Economic Development Policy: Moving from incentives to co-investment

S o much of our obsession with economic development in local and state government focuses on incentives. By some accounting, state and local incentives total over $60 billion a year, and there’s a business in enabling businesses to grab these goodies.

If I were “king”, I would do away with the term “incentive” and focus our thinking instead on “collaborative investment” (co-investment).

The world is shifting, and we need to move our conversations (and our language) to a new level. Incentives are transactional; co-investments are relational. Incentives are short term; co-investments are longer term. Incentives are gifts; co-investments are commitments.

We see good examples of co-investment in, for example, the Small Business Innovation Research program. (Developed by Roland Tibbets at the National Science Foundation, the SBIR program explicitly designs co-investments. When I worked in the US Senate in the early 1980’s I had the honor of interviewing Roland and learning the thinking behind his brilliant, simple design.) Perhaps if we began reframing the policy discussion around co-investments, more of our elected leaders would see that the returns from their excessive commitments to single companies make very little sense.

At the same time, we would be aligning ourselves more closely with an interesting development in the corporate strategy community: a recognition that strategy inherently involves managing interdependencies and the creation of “shared value”. Learn more.

This framework leads us to another important insight. Our long term competitiveness (and prosperity) depends, not on individual companies, but rather on long term investments that are inherently shared. Examples: education, research, innovation and start-up ecosystems, broadband, infrastructures.

ROI calculations on incentive packages are helpful, but seriously incomplete from this perspective. In addition, we should be thinking of opportunity costs. We should weighing whether a billion dollar package of incentives to one company is more valuable to our long term prosperity that investing in the brain development of thousands of 3 year olds through early child care. (Nobel LaureateJames Heckman makes this case eloquently.)

Moving our thinking from incentives to co-investment would also touch on the deeper historical initiatives that made this country’s democracy so powerful and resilient: Hamilton’s Report on Manufactures, Clay’s American System, Lincoln’s Morrill Act.

Ed Morrison is Director of the Purdue Agile Strategy Lab. He is also an adjunct professor at the University of the Sunshine Coast in Queensland, Australia. For the past five or six years, he has been developing new, agile approaches to strategy in open, loosely joined networks, a discipline he calls Strategic Doing. Prior to starting his economic development work, Ed worked for Telesis, a corporate strategy consulting firm. In this position, he served on consulting teams for clients such as Ford Motor Company, Volvo, and General Electric. He conducted manufacturing cost studies in the U.S., Japan, Mexico, Canada, Italy, Sweden, and France. Ed started his professional career in Washington, D.C., where he has served as a legislative assistant to an Ohio Congressman, staff attorney in the Federal Trade Commission, and staff counsel in the US Senate. He holds a BA degree cum laude with honors from Yale University and MBA and JD degrees from the University of Virginia.

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