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Economic Gardening – An Entrepreneurial Approach to Economic Development

In 1987, the City of Littleton, Colorado pioneered an entrepreneurial alternative to the traditional economic development practice of recruiting industries. This demonstration program, developed in conjunction with the Center for the New West, was called The New Economy Program.

We have had many communities visit us and inquire about the program over the years. In an effort to provide a concise summary of our original thinking and the evolution of that thinking during the first years of the program, we present here a synopsis of our experience.

The Seeds of an Idea

The seeds of economic gardening were planted in my mind in Leadville, Colorado in the early 1980s. At the time I was working in that community as a consultant after massive layoffs at the nearby Climax molybdenum mine. The community was interested in attracting new industry to town to offset an unemployment rate that was approaching forty percent.

Understand that Leadville lies above 10,000 feet in elevation and experiences winter conditions much of the year. It was, perhaps, the extreme bleakness of the situation that set me on a different course of thinking. During my tenure there, I met two miners who had invented a resin bolt to keep the steel mats up overhead in the mine. A mechanical bolt does not touch the rock in all places on its circumference. A resin bolt consists of two liquids which, when combined, become extra hard—but even more important make one hundred percent contact with the rock.

Several things occurred to me. First, here were two guys who knew the mining industry extremely well and had invented something that would be very useful. Secondly, how many mines were there in the world that could use a resin bolt—a huge market. Third, why didn’t the community shift its focus from trying to attract companies to a pretty harsh (albeit beautiful) environment and instead concentrate on growing local companies who had specialized expertise. The people most likely to live in and love Leadville were the people who grew up there.

I never got very far with that underdeveloped idea in Leadville, but the concept never left my head.

About five years later, the opportunity to try out the idea rose again—this time in Littleton.

Littleton, 1987

In 1987, I was hired as the director of economic development. At the time, the entire state was in a recession and Martin Marietta, the community’s major employer, had laid off several thousand employees. There was nearly a million square feet of vacant retail space and downtown vacancies were approaching thirty percent.

The Littleton city council expressed displeasure at having our future being dictated by out-of-state corporations and directed staff "to work with local businesses to develop good jobs."

It was a perfect alignment of the stars—an idea and a need. For nearly two years we researched the best thinking we could find on the subject, talked to experts, including the Center for the New West, a think tank here in Denver, and began to flesh out the concept.

We kicked off the project in 1989 with the idea that "economic gardening" was a better approach for Littleton and perhaps many other communities than "economic hunting." By this, we meant that we intended to grow our own jobs through entrepreneurial activity instead of recruiting them. The idea was based on some well founded research that indicated the great majority of all new jobs in any local economy were produced by the small, local businesses of the community. The recruiting coups drew major newspaper headlines but there were a minor part (often less than five percent) of most local economies.

Further, we had a sense that successful recruiting programs existed primarily in those areas that were attracting new businesses any way, regardless of whether they had an economic development program. For every successful recruiter who represented a hot office/industrial park in a major metropolitan area, there were literally hundreds of economic developers in rural areas, inner cities and small towns who struggled without much real success.

Artist at a potter’s wheel.There was another, darker side of recruiting that also bothered us. If an outlying area was successful at attracting new industry, it seemed to be a certain type of business activity: the branch plant of industries which competed primarily on low price and thus needed low cost factors of production. Rural towns with cheap land, free buildings, tax abatements, and especially low wage labor would "win" these relocating businesses. Our experience indicated that these types of expansions stayed around as long as costs stayed low. If the standard of living started to rise, the company pulled up stakes and headed for locations where the costs were even lower, often Third World countries.

This was the world then when we proposed another approach to economic development: building the economy from the inside out, relying primarily on entrepreneurs. We knew it wouldn’t be glamorous work nor work which would get 40-point-type headlines. But we sensed that if we could develop a solid alternative model, even if it took years to implement that model, we would make a valuable contribution to communities all over the world.

After two years of formulating and developing the idea, we kicked off the project in 1989 with the simple concept that small, local companies were the source of jobs and wealth and that the job of economic developers should be to create nurturing environments for these companies. Since then we have often compared our experiences to Alice following the rabbit down the hole to Wonderland. It has been a long journey with many bends and twists in the road and one that has been full of constant surprises.

Small vs. Large Companies

The first challenge to our thinking came in the early 1990’s with data that showed about three-quarters of all jobs (as opposed to ownership positions in small mom-and-pop businesses) were created by about five percent of the companies. This number turned out to be true for Littleton and seems to be generally true for most communities (company towns being the obvious exception). At the time small businesses were the sweethearts of the political world and indeed we had sold our own program under that banner. However, data started coming in which indicated that it wasn’t small business which were driving job creation but rather a few fast growing businesses (small companies that would soon be large companies). So we got out of the small vs. large debate. The real issue was about rate of growth.

Innovation

What we did notice in fast growing companies was a high correlation between growth and innovation. New products and processes seemed to be their lifeblood. At about the same time, we discovered works by economists Paul Romer, Paul Krugman, Brian Arthur, Annalee Saxenian and others that seemed to reinforce this point. It’s really ideas that drive companies and economies.

Based on this, we proceeded to develop a full blown 13-part seminar series to bring state of the art business practices to Littleton companies with a focus on innovation. We ran these for four years trying to make dramatic differences in the revenues and employment levels of our target companies. Our goal was to make them all high performance "new economy" companies. We assumed that if we could expose local business people to these "best practices", we could develop superior business people. Instead, we ran head on into what most Small Business Development Center directors know in their heart of hearts–this activity is mostly a waste of time. Anyone who has ever dealt with trying to make superstars out of small business people knows the truth of this statement. After a couple of years of miserable failure in trying to create high performance companies, we lowered our sights. At one of the lowest points in the program, we discussed whether we should just try to move distressed companies to a stable category. But we continued to be puzzled why a few companies grew at sky rocket rates while most languished with low or no growth.

Temperament

It was at this point that we discovered what may be our most profound insight about business: the temperament of the CEO is one of the major factors in the growth rate of a company. The temperament factor affected our thinking in two ways.

First, there was a very strong correlation between the fast growing companies and two CEO temperament types: the Sensing-Thinking-Judging (STJ) and, even more important, the Intuitive-Thinking-Judging (NTJ). (Think Bill Gates, Jack Welch, Larry Ellison, Scott McNealy, etc.) These two temperament types headed up gazelle companies at rates far beyond their statistical presence in the population. The two represented about twenty-five percent of the total population but accounted for approximately seventy-five percent of the leadership in a study of the Inc. 500 fastest growing companies.

Second, in trying to understand why we weren’t having any more success than we were, we always came back to the same fact: Temperament is not very amenable to change, at least over short periods of time. For those of you proficient in Myers Briggs temperament styles, you will recognize the difficulty in getting Artisans (SP) to be good bookkeepers or introverted Guardians (SJ) to be sales people. Try to get a Rational (NT) away from their precious ideas and actually produce something or get an Idealist (NF) to deal with the non-human factors of business (finance for example).

If you are not familiar with Myers Briggs, we would just note that a person with a preference for freedom is never quite as good at paying attention to detail as the person with a preference for control. The practical person will never quite see the possibilities that a big picture person sees. The feeler will never be quite as analytical as the thinker, nor the thinker as attuned to human emotions as the feeler.

This discovery of the impact of temperament put an end to our seminar and training program. It appeared to us that no matter what we did, we could not affect the growth rates of businesses much beyond what the temperament types and a few other factors determine. Most temperament types will remain in low or no growth businesses and about a small proportion of temperament types will drive most of the high growth companies.

Mechanical v. Biological

By 1994 we had traced the source of jobs to a few, fast growing companies which showed high rates of innovation and which were often headed by a couple of temperament types. The question again, was "can we do anything to affect this phenomena?" Is there anything at all about the environment in which gazelles operate or is it strictly a genetic issue?

The answer was "yes," there is an environment which is nurturing to gazelles. When we looked at a map of where the Inc. 500 companies were located each year, they were not randomly spread across the country. Rather they tended to clump up in certain locations like the Bay Area in California, Research Triangle in North Carolina, and in university towns like Austin, Boston, Boulder, Minneapolis and Seattle. We could explain part of this distribution pattern as centers of innovation, but not all of it. The full answer came from an unexpected place — the Santa Fe Institute — which had been working on an emerging science called Complex Adaptive Systems or "complexity" as we came to know it. They were writing the new rules for all things biological including humans, business organizations, stock markets, immune systems and of particular interest to us: Local economies.

The great scientific discoveries of the 16th and 17th centuries about physics (the non-living side of the universe) had created strong mental models which were mechanical in nature. Humans invented one mechanical device after another in which known inputs produced known outputs in a very predictable and controllable fashion. This mechanical mind set that things were controllable and predictable tended to color how we saw biological entities like organizations and economies.

The Santa Fe Institute saw something different. They saw a biological world in which each living thing was constantly adapting to all of the other living things, all tied together by innumerable feedback loops. They saw a complex world in constant turmoil which was both unpredictable and uncontrollable. Any parent could tell you that two children raised in the exact same home under the exact same conditions can turn out very different. Any employee can tell you that the organization chart has nothing to do with how things get done in an organization. And yet business managers and economists still talked as if organizations and economies were machines (rev up the economy, steer the organization) and not living, biological things. Revving up a rainforest or steering a wolf would sound ridiculous but well educated people continue to talk about organizations and economies as if they were mechanical in nature. It took Nobel Laureate scientists to show us that unpredictability in companies and economies is a deep law of living things.

Although based on complex mathematical formulas and scientific research, complexity science is beginning to produce some handy rules of thumb for every day use. The most useful of these are:

Edge of Chaos

The edge of chaos is on the border between stability and chaos.This colorful term describes the fine line between stability and chaos where innovation and survival are most likely to take place. To visualize this point, draw a horizontal rectangle and divide it into three equal parts: label the left 1/3 as the frozen regime, the middle 1/3 as the stable regime and the right one third as the chaotic regime. As a way to think about these regimes, consider what form H2O takes in each. In the frozen regime, it would be ice. In the stable regime, it would be water. In the chaotic regime, it would be steam.

Organizations and economies also operate in these three regimes. In the frozen regime, no information gets transferred and no activity takes place, so it is impossible to adapt. In the chaotic regime, information and change takes place so fast that nothing is stable enough to retain its identity. In the stable regime, there is a regular rhythm of activity in which identity is retained but adaptation to changing conditions is slow. While humans may favor stability, nature favors the thin line between stability and chaos (edge of chaos) because it is here that constant adaptation goes on which allows an organism to survive over the long run.

Once we understood this idea, we could see it operating in Littleton’s business world. We had very stable companies on Main Street which just could not adjust to a fast changing world. WalMart’s rapid innovations were destroying our smaller retailers. Our high growth companies, on the other hand, were innovating quickly. They sensed the changes going on and responded rapidly. Sometimes they would fall into complete chaos but most often they would ride the very edge of chaos like a seasoned surfer.

We came to equate the edge of chaos with lots of changes and experimentation and lots of little mistakes. It seemed like the mistakes that accompanied the process of innovation were like earthquakes: if you don’t have lots of little ones, you end up with a big one. We read a study out of Dallas that indicated the most vibrant economies (in terms of producing jobs and wealth) were highly unstable in the sense that they had the highest rate of business start ups and business deaths. This turbulence looked like an economy operating at the edge of chaos.

Photo: artist and observer.We started looking for other reality checks. The big, stable companies of the 1970’s like GM and IBM appeared to us to be in very stable regimes with minimal change or innovation. They, in effect, were headed toward big adjustments because of their very stability. They had lost contact with the chaotic edge and had quit adapting. People with entirely different ideas about cars and computers produced products better fit to a changing environment (the raucous din of a vibrant market place operating at the edge of chaos). At the economy level, the Great Plains appeared to be a situation of great stability with minimum innovation. The plains were dying economically. The USSR appeared to be a frozen regime that had not allowed adjustments for over 70 years and then one day it collapsed in one big adjustment.

Then it occurred to us that temperaments in organizations are much like regimes. Guardians are stable tending toward frozen ice while intuitives are chaotic like fire. Organizations that adapt and survive over the long run are neither ice nor fire, they are both. Intuitives (NT, NF) provide the ideas, push for the changes. The Guardians (SJ) provide the stability and the order that allow ideas to come to fruition. Fire and ice. That description definitely fit our high growth companies. It also felt like "the edge of chaos" again.

Self Organization vs. Command-and-Control

There is a related principle in complexity science called self organization. Scientists now know that nature runs large scale operations and it does it rather well but without anyone in control. There is no CEO in the ant den and there is no president of the board issuing instructions in bee hives. No squadron leader barks flight orders to a flock of geese. Ants and bees and geese operate on simple, local sets of instructions with short feedback loops and out of this order emerges. The work of the ant den and the bee hive gets done with no one in control. The flock of geese maintains its shape, identity and function with no one in charge.

Most modern organizations (and some remaining socialist economies), on the other hand, work on a command-and-control model. The problem long identified with large command-and-control structures is that the cost of coordination and communication eventually outweighs any benefits of specialization and economies of scale, and things grind to a halt. Self organization may be less efficient but it is more robust, more redundant and more likely to survive. What this means in a real sense is that the larger an organization gets, the less command-and-control works. In our every day work, we could see that the organization of gazelles was different than stable companies. Gazelles seemed to "just do it" and yet it all came together. Large, stable companies "just ordered it" and put into motion large numbers of meetings, committees and report generation.

Increasing Returns

Economist Brian Arthur has spent much of his life’s work documenting the existence of increasing returns (as opposed to the classical idea of decreasing returns). Arthur’s contention is that winner’s continue to win because they have won in the past. His prime example is VHS vs. Beta tapes. Although Beta was generally acknowledged to be the better technology, a critical mass of people opted for VHS early on which created a large installed base and all of the supporting technology decided to move to where customers were concentrated.

Increasing returns can be seen operating in college athletics (good players go to Notre Dame because Notre Dame wins because good players go there), products (people use Microsoft operating systems because it has the most software written for it which is because most people use it) and, we think, economies (companies move to hot urban areas because of the large specialized labor pool which is there because of the large number of companies).

Basins of Attraction

In chaos theory, there is a concept called a strange attractor which operates much like a marble being rolled around a basin. Although the path of the marble may never repeat, it doesn’t leave the basin. Similarly, economies can be thought of as basins of attractions for companies. To visualize this, think of the landscape as dimpled as a golf ball with different sized basins. Large metropolitan areas have wide and deep basins which tend to attract and keep many companies. Small towns have very shallow basins in which a business can easily roll out and into a larger basin.

We think this principle is very relevant to the economic development efforts of many small towns. Obviously, continuous growth would increase the size and strength of the "basin" but we also suspect that strong industry clusters in an area may create deep basins, regardless of the size of the population. Furniture making in North Carolina, carpets in Georgia, art in Santa Fe, RV’s in Elkhart, Indiana, airplanes in Wichita are specific examples of the ability of given areas to grow specific types of related businesses, regardless of the population size of the community.

Economic Gardening Today

As a result of all of these discoveries about how local economies work, we have refined our approach to economic gardening. Since we now know that a few, high growth companies drive local economies and that these companies have unique leadership temperaments and thrive in environments of high information flows and high innovation, we focused on these issues. Today, there are three main elements to our program:

Information

For a business to survive and thrive today, it must depend on critical information. We spend as much as three-quarters of our time providing tactical and strategic information.

Over the years we have developed very sophisticated search capabilities using tools often only available to large corporations. We subscribe to 15 different database services and CD-ROMS which provide us access to over 100,000 publications worldwide. We use these tools to develop marketing lists, competitive intelligence, industry trends, new product tracking, legislative research and to answer a number of other custom business questions. We also monitor all new construction through Dodge Construction Reports so that local contractors can bid on projects.

We track real estate activity and have access to the market reports of national consulting firms. Our Geographic Information Systems (GIS) software can plot customer addresses as well as provide demographic, lifestyle and consumer expenditure information. We also monitor local businesses and vacant buildings and projects.

Finally the information component also includes training and seminars in advanced management techniques such as systems thinking, temperament, complexity theory and customer service strategies.

Infrastructure

The second element of our program is infrastructure; not just basic physical infrastructure but also quality of life infrastructure and intellectual infrastructure. In the area of basic infrastructure, because we are the city, we invest in areas like interchanges and light rail stations and major street/sidewalk rehab projects. These are all just basic good government.

We also invest in quality of life projects including parks and open space (we have have four times the national average), trails (every major drainage channel in the city has a trail built in it), sidewalk widening in the downtown neighborhoods, restoration of the historic county courthouse, and sponsorship of the holiday’s Candlelight Walk (we put up a million white lights in the trees downtown every year).

The third type of infrastructure is something we call intellectual infrastructure: the curriculum, courses and training, and introduction of best practices that help keep our companies competitive. We helped build a telecommunication curriculum and e-commerce course at our local community college. Colorado University (30 miles away in Boulder) micro-waves live engineering courses to our library, making it possible to get a masters degree from CU without leaving Littleton.

All of our infrastructure work is based on the idea that economic development and community development are two sides of the same coin. In the New Economy, where new wealth and jobs are being created by knowledge firms, creating a community that is attractive to entrepreneurs and the talent they hire is as important as natural resources and heavy rail were to Old Economy companies.

Connections

The third element of our economic gardening program is connections — connections to trade associations, think tanks, R&D outfits, academic institutions, and other similar companies (industry clusters).

We are aware of research which indicates that an increase in the number of business connections increases the innovation levels of companies. In particular, "weak ties" to "hubs" outside a business’s normal daily connections are important for bringing in new ideas.

We have worked to develop connections with the University of Colorado, Denver University, Arapahoe Community College, the Colorado Software Association, the Rockies Venture Group, the Santa Fe Institute, Plexus Institute, and the Center for Business Innovation. We also sponsor the Colorado Center for Information Technologies, engineering industry meetings and health services industry meetings.
Summary

In Littleton, we have moved from mechanical models to biological models to help us understand the nature of local economies and the businesses that inhabit them. After nearly a decade of very intensive work, investigation and observation, we have come to a sobering conclusion: economies are massive biological organisms and not very amenable to control by anyone. Neither economic gardeners, nor economic recruiters nor politicians nor anyone else is running them. At best, we are adapting to everyone else’s adaptations.

We do have some insight into what makes a vibrant economy. We know NTJ and STJ temperaments are important in high growth companies but so is temperament diversity (fire and ice). We know community development is economic development and a sound infrastructure is the starting point. We know the best opportunity to move up is during periods of chaos caused by technological change.

We also know complexity science contends you can’t control or predict complex adaptive systems to any great degree. The goal is no longer control, it is adaptation through innovation. When organizations and local economies move toward the edge of chaos, adaptation and competition improve and the chances for survival improve. Hence, anything which increases the flow of information and ideas and anything that increases the number of connections is worth undertaking.

We by no means have solved the economic development riddle. We cannot patent it, put it in a jar and take it to any community and guarantee results. But we do think we are closing in on the answer. We think it involves slow, painstaking community development with an eye on the innovators. We think the five percent are critical drivers. We think increasing connections and the flow of information helps and we think the greatest opportunity is during periods of chaos.

And next year we will know even more.

Christian Gibbons , Director

Business/Industry Affairs

City of Littleton, Colorado

http://littletongov.org/bia/NewEcon/default.asp

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