The Q Factor
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.
A good labor force is also crucial. A Microsoft or a Compaq Computer cannot spring up anywhere; such a company requires large collections of skilled people who can program computers and design circuitry. Even outside the technology field, companies are finding it easiest to locate and grow in cities in which the nation's best managers and professionals have already chosen to live, and from which they are reluctant to move.
Local government is important, but not in ways that people used to expect. In the days when economic development was synonymous with the expansion of manufacturing facilities for large corporations, government's job was to keep out of the way -- to keep taxes down and make sure that major employers had the land and transportation facilities they needed. Cities that governed least governed best.
Today, by contrast, the small companies, not the large corporations, are the engines of economic growth. And more often than not, small companies are growing fast in places that pay attention to the public realm, even if higher taxes are needed to pay for it. A small company cannot afford its own snowplows and garbage trucks and security forces. Instead, it must rely on local government for these services. Whereas Fortune 500 executives can fly in and out of just about any town in the company jet, busy entrepreneurs and their salespeople need major airports for their transportation. A growing company doesn't mind paying a few extra dollars in taxes to get these things, and will avoid places that do not offer them. This is particularly true for service firms that have few hard assets, and for which local property taxes are relatively unimportant in any case.
The telecommunications industry is the real sleeper in the new equation. Most people take it for granted, as if one could get the same telephone service anywhere. Not so. Nationwide delivery systems, hotel chains, and brokerage firms transmit massive amounts of data and phone messages daily over wire, satellite, and microwave links, and will select places that offer modern digital-switching networks with plenty of growth capacity. Memphis has attracted many firms with the telecommunications facilities that Federal Express and Holiday Inns required (and were provided). Software companies in Fargo, N.D., on the other hand, have a difficult time hearing their customers' questions over the phone.
It's a whole new ball game. A city no longer needs a natural harbor, a surplus of labor, and lots of sunshine in order to prosper -- it needs quality universities, quality workers, quality airports and telephone systems, and, yes, even quality government. We have to marvel at how Dallas has built itself into a cultural and transportation capital; how Louisville has taken a backward school system and begun to reinvigorate it by gradually putting a computer in every classroom; how Charleston, S.C., has revitalized an old southern port; and how Orlando has built a thriving high-technology industry on the base of its Disney boom. Even Pittsburgh, still near the bottom of our rankings, has seen a brighter future through the dark clouds of its industrial present, transforming itself into "the most livable city in America."
There was nothing preordained about these economic success stories: they are the result of hard work and cooperation by people with vision. And thanks to changes in the economy and technology, people with vision can have similar accomplishments in almost any city in almost any region of the United States.