Econ Dev Tour 2007!

I apologize for the skipped week(s), but June was hectic in kicking off the economic development conferences that accompany the summertime. I spent the last few weeks in Europe, namely the UK and Portugal, in various cities meeting with folks in economic development and university technology transfer. Let me recap some of the highlights and my reactions from the start of my trip, a few days in central-western England, the UK’s Black County, for a conference on entrepreneurship and economic development. I had the opportunity to speak with a number of great folks from the area, who were quite gracious hosts, I should add. I strongly recommend a visit, especially the Great Western Pub.

The conference embodied many of the themes I have encountered across the U.S., particularly at conferences on entrepreneurship and economic development. Here’s the most prominent 4 themes I found:

1. Real Estate = Economic Development. Much of the conference was targeted at real estate development, which was largely used synonymously with entrepreneurship and economic development. This is not unique to this conference, and many cities have mixed supporting start-ups with building renovation and land reuse. The interesting aspect of this mix is that rarely is the question asked: are new malls, train stations turned loft offices, and the like what our start-ups most principally need?

2. Where’s the Entrepreneurs? I was one of two people whom I could find at the conference who had previously started a technology company. It was interesting to sit through a large conference about encouraging entrepreneurship when there are virtually no entrepreneurs in attendance. This is how one gets back to point 1 above.

3. What makes you different? The question I like to ask first to everyone I meet at such a venue is “What’s your strengths as a city?” The answer is generally “livability, an educated work force, and technology.” But ever city says that. A regional development strategy has to account for uniquely valuable assets in the region. Its that simple.

4. Profit driven economic development. Growing up in the 70’s and 80’s, I embodied Alex P. Keaton’s ideals. As I went off to college, I knew my eventual studies had to be a mix of economics and business. I joined the College Republicans. As you might imagine, I’m as much a free-market capitalist as the next guy.

All that said… it is tricky to mix profit motives with economic development. Specifically, throughout Europe (and the U.S.) I ran into a number of incubators and support organizations who charge high rent or take sizeable portions of their companies. Not all such organizations did, but many. Advocates of such an approach rightly argue that there needs to be some cost or any person will start a company to take advantage of the free space. I generally agree with the idea, but not the implementation. First, isn’t encouraging anyone to start a company the idea? Second, there’s other ways to screen that don’t take ownership and money out of the company.

Lastly, and most importantly, the debate is in the outcomes. Throughout my travels, I have observed that the more you charge in rent (or the costlier you make it), the more incubator spaces you have that house local R&D branches of big companies and small, stable (often service-oriented) companies. These are the two types of companies that can actually pay rent but don’t need to have their own large space.

The Unintended Consequences of Metrics

Among economic development circles, we have heard the phrase “unintended consequences” a lot over that past few years. My favorite recent topic that is subject to unintended consequences is metrics. Matt Hamilton, Anne Swift and I, all of Carnegie Mellon, are researching the impact of technology-based economic development programs on the regional economy. So far, this project reveled to us the seemingly endless number of cities and regions asking the inevitable question “what should we track to know if we’re on track?”

The answer is complicated beyond imagination because for benchmarking, trend analysis, and the like, no two regions face the same supply, demand, and political economy conditions. Even with a sophisticated multivariate regression, we currently lack the economic understanding (theory and evidence) to make meaningful comparisons.

But the grander issue, the “big picture” if you will, is: what happens when we start tracking data… and publishing it? On a regular basis? That’s where unintended consequences come in.

We all recall the famed Frederick Taylor studies, the grandfather of efficiency and operations management. Taylor, it is recounted, would time workers with a stopwatch as they performed various tasks, only to later realize that workers changed their practices when they knew they were being timed.

This happens everyday in economic development. For example, everyone’s favorite yardstick, patent counts, is an oft used metric for regional innovation output… or capacity, depending on the consulting report. And, I’ve seen several consulting reports by the same company that – at least pick one for consistency, but, it can’t be equally both. Anyway, if you start measuring patents, then the investment strategy of a region quickly turns to favor patent-intensive industries, like pharma, biotech, and chem. Twenty years of economic research by Wes Cohen, Dick Nelson, John Walsh, Sid Winter and others has shown that these industries focus on patents far more than semiconductors, software, and other areas. As a result, measuring patents only measures the mix of biotech and chem industries in a region and rarely represents actual performance, thereby veiling deeper economic trends.

Patent counts are perhaps the most obvious, but represent just one of many metrics that fall into this trap. Recognizing this problem, econ dev gurus propose a “multi-tiered” or “multi-layered” measurement approach drawing from a basket of measures. Now we take one bad measure, and multiply it by ten. We’re only increasing our “measurement error” in statistical terms.

The bottom line: focusing on econ dev metrics without nuanced understanding of what popular measures are really capturing dangerously misguides policy and business leaders. Dangerous is a heavy-handed word to use, but I mean it. And, this concern is compounded when one considers the temptation to report metrics on a short-term (annual or quarterly) basis when we all know economic development is a long-term investment.

Destructive Entrepreneurship

Pennsylvania, Ohio, and other former industrial states have spent a lot of money to promote entrepreneurship over the past decade. But, can there be too much of a good thing? Sure. I've had my fair share of Chicago-style pizza and Old Style, and there's definitely a limit to how much one can tolerate in one sitting. The same is true of entrepreneurship, or should I say promoting entrepreneurship. That's where the term Destructive Entrepreneurship comes in.

Noted economist William Baumol penned a brilliantly simple, important, and regrettably obscure article on destructive entrepreneurship. Baumol points out that e-ship comes in various flavors: productive, unproductive, and destructive. The gist of his article is that entrepreneurship can be expressed in a variety of forms, some which are quite bad for a society. Society and the famed invisible hand can provide resources and incentives to promote entrepreneurial endeavors, but if the wrong conditions are in effect, "entrepreneurs" will utilize these resources for personal gain at the cost of economic growth for society.

What are the wrong conditions? Without close monitoring of public resources, stable and predictable courts, and infrastructure support for business growth, entrepreneurship takes the form of graft, theft, and the style of business dealings most common in The Sopranos. These are extreme cases, but Baumol impressively has examples. (If I whet your appetite, you can find his article in the Journal of Political Economy, 1990 v98: pp 893-921.)

There is a softer but more prevalent threat when providing public and philanthropic funds to support entrepreneurship. Nepotism, favortism, vanity investments, and the like all creep into the scene. Public investments to support entrepreneurship are susceptible to each of these unproductive (at best) and destructive (at worst) activities. Unchecked by monitoring or market forces, and you have leaders of entrepreneurial efforts in jail or raking in salaries in the many hundreds of thousands... yes, that's U.S. dollars.

Entrepreneurial support is critical, but it is equally important to make sure that someone is guarding the guardians of the regional economy.