Deming on Regional Development

Applying statistical thinking to thinking about economic development: today, I offer a simple list that takes a page from Deming’s approach to business. This list provides a follow-on to the previous post on regional metrics. Based on a few emails I received, I realize I should have been to be clearer: Something needs to be measured, but my main point is that its worth thinking carefully about how statistics can lie to us if we don’t first recognize the truths behind numbers. So, in today’s blog, I offer three examples of metrics pitfalls.

1. Absolute success does not necessarily translate to competitive advantage.
Regional metrics commonly examine growth trends in a variety of industries and technology areas, then focus investment recommendations on the largest (by absolute numbers) or fastest growing economies. Even if a region or company in a region measures well on an activity, industry, or business model, that does not make it the platform for growth. Here’s a straw man: we have all seen consulting reports noting (paraphrased) “Region X has a rapid growth in green chemistry patents and employees, among the top 10% in MSA’s. Thus, green chemistry is a central investment opportunity.”

Another straw man example we’re all familiar with: regions are chasing biotechnology in all its forms. In conversations with policy makers, elected officials and foundations in cities across the U.S., I consistently hear something along the lines of “We’re creating a biotech corridor built on our (large medical school/local drug companies/excellent reputation for health care/etc.,.).” A major medical school with a specialty area is insufficient if (a) other regions have similar levels of expertise (thus competitors for your resources) and (b) the particular technology area does not create agglomeration economies.

These observations tells us very little. Rather, to be a competitive advantage and a platform for growth, a region must exceed other organizations in other regions, AND the regional activity or asset cannot be competed away in the medium-term (3-10years). Metrics on which industries are driving a region today have to categorically respect which industries and opportunities are easily competed away and should qualitatively capture likelihood of outsourced jobs, codified (rather than tacit) knowledge base, and specialized complementary assets all create situations where industries can be competed away.

2. A misunderstanding of “the direction of causality”.
We use this term in economics frequently to describe research proposing a conclusion about an outcome being caused by a specific activity, when in fact it is the activity that is being caused by the outcome. Richard Florida’s “Creative Class” argument has been criticized on these grounds: Do creative innovators move to regions and thus cause economic prosperity, or do creative types move to regions where there is prosperity because prosperity means more resources for artistic, scientific, and other creative endeavors to be creative? Just correlation alone does not prove a good econ dev strategy. Good metrics have to respect that one can plausibly assume away or control for “reverse causality”.

3. You can be fooled by the success of a start-up
A success start-up or two does not guarantee regional growth. Regional growth requires new firms generate positive externalities (wealth, jobs created that are not internalized by the company) for the region. Has Ann Arbor, Michigan (Headquarters of Domino’s Pizza) turned into the economic center of pizza making? Why not? Because while efficient delivery was valuable business innovation, pizza franchising does not generate the externalities necessary for agglomeration. In fact, there has been recent academic debate over whether such common drivers of externalities (knowledge spillovers) truly exist, and what determines them.

Pizza is a trite example to prove a point, but the same type of thinking holds true for semiconductors, agile robotics, biotechnology, tissue engineering, and so on. Simply establishing metrics based on counts, trends, etc., which I most commonly see regions engaging in these days--without implicating any one in particular, fails to recognize the competitive characteristics needed. We would rather have a moderately growing industry with promise of agglomeration than a rapidly growing, but unprotectable (easily moved) industry.

With these ideas laid out, future blogs will address the apparent elements of agglomeration economies (if such a thing truly exists).