Communities in Pursuit of “Economic Clusters”

In this second piece on communities attracting corporate investment, This Is Capitalism looks at the benefits of investing in “economic clusters,” how cities are successfully building clusters of like-minded enterprises, and how they help entice new residents and bring new life to a community.

Birds of a feather flock together.

That’s the rationale behind increasingly high-stakes efforts to attract corporate investment to cities and regions. If you can draw companies — particularly high-profile ones — to your community, others will invest as well. Those “clusters” of enterprises and their supporting ecosystems of suppliers and ancillary businesses will fuel economic growth.

The geographic concentration of companies and institutions in economic clusters remains a principal goal for economic development planners nationwide. For companies, a burgeoning cluster can foster innovation and competitive advantage by providing access to shared infrastructure and pools of skilled employees. For communities, corporate clusters can produce direct and indirect job opportunities and, over time, help a region bolster its living standards and tax base.

“Successful people like to be around other successful people,” says Dennis Hunt, executive vice president and manager of public finance at Stephens Inc. “If communities can establish a cluster of companies with connections between them, it can produce a lot of economic activity.”

Large, well-known industry clusters range from technology in Silicon Valley and Boston’s Route 128 corridor to investment banking on Wall Street, and entertainment in Hollywood. Other notable examples include music production in Nashville, drug research and manufacturing in Pennsylvania and New Jersey, and rubber and plastics in northeast Ohio. The success stories of Baltimore, Detroit, Jersey City, and Little Rock are more recent examples.

Risk vs. Reward

But communities must consider whether the cost of wooing and winning investment is worth the price. Competition for potential corporate-cluster assets is fierce. For instance, the recent bidding war for Amazon’s second headquarters — and a promised 50,000 or so jobs — garnered more than 200 bids from regions across North America, with New Jersey and Maryland each reportedly offering $7 billion or more in total tax and cash incentives to the company. Amazon finally settled on two proposed campuses, in Arlington, Va., and New York City, although it ultimately backed out of the latter location.

Tax breaks and public-sector promises have been time-honored cluster enticements, but communities shouldn’t always attempt to buy their way to an economic cluster. While an investment from a high-profile company such as Amazon might well provide the seed for more technology and logistics/distribution businesses to locate in the vicinity, big tax and cash incentives can cripple a community’s tax base.

“Government entities are on a slippery slope paying to have companies come to their communities,” Hunt says. “I understand why both parties do it, but I’m not sure it’s a good thing.”

The huge incentive packages regularly offered to corporations are usually based on optimistic assumptions — and they come with risks. Consider the deal that Wisconsin struck with Taiwanese contract manufacturer Foxconn in 2017. The state gave roughly $4 billion in total incentives for the company to build an LCD display manufacturing facility in southeastern Wisconsin. Based on what now looks like an overly optimistic assumption that the facility would eventually employ 13,000 people, that works out to a hefty public subsidy of about $230,000 per job. The state’s Legislative Fiscal Bureau estimated that the state would not recoup the incentives offered through other tax revenues until at least 2042.

“Place-Based” Investment

Bigger is not always better in economic development planning. Taxpayers often reap greater benefits from smaller, more deliberate investments than from the use of huge tax incentive packages to lure companies to a location. “Everyone wants to be the next Silicon Valley but you can’t just chase the latest shiny object,” cautions David Hart, a professor at the Schar School of Policy and Government at George Mason University and a senior fellow at the Information Technology and Innovation Foundation. “Communities have to start with an honest assessment of what their assets are and be deliberate about developing them.”

Such “place-based” economic development strategies focus less on direct incentives to attract corporate investment and more on investments that improve the overall quality of life in a city or region. Strong communities are able to both generate and sustain innovation and economic growth in unique ways.

From Steel to Tech

Pittsburgh provides a good example. Like other rust-belt cities, Pittsburgh was hammered when its cluster of steel manufacturers went into long-term decline in the 1970s. Thousands of jobs were lost and the population fell region-wide.

The city has staged an impressive rebound over the last two decades. The former steel city is increasingly a tech town, hosting a diverse array of information and healthcare technology enterprises that includes Google, Apple, Facebook, and SAP, which together employ several thousand people. The city is also a key location for companies working on autonomous transportation in the U.S., with Uber, Aurora, and other businesses focused on self-driving vehicles now employing hundreds of people in the region.

“Pennsylvania didn’t pay a cent to have those companies move here,” notes Brian Kennedy, senior vice president of operations and strategic programs at the Pittsburgh Technology Council, a trade association that now has 1,100 member companies.

In fact, Pittsburgh was able to attract tech corporations by leveraging its distinctive existing assets. Top of that list was Carnegie Mellon University, one of the premier research universities in the country. “Carnegie Mellon wasn’t meant to be an economic development entity, but it’s the most important one in the city,” says Kennedy.

The University of Pittsburgh Medical Center is a close second. The center employs 85,000 people and last year received more than $220 million in research grants from the National Institutes of Health—the third most in the country. That has helped foster a growing community of healthcare technology companies in Pittsburgh.

Talent and Diversity

Instead of offering up large incentives to lure companies to the region, Pittsburgh and the state of Pennsylvania through the Ben Franklin Technology Development Authority have invested in early-stage start-up companies and technology transfer projects tied to the universities. A key to its success, said Kennedy, is not being overly focused on any one cluster of businesses.

“Government hasn’t proven effective at determining what clusters will develop,” said Kennedy. “The new focus of economic development has to be on attracting, retaining, and training talent. Build a great community for people and you will get a thriving economy.”

When companies look for a new place to locate, they look for workforce readiness, explains Hunt. “Those communities that invest in education and in quality-of life improvements have a distinct advantage over those that don’t.”

That means investing in school systems, building safe neighborhoods, green spaces, mass transit, and cultural institutions—the core responsibilities of government that make a community desirable. In the long run, investments in anchor institutions, local resources, and human capabilities are more likely to attract enterprise and grow economic clusters.