Strategies for Community Economic Development
by Eric Scorsone
September 2002
Groucho Marx was asked how he managed to survive as an entertainer before he was famous. His reply was “my brothers and I washed each others laundry”. Clearly, communities will not be able to grow and prosper economically by simply “washing each others laundry”. In order to undertake local economic development in your community, a basic understanding of how the local economy functions is necessary. Just as you wouldn’t try and fix a car without understanding how it’s put together, an economic development practitioner should understand how their local economy functions.
Although there are many ways of understanding your local economy, one of the most useful is called economic base analysis. Similar to asset mapping, economic base analysis allows someone interested in local economic to gain a keener understanding of the structure of the local economy.
Rural communities across Kentucky are searching for the hard answers to economic development questions. For some, the question is how to create more jobs, for others it is how to sustain job creation and diversity their economy and finally for others it is how to manage the growth of exurban sprawl. While there are no easy answers to such questions, some basic strategies can be laid out for communities when undertaking community and economic development.
What determines the size and strength of a local economy? Jobs and wages are the best measure of local economic prosperity. We want to know what the local unemployment rate is, how many jobs have been created in the last few years, in which industries do jobs exist and what is the average rate for jobs in the community. Jobs in a community are based on a consumer or business expenditures. If no money is spent, no jobs are created. Expenditures come from two sources: local consumers and businesses and outside consumers and businesses. A community’s economic growth is based on both of these sources.
It is useful to understand which businesses sell to local customers versus outside customers. This division is based on the source of revenue for these establishments. Some establishments obtain their revenue or funding from customers outside our local community. In this context, “customers” may include individuals, companies or local, state and federal government. These domestic and international exports provide external dollars that support other services in the community.
Establishments that obtain their revenue from “customers” or sources outside of the local community are basic or base industries. The economic base of a community is determined by domestic and international exports. For example, the Toyota facility in Georgetown, KY manufactures cars, primarily sold through dealers outside of Georgetown, KY and even the state of Kentucky. Thus, this plant acts as a base industry for the region and state by attracting external dollars into the community. Another example is farmers located throughout counties in the state. These farmers primarily produce food products that are exported outside of the community. Hospital and health care providers, when they obtain revenue from Medicare or Medicaid, act as part of a community’s economic base. There are many examples in local communities of basic industries. In some cases, an establishment may sell to both external and local customers.
Some companies sell to local customers. Health care, retail, business services, landscape services and even some farmers sell to local customers. This type of activity ensures that a community receives the maximum bang for the buck with local income. If local people or businesses have to buy goods and services elsewhere, this reduces the potential for job creation in the local community.
Local market establishments provide an important function in community economies. Much emphasis, for example, has been given to the economic importance of farmers selling in local markets. The internal strength of the economy depends on the ability of companies and individuals to “recycle” basic industry dollars. So, as employees of manufacturers or other basic industries receive their paycheck, it is important for them to be able to spend their money locally. The oft heard “keeping local dollars at home” is the concept of non-basic industries. These non-basic establishments serve local customers.
Basic and non-basic establishments are mutually dependent. Local market establishments may provide the competitive advantage for external market firms that exist in the community. They may be a source of low cost inputs. At the same time, external market firms and their employees are the basis for the survival of local market firms.
Economic base analysis points to two major economic development strategies for communities. One is import substitution and the other is export promotion. Export promotion is the development and attraction of industries that serve external customers or draw in external dollars. Drawing in externally based dollars grows the size of the local economy. Generally, these companies or industries include manufacturing, some forms of agriculture, mining and even some services such as telemarketing, software, tourism and business services
Import substitution is based on recycling these external or export dollars to expand the local economy. The larger a community, the more likely it can provide for its own goods and services. This process of import substitution is largely dependent on the economies of scale associated with goods and services. Many goods and services are subject to declining costs as more volume is produced. In many smaller communities, transportation costs were high enough to protect local merchants from other competitors. However, the advent of the Internet economy and lower transportation costs has eroded this competitive advantage to some degree. Communities seeking to engage in import substitution must carefully gauge the ability of potential market entrants to stand in the face of competition.
How does a community begin to actually implement export promotion or import substitution? There are basic economic development tools that can be used to implement these two strategies. Table one indicates how the three tools and two strategies interact. In fact, each tool could possibly be used to target a particular type of industry or company to achieve a specific strategy (i.e. export promotion or import substitution).
Attracting new firms, fostering the growth of small business or retaining existing businesses are three basic economic development strategies. Each one of these requires assembling a different set of local assets in order to be successful. In order to be successful, a community should be willing to take a hard look at the existing set of assets, resources and institutions in the community.
Attracting new industrial firms is a difficult takes for any community. Known by various names, such as “buffalo hunting” or “smokestack chasing” it is the most traditional form of economic development. Companies are enticed through the use of tax incentives or breaks and land availability (i.e. industrial parks), to build a new plant or factory in a community or move an existing facility to the community. Typically, this strategy is focused on manufacturing and warehousing firms. These firms serve customers in other parts of the state or other states and do not compete with existing local businesses. This is the most common focus of an export promotion strategy to attract basic industries to an area. However, in some cases, firms may be enticed to move to an area to supply an existing company and would then act as a non-basic company.
On what basis do firms chose a location. There is a wide variation depending on the industry under discussion. Usually, labor quality and availability, local wage rates, housing, physical infrastructure, transportation and taxes are cited as important location factors. Labor cost is particularly important because it often makes up a large part of the company’s expenses and varies a lot by region of the country. Many of these factors are out of the control of local communities.
Therefore, communities attempt to change the local landscape to fit as best they can. A community may purchase land using proceeds from an industrial revenue bond. A speculative building may be constructed for a potential industrial client. Land sales or building leases provide the revenue to pay back the bonds. Industrial facilities lead to the creation of new jobs and income and the collection of taxes such as occupational tax and property tax that can be used to enhance community services. This process is usually overseen by a quasi-governmental agency known as a county or city industrial development authority.
Retaining existing businesses is another important economic development strategy. These businesses are often in need of a different set of services. At the top of the list, workforce development and workforce availability is often a key concern of existing employers. In some cases, it may be possible to work with a local community college or vocational school to provide a specific training program. Other concerns of existing businesses are often related to community infrastructure such as solid waste management, recycling availability or public safety. A strong existing business community may be one the most important aspects in attracting new firms to the region. This tool may be used for export promotion or import substitution. In some cases, a basic industry may be threatening to leave and the community must find a way to rally to save jobs. At the same time, expanding companies may serve local customers.
Finally, entrepreneurship and small business development are key features of any economy. Small business owners require support of a very different kind. Typically, these potential businesses need financial support for initial purchases, technical assistance, management support, legal training and support and market research. Again, community colleges and small business development centers are partners who can assist businesses in a local community. The roadmap for small business development is less traveled and known than the other paths.
The intersection of strategies (i.e. attracting new firms, retaining firms, entrepreneurship) and tools (business recruitment, business retention and expansion, small business development) dictates the best use of resources. To be most effective, economic strategies should complement the resources and nature of a community, especially given the inherent opportunity costs in choosing one policy over another.