There Will Be Graphs: The Final Installment

By Evan Robertson, Project Associate.

I’ve spent the last hour scouring the internet for a lighthearted topic that would be appropriate for the holiday season. You know, a feel good story, or perhaps an analysis piece that identifies the path Santa should take to maximize his holiday cheer production. Unfortunately, the internet has failed me. However, as I thought about it, with the year ending and the Mayan calendar starting afresh, it might be a fitting time to conclude my blog series. And, as I thought about concluding my series, I couldn’t help but think: you know, most of the gifts that were given this holiday season likely came from somewhere else – they were imported (or at least some of their components were). An idea was born. 

The Brookings’ Metropolitan Policy Program has long been beating its export-expansion war drum, and rightly so. One of my favorite statistics to this day comes from Brookings: less than one percent of American companies export a product or service to another country and, of those, less than half export to multiple countries. As an economic development professional this is nearly incomprehensible as it has been engrained within me that growing your export base is a surefire way of generating new wealth. Local companies that engage in export activities are simply importing dollars from elsewhere; they are less dependent on the local economic climate. China, India, and Brazil all understand the importance of exporting to their national economies, and not too long ago, so did America. Our country’s wealth was earned by a hard-working, immigrant population employed in factories across the country. And by country I mean cities, big and small. 

The following graphs are derived from Brookings’ Export Nation 2012 Database which extensively details the 100 largest metros’ export activity. Within the database are linkages between a metro area and the country in which they have an export relationship. The initial output of these linkages is graphically represented below. The red circles represent the 100 largest metro areas while the blue circles represent the 73 export-receiving countries Brookings’ tracks. The black lines represent an export relationship between a metro area and a foreign country. Through filtering these relationships we can deduce some useful takeaways.

Only a handful of metro areas have a very strong trade relationship (defined as $5 billion in exports) with another country. These export-receiving countries are those you might expect: Canada, Mexico, Japan, and the United Kingdom. By far the strongest trade relationship is Los Angeles’ $11.4 billion export relationship with Canada, followed by New York-Canada ($9.3 billion), Chicago-Canada ($8.3 billion), and Houston-Canada ($7.5 billion). What are these metros’ exporting in such volume? Machinery, oil and gas, chemicals, transportation equipment, and travel and tourism compose a large portion (greater than one billion dollars) of these metros’ exports. Can anyone say North American Free Trade Agreement? 

Many metros have at least one billion of exports or greater (considered as strong) with at least one trading partner. Moreover, these relationships are more diverse and more indicative of a global economy. However, as the following graph shows, these strong relationships are still dominated by Canada, Mexico, Japan, the United Kingdom, and China, with Germany and Brazil receiving an honorable mention. In the graph, a country’s label size is based on the number of metros’ trading with it. The bigger the label, the more metro area’s trading with it. So, for those of you trying to get more of your local firms to export to another country, it may be advantageous to focus on those countries which already have existing relationships with other large metro areas. Of course, it might also suggest that firms may have difficulty breaking into these markets since they could be dominated by these established trade relationships hence the value of emerging markets. 

What we can conclude, however, is that our “global” economy isn’t all that global. Our metros’ trade relationships are strong in only a handful of countries in North America, Asia, and, to a lesser extent, Europe. 

Our final graph shows the strongest trade relationships (those valued at one billion dollars or more) for a single sector within a metro area. The lines are weighted based on a metro area’s trade relationship (in dollars) to another country. Those with strong relationships appear darker with a yellow hue. As you can see, the usual suspects are present: Canada, Mexico, China, and Japan. Trade with Canada is dominated by transportation equipment. Seattle exports $4.5 billion in transportation equipment to the country while Detroit ($3.8 billion) and Dallas ($2.1 billion) also export a sizable portion. Probably the only surprising thing in the whole graph (and I imagine you already said this to yourself): Ireland. 

Why do New York and Los Angeles have such a substantial relationship with Ireland? Well, here is a hint, Los Angeles exports $1.7 billion of royalties to the country, New York $1.2 billion. In the world of corporate intellectual property there is something known as the Double Irish (usually accompanied by the Dutch sandwich). The Double Irish is a tax avoidance strategy (nearly evasion, but completely legal) in which technology companies transfer intellectual property (IP) to a shell company in Ireland in order to avoid paying U.S. corporate taxes on the royalties the IP generates. Last year, Google alone avoided $2 billion in corporate taxes by sheltering $9.8 billion in revenues through the transfer of intellectual property to shell companies located in Ireland and Bermuda. The large export relationships shown between Los Angles and New York are likely indicative of intellectual property transfers from companies in the U.S. to their shell companies located in Ireland rather than any real transfer of goods or services.* And I only point this out to say that it is important to understand the nuance of your export economy. Sometimes export activity might just be inter-firm transfers which generate no real wealth creation for the local economy. Understanding the minutia will help you, as an economic development professional, decide which export activities are generating real wealth for the community (thus, which you should pursue), and those that are just an artifact of a sector’s business strategy (something you don’t need to get involved in). 

Our world is an interconnected weave of stuff. This stuff interacts and interrelates in expected and unexpected ways. Only by grasping your connection within the weave (whether it is yourself, your community, or your organization) can you begin to develop an insightful view of the world and your position within it. This insight will be the result of appreciating how this intricate weave of stuff relates to one another, how it interacts, and, ultimately, how change influences the system as a whole. Social network analysis provides an expedient tool to begin to draw these connections. Its usefulness to economic development professionals is still unfolding, but as social network analysis is applied to ordinary economic data, we can begin to develop a well-founded comprehension of our local economy’s position in the chaos that is our global economy. 

And with that, while there will be more social network blogs in the future, they will come a little less frequently. I sincerely wish everyone a Happy Holidays and a Happy New Year!

* - The San Jose metro area had a smaller but sizable relationship with Ireland totaling $325.5 million in royalty payments. It is also important to note that Los Angeles is home to Broadcom, a manufacturer of wired and wireless communications products. The firm alone secured 1,556 patents between 2006 and 2010 in the Los Angeles metro area.

The Push Back Continues

By Jim Vaughan, Senior Fellow.

Perhaps it is because of the national debate about taxes—who pays how much and what is fair. 

Or maybe it's the scale of the study and the amounts of money involved. 

Whatever the reason, the New York Times series on corporate incentives (see Dec. 6 post by Alex Pearlstein) has editors and columnists across the nation raising more questions about the cost and benefits to states and cities of the subsidies being paid to businesses. 

The push back we’re seeing should cause leaders of chambers of commerce and economic development organizations to be particularly concerned since most of us have relied on incentives as one tool in our business recruitment and retention toolbox. 

The Waco Tribune-Herald has been a supporter of local incentives for new businesses and the local chamber’s work in economic development. I would not have expected its reaction to the Times series: “Corporate welfare, tax breaks and subsidies out of control in Texas.” 

The Waco paper’s editorial continued, “Our state has far too many tax loopholes and bonanza savings offered to lure businesses here, often at the expense of taxpayers and communities.” That’s strong. 

Writing in the Atlantic Cities, Richard Florida argues against incentives, calling the practice a “long-standing waste of state and local resources.” 

“Incentives do not actually cause companies to choose certain locations over others,” Florida writes. “Rather, companies typically select locations based on factors such as workforce, proximity to markets, and access to qualified suppliers, and then pit jurisdictions against one another to extract tax benefits and other incentives.” 

I have known and respected nationally syndicated columnist Neal Pierce for many years. He also challenges the value of the incentives. 

“No new net wealth is created,” Pierce writes in his most recent column. “One city or state’s gain is another’s loss.” 

I am inclined to make the case that most new projects are expansions or new operations and that we’re not playing a zero-sum game. But that’s certainly not always the case. There are many examples of communities competing to attract companies who will close plants and eliminate jobs in their former location with no net gain in employment or taxes paid. 

A classic example of this zero-sum benefit is seen in what has been called the “border war” in the Greater Kansas City region where Missouri and Kansas often compete for each other’s companies and jobs. The governors of the two states ignored a 2011 letter signed by 17 top metro area executives calling for a ceasefire. 

An insurance marketing company received $5 million from the state of Kansas to close the company’s existing location in Missouri and move to a new site one mile away in Kansas. 

The Kansas City Star says the Kansas-Missouri border war bleeds taxpayers for no good purpose. 

“Millions upon millions of tax dollars are being wasted this way, and for what? The back-and-fourth activity has created almost no new net job growth for the area.” 

During my tenure at the Greater Waco Chamber, we helped secure cash incentives and tax abatement for new and expanding companies in amounts from $24,000 to $2.8 million based on jobs created and capital investment. 

Compared to the awards described in the Times series, our program was quite modest and our contracts included “claw-backs” to require companies receiving grants to pay them back if the number of jobs created and retained were less than agreed upon. 

As the push back to incentives continues, a lesson learned is that the holistic approach to economic and community development advocated by Market Street has the best chance of winning broad-based support from public and private sector leaders and from the news media. 

Economic and community development is about creating great places with talented people where the businesses of the future will grow and prosper. A case can be made to offer incentives to businesses who invest in that new future. But the agreements need to be transparent and there is a need to make certain the agreement is a good deal for the local community, the state, and the company.

Heroes

By J. Mac Holladay, founder and CEO.  

What happened this past Friday is beyond belief for most of us. As President Obama said, “our hearts are broken.” There is nothing to say to the families who lost children or other loved ones. Newtown has been badly damaged. As the President said, “you are not alone.” We all grieve with them.

As the vile story has unfolded, heroes have emerged. They include several teachers, the principal, and the psychologist of Sandy Hook Elementary School. The teachers saved many children and intentionally put themselves in harm’s way. Their acts were selfless and brave. They died for the children they were teaching and caring for.

The other set of heroes is the first responders, local policemen, state troopers and EMTs who rushed into the school only to see what no one should have to bare. They tried to save the four victims who were still alive. Only two have survived. They had to report who lived and who had died. They had to talk to the families in the fire station next door to the school.

I want everyone to remember that all these heroes are public employees. They work for a public school, state or local government. Oftentimes, we forget how much we depend upon these people every day. So, perhaps we need to think a bit harder about budget cuts, downsizing, layoffs, and payroll freezes for these servants who give so much. They are there every day doing the best they can. It is only when a tragedy like this occurs that we learn who the true heroes really are.

Innovation Economics: A Webinar Review

By Evan D. Robertson, Project Associate.

Innovation takes time; it is not a short-term endeavor. With all the hype generated on innovating our way out of the Great Recession’s aftermath, we seem to be under the impression that innovation is a quick fix for our troubled economy – currently, this belief dominates the public debate over job creation. Four years, and bam, jobs galore, America’s competitive position is restored. However, as Robert Atkinson, founder and president of the Information Technology and Innovation Foundation, pointed out during his webinar Innovation Economics: The Race for Global Advantage, America suffers from “innovation atrophy.” While the world was busy pursuing and reforming policies to promote innovation, America rested on its laurels. In 2009, the United States spent just 2.9 percent of its GDP on R&D, a figure that lags Israel (4.46), Sweden (3.61) and Japan (3.36) according to the Organization for Economic Cooperation and Development (OECD). Our aggressive innovation policies, once first-class during the 1990s, are being overtaken as Atkinson pointed out.

Simply put, we got complacent. While we were riding the thrill of the real estate bubble, foreign governments across the globe were reforming and adopting policies to create real wealth, and real competitiveness in their economies. Atikins cited as key reforms policies such as the patent box, which reduces the taxes a corporation pays on its intellectual property by half, and a program that gives a $25,000 “innovation voucher” to companies so that they can by purchase innovation services from research institutions. Meanwhile, other countries pursued extremely aggressive and often times illegal practices. China began requiring that foreign companies enter into joint ventures with local Chinese-owned companies along with stipulating technology transfers of intellectual property entering into Chinese markets. Not illegal, just the cost of doing business in China. This, in conjunction with rampant intellectual property theft and blatant corporate espionage, has left America at a severe disadvantage relative to the rest of the world.

So, what do we do to regain our lost competitive edge? Robert Atkinson operationalizes the solution into the 8 I’s:

• Inspiration
• Intention
• Insight
• Incentives
• Investment
• Institutions
• Information Technology
• International Framework

Although he didn’t go into detail over every one, he did focus on two during today’s webinar. In terms of incentives, he recommended a strong expansion of our current research and development tax credit to include workforce development, worker training, and industrial machinery, as well as lowering the corporate tax rate to put us on par with, or perhaps surpass, most OEDC countries. At the state level, he recommended economic development incentive reform to ensure that states use incentives only to invest in things that actually create value for a company as well as the community. In this respect, he suggested that incentives be limited to building innovation capacity and productivity within a company seeking public investment.

Along with the incentives overhaul, Atkinson says that we need also rethink our institutions. One example he pointed to was the New County School in Minnesota, a high school focused on project-based learning. Students at the school are engaged in completing projects. Instead of lecturing “at” the students, adults take on a mentorship and facilitation role. This model has also been extremely successful at the University of Cincinnati’s Live Well Collaborative. Employers have begun to catch on since they realized they didn’t want to employ people with a bunch of knowledge crammed into their head in the first place. What they really wanted were employees who can work in dynamic teams, deal with and anticipate the unexpected, think creatively, and problem solve in a group environment. Our lecture-style classrooms no longer fill this need.

But what I thought was the most important takeaway was mentioned briefly during the Q&A session: the American innovation system doesn’t reward long-term, strategic investment. Our financial system is predicated on short-term returns and quarterly reports. As Atkinson mentioned during the webinar the average time an investor holds a stock has decreased from six months to around a few seconds thanks to high-frequency trading. One missed earnings report, even if a company invested in long-term innovation capacity, can tank a stock, erasing billions in a company’s market value, pressuring the CEO to protect shareholder value. Investors flee because the performance didn’t live up to their “expectations.” Since the CEO remains beholden to shareholders, then you can begin to see why CEOs must remain ever-conscious of their stock’s performance, and those pesky quarterly earnings reports. Thus, it is understandable why a CEO would choose an investment that has a payoff in two years over one that may have a large, but uncertain payoff in 10 years. Incremental innovation trumps long-term systemic innovation. Our incentives for systemic innovation are just not quite there. Whereas other countries such as Germany weigh their investment decisions on a longer time frame. Capital is their tool, not their deciding factor.

I don’t want this to sound like the silver bullet solution; this is economic development after all. Our innovation system requires a holistic rethink, and one in which we need to get everything right, from national to local policy. As Atkinson suggested throughout the webinar, we seem to have at least got the local level policy (state, metro, and city) under control. Now it is time to focus on federal innovation policy, keeping in mind that they must nurture the pioneering policies in place at the local level.  

Best Practices in Economic Development

By Ranada Robinson, Senior Research Associate. 

This morning, I participated in a webinar hosted by Atlas Advertising entitled 7 Keys to High Performance Economic Development in 2013. Featured in this webinar were three panelists representing top performers in the Economic Development Organization world, two of which are our clients: Janet Miller, Chief Economic Development Officer of the Nashville Area Chamber of Commerceand Sara Dunnigan, Senior VP of Existing Business Services and Talent Development of the Greater Richmond Partnership, who were joined by Clint Kolby, Project Manager for the Brenham Economic Development Foundation.

To set the tone of the webinar, the participants were asked to take a poll about whether they feel their economic development organization makes a difference. While 61 percent said they do think their organization does make a difference, what captivated me was the 35 percent that said that their organization does have an impact, but they can’t measure it. As a researcher, this was striking because here at Market Street, we are constantly advising clients to benchmark themselves and track their progress—that effective implementation requires metrics. I was pleased to see that all three panelists encouraged the webinar participants to measure, measure, measure.

It’s always important for economic developers to remember how much every action they take impacts final results, more evidence of how important it is to quantify economic development efforts. Before the panelists spoke, the latest figures from Atlas Consulting’s High Performance Economic Development survey were presented: 

• Fifty percent of economic development organizations felt they had an impact
• $244 million was invested per community in the last 12 months
• 1,768 jobs were created per organization in the last 12 months
• A single conversation with a prospect resulted in an average of 25 jobs

Each panelist then shared their challenges, goals, tactics, results, and lessons as they work to bring jobs and capital investment to their communities. Here are some highlights from each of these communities.

Nashville, TN

As we know because of our extensive work in Nashville, the Nashville Area Chamber of Commerce does a phenomenal job tracking various metrics such as job growth, population growth, increase in per capita income, increase in gross domestic product, percent of site visits resulting from RFPs, etc. The Chamber has been recognized in several publications, including being ranked #1 for job growth by Atlas Advertising, #1 “Future Job Creating Machines” by Kiplinger, and is one of the Top Ten Economic Development Groups in America by Site Selection Magazine. Janet Miller had great advice for the participants:

• Get your tools in order before marketing. The best use of marketing dollars for limited budgets is to invest in outside expertise on website creation.
• Make sure your marketing is consistent over a period of years for target audiences.
• Play to your strengths, rather than your weaknesses—Nashville has historical success in health care and healthcare IT, so that’s what they’ve focused energy on—not biotech, which has not had a solid foundation in the community.
• However, don’t ignore your weaknesses—acknowledging your issues is the first step to tackling them.

If politics is hurting a community’s image, and possibly business structures, the ED organization must get involved in advocacy and policy work at the state and local levels.

Richmond, VA

Richmond’s challenges have included fostering cooperation between four strong localities with their own strong economic development programs; integrating public and private sector investors; keeping economic development as a top priority despite having a stable, diverse economy which is a blessing but also a curse because they have had difficulty forming a solid “identity;” and a slow growth economy surrounded by very competitive neighbors. One of the things we at Market Street love to boast about the Greater Richmond Partnership is their focus on talent. They have a done an amazing job attracting, retaining, and developing talent through programs such as their talent portal RichmondJobNet.com and their virtual relocation tool LoveWhatYouFind.com. 

Sara Dunnigan urged participants to have a strategic plan in place, which sends a clear message to investors and the community and also helps staff get on the same page. She recommended internal and external scorecards—the Greater Richmond Partnership measures many outcomes and actions, but not all are included in their annual report or their five-year scorecard. She also emphasized the importance of having job creation and investment goals, not just overall, but also by program of work.

Brenham, TX

Brenham, Texas has a population of 16,000 people and considers itself a rural community—a challenge because the community is in the backyards of both Austin and Houston. It is seen as a tourism destination, they have a small pool of skilled labor, and they do not have an adequate supply of commercial buildings. However, that has not stopped this community from being recognized as the top micropolitan area in Texas by Site Selection Magazine for two years in a row. With its limited budget, the Brenham Economic Development Foundation launched a direct email marketing campaign, which features employment statistics and recent news—an inexpensive way to keep stakeholders and potential investors in the know. They also host site visits, “windshield tours”, and familiarization tours for site selectors and commercial real estate brokers along with surveying local employers as a part of their Business Retention and Expansion program, which Clint Kolby calls “the meat and potatoes of rural economic development.” 

Another impactful program that the Foundation has implemented is an industry tour and training program, which targets and tracks students who are not planning to attend a four-year college but will likely go directly into the workforce. Believing that workforce development is “a major ingredient to success,” the Foundation takes them on tours of facilities of local employers and makes connections to support a skilled talent pipeline. Kolby suggested that communities should embrace regionalism and to do what you can to make yourself known. 

This webinar underscored the importance of how Market Street approaches most projects. Major steps to success include benchmarking your community – getting a baseline of where you are and how you compare to similar or aspirational communities; setting goals and gaining buy-in from leadership and stakeholders; generating the awareness and driving the conversations that result in new jobs and investment; and implementing the “basics”– making sure you have the tools you need, including an effective and easy to manage website, a customer relationship management system, email marketing system, proposal templates, etc. Economic development requires careful planning and effective implementation!

Corporate Incentives in the Spotlight

By Alex Pearlstein, Director of Projects.

In recent days, the practice of awarding financial incentives to attract corporate relocation prospects has gone from an arcane subject in the economic development world to a full-fledged national topic. The New York Times ran an exhaustively researched, largely negative series on the practice in which they implied that providing tax abatements, tax deductions, tax forgiveness, upfront cash, and the universe of other incentives tools was tantamount to corporate welfare at a time when investments in public schools and other services were being cut. As the largest provider of incentives, the state of Texas was singled out for special vitriol, but numerous other states and regions were not spared the Times’ wrath.

The series got further airplay when the lead author was a guest on NPR’s “Fresh Air” program with Terry Gross.

The series certainly had its facts straight from the standpoint of the incentives awards, the recipients, the role of site consultants and brokers, and the dynamics of deals, but I thought the context of incentives in economic development was largely missing. The job of economic developers in charge of corporate recruitment is to attract good jobs. One of the ways good jobs are attracted in today’s hyper-competitive economy is through the provision of incentives. End of story. Whether practitioners like it or not – or if it’s a beneficial process or not – is almost beside the point. In war, it’s often the side with the biggest, most powerful guns that wins the day. Not to mention the fact that incentives exist to close deals; a tremendous amount of work goes into communities being competitive enough even to be short-listed for these projects. The Times also made nary a mention about the thousands of spinoff jobs and investment generated by incentivized deals, especially for auto manufacturing and other export sectors.

Another Times’ omission was the fact that corporate attraction was only one component of a broader, holistic program focused on existing business retention and expansion and small business development. The implication was that states and communities were putting all their eggs in the incentives basket. Sure, they’re expensive eggs, but millions of dollars are also spent on workforce development, infrastructure construction, innovation and research-and-development capacity, and other competitive assets.

I think that, in a perfect world, economic development practitioners would like to secure corporate wins solely based on their competitive positions and “fit” with the company’s location requirements. But those aren’t the rules of the game, and the game won’t be changing any time soon.

Lottery and Education: Good Odds or Odd Goods?

By Johnathan Miller, Project Associate.  

I will admit it, I bought five Powerball tickets. I fully embraced the fact that the odds of winning were astronomical. And lo and behold, I did not win. In fact, according to CNN.com, I had a better chance of hitting two consecutive hole-in-ones on a par three (looks like I need to spend more time at the range). I also had a better chance of being attacked by a shark or dying from a bee sting. 

But, what’s the point? With all the buzz around the lottery and being a resident of Georgia, it is hard not to think about public education. Lottery proceeds in Georgia, and many other states, fund education programs. In Georgia, proceeds go towards supporting pre-K and the HOPE scholarship.

The HOPE scholarship is one of the most competitive economic development tools for the state of Georgia as it pays for Georgia students to attend college. Prior to 2011, the scholarship paid for 100 percent of tuition at in-state public universities and colleges. However, it became clear that lottery funds were no longer able to keep up with the rising enrollment and tuition increases. In response, the General Assembly passed legislation that raised eligibility standards for those receiving 100 percent tuition, the original promise of the program. The changes in the scholarship program have also come during a time when K-12 education funding is being cut. Between FY 2008 and FY 2012, funding per student in Georgia decreased by 17.6 percent ($805), the eighth highest percent decrease of the 50 states. The inability of the lottery and the state to increase funding for education is concerning.

The impetus in many states for establishing lotteries was that the funds would be a supplement to state education spending. However, funds from lotteries have come to supplant, and not supplement, education spending. For example, in Virginia, the lottery was passed partly under the auspices of being bonus monies that would flow to local school systems. However, as budgets have worsened and even after a constitutional amendment passed to devote all proceeds to local schools, critics argue that the state is using lottery funds for programs it would otherwise fund, thus increasing reliance on the revenue. In Illinois, supporters of the lottery billed it as a windfall for the education system, yet it contributes only one-tenth of total funding. In Texas, lottery proceeds paid for the equivalent of two weeks of schooling in 1996, but in 2010, that figure has fallen to just barely three days.

The ability of lotteries to effectively enhance education spending, in general, has been called into question. In a 2009 study on state revenues from gambling, the Nelson A. Rockefeller Institute of Government concluded that “Expenditures on education and other programs will generally grow more rapidly than gambling revenue over time. Thus, new gambling operations that are intended to pay for normal increases in general state spending may add to, rather than ease, long-term budget imbalances.” Further, a 2011 survey of existing literature on lotteries and education found that, “Studies of the fungibility of lotteries have focused on educational spending and nearly uniformly find that the introduction of a state lottery increases total educational spending by less than the amount of the new earmarked lottery revenue, suggesting at least some degree of fungibility is present when funds are earmarked for specific state and local programs.”

Despite the structural issues with lotteries, it is clear that some mechanism needs to be in place to help fund education. While the mechanism is yet to be perfected, I guess I will continue to do my part and be suckered into lottery purchases, knowing at least some of it is making it to education. Even though Georgians, according to Bloomberg Business News, are the biggest lottery suckers (pay the most, for the least amount of payout), I am planning on hitting the next jackpot (even if it contradicts everything I learned in school)…all in the name of education.