tMichaelB is the web site for Tom Bengtson, who writes about business, religion, family and politics.

Thursday, October 13, 2005

Expert offers insight into growing local economy

Living in the Twin Cities of Minneapolis and Saint Paul, I don't hear a lot of talk about economic development. We have many large companies here, and a fairly diversified economy. But economic development is important in other parts of the state. Minnesotans are better off if all communities across the state are economically strong, not just the metro area. For many small communities, economic development is a matter of attracting new businesses. And the competition is fierce. Small communities all over the country vie for a small number of major businesses which relocate every year.

I had an opportunity to hear William Fruth address this issue recently. Fruth is president of an economics research firm in Palm City, Fla., called POLICOM, Corp.

Communities that want to attract new businesses need to have developed land to offer. “The most important issue relative to the site selection process is having an actual site,” Fruth said. “Economic development is ultimately a real estate transaction,” said the former mayor of Tiffin, Ohio.

Fruth explained that communities grow when they import more money than they consume. Money comes into communities through primary or contributory businesses, which generate revenue by selling products or services outside the community. In most cases, Fruth said, primary businesses are manufacturers.

Dependent businesses spring up because of those primary businesses, and they ultimately consume the wealthy the primary businesses import into the community.

“Typically, 75 percent of all the jobs in a community are dependent upon the 25 percent of jobs provided by your primary business,” Fruth said. “ Roughly 95 percent of all businesses are there because of the presence of some 5 percent of the businesses that are primary in nature. So improving a local economy is about creating more primary industry jobs which pay a wage higher than the average area wage.” Fruth noted the wages paid by primary businesses set the standard for the rest of the jobs in the community.

Many primary businesses are mobile in the sense that they can operate anywhere in the country, if not the world. When they decide to move, they look at three factors, Fruth said: cost, timing and community attitude.

“Cost relates to the cost of set up, land, building, permitting, moving employees to the area and long-term operating costs such as labor, insurance and utilities,” Fruth explained. “Time refers to how long it takes to get set up in a community. Companies might have five or six months notice that they need to move, so communities that are ready have an advantage.” Communities that have existing buildings have an important advantage, Fruth said.

The actions of local governments reflect community attitude, Fruth explained. A large employer is not going to move to an area that has a history of shifting the cost of government onto the non-voting commercial sector away from the voting residential sector.

Communities that are growing take economic development seriously, Fruth said. “The 25 best local economies have had well-financed, active, economic development organizations for some time,” he said. “They have multiple primary industries, and that did not happen by accident.”

Companies also want access to reliable pools of labor, so communities that have money to spend on training have a significant advantage. Fruth said access to state training money is nice, but if it takes a year or more to get it, those funds won’t be of much use to a company that needs to get up and running in a matter of months.

Other advantages, Fruth noted: access to the interstate highway system, good roads that keep typical commutes to less than 30 minutes, and sophisticated bandwidth and telecommunications.

The presence of a four-year university in eight out of 10 cases is a neutral factor. In one case out of 10 it actually retards economic growth because of the anti-business attitude of faculty and administrators; in one case out of 10, a university declares that part of its mission is to encourage local economic growth and it is successful.

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