Nine Rules for the Practice of Economic Development Edward W. (Ned) Hill Professor and Distinguished Scholar of Economic Development Center for the Study

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

The Study of Innovation Edward W. (Ned) Hill 2

Acknowledgements

The Center for the Study of Innovation

at Cleveland State University


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


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


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


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


Three Parts of Successful Economic Development Practice

Development Theory

Development

Practice

Local Leadershi

p & Context

Economic BaseResources

History/Culture

Economic Outcomes


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


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)


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


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.


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


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


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.


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


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.


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


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


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


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


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


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


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


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


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”


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


“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


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.


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


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?


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


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


Documents

Nine Rules for the Practice of Economic Development Edward W. (Ned) Hill Professor and Distinguished Scholar of Economic Development Center for the Study