What Is Economic Development? And What Is the Job of an Economic Development Professional?

Creative Destruction

Joseph Schumpeter coined the phrase creative destruction in his 1942 book, Capitalism, Socialism, and Democracy, to describe the process of economic development (Schumpeter 1942, 2008). Creative destruction is an evocative phrase hinting at how market forces redeploy an economy's stock of economic development assets to introduce new goods and services, disrupt current production methods, or infuse novel characteristics into existing products. However, as well-known as that phrase is, it is better to understand the five hypotheses about economic progress underlying the phrase. Schumpeter presented these hypotheses in the second chapter of the English language version of his 1939 book, The Theory of Economic Development. ⁶

Production innovation is the introduction of new methods of production. Schumpeter's use of production innovations hinted at both new production technologies (the machinery used to make things) and what we now call process innovations, the way machines and people are arrayed in a system to produce goods and services. The result is enhanced physical and economic productivity. ⁷

Schumpeter's lesson is that economic regions must constantly create and deepen their stocks of EcD assets because the economic base of a thriving regional economy is a constantly changing portfolio of products. All products travel along the product life cycle as they age; however, in the end, most die. The critical question to answer is if the death of a traded product also results in the economic decline or demise of the region. That is why economies must restock their portfolios with new goods and services.

Product Life Cycle

No matter the end state of individual products, a region's product portfolio needs constant replenishment. Vernon's original conceptualization of the product cycle had four phases (Vernon, 1966, 1979). ⁹ However, the concept has evolved through its use in business strategy into a six-part typology with slightly different labels given to each stage by various authors and business consultancies. These stages are (1) product development (product development and refinement); (2) product introduction; (3) takeoff (rapid sales growth); (4) product maturity; (5) product decline and industry consolidation; and (6) abandonment. ¹⁰ See Figure 1.

OPEN IN VIEWER

Figure 1.

The product life cycle.

Comparative Versus Competitive Advantage

The terms comparative advantage and competitive advantage cause confusion among practitioners. They are not synonymous. Comparative advantage in spatial economies comes from their stocks of economic development assets. Comparative advantage is the mix and costs of factors of production in one regional economy compared to another, as well as how geographic location and natural and built amenities stack up against those in other regions. Competitive advantage rests within companies and comes from proprietary corporate assets that give a firm an absolute advantage over its competitors. These sources can be its brand, distribution, intellectual property, or its locations and the factors of production embodied in those locations, especially in its workforce. A region's economic development assets can be a comparative advantage in attracting and retaining products and their related businesses at a specific point in the product or industry life cycle. And a region's comparative advantage can also be the source of a business's competitive advantage. However, as products move through their life cycle, factors of production that were once sources of competitive advantage often turn into comparative disadvantages. After that transition occurs, the chance that the company will move, or the operation will lose an intracompany internal rate of return competition to another facility, or an external competitor, increases.

Often the relationship between a region's comparative advantage and a company's competitive advantage is based on how the region's mix of labor skills and costs matches a company's occupational demand at the product's position along the product cycle. The connection is best illustrated with a hypothetical example. Let's begin with a start-up company, such as Hyperion, that locates its prototyping and initial production close to its research and design function to speed the product's model development cycle. The co-location recognizes that infant products experience rapid model changes as minimum viable products mature into standardized products. In Hyperion's case, the economic development asset that bonded the company to Southern California was the research and development team's dependence on California's Hydrogen Highway. In other cases, the co-location will be rooted in the mix of engineers, scientists, and industrial designers who provide the region with a comparative advantage in research and product development. However, as soon as product models stabilize and model development becomes incremental, dependence on research and development weakens. And, as growth rates slacken, the company becomes more sensitive to operating costs and may search for a new location. Here again, Hyperion serves as an example when it moved production to Columbus, Ohio, from Southern California based on cost factors and the location of many of its potential customers.

The geographic separation between research and development and production occurred in the computer and mobile phone hardware industries in what MForesight's Sridar Kota and Tom Mahoney referred to as an “invent here, manufacture there” production strategy (Kota & Mahoney, 2022). Apple's locational decisions and geographic relationship to its supply chain illustrate this strategy. An earlier example of technology rejuvenating a mature product and triggering production relocation is the rapid decline of tire manufacturing in Akron, Ohio. Corporate investment decisions related to the shift from bias-ply to radial-belted tires coincided with a strike of the United Rubber Workers Union in 1976 that resulted in Akron's tire manufacturing plants closing. ¹⁴ The companies invested in new plants in right-to-work states with lower energy costs.

The lesson that EcD practitioners should hold dear is that a company's current location is at risk every time a product moves from one stage of the product cycle to the next. What was a comparative advantage—a desirable and competitive mix of EcD assets—in one part of the product cycle might become a comparative disadvantage in the following stages. Therefore, economic developers must guide their regions to replace lost products through entrepreneurship and change the region's EcD assets to attract new products.

Practitioners and academicians should remember that markets determine how long a good or service spends at each stage of the product cycle. Clocks and calendars do not determine economic time, and EcD is neither physics nor trigonometry, where phases are well defined. For example, Southeast Michigan's run with automobiles began in 1896 when Henry Ford built his quadricycle in his kitchen. And the region's vehicle assemblers moved from product initiation to decline over a century and are now attempting to revitalize their products by moving to hybrid and electric drivetrains. Washington, D.C. was founded to export the federal government's services in 1800. It survived invasion in 1812, succession and civil war in 1861, and insurrection in 2021. The long runs of Detroit's and Washington's dominant products contrast with the short heydays of the lumber capitals of Bangor, Maine, and Muskegon, Michigan, or the fleeting reliance on flour milling in Buffalo and Minneapolis. Pittsburgh had a longer run with steel, as did Hartford, Connecticut, with gun manufacturing and insurance, but those eras ended.

Economic developers are constantly asked what is next whenever one part of a region's economic base dies. If there is no ready answer, the region will enter a period of secular decline that may result in a new, lower equilibrium and radically lower returns, or payments, for its factors of production. The previous sentence is a jargon-filled way of writing that real earnings will decline, housing values will decline, the value of commercial and industrial real estate will decline, and population will decline. Eventually, the region will reach a lower level of stable real, or inflation adjusted, EcD asset prices and move along a lower growth path.

Regional Product or Industry Portfolios

The concept of regional product portfolios introduces product life-cycle diversity as a complement to sectoral variety, which is behind portfolio theory in finance. Regional product portfolios are constructed from the life-cycle positions of each product in a region's economic base. The weighted average of the distribution is the region's growth rate, and the distribution of products across the different stages of development indicates the diversification of the region's product cycle.

A reality of the life of products and their industries is that over time growth slows, and, eventually, decline occurs. When taken to the level of an economic region, the implication is that regional growth rates will slow as products age and companies will either move production or disappear. Likewise, growth will decline if a region is not constantly introducing new or infant products into its portfolio. However, the implicit social contract between employers and workers limits a regional economy's ability to reload its product portfolio. This unwritten contract is a set of expectations about earnings, benefits, and working conditions held by the legacy workforce.

For example, wages and benefits in long-established industries set labor market expectations that prospective businesses may not be able to sustain. Earnings expectations will be especially sticky if the companies that owned the declining products had market power, earned monopoly or oligopoly profits, and supported the social contract by paying above-market wages to buy labor peace. If wage and benefit expectations are too high based on the productivity or skill mix of the existing workforce, the decline will become secular. If this occurs, negative path dependency results until the terms of the social contract erode or skills improve. The lesson is that, over time, regional growth rates change as the distribution, or mix, of products across the segments of their product portfolios changes.

While the idea of regional product cycle portfolios is intriguing, modeling the portfolio presents a considerable challenge for three reasons. First, publicly available data on products are nonexistent. Public data are collected by industry and are made publicly available at high levels of product aggregation. However, these publicly available industry data are the analytical starting point. Second, product age is not determined regionally. The geography of demand for a product defines its product-cycle age, and demand for all but local services is typically national or global. Third, new products and industries are often green shoots that emerge from the ashes of older or defunct parts of a region's economic base, especially if research and product development took place in that region.

Treado (2010) demonstrated that a specialized metallurgy and materials research and service industry developed in Pittsburgh from the legacy of that region's metals industry and became part of metropolitan Pittsburgh's economic base. Pittsburgh's heritage of research and development in metals provided the rootstock. Treado wrote that although Pittsburgh lost “steel-making capacity during the end of the twentieth century, it did not lose its steel-making expertise” (p.105).

I missed this nascent knowledge cluster in a regionally based, statewide economic cluster study that used two- and three-digit NAICS data (Deloitte, 2004). ¹⁵ The data were too highly aggregated to find this cluster. To complicate matters, the cluster's members crossed several NAICS industrial categories. Treado taught me that while quantitative research provides an excellent baseline for EcD analysis and planning, finding green shoots often requires a qualitative examination of the regional economy that focuses on products and services rather than industries.

Product portfolios can be constructed by placing industries in a matrix where each sector is positioned qualitatively within one of the cells by translating product age descriptors into positions along the product life-cycle curve. Those positions can then weight value added or regional GDP in each segment or product cycle bucket. A colleague and I wrestled with using industry GDP growth rates (first differences) and the rate of change in the growth rate (second differences) nationally and regionally over an extended period to capture product cycle positions. Unfortunately, the work was tedious and hampered by data aggregation. Nevertheless, I concluded that locating the place of each industry qualitatively in a product-cycle category, or bucket, is adequate for economic development planning and analysis for a single region or a small number of regions.

An understanding of EcD, creative destruction, product cycle age, and product portfolios sets the stage for a discussion of the work of economic developers by defining five activities that dominate their day-to-day jobs.

Rabbits

All who risk their incomes and assets to start or take over a business are entrepreneurs. Therefore, entrepreneurs are not just business owners who intend to lead high-growth firms or run companies with technology-based products. And their businesses will range from sole proprietorships to potential global companies. Entrepreneurs' motivations include being their own boss, earning an income, providing a solution to a pressing social problem, responding to a market opportunity, and translating a personal passion into a job. And the earnings goals of entrepreneurs range from replacing incomes lost after being fired to extreme wealth.

Entrepreneurs differ along four dimensions: (1) the amount of financing their business requires; (2) the complexity of their capital structure; (3) their desire to work in their business (producing the actual good or service) compared to their desire and ability to manage the growth of their business (and their ability to delegate responsibilities and production); and (4) the scope and complexity of their operations. These distinctions determine the level of technical assistance that EDOs provide. For example, the EDO in Ohio's Appalachia area rarely works with a company with more than ten employees, so cash management and marketing assistance are in high demand. At the same time, Ohio's major metropolitan areas created entrepreneurial ecosystems facilitated by specialized EDOs to identify and nurture rabbits that aspire to become gazelles.

While it would be nice if all regions could grow enough start-up businesses and products to completely replace those that aged, moved on, or died, however, the truth is that entrepreneurship is a piece of the job-growth puzzle because of five realities.

First, most net employment growth comes from a small number of high-growth firms (Piazza & Hill, 2021). Second, most start-ups fail at the product development and introduction phases of the product cycle (Hurst et al., 2011). Third, not all entrepreneurs are interested in taking on the 20-year task of building a national or global brand with substantial employment in a tradeable sector. Fourth, start-up businesses that produce tradeable goods and services and survive are associated with a region experiencing reduced poverty and increased incomes. In juxtaposition, while local serving (or nontradeable) start-ups generate external economic benefits, they are not large enough to reduce poverty (Lee & Rodriguez-Pose, 2021). Finally, higher new firm formation rates are associated with lower income inequality. In contrast, higher self-employment rates have a positive statistical relationship with increased income inequality, mainly through growth in the number of jobs at the bottom of the income distribution (Liu & Qian, 2022). Therefore, a herd of fecund rabbits appropriately represents entrepreneurial development because regions need to breed many start-ups to help restock and grow their product portfolios.

Three questions about an entrepreneur help predict if a rabbit will convert into a gazelle or a fox. Is an entrepreneur interested in managing a thinly capitalized, high-growth firm for 20 or more years to achieve scale? 2) Is an entrepreneur looking to replace lost income from another job? 3) Does an entrepreneur maintain tight top-down control over the enterprise? If a successful start-up owner answers no to the first question or yes to the last two, the company will likely become a valued part of the region's economic fabric. However, it will not become a desired gazelle. At best, it will become a respected and midsized lifestyle company (a fox), with its growth capped by the owner's aspirations or need to control the enterprise.

Gazelles

Gazelles represent high-growth firms in the takeoff phase of the product cycle. They have demonstrated a viable product and earned a market presence. Due to their growth rates, their corporate cultures focus on sustaining the top line of their income statements and meeting demand. And as a result, gazelles are highly desired targets for out-of-region EcD recruitment. If a region has companies with gazelle products, then EDOs should work closely with them to retain and sustain their operations. However, gazelles are difficult to identify unless the EDO is close to the industry. Gazelles are also hard to work with because the founders and managers are so busy running and growing their businesses that they stay under the EcD radar. When I show a gazelle in my lectures, the image is of a cheetah getting ready to take the gazelle down. I use this image for three reasons. First, several companies can enter a product niche market, and few will come out on the other side. Second, some owners of gazelle companies are not interested in establishing a long-lived company. Instead, they see themselves as a product development company. Being bought out by a large firm is their exit strategy. Third, when a gazelle gains visibility, other regions will try to attract the company or a significant part of its planned expansion. EDOs must remember that retention and expansion are competitive activities, and retaining a gazelle is not a region's birthright.

Buffalo

When I think of the attraction activities of EDOs, the image of a buffalo hunt appears. In this cartoon of reality, EcD professionals set out on a quest for buffalo to sustain the region. They drag their kill back, and the people eat. And when all the meat is gone, the hunters head back out. Buffalo hunts are neverending for EcD professionals, and it is the dominant EcD practice. While there is plenty of buffalo meat, there is little motivation to hunt. If life is good, why do anything differently? The answer is that, like a good meal, branch plants can pass quickly.

Foxes

Foxes are associated with product maturity because mature firms are concerned with managing their expenses. My association between foxes and mature products comes from idioms about foxes being wily and sharp-eyed, which is true of successful midsized companies engaged in retention or expansion projects with a financing component. Retention and expansion projects can also use other EDOs, such as the Manufacturing Extension Partnership, to improve the productivity and operations of existing establishments and change a potential relocation into a retention project (Bartik, 2016; Summit Consulting & W.E. Upjohn Institute for Employment Research, 2021).

In Figure 2, I split the decline phase of the product cycle into two paths, restructured and managed. Restructuring operations, improving products, and introducing new features to existing products are ways of moving a declining operation back in product cycle time. However, managing waning product demand is an activity that aligns with the Boston Consulting Group's (BCG) growth-share product portfolio matrix. The BCG matrix plots a product's market share against its growth rate and divides the figure into four quadrants (Henderson, 1970). ¹⁷

BCG recommended that managers of slow-growing products with low market shares “should liquidate, divest, or reposition these “pets” and reinvest in products with high growth and dominant market share or fast growth and growing market share (BCG, n.d.). The decision to abandon a product or a production location is a private-sector decision. However, when an organization announces its closing, EDOs are often under political pressure to react, even if that reaction is mainly symbolic. Abandonment is where puffins, an endangered species, take center stage.

Puffins

Cute and lovable puffins are an endangered species and represent retention efforts involving operations in decline and where management, or labor and management, are unwilling to restructure operations to return to profitability or wherecompetitive footing cannot be reestablished. Cleveland's saga over its steel mills is a good example (Encyclopedia of Cleveland History, n.d.; Shingler, 2020). The conglomerate LTV purchased Jones and Laughlin's (J&L) Cleveland Works in 1968 and Republic's Cleveland plant 4 years later. The plants are opposite each other on the banks of the Cuyahoga River. Unfortunately, operating economies from the merger never materialized in the face of declining demand. As a result, the behemoth entered bankruptcy in 1986 despite wage and benefit concessions by the United Steel Workers Union. As a result, steel production in Cleveland became an endangered species, and political pressure focused both political and economic development activities on saving the mills. LTV restructured its operations, but steel demand continued to erode, and operational efficiencies did not appear. As a result, the company reentered bankruptcy in 2000, and the mills closed in 2001. A year later, International Steel Group (ISG), a Chicago-based hedge fund run by Wilbur Ross, purchased LTV's assets, and combined them with other bankrupt mills. However, the purchase only occurred after the union and ISG agreed to restructure operations, and ISG promised to recapitalize the plant after the deal closed. In 2005, ISG sold the plant to Mittal Steel, and, for a time, it became the most efficient integrated steel mill in the nation. Cleveland Cliffs purchased Mittal's Cleveland Works and Indiana Harbor Works in 2020. Saving a region's endangered species depends on the willingness of the company, investors, workforce, and state and local government to support the restructuring and reinvestment required to create a rejuvenated set of products. The endangered species will become extinct if labor or the political community is determined to reestablish the old way of doing business and to reassert implicit social contracts.