Friday, April 16th, 2010

Replay: True Cities and Shadow Cities

As many cities, particularly 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:

  1. 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.
  2. Branch plant or departmental export. 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 as a captive service or commodity to satisfy particularized demand from elsewhere. They are often specialized and routinized.
  3. Indigenous exports/industry. These are pieces of the production puzzle, often creative or innovative, that either serve a broad and diverse market or create markets. This could be anything from a biotech firm to a hedge fund to a specialty bike manufacturer to an internet company to a specialty manufacturing concern to a Fortune 500 headquarters. These types of businesses constitute the 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 it and wanted it to. Flint was a shadow cast by Detroit. 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 and indigenous exports – and no culture of even trying to – it has had a hard time figuring out how to revive its fortunes.

Contrast Flint with Chicago. Chicago not only was a location of many branch plant operations, it had significant indigenous industry. Just like Flint, most of its manufacturing got wiped out. But it had other things to fall back on. Now, many of those local indigenous industries got wiped out too. That’s the nature of creative destruction. But what Chicago had from these was a legacy of creating new indigenous industries and a mindset that viewed the city as controlling its own fate. This has allowed Chicago to renew itself despite an epic manufacturing collapse. Chicago has economic life force apart from companies in Detroit, Tokyo, or elsewhere deciding to locate a plant there. It is a true city.

Or 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 life as well. 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. It has 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.

For Flint, Chicago or Indianapolis we could substitute in innumerable other cities.

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, innovation, and indigenous exports. 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.

You’ll notice one big difference between Flint and Chicago/Indy is size. It strikes me that in most cases there’s a certain minimum scale or critical mass you need to achieve in order to operate as a true city. My rule of thumb is a metro area population of one million or more. There are cities below that which are successful, but mostly they seem to be college towns or satellites of bigger cities. If you look at the Rust Belt, there are plenty of one million plus cities that are beating national averages or otherwise doing well in some measurable degree, but other than college towns, there aren’t many below that. The cold reality may be that the future isn’t that bright for most of those places. The question is, how do we address that from a policy perspective? In my view, a key part of this is linking them into broader metropolitan economies, but that’s a topic for a future post.

This is an edited version of a post that originally ran on December 21, 2008.

Topics: Economic Development, Globalization, Public Policy
Cities: Chicago, Indianapolis

11 Responses to “Replay: True Cities and Shadow Cities”

  1. Stephen Gross says:

    Question for you regarding the 1-million mark for “city” population: Here in Minneapolis, the population is 382k; St Paul is around 270k. So that’s definitely under the 1-million mark. However, we are easily the largest city by FAR within a 300-mile radius. So relative to the region, we’re a big fish. I wonder if the minimum population necessary for a city is more a reflection of regional population density rather than an absolute number…?

  2. Stephen, I’m referring to metro area population here.

    There may be a role played by city size within a region, but I haven’t formulated a view of it yet.

  3. Great post! I am working on developing an entrepreneurial ecosystem here in Chattanooga, TN. We have an amazing history of entrepreneurial successes back in the early half of the 20th century, but haven’t seen significant innovation over the last 60 years. Chattanooga became the poster-child for “shadow cities” during that same 60 year period.

    In 2008, we won the lottery by landing the VW plant for North America. My concern is that this will lull us back to sleep thinking that we’ve got it made. My daily work focuses on how to reawaken the entrepreneurial giant that lives in the hearts of Chattanooga’s citizens.

    My team is focused on building awareness in the community about angel investing opportunities and also helping high-growth potential start-ups get to the point where they can launch. It’s a good time to be a Chattanoogan, but we can’t sit back and wait for the goodness to keep coming.

    Thanks again for the thoughts…glad to know others are dealing with similar situations.

  4. John Morris says:

    Yes, a great post but I think somewhat unrealistic. A lot of small and very small cities will always need connections to places nearby. For example, Newark and Trenton and are shadows of New York and Philly.

    But one can also have constellations of small stars and planets. This is what should be going on with Cleveland, Canton, Youngstown, Erie, Pittsburgh, Wheeling and Morgantown.

    Problem with Flint is very much tied to the failure of it’s star–Detroit. I understand what your saying though and will think about it.

  5. Pete from Baltimore says:

    MR Renn
    You make many good points here but i would balk somewhat at your comparisons between Flint and Chicago. There are some cities in the world that are the exceptions to a lot of rules. New York City,London Paris , Moscow,ect.

    While Chicago is a great city i dont know if it has that many lessons that are applicable to other cities. Some lessons perhaps. But i do think that cities like Chicago are in a catagory of their own. In a way i think that Detroite is in a catagory of its own as well. But sadly in a somewhat negative way.

  6. John Morris says:

    I agree Flint and Chicago in the same sentence is somewhat absurd. One needs to think of a town like Flint as part of a solar system in which it’s sun is very dim and the planets don’t interact with each other. Of course, it’s hard to imagine now what a big city Flint once was.

    Chicago, obviously is the mega sun of the Midwest. But also, any important college town should be acting as sun spinning off lots of startups and creating unexpected fusions.

    Why in general, do they not seem to happen in much in Michigan? What’s up with Ann Arbor?

  7. John Morris says:

    It’s sun, being Detroit, of course.

  8. Alon Levy says:

    John: what you say about Newark and Trenton raises another point, namely that cities can be demoted to shadows. Krugman’s recent address on economic geography talks about how many Rust Belt cities used to have indigenous exports. For example, Trenton used to be a center of ceramic exports; it still has a sign “Trenton makes, the world takes.” It was only after the Northeast’s deindustrialization, beginning in the 1930s and 40s, that it became a shadow city. Unlike Wilmington, which has transitioned to being a corporate tax haven, or the New Brunswick-Edison-Woodbridge complex, which is now a global pharmaceutical research center, Trenton has had nothing to replace its old industry except the state capitol, becoming a shadow city.

    And at the same time, some shadow cities become true, import-replacing cities. Silicon Valley is a good example: in 1900, San Jose did nothing of importance. If you believe the notion that natural resource cities aren’t true cities, then San Francisco made this transition in the 1850s, Los Angeles did it in the early 20th century, and Houston and Dubai are doing it right now.

  9. Buffalo Denizen says:

    Great post and great discussion.

    Though, in a nutshell, this piece is basically just rehashed Jane Jacobs material with a contemporary spin. She wrote about exactly the same forces in her book The Economy of Cities. The “branch plant” cities like Flint, Youngstown, Cleveland, ect. were the agricultural and mining villages of the ancient world. They existed only to harvest/gather resources and ship them off too the real cities. Their existences depended entirely upon the cities they served. In that era the “true cities” the author speaks of were the real cities. I guess we can say a “true city” is a place where a society’s key decisions are made and great ideas are exchanged; it’s a place where the best of minds meet and mingle. None of this ever really happened in the satellite/branch towns which orbited the true cities.

    Going by the Jacobs idea of a city being an import/export machine, we could certainly classify my home city, Buffalo NY as a “branch plant” town. However, there is one small flaw that makes this dichotomy not so clear-cut. Economists often ignore impact of cultural institutions on an economy, society or civilization. Buffalo’s vibrancy is pretty much propped up by the Universities, Non-profits, and government sector. I’m sure the same could be applied to places like Pittsburgh, Madison, Columbus and others. The grandest example would probably be Boston. Without its universities and other public institutions, it’d likely be just another rotting rust belt hulk.

    On top of that there’s a lot of cultural inertia that keeps places like Buffalo an interesting place to be. Think of all the beautiful the old cities in Europe that don’t really do diddly squat economically (as far as the import/export model is concerned) yet remain exciting places to live and visit.

  10. Great post, Aaron.

    I think a useful refactoring of your observations is this:

    1) What economic activities in a city generate revenue (from outside sources)?

    2) How stable are those activities?

    Your categories 2 and 3 are those which are revenue-positive, the difference being one of stability. Economic activities which are essentially branch offices or low-skill activities, are less stable than those which are tied to the particulars of a place or which require a large accumulation of human capital. Flint, as a de-facto company town, is an extreme example–but a useful canary for the proverbial coal mine.

    As others point out, the intellectual, financial, and cultural wealth of a city has a lot to do with its ability to ride out economic downturns, paradigm shifts, and other disruptive events, and to attract new income-producing activities. And of course, tourism is a major income-producing activity in itself; for those cities which have cultural institutions or other attractions which are well-regarded enough to draw outside visitors.

    I give a brief (and informal) analysis of Portland here.

  11. Engineer Scotty, thanks for the writeup and link.

    Buffalo Denizen, yes, this is definitely Jacobsian. In fact, one of the edits I made when reposting was to rename class three as indigenous exports to align more with her writings. I do think she puts too much emphasis on import substitution though.

    In fairness to myself, I thought basically the same thing before I read her, as I contemplated why Indianapolis could renew its economy, but Anderson, Marion, Muncie, etc. couldn’t.

    Educational and cultural institutions are a product of economy success. Buffalo has them because of its history as a strong economic center. But can it maintain them over the long term if it is economically stagnant? I don’t know as much about Buffalo as more Midwest cities, but many of their institutions are struggling financially, though educational ones seem to be in pretty good shape.

    Pittsburgh may tell the story. It basically shrank itself into an “eds and meds” economy with a few bolt-ons like nuclear engineering. Can you really revive a city on an eds and meds basis? Will the Pittsburgh recovery be V-shaped, U-shaped, or L-shaped, to use macroeconomic analogies? You seem to be suggesting you can go L-shaped and still be an ok place to live. Let’s hope so.

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