Patricia M. Flynn

Dean, Graduate School of Business,and Professor of Econo~nics, BentleyCollege. This article is based on re-search conducted for the National Cen-ter on the Educational Quality of theWork Force at the University of Penn-sylvania.

States have become increasingly active in promoting industrialcompetitiveness and economic development in recent years.Some of these efforts involve the reorientation of existing institu-

tions and programs that provide training, small business assistance, andrecruitment incentives. In addition, states have undertaken a variety ofnew initiatives with respect to technology transfer, venture capital, andthe modernization of established firms.

An extensive literature has emerged on state economic develop-ment efforts. The results, however, have not been of much help to statesin terms of developing competitiveness strategies, for two major rea-sons. First, the materials are primarily descriptive, highlighting theactions of various communities, states, and regions. Little evidence isgiven on the success or failure of such experiences. Moreover, for manyprograms, not enough time has elapsed to evaluate effectiveness, atleast over the long term.

Second, state experiments and initiatives have not been viewed in alarger analytical framework that would permit generalization and anunderstanding of the dynamic processes underlying these changes.Lacking this larger context, information about the experiences of otherstates, no matter how detailed or successful, is of limited value to statesoperating under different industrial and technological conditions.

This article adopts production life-cycle models as a framework inwhich to analyze systematically the interrelationships between indus-trial and technological change, human resource needs, and state eco-nomic development policies. This framework--in which products, pro-duction processes, and technologies are seen as dynamic phenomenawhose locational, skill, and training requirements change as theyevolve--provides a conceptual model useful for evaluating and design-ing state economic development policies.

The life-cycle framework suggests that states that incorporate thedynamics of industrial and technological change into their competitive-

ness strategies will reap employment and productiv-ity benefits that technology can provide. In contrast,states that fail to address these issues increase theirvulnerability to the negative impacts of technologicalchange, including widespread unemployment andjob loss.

L Trends in State EconomicDevelopment Efforts

State economic development efforts revolvearound three major strategies: the recruitment offirms to the state, the development of high-techstart-up firms, and the revitalization of establishedbusinesses. All state economic development strate-gies attempt to boost the local economy. States hopesuch steps will result in net increases in the private

State economic development effortsrevolve around the recruitment of

firms to the state, thedevelopment of high-tech start-upfirms, and the revitalization of

established businesses.

employment base (direct and indirect), in state andlocal tax revenues, and in long-term economicgrowth. The number of jobs created or maintained isnot the only factor to consider. The quality and levelof income associated with the jobs and the potentialfor spin-offs and other positive externalities play keyroles in the long-term results.

Recn~itment of Finns

In the 1960s and 1970s, state economic develop-ment efforts focused on the recruitment of employersand jobs, either luring existing plants to relocate orattracting new plants. Seeking to differentiate them-selves, states offered tax and financial incentives toencourage firms to relocate within their borders. Arelatively low-wage work force and a good laborclimate--which generally meant accommodating la-bor or no unions--were often highlighted in recruit-

ment packages, particularly those offered by south-ern states.

Historically, North Carolina has been noted forits ability to attract manufacturing plants~a majorityof the Fortune 500 companies have at least one plantlocated in this southern, right-to-work state. Morerecently, Tennessee, Kentucky, South Carolina, andAlabama have been successful industrial recruiters. ANissan plant located in Tennessee in 1980, and in1985 the state won its bid for the General MotorsSaturn plant. Kentucky attracted a Toyota plant in1985 and was first runner-up in the Saturn contest.South Carolina was successful in recruiting a BMWplant in 1992, and Alabama was the site selected in1993 by Mercedes-Benz for its first North Americanplant.

More generally, states throughout the countrysought to recruit high-tech industries during the late1970s and early 1980s. These efforts included varioustax and financial concessions and promises of workforces trained to accommodate the needs of individ-ual employers.

Recruitment efforts continue to be an active com-ponent of many states’ economic development plans.The competition for the Saturn plant, for example,included 38 states and 1,000 local communities. Fur-ther, state recruitment packages have become morecomplex as well as more expensive. In its winningproposal for the Saturn plant, Tennessee provided asignificant property tax abatement and infrastructureimprovements and promised to spend an extra $45million on higher education, in order to offer a rangeof technical courses (such as robotics and automation)for upgrading General Motors employees. Michigan’srecruitment of a Mazda plant in 1986 included $19million to train new workers, and Illinois offered $64million in 1988 in hiring and training assistance in itssuccessful bid for a Mitsubishi/Chrysler plant (U.S.Congress, Office of Technology Assessment 1990b).

In the 1990s, the stakes escalated. South Carolinaoffered a $130 million incentive package in its success-ful bid in 1992 to lure a 2,000-job BMW assemblyplant. South Carolina reportedly offered MercedesBenz a similar package to that offered BMW but lostout to Alabama, which promised a record-settingincentives package worth over $300 million. In addi-tion to the price, another unusual feature of thepackage was Alabama’s agreement to pay the salariesof the 1,500 workers (at an estimated $45 million)while they were being trained during the first year orso on the job (Applebome 1993; Browning and Coo-per 1993).

18 May/June 1994 New England Economic Review

In recent years, recruitment efforts in manystates have focused on attracting new plants of firmsthat are expanding, rather than trying to induceemployers to relocate existing facilities. The trend hasalso been toward greater emphasis on internationalin~cestors, as states hope to lure plants of Japaneseand other foreign companies.

High-Tech Job Creation

In the 1970s and early 1980s, many states begansupplementing industrial recruiting strategies withefforts to create jobs at home. The impetus behindthis trend came partly from some states’ disappoint-ment with their lack of success in recruiting jobs fromoutside. It was also in response to growing evidencenationally that the key to employment growth andgood jobs lay in "growing your own" (Grubb andStern 1988).

The experiences of California’s Silicon Valley andMassachusetts’ Route 128 provided tempting exam-ples of the high-tech job creation approach. Seekingto replicate the success of these areas, many statesadopted a range of high-tech development initiativesthat focused on research, development, and technol-ogy transfer.

Efforts to stimulate technological innovationhave taken a variety of forms, including researchcenters, industry-university partnerships, matchinggrants, and research parks. Research centers, oftenoperated in conjunction with universities, conductapplied research and allow firms to pool their re-sources for facilities and equipment. Research parks,which encompass concentrations of R&D firms, aredesigned to generate the exchange of new ideas andhasten their transfer to the market. By the mid 1980s,approximately 150 research parks were in operationin the United States, almost double the number adecade earlier (Eisinger 1988).

Programs to support high-tech start-up firmshave also grown in recent years. All states nowoperate programs to assist small businesses and mosthave programs designed to stimulate new firm for-mation. Traditionally, small business assistance pro-grams offered technical and managerial help; statesare expanding these efforts to include more entrepre-neurial and financial assistance. A few states havecreated small business "incubators," which provideshared services such as legal assistance, conferencerooms, accounting services, and research facilities atrelatively low rents to start-up firms.

Increasingly, state initiatives to create and de-

velop new firms have influenced private investmentpractices and filled gaps in capital markets. By themid 1980s, most states had funded venture capitalprograms to finance new and emerging businesses.These programs, some of which require matchingfunds from the firms, are generally quite small. Theyoften seek to expand or change existing lendingpractices in the private sector. They may supportfirms that might not have approached traditionalsources of seed money, or encourage private invest-ments in potentially productive projects traditionallybypassed because they were considered too risky.

These entrepreneurial venture capital programshave brought states into relatively unfamiliar territoryfor public sector institutions. Traditionally, state in-dustrial development loan programs worked withexisting firms that backed their loans with collateral.In contrast, the new loan programs often focus onstart-up operations and new product development,for which collateral is often not reqttired (Eisinger 1988).

Revitalization of Established Businesses

Recent years have also witnessed a shift in em-phasis in state economic development programs to-ward assistance to established businesses (Ganzglassand Heidkamp 1987; Osborne 1987; Rose and Kotlow-itz 1991). Efforts to help established firms in theUnited States historically have focused on the pre-vention of job loss or on the reemployment of work-ers displaced from their firms. Measures to retain jobsin mature or declining industries, for example, haveoften included import quotas, domestic content rules,restrictions on outsourcing, and protection againstunfair competition.

At the state level, cost-reduction incentives (forexample, reductions in unemployment insurance,workers’ compensation, or taxes and direct subsidies)have been used in attempts to offset cost disadvan-tages in an area and to keep employers in the state.States have also taken an active role in seeking tooffset the adverse consequences of structural change.Many states have developed worker assistance cen-ters or emergency teams to assist with plant closingsand provide job search assistance, supplemental un-employment benefits, and assistance in moving.

Some states have created programs to assistexisting firms before a shutdown becomes imminent.Michigan’s Jobs Opportunity Bank, Delaware’s BlueCollar Jobs Act, and the New Jersey Jobs TrainingProgram specifically target resources to retrain cur-rent workers and possibly forestall plant closings.

May/June 1994 Nero England Economic Review 19

Skills corporations, in which business and academicinstitutions work together and share training andretraining costs, emerged in the 1980s to assist estab-lished firms that were growing rapidly and facingskill shortages.

Increasingly, states have begun to take broadermeasures, which include programs for moderniza-tion and the development of new, foreign markets, inorder to bolster the competitiveness of existing firms.Michigan’s Modernization Services Program andMassachusetts’ Center for Applied Technology, forexample, seek to revitalize the states’ traditionalmanufacturing sectors, such as auto parts, apparel,and cutting tools. These programs assist firms in theintegration of new technologies by identifying bothtechnological and training needs and by providingsupport and technical assistance.

In a multistate effort, the Southern TechnologyCouncil Consortium for Manufacturing Competitive-ness was established in 1988 to utilize the states’vocational schools and community colleges to assistsmall and medium-sized enterprises with new tech-nologies. Some states have begun experimentingwith programs to stimulate exports by helping smalland medium-sized enterprises market their productsoverseas.

Some state-financed training programs haveshifted their efforts toward retraining the potentiallyunemployed and upgrading the skills of currentworkers. California’s Employment Training Panel,the nation’s largest state-financed training program,funded at approximately $55 million a year, wasoriginally designed to assist firms moving into the state.It now focuses on helping existing businesses retooland reorganize in order to enhance productivity.

A few states have begun linking their trainingfunds for established firms to capital investments.Indiana’s Basic Industrial Training Program, for ex-ample, requires firms in mature industries (such astransportation, steel, and heavy machinery) that areexpanding or modernizing to invest in capital equip-ment in order to be eligible for retraining assistance.The state covers between 10 percent and 50 percent oftraining costs, depending on the level of investment.Illinois’ Industrial Training Program, which added amature industry component to complement the tra-ditional support of new and expanding companies,also makes training contingent on capital investmentby the firms.

While the revitalization of established businesseshas taken on increasing importance, the shift in thisdirection is still quite limited. Most states continue to

focus their technology program funds on universityR&D and on assisting start-up firms, rather than onthe integration of new technologies into establishedfirms. For instance, only about 10 percent of the $550million spent on various kinds of technology pro-grams in 1988 was spent on technology transfer andon technical and managerial assistance. As of 1990,only 10 states operated programs whose primaryfunction was to assist manufacturers in technologicaladoptions. A mid 1980s survey by the Office ofTechnology Assessment (1990a) showed that only 2percent of small and medium-sized enterprises hadreceived industrial extension services from the state.

The recent Department of Defense "build-down"and growing defense conversion efforts will bringgreater attention and funding to industrial modern-ization activities. The federal Advanced ResearchProjects Agency will be providing hundreds of mil-lions of dollars nationwide for R&D and dual use(defense and commercial) technologies. In October1993, for example, Massachusetts received $10.6 mil-lion in the Clinton Administration’s first round ofdefense conversion grants. These funds will be usedto create a statewide Manufacturing ModernizationPartnership Program to help small and medium-sizedfirms diversify into commercial markets.

H. Technology Life Cycles,Competitiveness, and EconomicDevelopment 1

Life-cycle models emphasize the evolutionarycharacter of production and employment needs. The"industry life cycle" concept dates back to the 1930s,when industries were found to undergo a sequenceof stages---experimentation, rapid growth, dimin-ished growth, and stability or decline--as they devel-oped. Separate "life cycles" have subsequently beendelineated for products, for production processes,and for technologies.

Technology and Skill-Training Life Cycles

The technology life cycle, in particular, is avaluable tool in understanding the impact of indus-trial change on jobs and employment (Ford and Ryan1981; Shanklin and Ryans 1984). Technologies--suchas a numerical control technology, a microelectronics

This section draws heavily upon Flynn (1991, 1993).

20 May/June 1994 New England Economic Review

Table 1Skill Training Life Cycle

Introduction: Growth: Maturity: Decline:New and Increased Demand Slower Growth in Skill

Emerging Skills for Skills Demand for Skills Obsolescence

Nature of Tasks Complex Increasingly routinized Increasingly routinized Narrowly defined

Type of Job Firm-specific Increasingly general General: transferable General: transferableSkills

Effects on Job Elimination ofStructure occupations

Job enlargement: new Emergence of new Relatively rigid jobpositions created when occupations hierarchy; occupationssignificant change in associated with formalskill needs occurs education and related

work experiencerequirements

Skill Training Employer or equipment Market-sensitive Schools and colleges, Declining number ofProvider manufacturer schools and colleges more generally schools and colleges;

some skills providedby employer

Source: Adapted from Patricia M. Flynn, Technology Life Cycles and Human Resources, Lanham, MD: University Press of America, 1993, p. 19.

technology, or a data-processing technology---exhibitpatterns of development in which they are intro-duced slowly at first, become more widely adopted asintensive research and development efforts lead toimproved performance, and are then replaced by anew, superior technology.

A clear understanding of the technology cyclecan provide signals of impending changes in prod-ucts and production processes. Rapid product inno-vation accompanies the earliest phases of a technol-ogy’s development, whereas process innovationpeaks later in the technology’s cycle as productdesign stabilizes. As a technology matures, uncer-tainty about its capabilities and limitations declines,and products and processes can become more stan-dardized. Innovations in the later stages of develop-ment of a technology, if they occur at all, are primar-ily minor improvements in equipment rather thanmajor, fundamental changes in either product orproduction processes.

Just as the production processes change over thelife cycle of a product, so do the skill and trainingneeds of industry over the life cycle of a technology(Table 1). The early stages of a technology, which arecharacterized by a high degree of product innovation,are relatively skill- and labor-intensive; professionalssuch as engineers and scientists perform most of thetasks later assumed by production and marketingmanagers, technicians, and skilled craftsworkers.

The firm-specific nature of skills required by the newtechnologies also means that employers must providetheir own training or rely on equipment vendors todo so.

As a technology becomes more widely adoptedand equipment standardized, skills that were oncefirm-specific become general skills transferableamong employers. Increased demand and standard-ization of skills permit their "production" on a largerscale and at locations away from the R&D sites. As aresult, skill development tends to shift from theworkplace to the formal education system as technol-ogies mature. Computer programming, keypunch-ing, and word processing are classic examples of thistransfer.

As technologies become obsolete, training fo-cuses on replacement needs and on the retraining ofworkers for other areas. A limited market for theseskills and declining student enrollments result in thetermination of school-based training programs inthese fields. The responsibility for training to fillrelatively short-term, skilled replacement needs,thus, shifts back to firms.

The Geographic Location of Jobs

In addition to altering production processes andskill needs, technology and production life cyclesaffect the geographic location of jobs. Patterns of

May/June 1994 New England Economic Review 21

regional specialization occur, as employers seek tolocate different production activities in areas bestsuited to their needs. Furthermore, changes in thelabor and skill requirements over a product’s life cantrigger geographic shifts in employment over time.

The "regional life cycle model" suggests that theattractiveness of regional and local economies varieswith the skill needs of products at different stages ofdevelopment (Rees and Stafford 1984). Early stages ofproduct innovation and development occur in areasin which highly skilled professional and technicalworkers are available to conduct R&D. Standardiza-tion and increasing output of the product triggerreduced skill requirements, inducing productionshifts to geographic areas characterized by lowerlabor costs.

The "’regional life cycle model"suggests that the attractiveness of

regional and local economiesvaries with the skill needs

of products at differentstages of development.

Similarly, on a global level, the "internationalproduct cycle model" posits that firms initially locateclose to the source of demand for their newly devel-oped products so they can rapidly communicatemarket information into product changes (Wells 1972;Vernon 1979). As foreign markets emerge for theproduct, they generate exports for the producingcountry. At some point, depending on the nature ofthe products and the characteristics of foreign de-mand, the expanded foreign market attracts its ownproduction base. When production costs abroad arelow enough to compensate for transportation andother costs, such as tariffs, the country that originallyproduced the product becomes a net importer of thegood. At the final stages of product development,production activities may shift from the sites of productdemand to lower-cost areas in other countries.

Industries usually rely on a range of technolo-gies, have products in several phases of develop-ment, and are characterized by diverse skill needsand employment patterns. The electronics industry,for example, produces both highly sophisticated

products that incorporate technologies on the cuttingedge and more mature consumer electronics goods,such as radios and televisions. Firms manufacturingthe newer goods tend to concentrate their productionoperations near R&D. More mature products areproduced in lower-cost areas. Similarly, while anincreasing share of the world supply of semiconduc-tors is produced outside the United States in coun-tries with relatively abundant supplies of low-costlabor, the design and development work is stillhighly concentrated in Silicon Valley.

The computer industry shows similar patterns ofregional specialization and employment trends (Hek-man 1980). R&D, design, and production of state-of-the-art equipment continue to be geographically con-centrated in Massachusetts and California, alongwith company headquarters. In contrast, the large-scale production of relatively standardized computercomponents and routinized assembly activities havedispersed away from R&D centers, taking place inlarge branch plants in states with relatively low laborcosts (such as Tennessee, South Dakota, and Northand South Carolina) or in low-wage countries (suchas Mexico, Hong Kong, and Taiwan).

III. State Strategies and Life CyclesWhen viewed in the life-cycle framework, the

evidence on recruitment, high-tech job creation, andbusiness revitalization strategies sheds new light onthe role of states in fostering economic development.

Recn~it~nent Strategies

Relocation incentives will have different effectson different types of production activities. In the earlystages of product development, firms competemainly via innovation and through product differen-tiation. In contrast, for firms that produce relativelystandardized products, competition is mainly a func-tion of cost. Incentives such as low wages and taxabatements will, therefore, be a greater inducementto plants operating at the later stages of productioncycles than to firms involved primarily with R&D andentrepreneurial activities. Similarly, short-term cus-tomized training programs are likely to appeal toemployers engaged in large-scale, mass productionprocesses, but be of little value to firms characterizedby complex, nonstandardized activities, which re-quire relatively high-skilled and broadly trainedworkers.

22 May/June 1994 N~o England Economic Review

The life-cycle framework accentuates the need tolook beyond industry aggregates in fashioning re-cruitment strategies for economic development. Mostindustries and many, especially larger, firms encom-pass products, processes, and technologies at variousstages of maturity. Industrywide data, therefore,combine production activities requiring different cap-ital and labor requirements, and with diverse locationneeds.

In the life-cycle perspective, the concept of a hightechnology industry is a misnomer. "High tech" is adynamic and relative concept that describes the ear-liest phase of development. "High-tech employ-ment" should refer only to those jobs involved withR&D, innovation, or nonstandardized productionactivities--jobs that exist across a wide range ofindustries, including those that are relatively mature."Low-tech" or routinized production activities (at theother end of the development cycle) also are foundacross a variety of industries, including computersand electronics.

In attempts to recruit "high-tech" employersduring the late 1970s and early 1980s, many statesused incentives including tax abatements and short-term customized training programs to pursue a listof "high-tech" industries. While the industries wereselected on the basis of their relatively high propor-tions of R&D expenditures and of professional andtechnical workers, the bulk of the employment inthese industries was in blue-collar and clerical jobs.Many states succeeded in recruiting only the rela-tively low-skilled, standardized manufacturing jobs(for example, the assembly of printed circuit boards)in these industries.

Earlier recruitment activities yielded similar re-sults, with jobs relocating from other states primarilyin manufacturing branch plants (Malecki 1983). Thesejobs are more apt to involve relatively standardizedproduction activities and be more vulnerable to fur-ther dispersion to lower-cost locations than are jobsin firms indigenous to a geographic area. Many of thenorthern firms that relocated to southern states totake advantage of a low-wage work force and com-pany-specific training, for instance, subsequently re-located to still lower wage areas (Southern GrowthPolicies Board 1988; Rosenfeld 1992).

The bulk of recruitment incentives used by statesare still those (for example, tax and financial abate-ments, customized training) that appeal primarily toplants with relatively low-skilled and low-wage posi-tions. The attractiveness of the Carolinas to Germanfirms locating plants there in recent years, for in-

stance, has been attributed to trained and malleablelabor, low wages, and cheap land. With respect toworkers, in particular, the Germans are said to havefound "a work force willing to tolerate managementpractices that Americans often find idiosyncratic, ifnot obnoxious .... Such adaptability has more thanmade up for the skill levels of many of the workers"(McCarthy 1993). In 1993 Mercedes-Benz sought aU.S. location in order to move closer to the vastAmerican market and avoid a 25 percent tariff onimported trucks. The Alabama site selected offeredrelatively low labor costs and a tax and incentivepackage that will result in Mercedes paying theequivalent of $100 for the site (Applebome 1993).

Few businesses move theiroperations between states, andvery little employment growthis attributable to the migration

of jobs into a state.

While many states continue to actively recruitemployers, a relatively small number of states can beexpected to launch effective recruitment strategiesthat contribute significantly to the number of "good"jobs and to long-term economic development. Fewbusinesses move their operations between states, andvery little employment growth is attributable to themigration of jobs into a state.

Moreover, recruitment strategies, even those ini-tially appearing quite successful in terms of numbersof new jobs, can actually undermine long-term eco-nomic growth. For instance, if tax and other financialincentives have a negative impact on the quality oflife by restricting education and services in the area,relocation incentives could deter the entry of employ-ers whose work force contains relatively high propor-tions of professional and technical workers. In addi-tion, the recruitment of new industries and firms canbackfire if, in the process, incentive packages to newfirms impair the competitiveness of established em-ployers or prompt their "premature" departure fromthe area. Expensive recruitment packages, for in-stance, can drain resources from more traditionalsources of employment, which comprise the bulk ofall jobs in local economies. Existing companies may

May/June 1994 New England Economic Review 23

also suffer if the state subsidizes the entry of firmsthat are their direct competitors.

The external control inherent in branch planteconomies, whereby major corporate decisions aremade elsewhere, suggests that local employment andother community concerns may not be a top priorityin discussions of firm location and restructuring.Further, given their mix of production activities andoccupations, branch plants are less likely than indig-enous new firms to act as a "seed bed" or "growthpole" in stimulating spin-offs and new employmentopportunities in an area.

Recent anecdotal evidence does indicate, how-ever, that several foreign auto assembly plants (forexample, Toyota in Kentucky, Honda in Ohio, Nis-san in Tennessee) have attracted supplier branchplants to the area. Moreover, if state recruitmentstrategies provide longer and more complex educa-tion and training programs than in the past, statesmay be able to attract better-quality jobs. More highlyskilled and more broadly trained work forces areincentives that appeal to firms in innovative, non-standardized activities in earlier stages of develop-ment. Michigan, for example, one of the top threecontenders for a Saturn plant in 1985, offered arecruitment package that encouraged development of"world-class" manufacturing and engineering talent.While it lost its bid for the manufacturing plant, itwon the company headquarters and R&D facilities,and the relatively high-skilled jobs that accompanythese functions (Fosler 1988).

High-Tech Job Creation Strategies

The life-cycle framework helps to clarify the roleof new and emerging businesses in economic devel-opment. The creation and development of new en-trepreneurial firms require strategies that focus onthe characteristics and needs of products and tech-nologies during their early stages.

In the high-tech success stories of the SiliconValley and Route 128, growth was driven by localstart-ups and spin-offs from companies already in thearea. The technical infrastructure of both areas en-compasses applied research and product develop-ment at universities, informal local communicationnetworks, a scientific and technical labor force, andproximity to complementary and competitive firmsand to distributors and markets. These examplesaccentuate the importance of innovation, research,product design, and non-routine production activi-ties. Venture capital can provide the means to create

and develop these new and emerging firms. Researchon the location of technology-based entrepreneurialfirms confirms these life-cycle hypotheses with re-gard to the importance of R&D, venture capital, andskilled labor in high-tech development strategies(Malecki 1990, 1991).

"High-tech" job creation strategies are not likelyto be very effective for many states (Browne 1983;Gittell and Flynn 1994). Historically, small technolo-gy-based firms, and high-tech employment moregenerally, have accounted for a relatively small pro-portion of all employment. High-tech employmentin the United States is geographically concentrated,with most found in New England, California, andTexas. R&D activities, in particular, remain geographi-cally concentrated in a few areas of the country.

States with significant universityR&D, venture capital, and highly

skilled labor have the mostpotential for implementing a

successful competitive strategybased on entrepreneurial

new firms.

States with significant university R&D, venturecapital, and highly skilled labor have the most poten-tial for implementing a successful competitive strat-egy based on entrepreneurial new firms. In addition,an established base of high-tech employment pro-vides an area with a competitive edge in the creationof new entrepreneurial firms. An existing agglomer-ation of firms in similar or related sectors is a princi-pal determinant of both birth rates and the distribu-tion of small technology-based firms. Concentrationof these resources in one area enhances the firms’productivity by creating external economies of scalein production and marketing. A self-sustaining "crit-ical mass" of employers can develop, as the concen-tration of entrepreneurial firms attracts additionalfirms and venture capital, strengthens the technolog-ical infrastructure, attracts and retains skilled profes-sionals, further promotes informal communicationnetworks, and encourages innovative activities (U.S.Congress, Office of Technology Assessment 1984;Malecki 1990, 1991).

24 May/June 1994 Nezo England Economic Review

The flow of venture capital further highlights theadvantages of an established high-tech base and thepresence of research universities in the formation ofnew firms. The availability of venture capital varieswidely by state and region, with funds flowing fromU:S. financial centers like New York and Chicago tocenters of innovation and technology. California,Massachusetts, and Texas regularly attract venturecapital, with California alone often accounting forone-third to one-half of all U.S. venture capital. Incontrast, many states have virtually no venture cap-ital funds.

While an established high-tech employment basegives an area a decided advantage in new firmformation, relatively little is known about the initialgeneration of local start-ups. The initial "confluenceof technological opportunity," or the appearance ofthe first entrepreneurs, appears to be due to theavailability of start-up financing and the existence ofinformal (noninstitutional) personal and local con-tacts supportive of new, unproven entrepreneurs(U.S. Congress, Office of Technology Assessment1984). Small firms, that is, those with fewer than 100employees, are the major source of entrepreneurs,although a significant number of founders do origi-nate from large firms.

It is important to differentiate among small firmsin fashioning a high-tech development strategy. Mostsmall businesses create no jobs after the first fewyears and many, particularly in the service sector,generate lots of relatively low-paying, dead-end jobsconducive neither to innovation nor to entrepreneur-ship. Relatively few small firms have the potential forgrowth and expansion and act as "seed beds" forfuture jobs. Such firms are dominated by innovative,nonstandardized activities.

A high-tech job development strategy will beextremely difficult, if not impossible, for relativelysmall areas that lack universities, existing technology-based companies, and skilled labor. Areas dominatedby relatively mature industrial bases and technologiesare also unlikely to be able to implement an effectiveeconomic development strategy around technology-based entrepreneurial firms.

Empirical evidence confirms that most researchparks fail (Eisinger 1988). Some are unable to attracttenants; others fail to generate spin-offs; almost all failto stimulate technology transfer. With respect toventure capital, most state programs are quite smalland probably will not prove effective in establishingthe "critical mass" of high-tech firms needed togenerate a self-sustained growth environment.

Business Revitalization Strategies

The life-cycle framework also sheds new light onstrategies to revitalize traditional and establishedfirms, whose activities are primarily beyond the ini-tial stages of development. Some established firmsinvolve "mature" production activities. Representingthe extreme opposite of high-tech activities, matureactivities are those in which technologies and prod-ucts are relatively standardized, mass productionpredominates, skill requirements are relatively low,and little or no innovation is taking place. Competi-tion is primarily a function of cost.

The potential across statesfor programs to enhance

productivity and competitivenessthrough revitalization

of established businessesis extensive.

Considerable diversity exists among traditionalindustries in terms of their organizational structures,occupations, wage rates, and skill requirements.Within industries and even firms, mature segmentsoften coexist with high-tech segments, as well as withactivities that involve products and technologiesalong the mid-range of the development spectrum.Effective revitalization strategies for these industrieswill take a variety of forms, including integration ofnew technologies, better utilization of mature tech-nologies, development of specialized product niches,and reorganization of the workplace.

In contrast to the recruitment and high-tech jobcreation strategies, the potential across states forprograms to enhance productivity and competitive-ness through revitalization of established businessesis extensive. There are two main reasons for this.First, the dynamics of technological and industrialchange accentuate the ongoing need for upgrading ofhuman resources and facilities to maintain competi-tiveness. Second, states have only just begun to tapthe opportunities available to them regarding busi-ness modernization strategies.

The introduction of new technologies across avariety of established industries can benefit states by

May/June 1994 New England Economic Review 25

fostering product and process innovations that leadto new and improved products and new markets.States need not have high-tech firms located withintheir boundaries in order to benefit from such astrategy. While still a strong competitor in terms ofR&D and innovation, the United States continues tofare poorly with respect to the transmission of "bestpractice" technologies throughout the industrialstructure. U.S. rates of adoption of robotics, comput-erized numerical control devices, and other advancedtechnologies continue to fall behind those of ourindustrial competitors. Moreover, even when adop-tion rates are similar, U.S. firms have been found tobe less efficient in their implementation (Osterman1988; Dertouzos, Lester, and Solow 1989; U.S. Con-gress, Office of Technology Assessment 1990a, 1990b).

The failure of firms to remaintechnologically competitivecontributes more to workerdisplacement and job loss

than does the adoptionof new technologies.

Some observers express concern that adoption ofnew technology causes permanent job loss. In fact,however, the failure of firms to remain technologi-cally competitive contributes more to worker dis-placement and job loss than does the adoption of newtechnologies (U.S. Government Accounting Office1986; Cyert and Mowery 1987; OECD 1988). Adop-tion of technologies in their relatively early phases ofdevelopment has primarily positive impacts such asupgrading and job enlargement. In contrast, thepreponderance of negative impacts such as masslayoffs, unemployment, and job downgrading relateto adoptions of relatively mature technologies or tothe failure of firms to adapt at all.

An alternative to the technology-based approachfor enhancing the competitiveness of establishedfirms involves a shift toward customization and mar-ket niches. Flexible manufacturing systems that makeshorter production runs economical and encourageproduct differentiation have promoted a trend to-ward greater use of small-batch production of rela-tively specialized products. More flexible production

processes and highly skilled labor also facilitate adop-tion of more advanced technologies (Doeringer,Terkla, and Topakian 1987).

Organizational and managerial changes are oftennecessary to fully exploit the potential productivitygains of new technologies and corporate restructur-ing. U.S. managers have been criticized, however, forseveral shortcomings in this area: (1) failure to eval-uate effectively both the short-term and the long-term costs and benefits of technological adoptions;(2) inadequate development of human resources tomeet changing needs; (3) insufficient development oforganizational structures that can fully exploit theproductivity gains associated with new technologies;and (4) failure to establish fruitful cooperative rela-tionships with workers (Hayes and Abernathy 1980;Cyert and Mowery 1987; Drucker 1988; Hayes andJaikumar 1988).

Small firms, in particular, have difficulties withtechnological adoptions because of costs, skill andretraining requirements, and the need to keep up-to-date. State industrial extension and training efforts,however, reach relatively few small firms. State offi-cials indicate that it is hard to find small companies,assess their needs, and spend enough time with themto make a difference.

The fact that industrial extension programs arerarely integrated with state training efforts highlightsother missed opportunities. Neither technology nortraining in isolation from systemwide support willeffectively increase productivity and jobs. The recenttrend, albeit small, to link training with capital invest-ments is a good step in promoting industrial compet-itiveness.

The shift in some state-financed training pro-grams away from recruitment and toward the moreefficient use of existing state resources and firms alsohas the potential to enhance competitiveness andlong-term economic growth. However, while mod-ernization efforts generally require flexible and morebroadly trained workers, most state-financed trainingprograms continue to provide relatively short-termtraining for individual firms (Creticos and Sheets1990). In-plant training provided by state-financedtraining programs has not been assessed on a sus-tained basis; skills corporations, too, have had fewevaluations. Furthermore, the firms accepting publicfunds might have provided the training anyway.Matching requirements help to limit the degree ofsubstitution taking place; questions remain, how-ever, about the transferability of the skills beingprovided.

26 May/June 1994 New England Economic Review

IV. Development of State StrategiesThe life-cycle perspective on competitive strate-

gies is useful to states for several reasons. First, statescan use it to assess where their economies are interms of emerging, evolving, and maturing employ-ment opportunities, and thus what economic devel-opment needs might be. Second, states can use it toguide their determination of where they might wantto be, the feasibility of their aspirations, and theeconomic development issues that must be addressedto move in that direction. Third, states can use it todetermine the relevance of the experiences of otherstates to their own competitiveness strategies.

Tailoring Competitiveness Strategiesto Individual States

Most states will select a mix of strategies (recruit-ment, job creation, retention) to promote competi-tiveness and long-term economic development. Astate’s economic development goals should reflect itscompetitive strengths and opportunities. In addition,the selection and design of strategies and particularprograms should be linked to the state’s employmentbase and resource mix.

States will differ with respect to composition ofemployers, characteristics of the work force, institu-tional capabilities, and other resources. Goals andstrategies, therefore, are expected to vary from stateto state. In tailoring their strategies, states shouldassess their existing employment base, the charac-teristics and potential of state resources, and thestrengths on which they can build competitive advan-tage.

Initially, states should analyze the nature andmix of their employers and jobs. This analysis re-quires looking beyond industry aggregates and iden-tifying the types of production activities (for example,R&D, standardized assembly), types of employers,occupational requirements, and skill needs. Businessrevitalization strategies, in particular, further accen-tuate the importance of understanding the existingemployment base. While each state is likely to iden-tify additional questions relevant to its particularcircumstances, the first box provides guidelines forconducting this employment assessment.

States should then develop an inventory of laborand other resources available (educational and train-ing institutions, R&D facilities, venture capital) thatcan influence competitiveness efforts. Does the statehave the types of resources necessary to effectively

State Employment Assessment

¯ How does the state’s industrial structure com-pare with the national economy? How hasthis been changing over time?

¯ How does the state’s occupational mix in itsmajor industries compare with the nationalaverages in those industries?

¯ Describe the extent of various kinds of pro-duction activities located in the state (the mixof branch plants, headquarters, and R&D fa-cilities). Is there a trend in recent years?

¯ Make a grid classifying the state’s major in-dustries and employers by development stage(emerging, growing, stabilizing, declining).

¯ What is the birth rate of new firms in thestate? How does this compare with the na-tional average?

¯ What are the characteristics (industries, firms,products, technologies) of the state’s high-tech employment?

¯ What are the characteristics (industries, firms,products, technologies) of the state’s majortraditional employers?

¯ What is the extent of entrepreneurial smallfirms within the state? Identify potential high-growth areas.

¯ What industries have been the primarysources of plant closings, layoffs, and unem-ployment in the state in recent years? Whatwere the reasons for these events?

What are the needs (skills, technological, fi-nancial) of the state’s traditional employers?

implement a high-technology job creation strategy orto recruit good jobs? The characteristics (age distribu-tion, education levels, occupations, wages) of thestate’s labor force should be compared with nationalaverages to identify state strengths or potential prob-lems. A state with a relatively old work force, forinstance, will face more replacement needs thanothers. A state with relatively high proportions ofengineering and technical talent can have an advan-tage over others in high-tech development possibili-ties. A state with relatively low production wages canattract manufacturing plant production jobs. Theoverall structure of a state’s education and training

May/June 1994 New England Econo~nic Review 27

State Resource Inventory

¯ How does the state’s work force compare withnational statistics regarding demographic andeducational factors? What are the implicationsin terms of education and training needs?

¯ What are the major R&D institutions in thestate?

¯ What are the extent and sources of venturecapital available to new firms?

¯ Describe the "business culture," labor cli-mate, and status of labor relations in the state.Give examples.

¯ What major skill shortages and surpluseshave occurred in recent years? How werethese imbalances resolved?

Describe the evolution and current status ofthe state’s education and training network.What are the strengths and weaknesses of thevarious institutional components of this net-work?

Which firms have used state-financed trainingprograms? Describe the extent and types ofskills provided.

What relationships/partnerships exist be-tween education and training institutions andemployers (for example, co-op programs, ap-prenticeships, advisory boards)? Have thesemet expectations?

network should be identified. Further, the roles andtrack records of the institutional components of theeducation and training network should be assessed interms of skill generation and responsiveness tochanging labor market needs, in order to understandthe capabilities of the system. The second box pro-vides guidelines for the development and assessmentof the state’s resource inventory.

Lastly, competitiveness strategies and programsshould be assessed in light of the state’s employmentand resource bases. In which activities is state policylikely to be most effective in generating good jobs andlong-term economic development? In which indus-tries? In which types of firms? Assessments should bemade of various recruitment, job creation, and busi-ness revitalization programs previously implementedin the state. Such assessments should include boththe short-term and the long-term impacts. In addi-

tion, potential barriers and constraints to implement-ing strategies and programs should be identified.When policy options have been identified as particu-larly appropriate for the state, the experiences ofother states in that regard may then prove particu-larly useful. What were the impacts of those pro-grams elsewhere, and what problems were encoun-tered? The third box provides guidelines for thinkingstrategically about the state’s economic developmentpolicies and employment and work force needs andopportunities.

"’Defensive" and "’Proactive’" State Actions

The life-cycle framework highlights the impor-tance of distinguishing between "defensive" and"proactive" actions in seeking to bolster a state’scompetitive advantage and long-term economic de-velopment. Defensive actions represent an expedientway of improving competitive position by loweringcosts. They do not, however, address issues of workforce quality and technological change that underliebusiness performance. In contrast, proactive or inno-vative adjustment mechanisms can lower costs byincreasing labor productivity, motivating workers,improving efficiency, and increasing the quality ofthe work force (National Center on Education and theEconomy 1990; Doeringer and others 1991).

Classifying state actions as defensive or proactivecan be useful in understanding the impacts andtrade-offs, both short-term and long-term, of variouspolicy options. Defensive state actions such as taxabatements or other financial incentives can quicklylower costs to potential employers and perhaps at-tract relatively large numbers of jobs to some states ina short period of time. As discussed above, however,these mechanisms may undermine long-term eco-nomic growth, as the jobs recruited are often rela-tively low-skilled and vulnerable to further relocationto even lower-cost areas. Proactive strategies mayincrease costs initially and will take longer to reducecosts via productivity increases. However, the ulti-mate impacts on jobs and growth are likely to bemore positive and longer-lasting.

The defensive/proactive dichotomy highlightsthe importance of having public policies focus on"good jobs" as opposed to "jobs" per se. Moreover,"output" should be viewed in addition to jobs inevaluating policy effectiveness, particularly with re-spect to relatively mature industries where increasingcompetitiveness and long-term viability are oftenachieved with lower employment levels.

28 May/June 1994 New England Economic Review

Strategic Thinking about EconomicDevelopment Policy and Employment

and Work Force Needs

¯ What are the areas in which the state hasparticular strengths, in light of the employ-ment and resource inventory assessments?

¯ What firms have moved into the area in recentyears? Did they relocate from another state (ifso, which)? Are they foreign-owned? Whatare their major production activities and thenature and extent of their jobs?

¯ What incentives have been used by the statein recruiting firms? Did those firms that havemoved in take advantages of these?

¯ To what extent have new, high-tech firmsbeen created in the state in recent years? Inwhat fields? What was the source of venturecapital?

¯ What are examples of traditional industriesand firms in the state that have modernizedtheir workplaces in recent years? Were state-financed training programs involved? Wereany education and training institutions di-rectly involved?

¯ Has the state been able to leverage funds toprovide for training? To what extent? Withwhich employers?

¯ What types of coordination and cooperationof education and training institutions appearnecessary to implement the programs thatappear to meet best the state’s current andfuture employment and training needs?

¯ What barriers and constraints may inhibit theimplementation of strategies and programsthat appear to meet best the needs of thestate?

instance, is indicative of this shift away from a purecost orientation to one that emphasizes productivityand technological competitiveness. The policy op-tions being used within these broader strategies havebeen evolving in a similar direction. More complexrecruitment packages that include training grants forupgrading and for relatively skilled positions, forexample, can reduce labor costs through productivitygains~in contrast to tax abatements and other finan-cial incentives.

With respect to business revitalization, whileefforts are still limited, states are experimenting witha range of options with the potential to enhanceproductivity at the workplace. These include helpingolder firms adopt new technologies or make moreeffective use of traditional technologies, and helpingthem develop new markets by customizing or export-ing their products. This shift toward more proactiveapproaches promises more highly skilled jobs. Proac-tive approaches also should provide real cost savingsover time, whereas defensive ones threaten to be-come increasingly expensive. With respect to recruit-ment strategies, for example, when the first fewstates began offering tax abatements and customizedtraining, these incentives helped to differentiate onestate from another as they sought to attract newemployers. Over time, more and more states havefound it necessary to follow suit or risk not beingconsidered a serious contender. Now virtually allstates offer tax and financial incentives and custom-ized training, so states are incorporating additionalfeatures into recruitment packages in order to distin-guish themselves from the others.

Proactive approaches have a further advantage:At the national level the likelihood is greater of realnet employment gains, rather than just a reshufflingof jobs among states. Moreover, proactive ap-proaches have the potential to lead the way to aneconomic development outcome with relatively highwages, high skills, and high living standards, effec-tively bypassing low-wage, low-skill alternatives.

In recent years, state economic developmentstrategies have begun to focus more on proactiveoptions and less on defensive responses. The trendaway from an almost exclusive focus on recruitmenttoward job creation and business revitalization, for

Note: The work reported herein was supported under the Educa-tion Research and Development Center program, agreement num-ber R117Q00011-91, CFDA 84.117Q, as administered by the Officeof Educational Research and Improvement, U.S. Department ofEducation. The findings and opinions expressed in this report donot reflect the position or policies of the Office of EducationalResearch and Improvement or the U.S. Department of Education.

May/June 1994 New England Economic Review 29

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