Intro to ED Flashcards
Neoclassical ED Theory
Unregulated capital will flow to areas where it will receive the highest return. Capital flows from high wage or cost areas to low wage or cost areas. Eventually, in an unregulated environment, capital flows should reach equilibrium between high cost and low cost places.
This theory assumes pure competition; that is there should be no market interference, including efforts to assist firms or workers to be more competitive or to protect consumers and residents.
This theory is irrelevant for small and undiversified economies.
Economic Base Theory
Economies are divided into export/import goods and services and non-export (internally produced) goods and services. These two products determine economic growth and development.
Export = basic Non-export = non-basic
The theory assumes that export firms have higher job multipliers. That is, increase in demand for a local export industry will create more jobs in the local non-export sector.
Based on this theory, communities should support the development and expansion of export industries to grow such as regional innovation cluster growth strategies. However this approach can lead to less diversified economies that are too dependent on a few industries and therefore more vulnerable to economic downturns.
Location Theory
Proponents believe that economic development is the distribution of employment and economic activity that results from individual location decisions by firms. Businesses typically decide where to locate facilities based on their needs and objectives, such as start-up, plant expansion, relocation, and opening new branch plants. Communities and regions where more firms locate will have higher job growth.
Today, location advantage includes not only proximity to both consumer and supplier markets but to industry clusters, technology related resources such as universities, proximity to airpots or other transportation, labor costs and skills, and other factors.
Location Theory drawbacks:
- Firms are less dependent on where they locate. Tech advances have allowed them to locate almost anywhere and still be able to reach consumers and suppliers.
- No net increase in economic activity, business, and opportunity is merely transferred to a new location.
- Businesses have no long-term commitment to the community.
- Location differences change over time.
Today, quality of life and workforce skills are factored into the location decision-making equation.
Spiral or Causation Theory
Holds that economic development is a “casual” process. The success and failure of development and community economic health can be attributed to specific local events and conditions. A community’s development moves in either an upward or downward spiral.
For example, the closure of a major firm in a community has a ripple effect throughout the community. The dislocated workers of that firm are not able to patronize other local businesses, thus reducing the income of those businesses as well, leading them to eventually close and continue the cycle of economic decline.
Product Lifecycle Theory
Specific theory of industrial location. Suggests that industries locate in different areas as they move through different phases of the product life-cycle.
Emerging industries tend to locate in large metropolitan areas where skilled labor and business services are plentiful because it is in its most innovative stage and thus production and product costs tend to be high.
As an industry matures and finds itself in a more competitive climate, profits decline and firms need to find ways to reduce production costs. In this phase, firms then relocate or decentralize parts of production to more rural, or now, international locations to find cheaper inputs.
New Growth Theory
Holds that the production of knowledge is the driving force behind long-term economic development. It believes that knowledge is different from other goods because it is both non-rival and only partly excludable, which means that ideas can be shared and reused at minimal or no cost. So the more knowledge we have, the more we can develop.
Provides the basis behind sustainability; we can use our knowledge to rearrange physical and human resources to provide a higher value and thus can produce more with less.
There are three interrelated strategies to promote knowledge development to meet economic development objectives:
- Investing in knowledge production (i.e. research development, technology transfer)
- Investing in human capital (i.e. skill, education)
- Promoting entrepreneurship.
Therefore, it is the theoretical force behind current trends to increase research and development, build up the research capacities of universities, support entrepreneurship, increase access to venture and seed capital, and to increase the number of educated and professional workers in a region.
The Creative Class
Richard Florida is an advocate. The term refers to the knowledge-based workers who embody the very essence of innovation and entrepreneurship. They are slowly taking back the abandoned urban core of the city.
The theory explains more than gentrification, it described social and demographic phenomena that have caught the interest of many economic developers.
Name three things that an economic developer can learn from assessing their local economy.
Assessing the local economy identifies:
The community’s existing and potential competitive advantages and how these advantages compare with other communities.
The obstacles to attaining economic development goals and objectives.
The socio-economic make-up of the community and migration trends.
The skill level of the workforce in the community.
The opinions and perceptions of your community that may help or hinder results.
The information and analysis generated from studying the local economy can be used to
Identify the local assets and potential liabilities that will affect local economic development.
Project or forecast local economic trends.
Monitor economic performance over time.
In analyzing and profiling the local economy, what should the study address?
Local economic conditions such as employment and unemployment broken out by activity and location, and fiscal well-being measured by tax rates and taxing capacity;
Current economic activity including the number of firms, their industry type, size, age, location, wage levels and amount of new investment;
Future trends and developments such as legislation, changes in economic structure and new business starts that may have an impact on the local community;
Community attributes such as size of labor pool, wage rates, market size, area income, market growth rates, land and building availability, and community amenities such as quality of life; and
Development capacity including local public and private resources and institutions that can administer specific economic development projects and programs.
To avoid pitfalls of data collection and analysis, economic developers should
Identify the area of analysis and limit information gathering to that area.
Keep information gathering simple. Collect and analyze data that has immediate analytical use, will help to understand the local economy, and will lead directly to economic development decision-making.
Gather and analyze information over time. Identify key data that are worthwhile to collect, maintain, and update periodically as part of a managed database. This information will reveal trends in the economy and benchmark programs.
Make information relevant and understandable to decision makers. Decision makers typically do not have time to wade through volumes of information. It is best to put the information in a format that readily and unequivocally highlights the key issues and concerns.
To gather a full understanding of the economic environment you are analyzing, an economic developer should look at the local and regional economic setting. Areas of study should include what ?
Region-wide Analysis of broader economic trends such as areas of business concentration, population, employment and unemployment trends.
City-wide Analysis of factors specific to the city, such as income, new business starts, population, employment and unemployment trends.
Sub-city Analysis of major areas within a city, such as the central business district, as well as small areas, such as neighborhoods.
Sectoral Analysis of particular parts of the economy, such as the manufacturing sector, service sector, or labor force.
If a city is too small, i.e. less than 50K, they can also survey or use focus groups to gather information not otherwise available.
It is important to understand the existing resources, such as programs and organizations in the local economy. Generally, this assessment is conducted after the study or audit of the economy, so as to force the analysis on existing institutional capacity.
This audit should identify and assess potential implementation resources, their competencies and abilities to take on additional tasks, and their strengths and weaknesses.
Factors to assess include what?
Labor: availability, cost, and skills;
Financial resources: types, availability, reliability;
Existing programs and services: service techniques and processes, capacity, and reputation/credibility;
Formal partnerships, MOAs and other binding agreements; and
Infrastructure.
It may also be helpful to conduct a SWOT analysis of an organization or existing programs and services.
When conducting an economic inventory (economic profile) of your local economy, what factors should you look at?
Economic Condition Population Characteristics Labor Force Characteristics Physical Condition Business Climate Knowledge-based Resources Quality of Life
Economic Condition
Describes the current level of economic activity of a community.
Employment indicates an economy’s ability to create jobs;
Unemployment indicates an economy’s ability to use human resources efficiently;
Wages indicate quality of jobs in the economy;
Area income indicates the money circulating in the economy;
Industry output indicates the productivity of area businesses; and
New business starts indicate the overall health of the economy and its desirability as a place to do business.
Area income provides information on the wealth circulating within the economy to purchase local goods and services.
Businesses can be analyzed in terms of number of employees, size, ownership, and output.
Industry size can provide insight into the level of dependency on certain industries relative to other industries, or of possible clustering.
