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Uncertain Future for Tech-Based Economic Development

In the last ten to twenty years, several regions of the United States have developed strong local economies based on fast-growing high-technology industries.

By James Klein, Larta VOX Editor

Encouraged by these successes, public and private sector groups in many regions have launched initiatives to promote high-technology development of their own. This trend first started in the 1990’s, when the growth of Silicon Valley spawned a large number of initiatives, each tagged with the "silicon" moniker. Some examples: Silicon Hills (Austin), Silicon Alley (New York) and overseas, Silicon Fen (Scotland). Now, with the bursting of the tech "bubble", the trend has abated only slightly, supporting the notion that economic development lags market realities. Some tech-based economic development programs have been cut as a result of states’ budget shortfalls, but others are being created in the hope that they’ll attract and grow new businesses, which will increase future tax revenues.

While economic Development means many things to many people, any discussion of tech-based economic development inevitably leads to a discussion of incubators. To many economic development initiatives nationwide, it also means redesigning government programs like Enterprise Zones and redefining such development staples as industrial parks and office parks in order to spur technology business development. These projects have had mixed results, affected as they are by larger economic trends; state, federal and local politics; and the success or failure of individual participating businesses. And while tax breaks (available in Enterprise Zones, for example) and utility discounts (Offered in most state and regional economic development packages) help, it takes more to make businesses succeed. Nevertheless, a strong federal commitment, combined with creative local coalition building has contributed to the continuing popularity of technology-oriented economic development programs.

Federal Commitment

Many economic development programs are funded through federal grants and a combination of state and local matching funds. Much of the federal portion comes from the Department of Commerce’s Economic Development Administration (EDA), which was created to generate jobs, help retain existing jobs, and stimulate industrial and commercial growth in economically distressed areas of the United States. EDA has invested more than $16 billion in grants and generated more than $36 billion in private investment. EDA provides direct grants, on a cost-share basis, for projects that will create and retain private-sector jobs and leverage public and private investment. Nationwide, EDA supports 320 Economic Development Districts (EDDs), staffed and operated locally, to help communities meet long-term economic challenges. Some of these programs continue to support technology initiatives even after the enchantment with tech incubators has somewhat worn off in the aftermath of the tech industry downturn.

Despite the sullied reputation of the technology economy, tech-oriented economic development projects continue to be funded around the country. The current White House administration is committed to technology-based economic development. The Commerce Department issued a report recently to forward President Bush’s goal of helping American communities compete in an increasingly complex, technology-driven world. Strategic Planning in the Technology Driven World: A Guidebook for Innovation-led Development explains how communities can succeed in planning and promoting technology-based economic development. The guidebook examines successful regional economic development initiatives, describes the "how to" of strategic planning for successful development, provides guidance for conducting a regional assessment, and includes a list of technology tools and resources for strategic planning.

"President Bush is committed to strengthening the nation’s economy. Economic development practitioners identified information on local technology strategic planning as a critical need. This guidebook provides the information and resources needed for communities to enhance their ability to plan tech-based economic development projects that will enhance their success in attracting private-sector investment and high skill/wage jobs," said Assistant Secretary for Economic Development David A. Sampson.

Enterprise Zones

An Enterprise Zone is a defined geographic area in which businesses can claim certain state income tax savings and other advantages. Though the evidence is lacking to conclude that companies have a greater success rate in enterprise zones, or that these programs significant contribute to a state’s overall economic welfare, companies are continuing to move into enterprise zones around the country. As should be expected, often the companies that move into these zones do so only in order to use the incentives, with no longer-range plan to deal with changing circumstances in their industry or business (which may affect their overall growth more than the small uptick provided by the incentives).

One of the most comprehensive studies of Enterprise Zones was done at the Carnegie Mellon Center for Economic Development. The study, Cluster-Based Community Development Strategies: A Guide for Integrating Communities with Regional Cluster Strategies, released March 19, 2002, emphasizes the best practices of the most successful Enterprise Zone projects. The study used several criteria to measure the effectiveness of Enterprise Zones, including the actual number of jobs created, and the number of qualified businesses participating in the programs.

Two states that have used Enterprise Zones extensively are New Jersey and California. Few programs have proven more successful than the New Jersey Commerce & Economic Growth Commission’s nationally acclaimed Urban Enterprise Zone (UEZ) program. Since 1984, it has been a hallmark for urban revitalization and a cornerstone for economic growth and development. Enterprise Zones were created in California to stimulate business investments in areas that are economically disadvantage as well as spur job growth in areas of high unemployment. The state of California has designated 39 locations as Enterprise Zones. Companies participating in California Enterprise Zone projects receive income tax relief and other benefits, including tax credits on up to half the wages paid to qualified new employees, and for sales taxes paid on equipment purchased for manufacturing or production purposes.

There is no comprehensive study of California’s success in promoting job growth, sustaining communities and building an economic base through the use of enterprise zones, and the limited anecdotal evidence that is available in such cities as Los Angeles does not support a definitive conclusion as to their effectiveness. However, Marina del Rey benefited well. The area was designated an Enterprise Zone shortly after the riots in L.A. in 1992, and by 1996, the area’s growth mirrored the extraordinary rise of the dot coms. Since the burst of the bubble, other tenants have moved into space formerly occupied by the high-flying dot coms, and the area remains a hub of economic activity, primarily in the service and support industries like marketing and logistics.

Some states are jumping on the Enterprise Zone bandwagon. Officials in Maine announced a plan May, 2003 to create eight enterprise zones to promote economic development around the state. Companies within the enterprise zones would receive special tax breaks and other incentives. Despite considerable efforts to advance the plan, however, there is growing opposition from those who argue in favor of more investment in education, health care and infrastructure improvements rather than benefits for corporations. It was reported at the end of May, 2003 that Minnesota will create several "tax-free zones" for businesses. Gov. Tim Pawlenty, who has championed the controversial concept, is expected to sign legislation that will establish up to ten "Job Opportunity Building Zones" (JOBZ) in greater Minnesota. Revenue forecasters now estimate the potential costs of the JOBZ program to be at least $5 million annually. Officials in Southington, Connecticut, home to the largest enterprise zone in Connecticut, announced recently that six industrial companies have made plans in 2003 to relocate their operations to Southington.

Incubators and Technology Centers

Even incubators, which have largely fallen out of favor, are attracting federal technology-oriented economic development grants. Pennsylvania’s Pottsville/Schuylkill Technology Incubator announced May 16, 2003 that it had received a $400,000 federal grants from the EDA. The Montana Technology Enterprise Center in Missoula County received $702,540 from the EDA to fund construction of Phase II of the MonTec business incubator. The Ben Hill-Irwin area Joint Development Authority of Fitzgerald, Georgia, and Fitzgerald Water, Light & Bond Commission got $1,300,000 in federal EDA grants for the development of a new technology business park.

The City of Anderson Redevelopment Commission, and Anderson University in Anderson, Illinois was granted $1,603,000 by the EDA to construct a manufacturing technology-based business incubator to be known as the Anderson Business Development Center. New Jersey City University in Jersey City, New Jersey received $1.5 million from EDA to rehabilitate a vacant building for use as a computer-technology business incubator facility. The City of Alexandria, Louisiana won a $900,000 EDA grant to support the renovation of a building for a business incubator. University of Texas at Arlington, Texas received a $1.4 million EDA grant to assist in acquiring and renovation an existing office building as the Arlington Technology Incubator.

A proposal was presented early May, 2003 by a coalition of development groups seeking to build a showcase technology facility in Franklin County, Pennsylvania. It is hoped the 25,000 square-foot building will be constructed using federal EDA grants, which are expected to pay for as much as half of the anticipated $2 million cost to develop the facility. The Franklin County Area Development Corporation and Chambersburg Area Development Corporation are partners in the plan to purchase a six-acre tract in the business park for the high-tech, multi-tenant building.

Coalition-building Essential

One of the challenges for economic development projects is putting together the matching funds required to qualify for government grants. U.S. Representative Tim Holden emphasized the cooperative nature of the programs in an interview that appeared in the Pennsylvania Shamokin News-Item. "This really is a partnership," said Holden about the Pottsville/Schuylkill Technology Incubator. "We have the Commonwealth of Pennsylvania, which has made a significant investment of about $300,000 in this incubator. There’s SEDCO, the Redevelopment Authority, the City of Pottsville, the county commissioners – everyone has come together for what we perceive to be a great cause and great effort for economic development. The federal government has already participated with a $100,000 grant from the Department of Agriculture."

Office and Industrial Parks

Sometimes just providing commercial real estate is enough for a project to build momentum and attract federal grants. A New Hampshire state development agency announced May 16, 2003 that it will receive a $358,000 federal EDA matching grant to the New Hampshire Community Development Finance Authority (CDFA) to assist its efforts to build a 39-acre corporate office park.

Regions can benefit from government money even by improving services in industrial parks. The City of Vineland, New Jersey, announced June 3, 2003 that it had been awarded a $1.66 million federal grant to boost sewer and water services in the city’s industrial park. The grant was awarded to the City of Vineland and the Landis Sewage Authority to help with the $2.4 million cost of the project.

On June 5, 2003, the Scott County Economic Development Authority, the Virginia Tobacco Indemnification and Community Revitalization Commission, and the Virginia Coalfield Economic Development Authority announced a $2.5 million expansion of the Duffield Industrial Park. The Virginia Tobacco Indemnification and Community Revitalization Commission agreed to grant a total of $1.66 million, while the commission’s Southwest Economic Development Committee agreed to spend $830,000 on the project. It is hoped the EDA will provide the remaining one-third of the $2.5 million needed for the project.

Sector Specific

Some economic development projects focus on specific technology sectors, such as the biotechnology industry. On May 20, 2003, it was announced that the Economic Development Administration is contributing $432,850 toward the funding of the Thomas M. Teague Biotechnology Center, a biotech park in the City of Fairfield, Maine. The Biomedical Research Foundation of Northwest Louisiana secured over $1 million in federal funding to jumpstart tech-based economic development in Shreveport, Louisiana. The US Department of Housing and Urban Development’s Economic Development Initiative Program is providing the funding, which will go toward obtaining land for the Foundation’s InterTech Science Park and purchasing equipment for a $10 million wet lab incubator. Construction of the 60,000 square-foot incubator is expected to begin later this year. The Foundation promotes economic development by supporting enterprises that advance healthcare delivery, medical research and medical technology. TCU California Community Partnership, Inc. in Colton, California received $2 million from the EDA to construct the Energy Technologies and Resource Complex.

States Go It Alone

States and cities sometimes create economic development programs without the benefit of federal money. The City of Camden, New Jersey is offering banks and insurance companies rebates of as much as 100 percent of their corporate taxes for up to 10 years to relocate into or expand operations in the city. The program has already attracted Cigna Corp., which is considering relocating its corporate offices and 1,500 jobs to Camden. Camden is benefiting from a state revitalization plan that calls for the investment of $175 million in the city over the next five years. Minnesota will create a biotech tax-free zone aimed at building a biotech industry on the coattails of research at the University of Minnesota and the Mayo Clinic. It would be located near one or both of the institutions.

Transportation Infrastructure

Projects to improve transportation infrastructure to business parks have also received federal grants. Haines City, Montana is receiving an EDA grant to reactivate a freight rail spur into an anticipated office and industrial park. The city’s financial commitment on the $2.8 million project is roughly $400,000 after it receives the federal money. The business park is currently envisioned as a equal divide between office and industrial use. April, 2004 is projected as the date when the first boxcars will roll into the 340-acre commercial-industrial park. In 2001, the City of Newburgh, New York received $1,750,000 from the EDA to provide road, water and sewer infrastructure to support the creation of a 17-acre Medical Technology Office Park and the construction of an 8,460 square-foot Medical Technology Incubator Building.

Some Programs Cut

Opponents of economic development find a tenuous connection at best between economic development investment and returns, citing the example of the State of Texas, which was dead last in its program spending on economic development per capita, yet ranked 19th in per capita GSP. More recently, in 2000, California was dead last in per-capita spending on economic development programs and eighth among the states in per capita GSP.

Hundreds of academic studies on economic development have been published in peer-reviewed journals over the last decade, covering everything from tax-incentive and job-training programs to property tax abatements and enterprise zones. These studies have shown mixed results and returns from these programs, and they generally reinforce skeptics’ observations. Terry Buss of Suffolk University produced an academic report on economic development programs in 2001 in which he examined 300 academic papers on the subject, and concluded: "Studies of specific taxes are split over whether incentives are effective, though most report negative results."

Whether the evidence is irrefutable or not, it is clear that some enterprise zones will not be refunded. When the Louisville Enterprise Zone program expires at the end of 2003, it will bring an end to tax breaks and other incentives for the roughly 1,300 qualified businesses in the zone, reported the Southern Illinoisan newspaper. The loss of the project, which is part of Kentucky’s Enterprise Zone program, is expected to significantly hinder the metro area’s ability to attract new businesses. At 81.77 square miles, the Louisville zone is the largest in the country in terms of size. The State of Louisiana has nine other enterprise zones in Hickman, Ashland, Covington, Owensboro, Lexington, Knox County, Campbell County, Paducah and Hopkinsville. The 20-year designations for the zones begin to expire at the end of 2003, and some of them will probably not survive the forthcoming budget battles. Other zones may face the same problems receiving new funding as those encountered by the Louisville project. The Michigan Economic Development Corporation (MEDC) is coming under increasing scrutiny as Michigan tries to reduce its mounting budget deficit. Legislators in Oregon are considering eliminating tax breaks totaling $225.3 million, including exemptions for e-commerce enterprise zones.

Other programs are struggling with companies that fail to meet designated targets. Cincinnati and Hamilton County in Ohio are reporting a sharp increase in the number of businesses failing to meet job growth and investment targets required in tax break contracts established to save the companies millions, as reported in the Cincinnati Enquirer. It is estimated that 30% of the companies involved in tax-abatement programs fail to meet requirements. City and county politicians are reviewing each agreement and determining whether these firms should continue to benefit from the tax breaks. A Hamilton County report shows 36 of 119 companies fell short of job and investment projections. County staffers recommend eliminating tax-break pacts with four of these businesses.

Getting The Word Out

Some programs are struggling because they can’t find businesses to take advantage of their generous incentives. As reported in the Washington Business Journal, the District of Columbia has the authority to grant as much as $225 million in Enterprise Zone funds each year to local hotels to pay for renovations and makeovers. So far, however, none of the roughly 36 eligible hotels has applied for the money, while others in the District are spending millions of dollars of their own money on makeovers, preparing for the throngs of conventioneers who are expected to pack the new Washington Convention Center. The problem is that most hotels within the D.C. Enterprise Zone don’t know about the money. The low-interest loan program is administered by the DC Office of Planning and Economic Development, which is taking steps to close the information gap.

Mixed or inconclusive results, a stale economy, and continuing budget woes will increasingly put economic development programs under the microscope and possibly onto the guillotine. In the final analysis, however, these programs are neither all good nor all bad. Economic development can work well when it is properly planned, executed, and publicized, but the vagaries of politics and the uncertainties of the future leaves the ultimate fate of these programs in question.

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