The Q Factor

These days, a city's growth has less to do with lower costs than with the quality of its people and lifestyle

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OVER THE YEARS, GOVERNORS AND mayors, academics and businesspeople have tried to figure out why some cities experience rapid rates of economic growth while others do not. By now, we have solid data about what doesn't cause a city to move ahead. And we have good ideas about some factors that, to the surprise of many, turn out to be rather important.

We know, for example, that what makes the Phoenixes hotter than the Buffaloes is not that companies are moving from Buffalo to Phoenix. A few firms do move long distances, and they get enormous publicity -- as when American Airlines Inc. moved its headquarters from New York City to Dallas. The popular press assigns great meaning to such moves, and so it's easy for businesspeople and politicians to feel that they are significant. But the numbers are very small and, in terms of employment at least, statistically insignificant.

We also know that it is not the number of plant closings and layoffs in a city that determines its economic health. Virtually every city in the United States loses about 7% or 8% of its job base each year through layoffs and shutdowns. Although they have been widely reported in Cleveland, Wichita, and Youngstown, Ohio, for example, the fact is that growing cities such as Dallas, Orlando, and San Diego experience slightly higher levels of closings and layoffs as a percentage of their business activity. The reason is almost obvious: the more dynamic cities are starting more businesses and experiencing greater levels of failure.

If loss rates are the same, and company movement is insignificant, there is but one explanation left: some places replace their losses with new and growing firms, while others do not. Cities at the top of our list produce significant start-ups at four and five times the rate of cities at the bottom: Austin, Tex., with a birthrate of 7.3%, compared with Duluth, Minn., with 1.6%. And roughly the same spread is found in the percentage of new companies that are high growth: Manchester-Nashua, N.H., with 4.8%, compared with Peoria, Ill., at 1.0%.

Why the huge differences in job replacement from one place to another? What is it about Raleigh-Durham, N.C., that makes it so much more likely for someone to start or expand a business there?

Traditionally, one would explain it by "factor costs," which is simply an economist's way of saying that business growth gravitates to places where it is cheaper to do business. Not so, as it turns out. Research shows that land, labor, money, energy, transportation, and taxes cost more, not less, in thriving cities. Atlanta, Washington, D.C., and Minneapolis-St. Paul are not inexpensive places to do business, yet they sit comfortably near the top of our metro ranking. Costs, say business owners, are only part of the story. The other part is the degree to which higher costs are justified.

In many places they are justified. Paying a 30% premium for a computer programmer in Silicon Valley can easily be rationalized by some special skills the programmer has learned at California Institute of Technology. And paying more for energy may not make much difference to a service firm in Portsmouth, N.H. A remote place like Tucson suffers very little for not being on the major transportation routes when most of its products can now be shipped instantly or overnight by satellite and airplane. More often than not, the higher cost is worth it, or it makes very little difference.

The key factor, then, is not cost, but quality. Whether it is a new company looking for a place to put down roots or an old one looking to expand, the criteria tilt toward areas offering the qualitative advantages that permit an increasingly service-oriented, brain-dominated collection of companies to attract the work force they need.

Quality takes many forms. Great research institutions, such as the collections of universities in the Research Triangle of North Carolina, or the University of Texas, generate a continuous and very fertile stream of bright young graduate students and faculty who want to live where they went to school, and who start and grow a disproportionate number of businesses. A recent study of producer service firms in Seattle found that 70% had a direct university connection -- an employee who taught on a university faculty or was taking a degree. And in East Cambridge, Mass., hard by Massachusetts Institute of Technology, a grubby old industrial plot less than a mile square has since 1980 outperformed each of 13 states, including Illinois and Pennsylvania, in terms of job creation.

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