Move over buffalos, there’s a new kid in town

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The practice of buffalo hunting sounds cruel and inhumane. But in the world of economic development, where the term refers to the practice of providing tax and cash incentives to lure companies from one place to another, the buffalo typically comes out on top.

Corporate incentives make the economic world go round. At least the focus on the race to attract the new Amazon headquarters makes it seem that way. Or, they turn worlds upside down. Take places like Elyria, Ohio, where despite a lucrative offer, the city lost one of its largest employers to a town just three miles down the road.

In 2015 corporate incentives totaled about $45 billion (Upjohn Institute for Employment Research). Finger-pointing on what drove those packages becomes confusing, since deals are either driven by corporations looking for more and more benefits — or by economic developers who choose relocation as a way to grow their economies.

But there is another path to growth. It’s found in supporting and growing a community’s existing business base. And though it may not sound as powerful as hunting buffalo, it results in real, not promised, jobs.

According to a 2016 report from the Center on Budget and Policy Priorities, a nonpartisan research and policy institute, jobs from existing companies account for more than 80 percent of total job creation in every state. Compare this to an average of 1-4 percent of total job creation from companies that move from one state to the other and one-sixth of job creation from companies expanding to other states.

An even lesser known fact is that the largest job creators are not startups or large corporations.  Instead, they are second-stage companies with 10-99 employees and $1 million to $50 million in annual revenue. According to statistics from YourEconomy.org, from 2006 through 2016, second-stage companies only represented 15.8 percent of all U.S. business establishments but generated 37.5 percent of all jobs and 36.3 percent of all sales.

A look inside Louisiana shows what happens when a state decides on a more balanced approach to economic growth. In July 2011 Louisiana Economic Development launched a statewide Economic Gardening® program that provides high-level strategic research to growing companies. Data has been collected from 159 of the 196 second-stage companies participating in the program, which is impressive. Within a six-year period, 159 of the 197* participating companies created 1,367 full-time-equivalent jobs and increased collective revenues by more than $215 million — a return of $11.13 for every $1 invested. Yes, that’s 1,367 real, not promised, jobs. Imagine the incentives a state would cough up for a deal that secured 1,367 jobs in six years.

No single form of economic development is a panacea. The magic is found in balance. But with a mindset of winning with the big home run, combined with the thrill of the chase and a fear of loss, recruiting often wins over a philosophy of entrepreneurship-led economic development. Capturing the hearts of existing businesses takes time and an ability to appreciate the beauty of singles and doubles.  But when done well, it results in a stickiness that means companies are positioned and encouraged to grow, and less likely to be lured away to what may be perceived as more lucrative pastures.

If we want to keep jobs close to home and ensure our country’s overall economic base is strong, it’s time we become as good at growing companies as we are at wooing them to greener ZIP codes.

 

*Note: Data will be collected from the remaining 37 Louisiana companies in 2018.

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Penny Lewandowski
Senior consultant on external relations
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A thought leader in entrepreneurship and building an entrepreneurial culture, Penny Lewandowski is senior consultant of external relations at the Edward Lowe Foundation. She is a frequent speaker on new ways to think about economic development – especially how a grow-from-within strategy leads to thriving and sustainable economies.