The New Economic Development Theory

The New Economic Development Theory

by Yudo Anggoro, University of North Carolina at Charlotte

The theory and practice of local economic development in the United States has transformed over the last ten years. The new local economic development theory and practice now focuses on enhancing local community’s ability to create and retain employment from within; while the old theory and practice emphasized on attracting outside investment in manufacturing (Teitz, 1994). The old image of economic development usually was dealing with promotional activity managed by local Chambers of Commerce to attract investment. The actors who were heavily involved in this activity were the business and political elites that formed coalition.

However, this old view of economic development has changed. The new theory and practice of economic development support the emergence of entrepreneurial spirit in the form of new enterprises, small businesses, and the development of existing firms. Other important elements in this new economic development theory are import substitution, support for entrepreneurship, technical and financial assistance to local enterprises, and private-public partnership (Teitz, 1994).

Meanwhile, Michael Porter (1997) believes that economic development in inner cities comes from recognizing and enhancing the inherent advantages of an inner-city location and building on the base of existing companies. Porter focuses on how to create jobs and sustainable business activity that benefit the disadvantaged inner cities residents. There is genuine economic potential in inner cities that has been largely unrecognized and untapped. The genuine competitive advantages of inner cities fall into four areas, which are strategic location, integration with regional clusters, unmet local demand, and human resources. This general idea of economic development from Porter (1997) is consistent with the new economic development from Teitz (1994) because Porter also supports the idea of developing the economic potential of the inner-city. In this respect, Porter follows the definition of economic development from the American Economic Development Council (AEDC) as “the process of creating wealth through the mobilization of human, financial, capital, physical, and natural resources to generate marketable goods and services.”

On his idea about industrial clusters in inner city development, Porter (1997) notes that an effective economic strategy for inner cities must focus on developing the clusters within inner cities, instead of isolated companies, and linking them better to those in the surrounding economy. Porter defines clusters as unique concentration of competitive companies in related fields. What should be remembered is that the definition of clusters does not only involve firms and suppliers, but also include educational institutions, specialized financial providers, and specialized research centers. Porter believes that the power of a cluster-based approach to development is far greater than company-based or even sectoral efforts.

A comprehensive and effective cluster economic development strategy according to Porter (1997) must focus on developing the clusters within inner cities, and linking them better to those in the surrounding economy. Building on regional clusters involves tapping powerful external economies on information, skills, infrastructures, and markets. A cluster-based approach also increased private and public investment in skills, technology, and infrastructure. Porter’s idea about clusters within inner cities is also consistent with the new economic development theory from Teitz (1994). The idea of developing clusters implies the development of local potential resources in terms of financial, physical, capital, human, and natural resources within inner-cities area.

Porter (1997) also supports the emergence of local entrepreneurs to meet demands in inner cities. It is because inner cities area offers promising opportunity for inner city based entrepreneurs and businesses. Even though inner cities area has low average incomes, high population density within the area represents a large local market with substantial purchasing power. The market becomes even more attractive because only few competitors exist. This is an opportunity for local community to be local entrepreneurs that can fulfill the unmet demand in inner-cities area. In his research, Porter found that there were many local entrepreneurs in inner-city area who were ready to respond to any opportunities arise.

Porter also gives his support on community by giving credit to the role of community-based organizations (CBO). Some CBO has been successful in developing community by managing low-income housing, providing public services, and recreating local market demand. The CBO has an important function in inner-cities area as they can operate in the conditions in which the private sector would consider investing.

However, some of Porter’s ideas on economic development are fundamentally different from Teitz’ (1994) new economic development theory. For example, Porter urges the need for CBO to build networks with mainstream business institutions to create valuable business to business connections and resources. While this suggestion is important to develop local community in inner-cities, but from the new economic development perspective this may also involve outside investment which is no different from the old economic development theory. Porter also stresses out the importance of private sector to invest in inner-cities. Porter’s premise is that a sustainable economic base can be created in inner cities only through private, for-profit initiatives, and investment based on economic self interest and genuine competitive advantage instead of artificial inducements, government mandates, or charity. While his premise is relevant to develop inner-cities economy; but it also may bring the fear that private sectors may dominate the CBOs in the market so that the local community would not be developed that much.

These critiques are actually in line with the critique from Harrison and Glasmeier (1997) on Porter’s approach on inner-cities economic development. They criticize Porter’s contention that inner-city business should exploit their potential linkages to other firms located outside their immediate neighborhoods by becoming suppliers or co-ventures. Harrison and Glasmeier (1997) argue that while Porter’s incorporation of these elements is valuable, but his inclination to dismiss the positive contributions of local governments and community-based organizations is not.

The new economic development theory implies several policy implications for inner-cities area. For example, government needs to develop business development programs to promote sustainable businesses in inner-cities area. This includes giving incentives to create new small businesses in distressed communities. Porter (1997) gives his idea to provide public funds (subsidies) to revitalize inner cities. However, these subsidies must be spent in support of an economic strategy based on competitive advantage, instead of distorting business incentives with futile attempts to lure businesses that lack an economic reason for locating in inner cities.

Job training program is also necessary to provide qualified and skillful people who are ready to work. But the challenge of inner-city job training programs is that this program needs to overcome many inner-cities residents’ low education levels and poor work skills (Porter, 1997). Another policy that might helpful to develop economy in inner- cities is by giving access to capital for new businesses. In this respect, Banks and other financial institutions may start to offer soft loan to local entrepreneurs to open new business to meet the demand in inner-cities area.

The new economic development theory looks promising to encourage the development of community in inner-cities area. However, the new economic development theory still leaves some questions that are remained unanswered. Those questions may include, “what evidence is there that the new theory has delivered any significant results, and has it in reality replaced the old economic development practice?”, and “Are this theory effective to develop inner-cities?”

These questions are relevant since further analysis should be taken place to assess the effectiveness of this theory. In some local areas, efforts to attract industries to invest are still prevalent. This indicates that the old paradigm of economic development is still favorable, at least from the elite’s perspective.  Another question that needs to be clarified in the new economic development theory is the definition of community. In his argument, Teitz (1994) does not specify what he defines as community. Measurement of the community is also another unclear thing in the new economic development theory.

References

Harrison, B. and A. Glasmeier (1997) “Why Business Alone Won’t Redevelop the Inner City: A Friendly Critique of Michael Porter’s Approach to Urban Revitalization,” Economic Development Quarterly, 11(1): 28-38.

Porter, M. (1997) “New Strategies for Inner City Economic Development,” Economic Development Quarterly, 11(1): 11-27.

Tietz, M. (1994) “Changes in Economic Development Theory and Practice,” International Regional Science Review, 16(1&2), pp. 101-106.