Making economic development strategies more strategic

By all appearances, economic development organizations (EDOs) approach the task of creating regional strategies very seriously. The process, which occurs roughly every five years, involves consultants, high-level steering committees, extensive research, and significant expense of energy and money. At the end of it all, new goals, metrics, and marketing campaigns are unveiled at major events. But beneath this frenzy of activity lies a problem: most strategies that EDOs create are actually not strategies at all.

To explain what we mean, we first need to define “strategy.” In a 1996 article, aptly titled “What is Strategy,” renowned economist and strategy guru Michael Porter outlined two basic principles intended for businesses but are equally relevant to EDOs: strategy requires making difficult trade-offs (choosing what not to do), and the ultimate goal is to establish a unique position. We’ve written about EDOs that have done just this–picking one or two truly globally-relevant specializations in which to make concerted, long-term investments. Examples include Syracuse (drones), Des Moines (insurance), Milwaukee (water technologies), or San Diego (life sciences). We’ve also written about places that, in the absence of clear specializations, have decided that the most strategic approach is to focus on capacity-building for mid-sized firms regardless of industry. Examples include PRISM in Northeast Ohio, Jumpstart’s Scaleup Services, and national lab voucher programs.

Why are these examples exceptional? Why do the majority of economic development strategies fail to meet Porter’s standard? It stems from the way that EDOs define their region’s “target” industries.

We start here because one of the most basic functions of EDOs is to selectively invest in capacities that make a region “sticky” for specific types of firms and talent, spurring a cycle of self-reinforcing growth in certain industries. (For proof that this is the dominant paradigm, look no further than nearly any region’s proclamation that it will become the “Silicon Valley” of something.) Nearly everything that an EDO does–from business attraction incentives, to workforce training to startup accelerators–should align to ensure that firms in some set of industries have to be in the region, whatever the cost. The point is that, when an EDO defines an industry as a “target,” it is making a claim about an industry specialization: either that one exists and should be protected, or that an emerging one could be deepened through targeted investments.

It follows that simply by choosing a reasonable set of target industries, an EDO should have a strategy that’s within striking distance of Porter’s definition–the chosen industries both define a region’s unique position and enable leaders to make difficult trade-offs between investment options. The opposite, however, is also true: choosing an unreasonable set of target industries could completely undermine an EDO’s ability to act strategically. The latter outcome is far more common. To illustrate, we looked at two regions for which we had access to the detailed, non-public economic data that their researchers used to define their target industries.

The first problem is that EDOs choose too many specializations (usually six to eight), each of which is too broadly defined (such as “advanced manufacturing”). To return to Porter’s phrase, EDOs fail to “choose what not to do.” This is clear from a quick scan of any EDO’s website, but the data offer confirmation. The target industries identified by the two metro areas that we looked at represented 74 percent of traded-sector jobs in one region and 59 percent of traded-sector jobs in the other (we use traded-sector as the baseline since EDOs don’t usually work in other parts of the economy, such as local government and retail). A strategy that “focuses” on half to three quarters of the entire regional economy simply fails to provide a way to harness the energy of local leaders, prioritize investments, or create concrete, actionable initiatives to reduce barriers to the industry’s growth. As economic activity becomes more concentrated in the U.S., including in the most desirable industries, the average region stands little chance of breaking through with the watered-down, distracted efforts that these strategies inevitably generate.

The second problem is a direct outcome of the first. By labeling such a broad swathe of the economy as a target, it’s inevitable that there will be substantial overlap with other regions’ specializations. It seems that every metro area we work with claims to specialize in not just overly broad industries, but the same broad industries: advanced manufacturing, life sciences, and food and beverage are nearly ubiquitous. Again, the data confirms this perception. The industries that the two metros defined as specializations represented nearly 400,000 jobs across both metros. Of those, over 270,000 jobs–or 68 percent of the total–were in industries that both metro areas claimed as specializations. Any pair of metros will have some overlap in their industrial makeup, but this level of duplication suggests that neither metro area has gotten anywhere close to establishing a “unique position.” They are sending generic signals into a crowded, noisy marketplace.

What keeps EDOs from doing this right? One explanation is that their leaders are timid. They prefer to avoid difficult strategic decisions, make every sector of the economy feel valued, and hope that opportunities will float their way despite their lack of strategy. Another is that many EDOs leave this research to consultants who lack in-depth knowledge of local industry dynamics, rather than doing the hard but necessary work of regularly convening and learning from firms. There are also, however, more benign explanations for why EDOs end up with muddled strategies: the academic research on specialization and economic performance is muddled. It’s not entirely clear whether it matters more if a region has a relative specialization–an industry that’s large compared to other industries within the region, even if small compared to other regions–or the opposite. It’s not even clear whether specialization or diversification is better for regional economies. Further, the notion of carving out unique industry-based niches is increasingly at odds with how the economy is organized–for decades, regions have become less specialized by sector and more specialized by function.

Given all of this confusion, is it reasonable for EDOs to do what we’ve described–hedge their bets and claim to have “diverse specializations”? No. It is possible to pursue both specialization and diversification and still be smart and strategic about it. But doing so means committing to making real choices–otherwise a strategy is just a wish list.