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Theory to Practice: There are many policies to promote community and economic development – which ones are used by North Carolina’s cities and counties?

August 7, 2019 / Jamie McCall / Community Development, Economic Development, Public Policy, Small Business, Theory to Practice

Theory to Practice is an occasional blog series which explores the intersection of economic development research and current issues of debate within the practitioner community. In this post Jamie McCall (Vice President of Research, CSBDF), Michele Hoyman (Associate Professor of Political Science, UNC Chapel Hill), and Jonathan Morgan (Associate Professor of Public Administration, UNC Chapel Hill) consider which types of strategies are most frequently used by North Carolina’s local governments for economic and community development. For more information about CSBDF’s research and policy analysis program, click here

The Process of Local Economic Development

The practice of economic development is complex. All levels of government – federal, state, and local – play some role in shaping and carrying out policies that encourage investment and create jobs. But compared to other countries, the United States policy landscape for economic development is fairly devolved.[i] The use of public policy to promote economic and community development primarily comes from local governments. Variation in the amount of authority local entities have over economic development is largely a state level legal question.  About 38 states use a legal framework called Dillon’s rule. Under Dillon’s rule, local governments can only exercise authority granted them explicitly by state government.[ii] North Carolina has traditionally been considered as a Dillon’s rule state, although a 2012 court ruling has changed how legal scholars classify it.

The state’s cities and counties generally have wide latitude (with some exceptions – e.g., prohibitions on the use of property tax abatements[iii]) in the crafting of economic development policy.[iv]. As the primary actors for policymaking in this arena, North Carolina’s local governments are thus essential for our understanding of the economic development process. Because local governments in our state (and in most states) vary so widely in terms of their capacity and size, assessing correlations between economic development approaches and organizational characteristics is important. We recently published a peer-reviewed article on this topic in the journal Economic Development Quarterly.[v] In this post we explore some high level findings from our paper and consider a few implications for policies involving small business promotion.

Competing Theories of Economic Development Policymaking

A great deal of scholarship has explored how localities engage in economic development. Generally, research has tried to craft typologies around how municipalities promote different types of economic development.[vi] But there is little agreement on exactly why local governments ultimately choose the array of economic and community development strategies they deploy. Some scholars suggest local governments engage in a large number of economic development policies – essentially, trying a little bit of everything and seeing what sticks. [vii] Others have argued the opposite, that localities have limited resources and thus are deliberate and strategic – carefully choosing the array of policies they will use.[viii] How can there be evidence for both of these ideas when they seem diametrically opposed? Much of the disagreement comes from how various scholars have measured concepts like “economic development policy” and what types/sizes of government are included in survey sampling techniques.[ix]

City and County Development Policies in North Carolina

North Carolina’s local governments offer an ideal subset of municipalities to study this question. The state’s cities and counties are highly diversified both in terms of population size and socioeconomic demographics. The School of Government at the University of North Carolina at Chapel Hill surveyed the state’s cities and counties on their use of 54 separate economic and community development policies (e.g. whether they use business incubators, industrial recruitment incentives, etc.).  Almost 2/3rds (74%) of county governments and over ½ (56%) of city government responded – a far higher response than similar surveys of this type.[x] On average, respondents reported using 19 different policies (about 35% of the total strategies surveyed).

The top 10 policies used by local governments are reported below. The data show a wide variation between cities and counties. For example, only 42% of city governments engage in tourism promotion – but 76% of counties use this strategy. In the chart below, the column labeled category indicates the type of policy, in other words, the subset of firms or businesses the strategy is seeking to attract and/or grow. Recruitment policies encourage external firms to locate into the city or county. Retention policies are designed around existing businesses remaining in the jurisdiction (or promoting new business growth). Amenity development are policies that seek to promote a locality’s quality of life, and in theory are attractive to all types of businesses.


Source: UNC School of Government Economic Development Survey Data

The data suggest two primary factors influence the number of strategies that are used by cities and counties. Governments with more staff devoted to economic development and larger budgets tend to engage in more strategies. This is perhaps unsurprising, since more staff and fiscal resources indicate higher levels of organizational capacity. More importantly, the data also show a government’s participation in formalized economic development networks is correlated to using a higher count of strategies. Such findings are consistent with other work that shows the enduring importance of social capital. As previous CSBDF research has noted, there is increasing evidence that the use of social networks – particularly those that are bridging in nature – is critical for positive development outcomes.

Implications for Small Business and Entrepreneurship Policies

Compared to other types of strategies that tend to target larger businesses, relatively fewer North Carolina cities and counties engage in strategies to promote small business. Across total respondents, about 23% engage in small business technical assistance, 19% have small business centers, 19% support revolving loan funds, 14% use business incubators, and 5% have microenterprise programs. There are several reasons that may explain this proportionally smaller use of small business policies. Though a substantial amount of research shows that the promotion of smaller businesses can have outsized economic impacts,[1] policies to promote these types of firms can have long time horizons and be expensive to implement. Smaller governments (e.g., those with fewer staff and budgets for development) may simply have fewer resources to engage in this type of policy.


Source: UNC School of Government Economic Development Survey Data

The data hint at this when looking at strategy use by jurisdiction population size. For example, 2% of responding jurisdictions with less than 10,000 population have a microenterprise program. Jurisdictions with more than 10,000 populations are 4 times as likely (8%) to report having these types of programs. This pattern holds true across all types of policies surveyed that involve entrepreneurship or smaller firm development. We think such findings are interesting because they offer preliminary evidence that lower capacity governments are less likely to engage in economic development strategies that promote small business. Given our findings about the importance of participation within formalized networks, there may be evidence for the leverage of social capital within economic development organizations to promote these types of strategies.

Throwing Everything but the Kitchen Sink at Development Policy

So are North Carolina’s cities and counties strategically choosing a small number of economic development strategies? Or are they throwing everything but the kitchen sink at it in an attempt to create jobs? The answer, of course, is: it depends. While a small number of respondents are engaging in a large number of deployment strategies, others are doing much less. Variation in strategy count use by cities and counties appears to be influenced by a number of factors, including organizational capacity and participation in formalized development networks. For small business policy, it seems like a local government’s fiscal capacity is particularly important.

References

[1] Robbins. D.K., Pantuosco, L.J., Parker, D.F., & Fuller, B.K. (2000). An empirical assessment of the contribution of small business employment to US state economic performance. Small Business Economics, 15(4), 293-302.

[i] Kettl, D.F. (2002). The transformation of governance: Globalization, devolution, and the role of government. Public Administration Review, 60(6), 488-497.

[ii] Krane, D., Rigos, P., & Hill, M. (2001). Home rule in America: A fifty-state handbook. (1st ed.). Washington, DC: CQ Press.

[iii] N.C. Gen. Stat. § 105-380. However, it should be noted that in practice localities are able to offer property tax incentives through other mechanisms.

[iv] Hoyman, M.M, & McCall, J.R. (2010). “Not imminent in my domain!” – county leaders’ attitudes toward eminent domain decisions. Public Administration Review, 70(6), 885-893.

[v] Morgan, J.Q., Hoyman, M.M., & McCall, J.R. (2019). Everything but the Kitchen Sink? Factors Associated With Local Economic Development Strategy Use. Economic Development Quarterly, forthcoming.

[vi] Reese, L.A. (2006). Do we really need another typology? Clusters of local economic development strategies. Economic Development Quarterly, 20(4): 368-376.

[vii] Rubin, H.J. (1998). Shoot anything that flies; claim anything that falls: Conversations with economic development practitioners. Economic Development Quarterly, 2, 236-251.

[viii] Stokan, E. (2013). Testing Rubin’s model 25 years later: A multilevel approach to local economic development incentive adoption. Economic Development Quarterly, 27, 301-315.

[ix] Besser, T.L., Recker, N., & Parker, M. (2009). The impact of new employers from the outside, the growth of local capitalism, and new amenities on the social and economic welfare of small towns. Economic Development Quarterly, 23(4): 306-316.

[x] International City/County Management Association (2014). Economic Development Survey Results.