Sunday, December 21st, 2008
As many Midwestern cities, particularly its smaller industrial ones, continue to struggle with the loss of manufacturing jobs, people wonder how or if these places will come back and again become economically prosperous. I think the potential for economic renewal at least partly depends on whether or not a place is a true city or a shadow city. What do I mean by that?
Here is one way I categorize the economic life of cities. One can divide companies into three types:
- Local goods and services. These are things like banks, grocery stores, dry cleaners, coffee shops, plumbers, etc. that exist in order to provide goods and services to the people who live in a place.
- Branch or departmental. These are things like raising wheat, building brake components for cars, certain types of laboratory work, or any other type of specialized product that exists to service demand from elsewhere. They are often specialized and routinized.
- Internally generated production. These are pieces of the production puzzle, often creative or innovative, that constitute an independent economic life force in a city.
Every city has local goods and services type industries. Many of them have other companies as well, but the kind of companies and industries is important. In particular, we need to distinguish between types 2 and 3. Consider the case of Flint, Michigan. This town was extremely prosperous at one time as GM located huge numbers of auto factories there. But these factories existed only to the extent that they served a need for GM. Once they no longer served that need, they were gone. Flint, in a sense, was not a true city. It was a shadow city that existed because Detroit needed and wanted it to. Once Detroit no longer needed it, Flint began to wither. And because it did not have the independent economic life force that comes from having significant internally generated production, it has had a hard time figuring out how to revive its fortunes.
Contrast with Indianapolis. It’s a branch plant town to be sure in many ways. There are few local large companies headquartered there. But Indianapolis has significant internally generated economic fire. It has a tourism and sports industry, it has the motorsport cluster, it has significant life sciences companies like Lilly and Dow Agro Sciences that didn’t just locate a facility there because it was convenient, but which are really driving the companies. It’s got technology startups like Exact Target and Angie’s List. What’s notable is how many of these companies can generate either serial entrepeneurism or spin-offs. Chris Baggot left Exact Target to found Compendium Blogware. Scott Jones didn’t just sit around counting his money after inventing voice mail, he has started several companies since. Not all of these will be successful, of course. But the key is that many of them can be started and sustain their operations without having to convince a company in a far away place to locate there. They are local, independent sources of production. They are also often creative companies that are building new and innovative products and services.
Cities that are capable of generating this type of internal economic life force have a much greater chance at adapting to the new economy than the ones that do not. Unfortunately, many small manufacturing cities were really just branch plant towns that were there to take advantage of a certain need at a certain point in time. But they were almost totally dependent on outside actors to sustain their economic life force. Their animating power was elsewhere. That’s not to say that they don’t have assets like a skilled labor force or good infrastructure. But they are only able to deploy them profitably to the extent that economic forces elsewhere dictate.
It comes as no surprise that these types of “shadow cities” are often victims of macroeconomic forces they can’t influence or even sometimes understand. We’ve seen that for sure in the Midwest as our agricultural and manufacturing industries have gotten pummeled by structural economic changes and vast increases in productivity. But even if a place is successful today, to the extent that it either overspecializes or is dependent on outside forces to animate its economy, it is living on borrowed time.
To be successful, a city needs to be a true city, one that has a healthy and diverse mixture of businesses, and with a combination of all three types of companies. It simply must have some capacity for internally generating economic life and innovation. Starting or restarting that economic fire is the key to turning around struggling cities. Without it, they are only going to be waiting for their number of come up in the site selection lottery, and slowing shrinking away over time.