Friday, April 16th, 2010
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:
- 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 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.
- 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.