James W. Harrington, Jr.
University of Washington
Prepared for the Pacific Northwest Regional Economic Conference, Olympia WA, 7-9 May 1998.
 

Making sense of the new era
· ICT
· improved transportation logistics, based largely on ICT for ordering, tracking, and transferring goods
· ever-increasing rates of change in products, processes, markets, and competitors
· reduced latitude of national or sub-national governments to intervene via monetary or fiscal policy, even as national governments (esp. in the U.S.) devolve public-service and taxation responsibilities to lower levels of government
 

 What is the reality behind “globalization”?
 Part ideology:
 Governments, workers, and small companies are led to understand that anonymous “global” forces are running the show, making it impossible to develop local or even national solutions or policies.

 Part reality:
 ICT and transportation make differences among places more, not less important, making global markets in factors and products.
 The analogy is the creation of national, continental markets in the late-nineteenth century, courtesy of the railroad, telegraph, multi-divisional corporation, and mass production.  This saw the advent of national brands and robber barons, as economies of scale and collusive oligopolies allowed a few companies to become very profitable  and a few people to become very rich.
 At the end of the twentieth century, we have more and more international markets, courtesy of multi-modal transport systems, computerized tracking of sales and shipments, networks of corporations, and distributed mass production (production of a variety of products through programmable equipment and reliance on externalized networks of contractors).  We’ve seen the advent of international brands and very wealthy executives and owners, as economies of scale and the power of technical standards allow quite a number of companies to become very profitable and quite a few people to become very rich.

 Limits to globalization:
 However, what this does not do is make every place like every other, nor necessarily pit every worker against every other.  (1) For one thing, much production remains local or national, especially the provision and delivery of services.   (2) More importantly, even “global” corporations and inter-corporate networks seek out, not just any places, but the best places in the world for particular functions, based on some combination of:
· transitory localized characteristics and
· long-term, hard-to-replicate localized characteristics.
 The transitory characteristics are the simple cost factors of low taxes, low regulation, low wages.  These hardly anchor productive activities, and unless they are matched with developmental policies of infrastructure and educational investment, they represent a dead end of competition for the lowest of the low, a competition that no U.S. state, region, or locality is going to win.  To add to the downward spiral, the substantial proportion of local economic activity that is local, that is not directly subject to international competition, suffers in direct proportion to the reduction in real wages and public services.
 The longer-term, hard-to-replicate characteristics are the supply factors of communications and transport infrastructures, educated and innovative workforces, and environmental amenities, and the demand factors of growing household, commercial, and government markets for high-quality goods and services.  These characteristics are not only hard to replicate, and thus earn high economic rents, but are hard to sustain, and require large economic investments.

 “Competitiveness” is a misnomer
 There are two problems with the straightforward translation of the concept of competition and competitiveness from the business world or the world of neoclassical microeconomics to the world of international trade or regional development:
· Unlike firms, territories don’t compete, merge, or go out of business.  The citizens and resources who make up territories don’t shrivel up and die:  rather, they must be employed in some productive activities.  The key is to find the most productive activities for people and resources (the principle of comparative advantage), and to increase the productivity of those people and resources, through private investment, infrastructure, and technological change.  We needn’t be so concerned about characteristics relative to other places as about improving the productive characteristics within a given place.
· Only the most unfortunate and stagnant firms face the kind of perfect competition that we learned about in first-semester microeconomics.  Much of business management entails reducing competition by carving out some basis for limited monopoly power:  a tradename, reputation, location relative to a market, proprietary technology, or long-term contracts.  Competition limits a business to normal profits;  monopolistic advantage allows a business to earn higher returns.  Analogously, regions that become wealthy benefit from some advantage, sometimes of their “making,” as in an educated workforce or top-quality infrastructure, but often of natural or corporate provenance.

 Strategic economic development
 A key task of strategic economic development is to sustain such advantages, through the promotion of long-term regional characteristics:
· public and private infrastructure investment, through tax revenues, user revenues, and careful regulation of infrastructure
· publicly supported general education and tax incentives for private, job-specific training
· financial and regulatory support for entrepreneurship
· support for wage growth and the productivity growth that will allow this
· stringent standards for public-sector procurement.

Another way of expressing the difference between transitory and longer-term characteristics is to ask, “Given the still-limited but clear tendency toward globalization, what remains local?”  The outlines of the answer are clear:
· certainly not financial capital
· certainly not large-scale, fixed, private capital, which can be depreciated or sold quite rapidly
· some entrepreneurial resources — entrepreneurs have their greatest contacts and base for operation in a localized area
· most labor resources — while managerial and top-level technical workers are certainly mobile, most workers have a familial and financial attachment to places
· those institutions and institutional relationships that develop historically in the local area:  labor practices, relationships among small firms and with sources of finance, localized cultural groupings;  and
· the physical infrastructure of a place:  the roads, fiber-optic cabling, sewers, and the like.
 It only makes sense to concentrate local or regional public investment, expenditures, and tax expenditures on the resources that remain local or regional, rather than on subsidies to financial capital or private facilities.

 Taxes
 The empirical evidence (econometric analysis of output growth) suggests that exceptionally low tax rates are not effective attraction for private investment and output.  Rather, (1) it is important that a locality’s overall tax burden be "in line" with other localities providing similar levels of public services and agglomeration economies, and (2) it is somewhat important that no one particular tax be egregiously higher than neighboring localities or states, even if that high tax is offset by some other low tax.

 Routes to information development and diffusion:  the current question in regional-development research
 Information — about process technology, market opportunities, trustworthy suppliers — is of paramount importance to any productive activity, private or public, large or small.  Some information can be purchased, as through the (a) acquisition of the equipment that embodies new technology, (b) hiring of a market research firm, (c) subscription to an Internet-delivered data service, or (d) sale of goods to an intermediary that concerns itself with marketing.
 However, if information or technology can be purchased in that way by one organization, it can be purchased by others:  it won’t lift the firm out of the rut of  “normal” profit or a rate of growth average for the industry.
 Because of the expense and uncertainty of generating new information through R&D, internal market research, or internal supply sources, most firms minimize expenditures on some of the very activities that could potentially lead to above-normal profit and growth.  This is a central dilemma for managers, and a central problem for national and regional economies.
 This is a motivation for the agglomeration of businesses around highly skilled or specialized labor, or around “someone else’s” development activity (a large firm, a government lab, a university), is to reap the benefits of “someone else’s” investment in skilled workers, skilled managers, new technology, or market knowledge.

 Can public entities increase the level of information within a local or regional area, sufficiently to increase localized growth and profits?
· Labor training?
· Management training?
· Promotion of entrepreneurship (through training, micro-finance, tax subsidies for finance)?
· Public investment in information and technology development?
· Public investment in information and technology diffusion?
· Public incentives for information and technology development?
 

 “New” models of growth
 Economists have formalized these relationships into theoretically powerful, “new” models of growth, which entail:
· increasing returns to scale in the use of new technology (i.e., a little new technology in a firm can be applied to a great deal of output), but
· decreasing returns to scale in the development of new technology (i.e., you can throw a lot of resources at a technical issue, but beyond a certain point, you won’t speed up the development process, because of knowledge and technical bottlenecks that take time to resolve), with the additional recognition that
· not all the benefits of creating new technology can be held within the innovating firm (there are technological spillovers).

This suggests that large, innovative firms have the resources and the market power to devote resources to new technology (and we certainly see evidence of that in the Puget Sound region), and that not all the resultant information and technology can be appropriated by the innovating firm (and we see evidence of that, as well).
Therefore, most firms may under-invest in technological development, from a societal perspective, because (a) they’re not able to see the benefits from large-scale output and (b) they’re not likely to appropriate all the resultant technology.
Networks or strategic alliances among firms appear to be one way to increase the (a) scale of use and (b) control over spillovers of information generation and technological innovation.

What are the mechanisms through which technological spillovers occur?
· Labor mobility
· Managerial mobility
· Entrepreneurial spinoffs
· Reverse engineering
· Demonstration effects
· Gaps in IPR protection
The first three of these depend on inter-organizational movement of people, and therefore benefit from localization.  These become the basis for localized, information-based development.
These mechanisms are relevant for non-metropolitan regions and non-"high-tech" sectors as well as for the more commonly discussed examples.  From wooden furniture in Denmark to boat manufacturing on the Olympic Peninsula, institutionalized practices of labor training and mobility, small- and medium-scale entrepreneurship, and process innovation can create and sustain relatively high-wage employment in medium-tech sectors in non-metro places.

How can public entities motivate increased investment in and use of specialized information (e.g., marketing, organization) and technology?
· Labor training?
· Management training?
· Promotion of entrepreneurship (through training, micro-finance, tax subsidies for finance)?
· Public investment in information and technology development?
· Public incentives for information and technology development?

Conclusion:  variations on a theme:
· Public investment in region-specific assets
· Public incentives for labor training and innovative activity