State of the New Economy
State of the New Economy Index 2017

No matter the size, each city plays a role in the global economy. However, it’s hard not to recognize the advantages larger cities have over their small and medium-sized counterparts. While cities like New York, New York, Austin, Texas, and Raleigh, North Carolina, are swelling with a stunning mix of corporate careers, tech-heavy startups, and innovative culture, “rust-belt” cities seem to be stuck in the Stone Age.

While there is nothing inherently wrong with a city that focuses on manufacturing, resource production, or service industry jobs, this kind of economic landscape can be inimical to competing in a global market. This is especially true when in these same industries—when they exist in forward-thinking cities—have successfully integrated technology into their processes and are using cloud computing to actively compete nationally and internationally.

In order to capitalize on today’s technological innovations, it’s important to understand the obstacles small and mid-sized cities face when “competing” with tech-heavy metropolitan areas and how they can redirect policies makers’ misguided notions that “rust belt” regions should stick to their traditional “strengths.”

When Cities Are Type Cast

What is it that equips a city to flourish in today’s market? Many would argue that jobs are the answer. However, what if there was a fundamental element of a city that could better ensure high-quality, high-paying careers? There is. It’s a better economic policy.

In most small and medium-sized cities, there is hesitation in even attempting to compete with America’s booming, iconic, technological hotbeds like California’s Silicon Valley or Boston, Massachusetts’ Route 128 tech corridor. However, this myopic fear and lack of initiative are stifling the modernization of many cities’ policy framework. Besides, it’s not that small and mid-sized cities need to “compete” with major metropolitan areas, it’s that they need to adapt to a changing economy.

To highlight and hopefully alleviate the “unfortunate results of this myopia,” The Information Technology & Innovation Foundation (ITIF) published a new study entitled The 2017 State New Economy Index in order to help local and state leaders become grounded in what economists have called “New Economy” success factors. Ultimately, if small and mid-sized cities continue to be typecast by their long-established (yet dying) industries, they won’t be able to take advantage of the latest technological innovations that make it possible to compete in the global market.

New Economic Success Factors

Before exploring how to take advantage of the many opportunities technology could present to small and medium-sized cities, it’s helpful to understand what new economic success factors are. The ITIF has broken these economic metrics into five categories and 25 indicators:

  1. Knowledge Jobs: Information Technology Jobs; Managerial, Professional, and Technical Jobs; Workforce Education; Immigration of Knowledge Workers; Internal Migration of U.S. Knowledge Workers; Manufacturing Value Added; High-Wage Traded Services.
  2. Globalization: Foreign Direct Investment; Export Focus of Manufacturing; High-Tech Exports.
  3. Economic Dynamism: Business Churning; Fast-Growing Firms; Initial Public Offers (IPOs); Inventor Patents.
  4. The Digital Economy: Online Agriculture; E-Government; Broadband Telecommunications; Health IT.
  5. Innovation Capacity: High-Tech Jobs; Scientist and Engineers; Patents; Industry Investment in R&D; Non-Industry Investment in R&D; Movement Toward a Green Economy; Venture Capital

A Systemic Issue

Since 1999, the ITIF has published their new economy research to rank cities in terms of how successfully they can compete in this ever-changing, globalized market. Unsurprisingly, the ITIF found that there was barely any variance in the top ranking states since 2014. For instance, Massachusetts has continued to occupy first place since 1999.

While this finding is impressive for Massachusetts, it’s also disconcerting for states attempting to compete. This is because as cities embrace technological innovation—at least when it’s integrated properly—they’re better equipped to compete in the global economy. Likewise, as they’re better able to compete, they can also bolster their economic infrastructure with better technologies, ensuring their place in the global economy. However, the reverse effect is also true.

States that have fallen behind in policies that enhance the integration of technology will only continue to fall behind. Moreover, the longer they wait to build an innovation district of their own, the more arduous a process it becomes to get a foothold in the global economy.

This is not to say that state leaders should abandon ship if they’ve fallen behind, or vice versa, that booming cities should stop innovating. Policy makers in states that rank in the bottom quartile of the New Economy Index, like Mississippi, Arkansas, or West Virginia, as well as those who rank in the middle and above, can make several changes to their state’s framework to better elevate the cities within them.

Two Ways to Compete Like a Big City

1.    Support but Don’t “Pamper” Small Businesses

As ITIF notes in their research, “States that are pro-business tend to not only have highly productive manufacturing sectors, but they are home to higher concentrations of fast-growing businesses.” That being said, small and medium-sized cities should know that making brazen, uninformed, “business” policies can be as dangerous as not supporting them at all.

Although this is a less-than-popular sentiment—especially as startups are a hot topic right now—states shouldn’t necessarily “favor,” or give preferential treatment to small businesses. Unless these entrepreneurs have created a business that is highly likely to grow rapidly, it’s best for states to let small businesses develop organically.

While that may come as a crushing blow to many local policymakers, as funding startups and fueling entrepreneurship looks great for headlines, it doesn’t do much in the way of making small or mid-sized cities thrive. For this reason, it’s critical that local leaders turn their focus to large firms.

Many state policymakers could find this alarming, but large firms are not the Wal-Marts, Targets, or Amazons of the world. These are substantial companies, 500 employees and up (as defined by the Small Business Association), that can export goods and services, invest in R&D, and pay higher wages to their employees.

Wholeheartedly, it seems and feels like the small business is the backbone of a city’s economy. But the truth doesn’t always align with our beliefs. According to research by ITIF, Robert D. Atkinson, and Michael Lind:

“On virtually every economic indicator, including wages, innovation, exports, and even job creation, large firms in the United States outperform small ones. Moreover, states with larger average firm sizes outperform states with smaller firms. As such, any economic development policy focused on boosting the welfare of a state’s workforce cannot afford to be indifferent to firm size.”

2.    Embrace and Respond to change

State policymakers need to ensure that their development policies aren’t based on flash-in-the-pan politics, business fads, or headline opportunities. However, like Charles Darwin eloquently wrote, “It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.”

For instance, in a major study by the Knight Foundation and Gallup, they found three factors the boosted community attachment—a metric with a direct connection to higher gross domestic product (GDP) growth:

  • Social Offering: opportunities for social interaction and citizen caring
  • Openness: how welcoming the community is to different people
  • Aesthetics: physical beauty

It is the openness that is particularly striking in coordination with the New Economic study. This because ITIF found that a staggering “third of U.S. innovators were born outside the country even though immigrants only represent 13.5 percent of all U.S. residents.” Cities that embrace refugees and the immigrant population should be proud and continue their openness.

For example, Erie, PA has an immigrant population of about 20,000, according to the U.S. Committee for Refugees and Immigrants. That’s over a fifth of their entire population. Down the line, this should statistically position Erie in a place to better compete in the global economy.

Small and Mid-Sized Cities can Prevail

While some of this information may seem discouraging, it is not meant to be. In fact, these findings should serve as a motivator for policymakers and small businesses alike: because what ITIF also found is that, if small business show promise and are potential “gazelles,” (meaning fast-growing and job-providing), that states should consider a preferential policy for them.

Small businesses should keep this in mind as well: a high-quality business that evolves with a changing economy will remain in business despite its size. Small business owners shouldn’t be afraid of large firms moving into the area. In fact, researchers from ITIF found that “among the small firms that remain viable, many are dependent on large firms as their customers.”

If you would like to leave a comment, we’d love to know what you think about the New Economic Index findings.

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