverSilicon River
Automation AlleyAutomation Alley
Silicon Tundra/ Silicon Valley NorthSilicon Tundra/ Silicon Valley North
WebPortWebPort
Silicon IslandSilicon Island
Silicon AlleySilicon Alley
Silicon Valley ForgeSilicon Valley Forge
Philicon ValleyPhilicon Valley
Silicon HollerSilicon Holler
Silicon MountainSilicon Mountain
Silicon SeaboardSilicon Seaboard
Silicon Dominion/ Silicon PlantationSilicon Dominion/ Silicon Plantation
E-CoastE-Coast
Cyber DistrictCyber District
Silicon HillSilicon Hill
Silicon NecklaceSilicon Necklace
Silicon SandbarDot CommonwealthSilicon Mountain
Silicon SandbarDot CommonwealthSilicon Mountain
Silicon SnowbankSilicon Snowbank
Silicon PlainsSilicon Plains
Silicon GlacierSilicon Glacier
Silicon OrchardSilicon Orchard
Silicon IslandSilicon Rain ForestSilicon IslandSilicon Rain Forest
… fight the allure of economic development fads; do not lose sight of true competitive advantageSource: Deloitte Fantus
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“One person’s pork barrel project is another person’s wise investment in the local infrastructure.”
-- Thomas Foley, Speaker of the US House of Representatives, 1989
After all, look what the Eiffel Tower did for Paris and the Space Needle for Seattle. "Whether it will ever be finalized, I don't know, but a lot of people are interested in it," Mayor Ken Lee told Reuters by telephone. "I'm for anything that will bring tourism back into our city."
Tuesday, January 14, 2003 Posted: 10:05 AM EST (1505 GMT)CNN.com
”There is a market for the unusual and unique,"
Town sees salvation in huge lava lampBuild a giant lava lamp and they will come?
Questions to think about
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Questions about the long-term investment agenda Can you describe the region’s long-term economic
development investment agenda? Are there any key catalytic people or organizations who
can make civic activities take place or cause economic development investments to be made?
Differences in leadership styles Private sector leaders think that they have control over their
organization; when it is really their customers who control through investment decisions. They hate process.
Public sector there is no immediate, or visible, customer to act as a check on the leader and their investment decisions. After all, who’s money is it? They survive by process.
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Questions about the long-term investment agenda
Who, or what institutions, can maintain the long-term civic economic development investment agenda? How catalytic are they? What is their institutional legitimacy? Are they check writers, check takers, revenue generators? What is their expected tenure? What is their institutional capacity?
No one would remember the Good Samaritan if he only had good intensions. He had money as well.
Margaret Thatcher, Prime Minister, United Kingdom, 1980
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Questions about the long-term investment agenda
Does the economic development investment agenda confront basics of economic performance, or is it a fad-driven exercise in thinking by either copy machine or economic development policy peddler?
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Questions about the fundamentals Are there any barriers to effective action in addressing
the region’s economic development success?
How does the local political culture influence economic development activity? Are there any particular cultural strengths or weaknesses?
Are the economic fundamentals in place to make the agenda feasible? If not, can they be put into place?
There is nothing fundamentally wrong with America’s cities that money can’t cure. Carl B. Stokes, Mayor of Cleveland, January 1971
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Questions Is the decision making: Politically based? Focused on
greatest need? or, Responsive to opportunity?
Are there any key investments that can leverage economic development, as measured by increased average regional income?
Are there any civic or cultural activities that might help encourage economic development?
How broad is the support for the economic development agenda? Who supports the agenda?
Every time you do a favor for a constituent you make nine enemies and one ingrate. John Michael Curley
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