Hope to Be the Next Silicon Valley? What Every Mayor Should Know

Transforming cities into competitive hubs for economic growth is a top priority for our nation's mayors. Yet, the traditional "firm chasing" and incentivizing efforts frequently fall short. This week, I welcome guest authors Ed Glaeser of the Harvard Kennedy School of Government and Robert Litan of the Kauffman Foundation to address this issue.
by | March 10, 2008

Robert Litan
Ed Glaeser
Ed Glaeser

Transforming cities into competitive hubs for economic growth is a top priority for our nation's mayors. Yet, the traditional "firm chasing" and incentivizing efforts frequently fall short. This week, I welcome guest authors Ed Glaeser of the Harvard Kennedy School of Government and Robert Litan of the Kauffman Foundation to address this issue. Their recent report , Entrepreneurship and Urban Success: Toward a Policy Consensus (available at www.kauffman.org/policy ), argues that city leaders must make their civic climates more hospitable to entrepreneurial innovation.--Stephen Goldsmith

Over the past 30 years, the gap between successful and unsuccessful cities has been growing, which suggests that economics, like politics, is increasingly local. The rising importance of local economies, and their importance to voters, should make economic growth and competitiveness a high priority for mayors. Yet even as the United States and world economies have changed dramatically over the past 25 years, mayors' strategies for bringing economic growth and jobs to their communities have remained largely unchanged.

Too many local leaders still rely on "firm-chasing" (once called "smokestack-chasing"), in which established companies are lured away from other cities with targeted tax incentives and subsidies. While this strategy can generate some short-term benefits, such as new jobs, it is a long-term loser: firm-chasing fails to lay a foundation for sustained growth. It is also difficult to ensure that once a firm or a plant is "bought," it will stay put. As many mayors know too well, firms and plants can and do leave for other locations. Meanwhile, from a broader perspective, firm-chasing is a zero-sum game -- when one city wins, another loses -- and thus contributes nothing to national competitiveness.

A better strategy for sustained economic growth in cities, regions, and for the nation as a whole is to create an economic climate conducive to entrepreneurship.

Entrepreneurship is the growth engine of the modern economy -- the foundation for innovative work that not only generates profits and creates jobs, but also plants the seeds for future business development and job creation. Rather than simply maximizing current economic output, entrepreneurship and innovation enhance economic growth by introducing new products and services to the market or making existing ones more efficient.

Entrepreneurial growth often occurs in clusters, with similar firms locating near one another and participating in a virtuous cycle. Successful firms attract suppliers and service providers (lawyers, accountants, financiers and financial institutions) and, in turn, spin off other successful startups.

We have witnessed this phenomenon in every region of the country. Silicon Valley in California remains the ultimate example of an entrepreneurial high-tech cluster, but there are similar hotbeds of innovation in Austin, Texas; northern Virginia; Boise, Idaho; and the Route 128 Corridor of greater Boston.

Each of these regions became an economic cluster, a focal point of America's high-tech surge, in the 1990s. These areas combine advanced technology, strong growth, job creation and a high quality of life. It's no wonder mayors throughout America have asked the same question: How do we become the next Silicon Valley?

While no single formula exists for attracting and cultivating entrepreneurs, the best available research has found that mayors should focus on a few key basic strategies: streamlining regulations, keeping taxes low and improving transportation efficiency. At the same time, they should let go of fashionable but ineffective policies, including targeted tax credits and state- and local-level investments in research and development. In short, entrepreneurial growth depends on creating an overall economic climate that encourages business formation -- a culture that rewards people for leaving behind the stability of large corporations to pursue the uncertain gains of a self-made future.

But that is not all. Smart, entrepreneurial people care about the quality of life for themselves and their families, as well as the general business environment. Unfortunately, for mayors, improving the quality of life means more than just trying to have a hip downtown. The typical entrepreneur is more likely to be a married 40-year-old than a 27-year-old bohemian. This means that mayors need to make their cities friendly to well-educated families who want a strong school system and safe streets.

Potential entrepreneurs also don't want to waste time in endless commutes. Local leaders need to consider novel ways to improve transportation efficiency. Congestion pricing is an attractive idea for reducing traffic congestion in dense, highly populated areas. In more sparsely populated areas, greater use of highway tolls -- with higher charges in peak hours -- is a promising alternative. Such policies can be a "twofer" -- improving both the business climate and residents' quality of life.

Removing state and local regulatory hurdles is one of the most effective ways to make a region more attractive to entrepreneurs. Most entrepreneurial firms start small, with few resources for regulatory compliance. In contrast, large businesses, with more staffing and other resources, have an easier time coping with regulatory burdens. As a result, unnecessarily burdensome regulations act as a de facto advantage for larger businesses over smaller challengers. This can dampen economic dynamism by reducing competition.

Of course, every jurisdiction needs some level of regulation to guarantee safety, health and other standards. But all regulations should pass two straightforward tests: They should deliver more benefits than costs and should be the least restrictive of the available options. Exempting smaller businesses from certain regulations could also serve as an incentive for entrepreneurs.

But perhaps even more important for entrepreneurs is receiving prompt decisions from government officials on matters of crucial importance to their businesses. Cities can meet entrepreneurs' needs for speed by streamlining their approval processes for building permits and other licenses and conceivably by vesting decision-making over such matters in a single agency. Local institutions, such as universities wanting to expand their research facilities, also could benefit greatly from such measures.

Taxes are another area of interest to entrepreneurs. The relationship between business tax rates and individual tax rates factors into the decision to launch one's own firm. To encourage potential entrepreneurs to become business owners, local jurisdictions should aim to keep business tax rates as low as possible relative to income tax rates. Four of the five metropolitan areas with the nation's highest rates of self-employment (one proxy for entrepreneurship) are in Florida, which has a relatively low business tax rate.

Implementing the right local policies to spur entrepreneurial growth is especially crucial now because the competition for entrepreneurs is more open and stiffer than ever before. In today's global economy, entrepreneurs can locate virtually anywhere. It's hard to predict where the next Silicon Valley will be, but mayors who focus on low business tax rates, streamlined approvals and regulations, and providing a high quality of life for local residents stand the best chance of generating the economic growth that their constituents demand.

Ed Glaeser is a professor of economics at the Harvard Kennedy School of Government and Robert Litan is vice president of Research and Policy at the Kauffman Foundation. Glaeser and Litan, together with other economists, have authored the report, Entrepreneurship and Urban Success: Toward a Policy Consensus, which provides a roadmap for how regional economies can grow by forming and growing new firms. It is available at www.kauffman.org/policy.

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