Economic Development Realities

Economic development projects and conversations often are based on magical thinking and 30-year-old industrial attraction formulas rather than data about how the real world works now.

The pages of this section educate you about what is and is not worthy of public sector and business association support and effort. These efforts sometimes spend plenty of tax money and achieve very little of the promised job creation and business expansion.





We want to give you the analytical tools you need to determine what is worthwhile, what can happen solely through the force of a businessperson's perseverance, and what needs a little nudge from a government, private development organization, or public-private partnership.

We hope you'll study our definition of economic development for the good of your city, town, or area as a whole: adding to the economic base.

Economic base means the jobs you generate and income you earn when you produce goods or services in your community, but sell to people beyond your community. Important examples are manufacturing, tourism, higher education, and services sold beyond your community.

Often people think they are practicing economic development when they engage in business attraction or retail attraction.

Community leaders tick off the benefits of their economic development programs: jobs for residents, places to shop, and business owners or managers to approach for donations to assist your community. Maybe.

Not all businesses contribute to the all-important economic base. You might have heard that we can't thrive by simply selling hamburgers to each other. The thought behind this is correct; hamburgers provide jobs, but for the most part, they are sold to local people.

Worse, just a few owners sell most of the hamburgers, and odds are, those corporate headquarters are not in your town. Selling burgers is economic development only in tourist towns.

An economic base activity is one in which your community has a specialty. You can determine which activities are "basic" through calculating a measure called the location quotient.

As an aside, the whole idea of business clusters is important to address, even in a smaller city. A cluster consists of businesses logically grouped together because they are similar, related, complementary, or up and down the supply chain from one another.


Keeping Business Attraction in Perspective

Business retention and entrepreneurship support programs are easily the best economic development investment. Rather than producing those colorful expensive ads, your chamber of commerce should be concentrating on serving the economic base businesses that are there already, and developing a culture that supports new business ideas.

Only when business retention has been addressed and re-addressed on a regular schedule should you even think about business attraction.

Too many economic development organizations and neighborhood associations think they need to devote major blocks of time and money to "marketing" and "branding" themselves, and then somehow, someday, the right people magically will notice them and relocate.

Generally you are much better off thinking about business retention, improving quality of life measures relevant to businesses in your economic base, and encouraging individuals who are laid off, approaching retirement, tired of the commute, or stay-at-home moms to start businesses. Then the "non-basic" (not part of the economic base) activities will find you.

One important exception to the rule of leaving business recuitment to the market is when you are lacking in essential services.

This may happen because you live in a distressed neighborhood, rural area, small city, or a somehow-overlooked rapidly growing community.

Markets aren't perfect, so they don't always notice sufficient demand the instant it arises. It's your job to point out that demand, if you lack a grocery store, dry cleaner, restaurant attractive to management and workers in your economic base activity, or health care provider.


Entrepreneurship: The Best Way to Improve Your Economy

If you are a community devastated by the disappearance of manufacturing jobs, or other jobs unlikely to replaced, you especially need to consider an entrepreneurship program. An entrepreneur simply means a person who starts a business.

We elaborate a bit on an entrepreneurship definition and characteristics on another page.

Small business creates as many as 90% of the jobs in some years. And in the Great Recession's aftermath, new businesses are doing all the net job creation in the U.S.!

Too few neighborhood associations have teamed up with other groups in their city to find a good entrepreneur training program and offer it frequently.

This is your best chance if your economic base is gone. Unleash the creativity of your people. Most community organizations or local governments don't have experience in creativity and innovation training or in teaching business planning.

A local foundation or university could work on a template for addressing that gap. A faster way is to find a few talented businesspersons who could give a series of presentations.

Also in support of entrepreneurs, even small cities can manage a high-quality business incubator (also called an economic development incubator or business accelerator).

Take the four to eight people in town who are considering starting a business, screen those ideas, and put the ones with promise together in one run-down building that your community association paints and repairs to an acceptable level on Saturdays.

Add common services and a knowledgeable manager skilled in working with start-ups. If you have abandoned factories, incubators are a potential adaptive reuse.

Of course the other thing entrepreneurs need is a source of capital. If your neighborhood lacks lenders for very small enterprises, you might want to learn about microloans. Microfinance is available in the U.S. through the Small Business Administration and also through a variety of community organizations.

On the city scale, you need sources of seed capital, to support the entrepreneur while he or she is producing business plans and prototypes, before venture capital and other business loans are available.



Tourism as a Source of Economic Growth




In our definition of economic development, tourism and business growth are natural companions.

Many places have more tourism potential than they are taking advantage of. If you have any tourism base, think carefully about what it is, and try to expand it logically.

If scenery is your stock in trade, how can you differentiate yourself from all those other beautiful mountain communities? What do you do better? What could you do better? Do you need to add festivals? Or should you add a spa? Or do you need to say no to those fast-food places and monster signs that would ruin your gorgeous view?

If you really talk with your visitors about why they come to the mountains, you can perhaps find a compatible economic activity and thus have a focus to your tourist attraction efforts.

Incidentally, the entire U.S. is lagging its potential in international tourism.


Downtown and Retail Reinvestment

Investing in downtown redevelopment, using any available state programs or tax credits, has value in and of itself because it helps prevent expensive suburban sprawl and takes advantage of the investment prior generations have made.

It also gives civic pride a lift, because now your residents will be happy to claim that wonderful mix of vibrant human activity in a block or two, or 100 blocks. Downtowns are your gathering place too.

More importantly, perhaps you can bolster locally owned businesses, so that the return on investment remains in your community. You can encourage new businesses, artists, non-profits, and civic uses to locate on the side streets.

Beyond downtown, you probably have a few candidates for shopping center renovation in older malls, strip shopping centers, and such. We urge renovation when there's a market, but the venue is very out of style.


Higher Education and Good Schools as Economic Tools

Education and economic development are natural partners. Business needs a workforce that is literate, not only in reading, but in math and technology.

So if your school system needs improvement, that should be considered a crisis for a local development agency. If schools have a high dropout rate, demand better.

More and more often, research shows percentage of college graduates living in a city as the best predictor of its economic performance. Keep those little ones and adolescents in school, and cultivate the potential link between higher education and economic development at every opportunity. Chances are, your residential college or university is a big contributor to your economic base.


Rural Economic Development

Rural growth offers some unique challenges. Most businesses want to locate near good transportation, so if you were bypassed by the interstate system and are not near a good airport, you'll have a frustrating economic development situation.

So it's doubly important for the rural, far-from-transportation crowd to foster creativity among its residents. Now the Internet offers much economic opportunity, but only to those with broadband.

Consider broadband like electricity, and bring it to your community. Also bring every creative person, idea, speaker, festival, and reinvestment you can think of. If you have any hook for tourism, history, scenery, or currently present economic base activity, exploit it by a sideways exploration into a related activity.

Wind, solar, and geothermal energy could be possibilities, as could biofuels that are more efficient than corn. And by all means, get your farmers into planting broccoli and your retirees into growing basil.



Another Use of the Term in Low-Income Neighborhoods

In lower income communities, it's common to speak of economic development as raising income levels of individuals. While meeting community poverty directly and openly is very important, getting people jobs or better jobs really doesn't do justice to the idea of economic development either.

Financial asset building for low-income or low moderate-income households makes every kind of sense. Community development banks specialize in this. A promising approach that could be imitated anywhere that there are financial institutions that allow accumulating capital involves setting up individual development accounts.


Government Financial Incentives for Business Location

For communities of all sizes and types, yes, economic development is an important goal because it provides jobs and supports the local population.

But you don't always have to hand giant corporations large subsidies. Learn about the appropriate use of tax increment financing (TIF) and other financial incentives, and then be tough in rejecting all inappropriate requests.


Elected Officials and Community Leaders Supporting Business

You simply must start acting if you're an elected official. Economic difficulties in almost every part of the world are severe and in need of resolution. Here's a link to a decent discussion of the role of elected officials in economic growth.

Community leadership can and should address many of the quality of life issues that are critical when business growth is discussed. It's essential that your people love your town, because their passion shows.

For a fascinating glimpse at what makes people have an emotional bond to their city, check out the new community attachment research.

Read a couple of books if you really need to succeed in this arena. We recommend:

1. Community Economic Development Handbook: Strategies and Tools to Revitalize Your Neighborhood

2. Planning Local Economic Development: Theory and Practice

We know it's tough out there. In response, we started a new page where people can tell their economic development success stories. Please contribute if there's anything that's going right for you in creating jobs for your community.


Return to Useful Community Development home