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The Higher ED Blog: What’s new in economic development research (fall 2015 edition, Part II)

/ November 16, 2015

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The Higher ED Blog: What’s new in economic development research (fall 2015 edition, Part II)

Continuing from last week’s Higher ED Blog, this week we summarize interesting articles from the latest issues of Economic Development Quarterly and Regional Studies. These research roundup articles are published every four months or so to keep economic development practitioners on top of what’s happening in the academic world.

Do incubators really help businesses, or do they just pick winners?

The biggest challenge in measuring the performance of incubators is not knowing if an incubated firm would do better, worse, or the same if it had not joined the incubator. Some critics of these business support services have pointed out that they have excellent track records because they “pick winners” and filter out firms unlikely to succeed.

A group of researchers from the US were determined to overcome this selection bias and truly assess the impact of incubators. They created two groups of firms: one group contained incubated firms and the other contained similar types of firms that met the criteria for incubation but were not incubated. The researchers even took the comparison a step further and matched firms based on features like sector, size, and location (urban vs rural).

The results show that incubators have strong positive impact on job creation. Before the matching, incubated firms created 49 per cent more jobs. After matching, they created 58 per cent more jobs, indicating an even stronger effect of incubation. The authors think it comes down to the common practice of incubators providing easy access to business services (legal, financial, marketing, etc.). Non-incubated firms get an average of 0.04 business services per year, while those inside incubators receive 0.41 per year, a ten-fold difference. The incubator helps the firm access more information with less effort and cost, which allows them to focus on growth.

Read more: Testing the Differential Effect of Business Incubators on Firm Growth. Economic Development Quarterly, 29(4).

Improving the productivity of local domestic manufacturing firms

The attraction of international firms has been a core economic development activity for decades. Research has shown that foreign multinational enterprises (MNEs) in the manufacturing sector can improve the productivity of domestic manufacturing firms in the same community through imitation, worker mobility, and vertical linkages. Fewer studies have examined the impact of MNEs in the services sector on domestic manufacturing firms.

Since services are becoming the dominant contributor to GDP in many countries, researchers in Italy wanted to know if productivity in local manufacturing firms was affected by the arrival of service sector MNEs in the community. They also wanted to explore whether co-location was an important driver, or if other forces were at work.

They found that service MNEs have a strong productivity spillover effect on local manufacturers. This is particularly true for customers of the MNE (more so than competitors or even suppliers), as it is in the foreign firms’ best interest to share knowledge with and improve the operations of their customers.

As for co-location, the results show that having an organizational relationship with service sector MNEs is more important than spatial proximity. Resource-sharing, meetings, short visits, and other communication and collaboration channels can be more significant than being located in the same community.

Economic developers trying to improve the productivity of their local manufacturing firms could consider asking about and offering to facilitate relationships between local manufacturing firms and their MNE suppliers as part of BR&E efforts.

Read more: Productivity Spillovers from Foreign Multinational Enterprises to Domestic Manufacturing Firms: To What Extent Does Spatial Proximity Matter? Regional Studies,49(10).

Case study of the Louisville Enterprise Zone

Enterprise zones (EZ) are defined geographic areas, often struggling economically, where incentives are used to attract firms and encourage job creation. In the 1980s and 90s, US federal and state governments adopted enterprise zone programs, with mixed results. However, a review of the research done on these zones revealed that different research methods (using more appropriate spatial units, time spans, and data) may be more insightful. With that in mind, a researcher from the University of Louisville in Kentucky decided to do a post-program evaluation of the Louisville EZ, which was launched in the 1980s and terminated in 2003 for various economic and political reasons.

The Louisville EZ offered tax benefits to firms that provided benefits back to the zone. To qualify, the firms had to hire unemployed and underemployed people who lived in the zone, increase capital investment or workforce size, and deliver at least 50 per cent of its services within the zone. Firms that met these criteria were rewarded with tax exemptions on building materials, machinery, equipment, and vehicles, and wage subsidies (in the form of tax credits) for the formerly underemployed local workers.

An older study of the Louisville EZ concluded that the program had no effect. However, the study only looked at the time frame of 1980-1990—even though the zone was expanded several times through the 1980s and continued until 2003—and did not differentiate employment outcomes by industry. This new study found strong positive impacts for manufacturing and service firms. This impact may not have appeared in previous studies because the changes were slow to take hold. Firms in trade (retail and wholesale), agriculture, and mining saw insignificant impacts.

Since geographic characteristics like access to markets and local transportation infrastructure are important to firm growth, the results of the Louisville EZ may not be universally applicable. However, the study adds to the body of research showing that enterprise zones have the potential to successfully help distressed areas.

Read more: Impacts of Enterprise Zone Policy on Industry Growth: New Evidence From the Louisville Program, Economic Development Quarterly, 29(4).

Economic developer perceptions of green buildings and local economic development

Research shows that environmentally sustainable real estate development projects can improve quality of life, attract residents, and encourage the green economy by increasing demand for green building materials and recruiting firms interested in occupying environmentally friendly spaces. Given the potential economic benefits, it could be expected that economic developers would support this type of development. The perceptions of economic developers are important because they are in a position to influence policy decisions, mobilize stakeholders, and build consensus.

The authors asked over 500 members of the International Economic Development Council (IEDC) whether they view LEED and Energy Star certified buildings as a business recruitment tool. They found that the responses varied, depending their personal characteristics and community.

  • Economic developers from smaller communities and communities with weaker economies did not think that certified buildings were important to companies, while those from larger communities thought the opposite. Perhaps because of the perceived importance, the latter were also in favor of government mandates requiring some form of certification for new real estate development.
  • Women were more likely to see these buildings as important to companies and were more supportive of using mandates and incentives to encourage sustainable real estate development.
  • Men felt that companies and real estate developers did not know enough about the certifications and sustainable real estate development to make an informed decision.
  • Liberal economic developers were less supportive of using incentives.
  • Older respondents more strongly preferred government mandates.

Clearly, economic developers are not unanimous in their support for sustainable real estate development.  If advocates of this kind of development want to generate more support among economic developers, they will need to adapt their messaging and policies. In smaller and weaker communities, it may be helpful to accentuate operating cost savings to offset real or perceived rent premiums. They could also work to educate economic developers about the benefits of green buildings, and the declining cost of constructing them. A more complex target, but one that could yield good results, would be to increase the number of women in the profession (only 37 per cent of IEDC members are female).

Read more: Analyzing the Perceived Benefits of LEED-Certified and Energy Star–Certified Buildings in the Realm of Local Economic Development, Economic Development Quarterly, 29(4).

About the author

Michelle Madden is the editor of Higher ED. She is also the Outreach Manager for the Economic Development Program and a graduate of the LED master’s program.  She has authored a number of the articles in this series on behalf of the students, and has published several of her own blogs on economicdevelopment.org as well. Follow her on Twitter at @michelle_mad.

About the series

Higher ED: Insights for the Next Economy is a platform for students, guest speakers, staff and faculty of the University of Waterloo’s professional and graduate economic development programs to share knowledge with the field at large. The series takes works destined for an academic audience and reworks them into a fresh, easy-to-digest blog article.

Established in 1988, the Local Economic Development program is the only master’s program in Canada devoted solely to local economic development. It offers a balance between theory and practice by combining coursework, a major research paper, an internship, and weekly seminars featuring guest speakers. Students are prepared for careers in local, community, or regional economic development.

The Economic Development Program is a nationally-accredited provider of professional training. It delivers certification programs and seminars that offer a deep understanding of the Canadian context in a convenient block format. Peer learning is combined with informative lectures and practical case studies to provide dynamic instruction that is beneficial for junior and senior-level practitioners.

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