Abstract
Observers of state economic development policy in the United States have identified two conceptually distinct approaches, often termed industrial recruitment and entrepreneurial policies, and debated the extent to which a “third wave” of policy emergent during the 1990s represents a conceptually distinct approach to economic development. Data limitations and conceptual confusion have hindered efforts to distinguish state economic development strategies and to update existing typologies to reflect contemporary practices. This article uses data from the Council for Community and Economic Research’s Expenditures Database in 2007 to evaluate the extent to which the states follow conceptually distinctive economic development strategies. We find that the states’ economic development expenditures reflect a high degree of conceptual hybridity rather than strict adherence to supply-side industrial recruitment or demand-side entrepreneurial development.
Introduction
State and local economic development policy in the United States is an area of significant public spending despite ongoing questions about the efficacy of specific policy measures (Dewar, 1998; Eisinger, 1988; Teitz, 1994). The evaluation of policy effectiveness has been stymied by limited data on the specific development policies undertaken by the states and debates over the classification of such policies into distinctive development strategies. It is widely accepted that industrial recruitment and entrepreneurial strategies represent conceptually distinct approaches to state economic development, but given the flux in policy adoption, it is unclear whether contemporary development practices follow the conceptual frameworks established using data from the mid-1990s.
This study uses data on 2007 state economic development expenditures by program type to examine contemporary development strategies. The data were collected by the Council for Community and Economic Research (C2ER) as part of its database of state economic development expenditures. While the C2ER data share some of the weaknesses of other more commonly used economic development policy data, its detailed information on recent expenditures by program type offers two distinct advantages. First, even recently published articles (e.g., Jenkins, Leicht, & Wendt, 2006; Saiz, 2001) rely on policy data from the mid-1990s. The field of state economic development is constantly changing as state actors seek to match competing states’ policy measures, develop new approaches to distinguish their states from rivals, or adopt variations based on other states’ best practices. Regardless of whether policy flux is a response to competitive pressures or policy learning, it is necessary to update our understanding of the practice of state economic development policy with more contemporary data. Second, existing evaluations of the states’ development strategies are based on program incidence data that do not capture policy intensity. Incidence data may mischaracterize state commitment to a particular economic development strategy, as initiatives may be instituted in response to immediate political pressure and then not funded. Even when all development policies enacted are funded, the number of programs following an industrial recruitment or entrepreneurial strategy may not align with state fiscal commitment to that strategy. Data on economic development expenditures are therefore important to accurately characterize the states’ economic development strategies. Developing a clear classification of economic development strategies practiced by the states is, in turn, a necessary prerequisite for evaluating the effects of those strategies. Recent debates over the most effective use of state funds in a period of stagnant economic growth—including questions about the proper relationship between government and the economy and the social benefits of large public expenditures to stimulate job growth—add urgency to the task of understanding the contemporary economic development strategies enacted by the states.
The article proceeds as follows. First we review the existing literature on state economic development policy to clarify the conceptual core of different development strategies and generate classification criteria. We begin by summarizing what has become the standard narrative: Starting in the 1980s, the “first wave” of industrial recruitment policies was replaced by or supplanted with a “second wave” of entrepreneurial policies; observers raised the possibility of a “third wave” of state and local economic development policy starting in the 1990s. Next, we argue that key elements of Eisinger’s (1988) initial distinction between supply-side industrial recruitment policies and demand-side entrepreneurial policies have been overlooked in recent typologies, which have built the assumption of conceptually distinctive waves of economic development policy into the classification criteria. We then provide alternative classification criteria and test our theoretically driven classification using confirmatory factor analysis. We conclude by discussing the different ways that contemporary practitioners have fashioned conceptually hybrid, “off road” economic development strategies that draw on both supply- and demand-side traditions.
Three Waves of State Economic Development Policy
States and localities have a long history of competing for development in the United States, dating at least to the 1850s competition for the eastern terminus to the Transcontinental Railroad (Dobbin, 1994; McCague, 1964). But the United States experienced a marked increase in the intensity of competitive development dynamics during the second half of the 20th century. The passage of the Taft-Hartley Act in 1947, which legalized state right-to-work (RTW) laws, marked one step toward heightened development competition as states in the South and Southwest used RTW laws (which limit the power of organized labor), along with selected tax abatements, to attract northern manufacturing (Cobb, 1993). 1 Most studies do not include RTW laws and other deregulation initiatives as part of the field of economic development policy, with Leicht and Jenkins (1994) and Jenkins et al. (2006) being important exceptions. Rather, the “first wave” of state economic development policy is traced to the increase in public spending to promote economic development that started in the late 1970s in response to Nixon’s New Federalism and the end of federal revenue sharing (Eisinger, 1988; Fox, 1990).
The “first wave” thus represents an intensification of a longstanding local development logic based on zero-sum investment competition. The use of property tax abatements and other subsidies to lower the local costs of production and, therefore, lure existing jobs from higher cost locales is often characterized as “low road” development because of the downward pressure such measures exert on wages and employment stability (Luria & Rogers, 1999). While they are dubious engines of new job growth, industrial recruitment policies have been moderately effective in attracting existing jobs from alternative locales (Dewar, 1998; Eisinger, 1988; Teitz, 1994). The long-term benefits of successful industrial recruitment policies are less clear. One notable example was the decision by Mercedes Benz in 1993 to locate its first U.S. facility in Tuscaloosa County, Alabama. After fierce competitive bidding by rival states, Mercedes Benz accepted free land and roughly $100 million in tax breaks in return for opening a plant expected to employ 1,500 workers and projected to create another 11,000 related jobs; the final cost of the various state and local location incentives paid by Alabama officials to lure Mercedes Benz was estimated at $168,000 per new job (Teitz, 1994). In July 2011, the county approved an additional $100 million in incentives to keep the company’s next round of plant investment centered in Alabama; meanwhile, the region has struggled with stagnant wages and high rates of poverty and unemployment (The Birmingham News, various). When traditional location incentives do successfully attract jobs, it is often at such a high cost per job—and with uncertain long-term commitments to the locale on the part of the firms—that some have suggested direct transfers might be more efficient policy options for achieving goals such as reduced poverty or unemployment (Teitz, 1994).
A “second wave” of economic development policy emerged in the 1980s as economic development practitioners sought to move beyond the increasingly evident pitfalls of the low road (Fitzgerald & Leigh, 2002). Entrepreneurial policies attempt to foster innovation, nurture new businesses, and attract high-tech industries, purporting to grow local economies rather than merely poaching jobs from other areas (Grant, Wallace, & Pitney, 1995; Leicht & Jenkins, 1994). Policies include direct and indirect lending, investments in education targeted to specific employer needs, and technology transfers between local research universities and businesses. Entrepreneurial policies are often considered a “high road” approach to economic development because they emphasize new job growth (as opposed to job poaching) and encourage local or regional competitive advantages based on high-value economic products, not merely lower production costs as in the low road approach (Luria & Rogers, 1999). It is unclear, however, whether entrepreneurial development strategies represent a true departure from the low road, as entrepreneurial policies are often used alongside low road industrial recruitment tools (Bradshaw & Blakely, 1999).
Finally, some observers identified an emergent “third wave” of economic development policy in the 1990s, but considerable debate remains as to whether those measures constitute a conceptually distinct approach (Bradshaw & Blakely, 1999; Eisinger, 1995). The specific policies associated with the third wave (e.g., public–private partnerships, technology transfers, infrastructure development, education) are similar to entrepreneurial policies but often are geared toward enhancing the local context for economic growth rather than a particular firm’s needs (Bradshaw & Blakely, 1999). At their heart, then, third-wave policies identify and respond to local firms’ shared interests to maximize a region’s economic competitiveness, foster interfirm networks, and otherwise seek to recreate the characteristics of highly successful economic regions such as Silicon Valley or Italy’s Emilia Romagna (Putnam, 1993; Saxenian, 1994).
Challenges to Identifying Conceptually Distinct Development Strategies
A persistent problem in the literature seeking to identify coherent economic development strategies at the state level is that policies are often classified according to the labels practitioners assign to their states’ policies. As Saiz (2001) notes, this approach assumes shared programmatic content among similarly labeled policies rather than evaluating it based on the application of a priori analytic criteria to detailed program descriptions. Relying on economic development practitioners’ nominal classifications of economic development policies may exaggerate the extent to which new policy waves really mark a departure from earlier approaches.
A second, related problem is that the classification literature often works backward from the assumption that the “second wave” entrepreneurial approach is substantively different from the “first wave” industrial recruitment approach, defining each policy wave in terms of the other rather than applying independent and theoretically informed conceptual criteria. Embedding assumptions about the distinctiveness of first- and second-wave development policies into the classification criteria makes it impossible to conclude that there has not been a significant change in the economic development strategies employed by the states. In this section, we critically assess a particularly rigorous recent classification (Saiz, 2001) that serves as both a model for the application of theoretically informed classification criteria to policies’ programmatic content, and an illustration of certain analytical errors common to the literature.
Saiz (2001) defines first-wave industrial recruitment policies as “state efforts to reduce the cost of production factors in relation to other jurisdictions” in an effort to “attract businesses that wish to relocate, retain those tempted by other states to leave, or encourage existing businesses to expand in place” (p. 47). From this conceptual definition, Saiz (2001) derives three first-wave policy attributes: direct cost reduction, administrative passivity, and an absence of targeting. Indicators of direct cost reduction include loans, grants, and interest subsidies that pass directly from the state to the firm. Administrative passivity means that “government investment decisions remain subordinate to those of the private sector” and are embodied by policies such as tax abatements and infrastructure improvements (p. 47). The absence of targeting essentially means a lack of strategic planning on the part of government, “excluding programs that target specific areas or economic sectors (except manufacturing)” and including “only nontargeted programs or programs potentially available to virtually all businesses” (p. 47).
Saiz (2001) characterizes entrepreneurial policies as following “a more interventionist government role” that supports “particular growth processes rather than influencing particular firms in their choice of location” (p. 48). Entrepreneurial policies are therefore distinguished from industrial recruitment by a more active state role in strategic decision making, along with a de-emphasis on competitive relocation in favor of supporting existing jobs and growing new jobs. Saiz identifies four attributes of entrepreneurial policies: they target entrepreneurs, they target high-growth business sectors, they facilitate firms’ adaptation to new production processes, and they include public–private partnerships. A program that targets entrepreneurs gives incentives and benefits only to “high-technology and small business or to firms at high risk (start-up, new product, technology transfer, and basic research) stages of development” (Saiz, 2001, p. 48). High-growth business sectors are defined as “banking, education, and communications” (Saiz, 2001, p. 48). Measures to facilitate firms’ adaptation to new production processes include business incubation, targeted infrastructure improvement, job training for new technology, and technical support for businesses as they attempt to modernize. Public–private partnerships include state credit corporations, which often leverage “private capital with public dollars, thereby increasing the pool of local investment funds” while avoiding the bureaucratic difficulties of full government agencies (Saiz, 2001, p. 48).
Saiz’s (2001) indicators of industrial recruitment and entrepreneurial policies raise questions about the core analytic distinctions at the heart of alternative economic development strategies. While we agree with Saiz that direct cost reduction and administrative passivity are hallmarks of industrial recruitment, we argue that his third criterion’s exception for the targeting of manufacturing speaks to a larger problem: confusing initial period of adoption—namely, the dominant industry of the period in which a development approach is adopted—with the theory of economic development and job creation that underpins the policy. The muddling of a policy’s underlying theory of development and its initial period of adoption is evident in Saiz’s criteria for entrepreneurial policies as well. Beginning with the first “second wave” criterion, targeting entrepreneurs clearly falls within the logic of the entrepreneurial state, but extending support to high-tech firms that are large and well-established companies with a mix of new and more routine technological products amounts to “chip chasing” (Fitzgerald & Leigh, 2002), applying the logic and tools of industrial recruitment to a new footloose industry. Tax credits and other forms of direct cost reduction that are extended to mature firms outside the manufacturing industry should not automatically be understood as entrepreneurial policies. Similarly, classifying direct public support of high-growth industries such as banking, education, and communications as entrepreneurial policies amounts to old wine in new bottles—public funding that directly lowers firms’ input costs in the hopes of influencing location decisions, repackaged for new industries. Firms in the high-tech, banking, or tourism industries have different factors of production than industrial manufacturing firms, but the essential logic of “first wave” industrial recruitment—reducing input costs—can still be applied to these newer industries. It is likewise unclear why support for firms’ adaptation to new production processes is distinctly entrepreneurial: Manufacturing firms routinely consider new locations precisely because they wish to implement new technologies or new divisions of labor in their production processes, and states’ industrial recruitment incentives and deregulation policies often make building new factories more cost effective than updating or modernizing existing facilities (e.g., Hanley, 2011). Finally, Saiz’s description of public–private partnerships reflects elements of administrative passivity and deregulation—albeit financial rather than labor or environmental—that is reminiscent of industrial recruitment policy. In the following section, we argue that moving beyond the conceptual confusion displayed in Saiz’s (2001) otherwise rigorous analysis requires a reevaluation of Eisinger’s (1988) original elaboration of supply- and demand-oriented approaches to economic development.
Back to Basics: Supply- and Demand-Side Theories of Economic Development
As the labels applied to divergent economic development strategies have shifted from supply- versus demand-side, to industrial recruitment versus entrepreneurial, and finally to first, second, and third waves, the conceptual core of Eisinger’s (1988) initial distinction has become obscured. In identifying and naming the rise of the “entrepreneurial state” during the 1980s, Eisinger articulated a policy distinction based on alternative theories of economic development that imply different roles for state actors. The supply-oriented theory that informed state and local economic development policy through the early 1980s is derived from classical location theory. Within this framework local or regional economic growth is a function of input costs (land, labor, and capital) because the demand for new goods is understood as endogenous to the price of those goods. In other words, the only way to stimulate growth is to reduce production costs. Working with these assumptions, the role of state and local economic development policy is to fashion locational advantages by subsidizing or otherwise reducing the cost of factors of production. According to the demand-oriented theory that motivates the entrepreneurial state, however, demand for new products may be stimulated by factors other than by price reductions. Growth is not only a function of input costs, but is fueled by identifying and meeting demand in external markets that may have different price elasticities. The role of economic development policy under this set of assumptions is to help businesses identify, meet, and even shape external demand; in doing so, public officials necessarily become partners with private firms in establishing production priorities and strategic decisions. Supporting innovation and entrepreneurship is, in turn, central to demand-side development policy because local advantages are found in anticipating new areas of external demand and moving quickly to become early suppliers. Demand-side policies are, therefore, distinguished not by the particular industries they target but by interventions tied to a particular stage in the product cycle. Finally, there is an element of risk management implicit in the relationship between state and private actors under the demand-side approach: When firms become risk adverse or otherwise distracted from pursuing new products and new markets, the entrepreneurial state acts to redirect firms’ priorities and/or share the risks associated with investing in new products and new markets.
Renewed attention to the core distinction between supply- and demand-side development strategies suggests the following criteria for classifying particular policies. Supply-side policies are focused on direct input cost reduction and are administratively passive in terms of business strategy. We consider policies with these two attributes examples of a supply-side approach to economic development regardless of the industry to which they are targeted. Demand-side policies provide support for new and/or risky enterprises and ideas early in the product cycle (entrepreneurs and innovation) and rely on public–private strategic collaboration. Again, we classify policies with these attributes as demand-side strategies regardless of the industries targeted by the policies.
Data and Methods
This analysis uses data from the Council for Community and Economic Research (C2ER) 2007 State Expenditure Database. The data set is based on a survey of budget information reported to C2ER by state administrators, in most instances the state’s primary economic development agency. C2ER staff members examine the budget data and classify the funding streams as belonging to 1 of 15 functional activity areas summarized in Table 1 and discussed in more detail below. The functional activity areas are based on C2ER senior staff’s experience and materials used by the National Association of State Development Agencies in their surveys during the 1990s. Economic development funds reported by the states may come from state general revenues, special funds, other state funds, or federal funds. C2ER estimates the states’ total resources available for economic development by aggregating all of the funding streams reported.
Council for Community and Economic Research State Economic Development Expenditures by Program Type.
Note. Demand-oriented policies are in boldface; policies in italics are not elsewhere classified (n.e.c.); and policies in shaded text are excluded from analysis.
A distinct advantage of the C2ER data is the ability to use expenditures to indicate the intensity with which states commit to different development strategies. We adjust the expenditure data for each program area for the state’s total economic development expenditures to avoid confusing state commitment to a particular development strategy with the size, gross output, or fiscal health of the state, each of which may influence expenditure levels. A weakness of the C2ER data is that, like the policy incidence data on which most studies are based, there is potential error introduced by relying on disparate practitioners’ reports of their economic development activities. In the C2ER data this potential source of unreliability is ameliorated by the work C2ER staff do to standardize the data across states. One consequence of this reliability check is that certain functional activity areas have large numbers of states listed as having no expenditures earmarked for that type of policy. For example, 16 states are listed as spending nothing on technology transfers in 2007. In most instances zeros reflect areas where state budget documents did not provide sufficient detail to track the exact dollar amounts spent on particular policy categories. In instances where C2ER staff are unable to match a reported state expenditure stream to one of the functional activity categories and it is confirmed that the main purpose of the reported state expenditure stream is economic development related, then it is included under the category “Other Programs.” The C2ER data should therefore be thought of as conservative estimates that prioritize a clear and consistent classification of program type over assigning all the reported expenditures to a category.
We perform a confirmatory factor analysis to evaluate the extent to which the states follow conceptually distinct economic development strategies. Confirmatory factor analysis is distinguished from exploratory factor analysis by the focus on evaluating theoretically informed hypotheses; it examines patterns of covariance among variables to evaluate whether the underlying factor structure of those variables corresponds with theoretical expectations. We derive hypotheses of how the policy intensity (program expenditures adjusted for total economic development expenditures) of conceptually similar programs should hang together in an integrated state strategy by applying our classification criteria for supply- and demand-side development to the C2ER detailed program descriptions, summarized in Table 1.
As stated above, we exclude the Other Programs category from our analysis because there is no basis on which to hypothesize that the policies reflect a supply- or demand-side approach. We exclude Program Support and Administration expenditures because they are not core development initiatives reflecting either supply- or demand-side principles, but rather constitute support for whatever core strategies are reflected in the other funding areas. Of the 12 remaining program areas we hypothesize that six are part of a supply-side development strategy and five reflect demand-side development. Minority Development does not belong to either approach and is not usually discussed in the development policy classification literature, so it termed “not elsewhere classified” (n.e.c.). Due to the particular nature of their economic development trajectories, Alaska and Hawaii are excluded from the analysis.
The supply-side policies (Business Finance, Strategic Business Attraction, Domestic Recruitment, Workforce Preparation and Development, Community Assistance, Tourism/Film) each reflect an emphasis on direct cost reduction and administrative passivity. While classifying Domestic Recruitment as a supply-side measure is noncontroversial, classifying the other policies as such merits further explanation. While the description for Strategic Business Attraction includes no information as to the supply- or demand-oriented nature of the initiatives it funds, the term business attraction implies funds available for supply-side development. Business Finance measures are often associated with the entrepreneurial state because they may be used to support risk taking in terms of developing new products or entering new markets, but there is no evidence of this program attribute in the detailed program description. Absent clear evidence that the capital access programs in the Business Finance category include this condition for demand-side development, they are properly understood as input (capital) cost reduction. Similarly, Workforce Preparation and Development amounts to lowering the cost of another factor of production (skilled labor). The Community Assistance and Film/Tourism policies also appear to fund factors of production critical for postindustrial development without embodying the essence of the entrepreneurial state. The application of our classification criteria prevents us from perpetuating the fallacy that support for new industries such as high tech necessarily constitutes a new development strategy. The demand-side policies (Business Assistance, International Trade, Technology Transfer, Entrepreneurial Development, and Special Industry, in bold) reflect support for new and/or risky enterprises and ideas and public-private strategic collaboration. We therefore expect to find evidence of three conceptually distinct approaches in our analysis of the intensity of state economic development policies (supply side, demand side, and minority development) if the states practice coherent development strategies. The null hypothesis is that the states do not practice coherent development strategies, with their development expenditures instead reflecting conceptual hybridity.
Results
We begin by describing the field of state economic development policy in 2007. Table 2 shows that there is enormous variation in both the level and type of state economic development expenditures. On average, the U.S. states spent nearly $184 million on economic development in 2007, ranging from $1.04 million spent in Pennsylvania to $6.03 million in Montana (not shown).
State Economic Development (ED) Expenditures by Program Type, 2007.
Note. Demand-oriented policies are in boldface; policies in italics are not elsewhere classified (n.e.c.); and policies in shaded text are excluded from analysis.
Source. C2ER; all dollar amounts are $2007.
Looking at economic development expenditures by program type, the states on average spend the most on Community Assistance programs ($62.10 million) and the least on International Trade ($1.11 million). Adjusting for total state economic development expenditures, we see a slightly different picture: Community Assistance still represents the largest program area, with the states on average spending about $27.37 million in 2007, but International Trade and Minority Development are the areas of lowest average expenditures (adjusted for total state economic development expenditures), at $1.26 million and $1.27 million, respectively.
The states’ average expenditures by program type mask enormous variation. The coefficient of variation (CV) is a measure of variability calculated by dividing standard deviation by mean; program types with higher CVs have expenditure levels that vary more across the states. Looking first at the unadjusted figures, Special Industry expenditures vary the most, with a CV of 3.49, followed closely by Entrepreneurial Development (3.37) and International Trade (2.84); spending varies the least on Tourism/Film (0.86) and the sum of all economic expenditures (1.12). Turning our attention to the variation in program expenditures adjusted for total expenditures, Minority Development varies the most with a CV of 3.90, followed by Entrepreneurial Development (3.53); the least variation is seen in Community Assistance (0.86), Tourism/Film (0.90), and Workforce Preparation and Development (1.00).
We hypothesized that if the states follow coherent economic development strategies, we would find evidence of three conceptually distinct approaches (supply side, demand side, and minority development). The program areas we expect to hang together as part of supply- and demand-side development strategies are summarized in Table 1. In Table 3, we present the results of our confirmatory factor analysis of state economic development expenditures and find that the states draw from both supply- and demand-side development approaches but most often combine the two into conceptually hybrid “off road” strategies. Six distinct factors are identified, and three of the development approaches represented by the factors reach across the supply- and demand-side distinction. The first factor, accounting for about 15% of the total expenditure variance, uses Domestic Recruitment (supply side) tools alongside demand-side measures to support International Trade. We might term this first strategic approach an export-driven recruitment model. The second factor identified follows a strictly demand-oriented approach by combining Entrepreneurial Development with the development of new products in traditionally important state industries (special industry). Together the first and second factors explain about 30% of the total variance in state economic development expenditures. The third factor shares with the first a demand-oriented emphasis on International Trade, but combines it with Strategic Business Attraction, a fund allocated at the discretion of the head of the agency to respond quickly to new development opportunities; we might term this approach a rapid-response, export-driven recruitment model, as its only departure from the first factor lies in the discretion given to the economic development practitioner. The fourth factor follows a purely supply-oriented model, combining Workforce Preparation and Development with Strategic Business Attraction; we can term this an education-driven recruitment model. The fifth factor combines supply-side domestic recruitment policies and demand-oriented technology transfer policies in a hybrid “chip chasing” development strategy. The sixth factor, minority development, is an independent approach not associated with other development strategies. Finally, demand-side Business Assistance policies, along with supply-side Business Finance, Community Assistance, and Tourism/Film, are not associated with any of the six strategic areas identified. The six development strategies identified are summarized in Table 4.
Results of (Exploratory) Factor Analysis (Rotated Factor Loadings).
Note. Demand-oriented policies are in boldface.
Summary of Economic Development Approaches.
Note. Demand-oriented policies are in boldface; policies in italics are not elsewhere classified (n.e.c.).
Overall, our hypothesis that the states follow conceptually distinct supply- or demand-side economic development strategies is rejected on the basis of this confirmatory factor analysis. But we do find evidence of strictly demand-oriented entrepreneurial and supply-side education-driven recruitment strategies. More often, however, we find evidence of hybrid development strategies that combine supply- and demand-side approaches. The most widely used strategy combines the supply-side tools of industrial recruitment—including rapid response to new recruitment opportunities—with demand-oriented efforts to support exports by identifying new markets for local producers. Similarly, a hybrid chip-chasing approach applies the tactics of industrial recruitment to high-tech firms, which are also supported with state assistance in the development and adoption of new ideas, drawing from both supply- and demand-oriented logics to accomplish economic development. Finally, minority development emerges as an independent approach to economic development and a handful of other programs are not clearly aligned with any of the six strategies identified. We discuss the implications of this analysis for understanding the field of contemporary state economic development policy in more detail below.
Discussion and Conclusion
State economic development policy has recently been the subject of increased public scrutiny, as the Great Recession and its aftermath have added urgency to the task of better understanding the effectiveness of different job creation strategies. The existing literature on the classification of economic development policies into distinct strategies has three primary problems: typologies are based on data from the 1990s, rely on policy incidence data rather than data on expenditures, and prioritize practitioners’ concepts and definitions in the delineation of different strategies at the expense of conceptual rigor. Even the most rigorous classification schemas (e.g., Saiz, 2001) are flawed because they accept practitioners’ periodization of strategies into first and second policy waves by embedding the dominant industry of the period in which a development approach is adopted into the classification criteria, rather than evaluating strategic change empirically. For example, targeting particular industries is considered part of an entrepreneurial approach except when manufacturing is the targeted industry, and administrative passivity is considered the cornerstone of the industrial recruitment approach except when applied to high-tech, creative, or other “new economy” industries. In essence, the period of a policy’s initial adoption—and, in particular, the dominant industry of that period—is often conflated with the theory of economic development and job creation that underpins the policy, making it difficult to assess the prevalence and efficacy of different economic development strategies.
This study identifies criteria for distinguishing supply- and demand-side economic development policies that are independent of the industries to which they are applied and utilizes confirmatory factor analysis to evaluate whether the states follow conceptually coherent strategies using policy expenditure data from 2007. Contrary to expectations, we find that the states do not follow conceptually coherent approaches, but instead rely on a combination of supply- and demand-side policies in pursuit of job growth. The six strategies we identify are the following: (a) export-driven recruitment; (b) entrepreneurial; (c) rapid-response export-driven recruitment; (d) education-driven recruitment; (e) high-tech recruitment or “chip chasing”; and (f) minority development. The entrepreneurial and education-driven recruitment strategies are ideologically consistent, drawing purely on demand- and supply-side theories of economic development, respectively. The remaining strategies defy easy classification as either low road or high road approaches to economic development and are instead best understood as off road insofar as they are hybrid strategies drawing on supply- and demand-driven traditions.
The prevalence of off-road development strategies combining supply- and demand-side policies at the state level has important political implications. The core analytic distinction between supply- and demand-side policies centers on the role of the state in promoting economic growth. The industrial recruitment approach is based on a supply-side theory that allows no positive role for the state other than lowering business input costs via subsidy or (de)regulation. Demand-oriented entrepreneurial policies, by contrast, are defined by active partnership between the state and private enterprise. Even as debate over federal job creation policies continues to frame the political choices available in starkly polarized terms (i.e., the free market vs. socialism), the U.S. states are widely and actively “intervening” in the economy in pursuit of job creation with demand-side policies. Even states with decidedly right-leaning electorates and noninterventionist political cultures rely heavily on demand-side policy. A fuller recognition of the way the U.S. economy is currently governed may help inform a more productive exchange on the ideological elements of job creation policy.
The prevailing state economic development strategies identified in this analysis may also serve as a basis for a more informed evaluation of the pragmatic elements of job creation policy, namely, what works and at what cost to the public? As public and academic critics of industrial recruitment policies emerged in the 1980s, economic development practitioners sought to move beyond the increasingly evident pitfalls of the low road by emphasizing how entrepreneurial policies marked a new and different approach. While the conventional wisdom currently challenges the social benefits of tax abatements and other industrial recruitment tools, the continued application of supply-side policies to high-tech and other “new economy” industries seems to have largely escaped public scrutiny. Efforts to promote innovation, entrepreneurialism, and creative industries are almost universally hailed as class- and value-neutral, when in fact the cost effectiveness and distributional consequences of such policies are unclear. While this study cannot speak directly to these questions, it does provide a starting point for empirically evaluating the effectiveness of the identified off road development strategies.
Footnotes
Acknowledgements
Thanks to Pofen Salem and Wen Sun for sharing their expertise on the Council for Community and Economic Research’s Expenditures Database, and to Sal Saporito for his support; we are responsible for any remaining errors or omissions.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.