Targeting Regional Economic Development

Stephan J. Goetz, Steven Deller, Tom Harris

• Publisher: Taylor & Francis
• Year: 2009
• eBook ISBN: 9781135972103
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Targeting regional economic development (TRED) has a long and rich tradition among academic economists and in the world of economic development practitioners. This book builds on a series of workshops and papers organized by The Northeast Regional Center for Rural Development (NERCRD) at the Pennsylvania State University and the Rural Policy Research Centre (RUPRI) at the University of Missouri. Through the coordinated efforts of NERCRD and RUPRI, a network of university based researchers and Extension education specialists was developed and provides the foundation of this new edited volume.

For the first time in a single book, Goetz, Deller and Harris present an innovative approach through a collection of chapters discussing industry targeting and the relevance of TRED as an important analytical tool for practical targeting purposes. The papers present issues surrounding community economic development, clusters in industry and rural communities and the role of agglomeration economies. The book provides the reader with insights into not only the theoretical foundations of targeting as well as empirical methods, but also approaches for using the community-level analysis to affect policy directions.

1 Targeted regional economic development

Introduction and overview

Stephan J. Goetz, Steven C. Deller, and
Thomas R. Harris

Introduction

Academic economists have long frowned on government-directed development programmes that seek to recruit or develop particular industries within local communities. The standard argument is that public sector decision-makers are ill-equipped to cherry-pick industries with strong future potential, and many examples exist of ineficient and wasteful uses of taxpayer funds to recruit businesses from elsewhere. The escalating public expenditures per job created in the automobile industry exemplify the high and growing public cost of such industrial recruitment efforts. A common related argument is that there simply are too few business owners seeking new locations in a given year, compared to the large number of communities offering industry location incentives, to justify or make worthwhile the recruitment effort. Nationally, and indeed internationally, the debate about the proper role of government in economic development culminated in the so-called Washington Consensus of the 1980s. This consensus, which has since fallen apart, held that “getting policies and prices right” at the national level and allowing markets to function freely would place countries on a path of economic growth and prosperity. Even if this prescription was necessary and suficient as a national policy, it made no allowance for regional or local variations within countries.

In a forum published in Economic Development Quarterly, Buss (1999a, 1999b) dismissed industry targeting strategies as wasteful and ineffective “central planning”.¹ Pointing to a selected set of failed firm-targeting efforts, Buss concluded that such activities are methodologically flawed, not grounded in economic theory, and are mere political acts, in addition to being based on poor data. Nevertheless, in his rejoinder to criticisms by Wiesel (1999) and Finkle (1999) published in the same forum, Buss conceded that targeting efforts will continue as a political necessity, and he presented a number of suggestions for improving future studies, which we review in more detail in Chapter 20.

While the academic debate continues within economics and related social sciences about the value of public policies aimed at promoting specific forms of local or regional economic development, concerned citizens and in particular elected oficials face tremendous pressures to “do something” about the economic situation of the local economy. Peter Eisinger (1988, 1995) argued that strong political incentives exist for politicians to invest in subsidies and other targeted economic growth strategies because of the need to show short-term and immediate impacts. The ability to attend ribbon-cutting ceremonies and “take credit” for businesses moving into their districts has powerful political appeal for elected leaders. The work of Michael Porter (1998, 2000) has reinforced this push toward proactive intervention in many important ways.

In this second-best environment, economists can play an important role by helping decision-makers to better understand the fundamentals of their local economies, with the goal of choosing those strategies that potentially are most productive (and least damaging) in the medium to long runs. Furthermore, a few notable – and in some ways path-breaking – recent publications shed new light on the issue of targeted development. This new work also suggests that the time has come to reevaluate the role of the public sector in identifying potential businesses to target for development.

At the same time, most of the discussion of targeting regional economic development (TRED) has been heavily biased toward recruitment in the spirit of the first wave of economic development policy. As we will discuss in detail throughout this volume, equating targeted economic development efforts with recruitment is too narrow of a view. We will see that well-crafted targeting analysis can help focus energies on existing businesses and the promotion of new businesses through entrepreneurship in the spirit of the second wave of economic development policies. By combining the process of targeting analysis with the contents of the analysis, powerful insights into the regional economy can be gained. We suggest that the TRED exercise can be as much an educational tool as it is the foundation of a technical report delivered to community leaders.

Key recent developments in the literature

An important recent study on the possible merits and demerits of industry targeting is that by Greenstone and Moretti (2004), who use counterfactual analysis to find a 1.5 per cent increase in earnings above trend in counties that succeeded in attracting a major manufacturing plant, and a 1.1 per cent increase in property values above trend in these counties. This result is in stark contrast to the conventional wisdom that holds that the net benefit to communities of giving subsidies for the purpose of attracting plants is, at best, zero and at worst, negative and that such activities on balance reduce the welfare of the local population. Although this study has been sharply criticized, for example by Markusen (2007) for the methods used and conclusions drawn, it has caused some economists to rethink their long-held beliefs on these kinds of interventionist activities.

Another important recent publication is Baumol et al.’s (2007) Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. These authors identify four types of capitalism (pp. 60–61): entrepreneurial, big-firm, oligarchic, and state-guided. Briefly, small and innovative firms play a major role in the first form of capitalism, and large firms in the second form. Under oligarchic capitalism, a small number of individuals have wealth and political influence. State-guided capitalism consists of government extending its role beyond merely providing public goods to many citizens and removing barriers to entry for businesses. Baumol et al. argue that this form can succeed as well, and point to booming Asian economies that have grown rapidly primarily through export-led growth that was encouraged or “guided” by the state (p. 67).

There are of course important potential pitfalls to such state-guided capitalism, and it may work best where a known production frontier exists toward which firms within a nation – or region – can be nudged. Once that frontier has been reached, it is less clear that the government can necessarily do a better job than private businesses of identifying “the next big thing”. In other words, predicting the whims of consumer demands or the next production innovation is dificult, and the danger always exists that vested interests in protected industries succeed in extending those protections indefinitely. At the same time, there is at least one important precedent under which the United States government not only decided on an industry that would be a winner but also created that industry from scratch and made sure that it would succeed – space exploration. The benefits of these original public investments for American consumers have been significant, and continue to this day, for example, through the ongoing miniaturization of technology. Similarly, the prospect of private space exploration today would be unthinkable had it not been for this initial public investment.

One of the communities that benefited enormously from the Space Age – the region surrounding Cape Canaveral in Florida – is now bracing for the end of the Shuttle programme in 2010. Although private space-related businesses are expected to employ some of the up to 10,000 individuals who may lose their jobs in the region, local government leaders are pursuing other firms and sectors that could build on the existing local human and capital resources. This is an example of proactive targeted regional economic development, where government seeks to act well before the local firms are lost or move elsewhere.

Another success story – especially in terms of initially unexpected indirect or secondary impacts – is that of the UPS sorting hub in Louisville, Kentucky. At the time when the city was bidding for UPS to locate its facility in the community, and rearranged air corridors around the airport to accommodate the shipping company, to the detriment of local residents who were exposed to noise pollution, few observers foresaw that major manufacturers of electronic goods would establish repair operations in the community. It turned out to be more cost effective for them to locate such facilities at this transshipment point, and so the city of Louisville has benefited from a sizeable expansion of employment in the ostensibly unrelated equipment repair sector. In other instances, major recruitment projects have turned out to be white elephants. For example, the city of Indianapolis lost $320 million in direct subsidies when United Airlines shut down its aircraft maintenance facility in 2003.

Last, the work of Michael Porter (e.g., 1998, 2000) has led to an explosion of interest in cluster development. Clusters in turn are intrinsically and inseparably tied to space, or regions, just as they are tied to or built on specific industries. Thus, there is a close logical connection between the emergence of clusters and targeted regional economic development. The idea of clusters can be traced to the writings of early classical economists such as Marshall (1930). Later, cluster studies were developed more fully in Europe (Asheim et al. 2006:6) – primarily in Italy – and they were also applied to food system subsectors by agricultural economists through the structure-conduct-performance model (e.g., Marion 1986). This is not to diminish the contributions of Porter, as he almost singlehandedly spurred the interest in thinking differently about economic development (Maskell and Kebir 2006). One important outgrowth of this new thinking is the concerted movement away from the former approach of “shoot anything that flies, claiming anything that lands” (Rubin 1988) to more strategic behavior in identifying the specific types of industry that should be promoted at the local and regional levels.

Porter’s work has also drawn attention to the idea that regions matter, and that they to some extent control their own destinies even as they are constrained by the rules of cumulative causation and path dependence (Arthur 2007). In the US at least, regions have in many ways become the primary level at which economic development now occurs in practice. In particular, Scott and Storper (2003) refer to certain regions within countries as launching pads for innovation and “most advanced” types of development. And these regions, as well as regional analyses, are becoming more rather than less important as globalization continues.

The rationale for Targeted Regional Economic Development (TRED) and this book

Policy-makers and economic development practitioners are now asking the more focused question: in what types of industry does our region have a competitive advantage? The analytical tools that are available to policy-makers and practitioners for practical targeting purposes range from the relatively simple, such as the location quotient approaches promoted by Porter to statistically derived probability models, to interlinkage models based on input-output analysis. Despite the explosion of interest in this area, however, these various tools have until now not been presented within a single volume that describes both the underlying analytical principles and provides examples of each. The intent of this volume is, first, to review the current thinking in industry targeting policy; second, to discuss the socioeconomic theoretical foundations of industry targeting; third, to present alternative methods of identifying industries for targeting in different community settings; and fourth, to think more seriously about the process through which the analysis is undertaken and used by the community.

This edited volume builds on a series of workshops and working papers organized by the Northeast Regional Centre for Rural Development (NER-CRD)² at Pennsylvania State University in collaboration with the Rural Policy Research Institute (RUPRI) at the University of Missouri, at the request of stakeholders in the community of scientists. Through the coordinated efforts of NERCRD and RUPRI, specifically the Community Policy Analysis Network (CPAN) within RUPRI, a network of university-based researchers and extension education specialists has been developed and provides the foundation of this book.³

In this book we do not advocate industrial recruitment efforts at any cost, and certainly not at the cost of neglecting other local economic development strategies. We do believe, though, that there are tangible benefits to communities in thinking through the possible alternatives for local economic development, including gap analyses, and to applying the tools presented here. As we mentioned earlier, and as Shields et al. note in Chapter 3, we live in a second-best world that is driven by political considerations, and there is a benefit to reducing the potential damage that can be done by blindly recruiting firms. In other words, it is better to shoot at fewer targets. Indeed, many if not most of the industries that should be targeted for promotion may already be present in the region, and strategies of retention, expansion, and entrepreneurship may be highly effective.

This book follows in the spirit and intent of previous efforts of the researchers and extension educators who make up CPAN. This work is best represented in the volume Community Policy Analysis Modeling (2006), edited by Thomas G. Johnson, Daniel Otto, and Steven C. Deller. The intended audience for the present book is researchers and community development educators located in universities, state agencies, and public policy centres, and economic development practitioners.

Targeted economic development, or in our construct, Targeted Regional Economic Development (TRED), has a long and rich tradition both among academic economists and in the more practical policy world of economic development practitioners. As Deller and Goetz outline in more detail in Chapter 2, targeted development efforts have historically been thought about within the context of industry recruitment that can be traced back to the Mississippi Balancing Agriculture with Industry (BAWI) policies of the 1930s. In an effort to rebuild the state’s economy after the Great Depression, Mississippi aggressively marketed itself to manufacturing firms from the northern states with offers of cheap labour and land, coupled with low taxes and limited regulations. Initial attempts at recruitment took what might be considered a “shotgun” approach and did little to discriminate between types of industries or firms. A job was a job and all comers were welcomed.

Over time, as firm location theory was refined (e.g., Deller, Chapter 4), insights were gained into factors that influenced where industries are mostly likely to locate. As academic empirical work on firm location moved forward, our understanding of where certain industries might locate expanded as well. Alongside the expanding academic literature, numerous attempts were made to build tools to help state and local economic development practitioners target select industries that had higher probabilities of locating within their region.

Goode and Hastings’s (1989) Northeast Industrial Targeting (NIT) and Economic Development Database (EDD) System was a pioneering early effort to provide rigorous, community-specific estimates of locational probabilities of different industries. Supported by NERCRD, this work represented a rigorous movement away from more simple descriptive tools such as location quotient and shift-share analyses to more comprehensive and systematic examinations of how local factors affect industrial location. The work was described in publications such as the Wall Street Journal and became widely known across the nation. This earlier work has now evolved in many ways to include agglomeration factors in the analysis (Gabe, Chapter 6), to examine more detailed industries than was the case earlier (e.g., Leatherman and Kastens, Chapter 7), and to take advantage of recent developments in econometrics (e.g., Davis and Harris, Chapter 9). In many ways, the primary purpose of this book is to take stock of developments in this subject area, many of which were spawned by the work of Goode and Hastings.

TRED is a collection of analytical tools aimed at helping users to quantify regional competitive or comparative advantage(s). This advantage is in the spirit of Porter’s work and “clusters”. TRED does not presume that we can pick winners more effectively than the market, or firms, can. Instead, it provides a framework for thinking about local markets, economies, and regions. As we have already noted, TRED has historically served as a foundation for targeted firm recruitment (first-wave strategies) but within the spirit of Porter it also provides focus to second-wave strategies (BR&E and entrepreneurship strategies) and third-wave strategies (public-private partnerships and regional collaboration).

More specifically, the basis of the first ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of figures and tables
• List of contributors
• 1 Introduction and overview
• PART I Policy background
• 2 Historical description of economic development policy
• 3 Industry clusters and industry targeting
• 4 Overview of firm location theory and TRED
• 5 Porter’s Cluster strategy and industrial targeting
• 6 Impact of agglomerations on the economy
• PART II Empirical modelling approaches
• 7 Modelling the probability of manufacturing activity in the Great Plains
• 8 Regional variation in the location choice of goods- and service-producing industries
• 9 An application of a double hurdle firm location model: The example of Montana
• B. Input-output and value chain models
• 10 Targeting industry clusters for regional economic development: The REDRL approach
• 11 Rural-urban economic linkages: Implications for industry targeting recommendations
• 12 Regional cluster analysis with interindustry benchmarks
• C. AHP and matching models
• 13 Targeting with the analytic hierarchy process
• 14 The community business matching model: Combining community and business goals and assets to target rural economic development
• PART III Applications and case studies
• 15 Identifying food industry clusters: A comparison of analytical tools
• 16 Targeted industry analysis in a “comprehensive” economic development extension programme
• 17 TRED as an educational tool
• 18 Industry targeting: Theoretical underpinning and practical application
• 19 Import substitution and the analysis of gaps and disconnects
• Conclusion
• 20 TRED: Conclusion and the future