Understanding the Economic Base for Your Community

Last Updated: December 19, 2021

Establishing, maintaining, and strengthening your economic base should be the goal of your municipal or national economic development program, or the economic development division of your local government or chamber of commerce.

Even a neighborhood can generate community exports, which can be defined as items that primarily people from outside of your community will purchase. Instead of recycling the same money over and over again, your city, town, neighborhood, or nation gains new money through employment in enterprises and business types where your locale can excel.

It's just a different way of looking at what you perhaps already know to be true. A unique product makes money for your community, if you have enough to sell to the outside world after you factor in local consumption.

Beyond merely generating good publicity, new money coming into the area should be your economic goal. Being an exporter or products or services to other cities or countries means jobs. Both exciting new technology start-ups and dull industries in high demand count.

To determine the current economic base of your community, and therefore what your government or economic development organization should be emphasizing in its economic development program, you need to do a little research.

You can do this yourself if you don't have professionals at your service or the resources to hire a consultant. Directions are on the page called location quotient, which is the term for the calculation you make.

Once you know where your economic base lies, the point of an economic development strategy often should be to expand that economic base in a logical fashion by attracting related businesses.

However, like almost everything else in community work, this isn't a hard and fast rule. If your economic base consists mostly of an industry that is becoming obsolete, or is no longer competitive for your nation, you may need to find another economic sector entirely.

Manufacturing as an Economic Activity

Two classic examples of business types that generate exports are manufacturing and tourism. Manufacturing (making something) and selling it to the outside world is exactly what you need in many parts of the world. Manufacturing in remote locations requires transportation and communication networks, and then a favorable labor environment and work ethic.

Frankly, these particular economic base activities (which also may be called simply "basic activities" in other articles) are totally irrelevant to many U.S. communities.

It really makes us squirm to see how many good community people still cling to the unrealistic hope that they will land one of the very few industrial relocations that occur in the U.S. each year. (It's in the low hundreds, not thousands.)

If you're reading this in a country where manufacturing is still competitive globally, by all means attempt to locate some of those factories in your community.

Just try not to let them pollute the air or the water, exploit the workforce unfairly, or dominate local politics and decision making.

Many economic development programs in the U.S., whether administered by a Chamber of Commerce, or by government or a quasi-governmental corporation, have specialized in attracting industry. The problem with this approach today is that the U.S. has lost its competitive edge in the world in manufacturing.

So if your American community wants to get on this ship, be aware that it is a sinking ship, and you should board only if you're sure that you have a true niche in advanced manufacturing.

It may be possible to make an American industry more competitive in the world again, but the measures required are beyond the power of a local community and might involve appropriate policy changes in the areas of trade, tax structure, regulatory reform, technology transfer, and rapid re-training for individuals who are replaced by automation or outsourcing to another nation.

Growing Science-Based Industry in Your City

One type of industry still possible in the U.S. is so-called "high tech" industry, where the use of very sophisticated technology not available in the rest of the world gives a U.S. company a competitive advantage. We don't mean to discount the huge technology capabilities in Asia and Europe, but for the moment we focus on the U.S.

Examples might be advanced medical equipment, computer technology, and "smart" weaponry. So in the 1980s and 1990s seemingly every community sought high tech industry, without regard to whether the community had any competitive advantage within the U.S. or the world to offer the high tech entrepreneur.

Now some of the world's most highly valued companies function online and thus can afford to be located in Europe or the U.S.  Those now-familiar leading companies usually require a highly educated workforce though, and are best supported directly through venues and events that promote clustering of complementary businesses in your area.

If your community has a science base, usually meaning a leading research-oriented university or institution, you may have some success in a tech industry.

The best way, and often the only way, to get on this bandwagon is to grow your own businesses. You will need to foster and support the development of entrepreneurship among scientists or applied technology specialists living in your community. Often these folk love science, but are ignorant about business.

If the science is illustrious enough, it makes sense to try to use community resources, whether public or private, to support the scientist while he or she tries to move into the business world. Entrepreneurship support may come in the form of inexpensive offices, laboratories, or manufacturing facilities, or it may be that business information, loans, and introductions to business services are more important.

See the sections on building a business incubator, establishing an innovation district, and entrepreneurship for more ideas.

While you're supporting technology transfer, it's important to increase networking among people who stand to gain from being acquainted with one another. You need to help the community build an appreciation for this activity and to be proud of it, even if culturally the people involved are very different from the local population.

Help the entrepreneurs deal with problems that the local climate, transportation limitations, banking conditions, taxation picture, and local government conflicts or inefficiencies introduce for businesspersons.

One idea is a monthly roundtable discussion among your manufacturers, representatives of labor (whether union or non-union, labor still should be there), financial institutions, city government, important local workforce players such as community colleges, and well-respected long-time residents. Make it a breakfast or lunch.

Weekly or monthly networking events can be very helpful in growing an ecosystem that supports new business ventures of any type, but especially those specializing in technology or science. In addition to networking, these events can include a variety of presentations or short appointments with experts who might be helpful in establishing a business.

The Importance of Artisans in Many Local Economies

Another type of "industry" where the U.S. may still be competitive is in artisanship. Although competition is fierce also in producing high quality fine crafts, it is still possible for U.S. artisans to sell their works on or near the site of their production at a profit. And when they sell beyond your community, art is an economic base activity.

Like technology, a community of artisans requires a particular mindset around town. Artisans need inexpensive space, places to sell their wares, and a climate supportive of creativity and nonconformity. They need the economic development program to organize festivals to showcase their wares, and they often need assistance in understanding business, just as the high tech entrepreneur does.

Of course, many cultures around the world have old and unique traditions of craftmanship, which indeed can produce economic vitality for them. For a deeper discussion, see our community cultural development page. In those instances, the expertise and governmental support that is needed will be the communication infrastructure necessary to market those products beyond the village where they are produced.

Other than these exceptions we've noted, manufacturing is generally a poor place to concentrate your efforts if you're in the U.S. Yes, there are a few plant relocations within the country every year (about 200 in the entire nation in a recent pre-Great Recession year), but the return on your investment of time and money isn't worth it. It won't be popular to end your decades-long effort to attract industry. Your ambassador groups may protest loudly. However, it's a rational and data-driven decision that you need to make.

Tourism as Community Economic Development

The other obvious economic base or export activity is tourism. Some communities have natural advantages over other communities in this matter.

Here again, realism needs to be the order of the day. If you have no direct interstate highway access, no charming historic areas, no tourist "attractions" of considerable reputation and quality, a lousy climate, no mountains or lakes, and no terrific scenery, you are fighting an uphill battle if you invest time, energy, and money in attracting tourists. Our advice would be not to spend your dollars in this area.

If, on the other hand, you have good access and either noteworthy scenery or an already thriving attraction or group of attractions, you should consider seriously how tourism can be expanded. Of course massive attractions outweigh bad transportation.

Critical mass is a very important concept in economic development and especially in tourism. As applied to community development, the concept is that just because you have one of something, that may not be enough. When you reach "enough," you have critical mass.

Tourism as an economic base has tremendous potential world-wide. The rise of new middle classes across the world brings a new market for tourism. New challenges arise when tourism threatens to overwhelm current residents or their way of life, so creating an excellent plan for how you will manage visitors is especially necessary when your scenic resources or charm are outstanding.

A Service Economic Base

The third category of exports left for Americans is services. Our own economy has become a service economy. Services include both personal services, such as cutting hair, and business and professional services, such as accounting. Tourism is a particular subdivision of services also.

Technology has permitted certain services to be performed outside the U.S. as well. Computer software support, many sales operations, and even some professional services such as aspects of accounting are "out-sourced" to companies or divisions of companies outside the U.S. So as a caution, do not expect that just because you choose to be a service economy, you will be immune to the forces that disrupted the once-booming American manufacturing economy.

So what services performed in your community are exports? Cutting hair is an example of a service that is not at all likely to be an export activity. Even tourists mostly have their hair cut before or after their visit to your town.

Look again at national trends. America is a big exporter of higher education and entertainment. Entertainment, at least of the type that America exports, is mostly concentrated in a few cities, although video and audio technology advances now have enabled many more communities to benefit. But higher education is delivered in many cities large and small across the nation. Supporting a healthy institution of higher learning in your community can be one of your very best economic development strategies; see our page on that topic.

Attracting Businesses Desired by the Community

Although true economic development involves export of goods, most communities have non-economic development goals when they talk about attracting particular businesses and brands. If this is where your neighborhood, town, or city finds itself, you may want to read about business attraction in general or retail attraction.

What Not to Export

We want to try to convince you to take the moral high road, and a leap of faith, to subtly discourage certain economic base activities that are socially destructive or that feed on evil.

The most noteworthy example is the gambling casino. We know that the industry prefers the words gaming and entertainment. However, the truth of the matter is that people lose money there, and that desperation is the motivation sometimes instead of entertainment.

Yes, the casino provides jobs, including many jobs for unskilled labor, but it also is a highly centralized industry that sends the profits outside of your community while creating addicts and debtors in your community. Does that sound like a good deal to you?

Another soul-dulling way to provide jobs in your community is to accept a major for-proft prison. It brings ugliness and bad people into your community, and you need to think two or three times before deciding you want to do that. Yes, you can have a very minor sub-specialty in lodging and food for people who visit the prisoners, but many prisoners are abandoned by the outside world.

So if you want to cultivate a culture of fear and potential violence in your community, go for a prison. If you want to see ugliness (often the physical ugliness of the actual prison facility), build a prison. Prisons do bring jobs, and are necessary evils, but they should be the economic development activity of last resort.

Roles for a Municipal Economic Development Program and a Private Business Organization

A municipal or county economic development program, in our opinion, should concentrate in two areas:

• Providing an overall economic development strategy that reflects the broad public interest, in contrast to the private interests of a few business leaders
• Ensuring that the government supports a sane and reality-based economic base strategy through appropriate zoning, targeted investments in functional infrastructure and good-looking streetscape, and limited but decisive use of tax increment financing and other financial incentives.

A city economic development program should work very closely with the private sector and its chamber of commerce or other business-oriented organizations.

Here is our word of caution for the private sector: Don't degenerate into boosterism. Boosterism is promoting every business as wonderful, and considering any and every proposal for new employment, new construction, or even other economic activity of any sort as a gain. Typically if we become too much of a cheerleader, we lose our ability to address real major or minor problems. Also the booster mentality common to chambers of commerce and business associations often fails to distinguish economic base activities from what the business community often characterizes as growth.

Maintaining the focus on economic base activities without giving in to demands for undesirable businesses and squandering resources on individuals who simply are bad business operators is tricky but not impossible.

Within each community, you need to define clearly the public and private sector roles so that each is emphasizing their strengths and staying out of the other's way while building economic prosperity. It's hard work and egos get in the way, but it's so worthwhile. Try to avoid too many organizations; even two or three public sector organizations, such as one in the central city and one or more in suburban counties, can be too many. The same problem is possible in the private sector, so work to consolidate historically separate chambers of commerce can help a community retain its focus on its economic base instead of organizational maintenance.

Read Other Pages Relevant to the Economic Base

Definition of Economic Development

Location Quotient

Definition of Entrepreneurship

Incubators

1. Community Development
 ›
2. Economic Development
 ›
3. Economic Base

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