The most important, overlooked role for an economic development agency

I have been studying economic development agencies and their effectiveness for well over a decade and I can tell you there is one very important role that is mostly ignored or at least glossed over.

Unless the economy is booming, when I talk with politicians and local stakeholders I always here the same thing.  How come we are investing in this economic development agency and the economy isn’t booming?

The usual retort from the economic development agency is some version of this:  we can’t be responsible for the growth of the economy.  It’s too much to ask of an agency receiving government funding of, say, 0.02% of GDP to be expected to directly move the needle on overall economic growth.  They will then focus on the narrow stuff they are doing and try to correlate that with some form of hard or soft ROI.

For example, yes overall economic growth might be weak but we worked with 22 firms on their expansion plans.  Or we helped 15 new entrepreneurs start up companies.  Or we embarked on a marketing campaign that promoted our city or province far and wide.  We worked really, really hard and why don’t you appreciate us?  What more do you want from us?

Because the economy is in the doldrums, that’s why.

Let me use an example.  Let’s say the shareholders of a private corporation were questioning why the company wasn’t profitable.  The CEO of the company can blame a lot of things that are mostly out of her control: the general health of the economy, government, competition, consumer attitudes and other issues.  She will tell the shareholder that the employees are doing their best.  They are working really, really hard.  But the shareholder still wants a return on invested capital.

The most important and overlooked role for an economic development agency is to be clear with the shareholder (s) what it would really take to address their goal.  If a city wants 2% growth in the tax base, the economic development agency should be the organization best positioned to clearly articulate how that might happen.  If a provincial or federal government wants 3% GDP growth, the economic development folks should be the best positioned to tell them how that might happen.

Consider the private sector example again.  The shareholders want the leadership to double revenue (profitably) and grow to be within the top five firms in the sector.  The leadership of the company would then go back and do the analysis and report back to the shareholders with the following finding:  If you want that level of growth we can’t do it organically without dramatically cutting into profits.  You will need to grow by acquiring smaller firms in the sector.  Then the shareholders have a decision to make.

This is exactly what I would like to see with economic development agencies.  They should be the most knowledgeable of the local economy, the structure of the economy, the competition, the labour market, etc. and what it would take – at least in theory – to achieve the strategic goals set out by the city council or the Cabinet.

In the CEO mandate letter:  Please tell us what it would take to get our economy back to 2% growth per year on an average basis.

CEO response:  After careful analysis, we believe it would take the following steps to bring the economy back to 2% growth: 1) we need to focus heavily on sectors A and B; 2) we need to cut tax X or Y to be competitive with the fast growing jurisdictions; 3) in our analysis of other similar jurisdictions they achieved growth of 2% by doing X or Y and we should too; 4) you are investing 0.02% of GDP in economic development and the best practice is 0.04% of GDP.

Or whatever.  I think you get the point.

But economic development agencies don’t want to set themselves up for failure so they focus on narrow functions (business attraction, startups, etc.) and then cross their fingers and hope it moves the needle.

In my opinion, being the most credible advisor to government and community leaders on what it would take to move the economy forward in a sustainable way is the most important function of economic development.  More than business attraction.  More than startups.  More than workforce development.  More than marketing the community.

Because, if not you, then who?  Find me another organization better positioned to play this role.

If economic development agencies truly played this role, it could lead to exciting new thinking.  It turns out, surprise, surprise, that a single economic development agency can’t move the needle by itself so maybe one conclusion is that we need to better align the myriad of government agencies and departments that impact economic development.  Or maybe we need to do a better job of natural resources development.  Etc.

You may say, rightly, what if the conclusion is that 2% growth is not realistic?  That there are too many obstacles, cultural and otherwise to get back to a sustained level of growth?

I would respond with two points:

  1. Who, if not the economic development agency charged with fostering growth, is better positioned to draw this conclusion?
  2. Then you take it to the public. You be very clear with the public, the voters, the ultimate shareholders, that if we want to get the economy back to a sustained level of growth, we have some big obstacles to overcome.

Ultimately, this would alter the focus of economic development agencies. They would need more policy minds, more thinkers and analysts (and, shockingly, maybe even an economist or two).  Most economic development CEOs would rather invest that money in business development folks or marketing or whatever.

But my many years of experience tells me that we will never fill the gap between disgruntled politicians and exasperated economic development agencies unless we make this simple change to our approach.