Economic development is a government process to improve the economic, civic and social well-being of its people. It can be accomplished via public or private organizations.
All for-profit firms, no matter the industry, size or form, began as an imagined opportunity in the mind of an entrepreneur. Thus, the essence of private economic development is entrepreneurship — the identification of unrecognized business possibilities.
Entrepreneurs perform several functions for sustainable economic development to occur: They take the initiative to launch the start-up; make business model decisions and innovations, and bare the risk/reward.
Today it is necessary to train government leaders in entrepreneurial thinking if effective rationing of public funds is to be realized. Their goal should be much like the objective of entrepreneurs: launching developments that create value for their customers. Value can be defined as the difference between the price of a product and what the customer would have been willing to pay for the item. For example, if a consumer pays $200 for a product, but would have paid $300 for the item, $100 of value “migrates” to the consumer.
There is a right and wrong system of economic development. All economic development mavens realize that scarce resources must be combined to produce goods and services. Politicians believe that development can occur anywhere under any circumstances. This is a mistake. This faulty assumption is the belief that exclusive public investment projects will automatically create economic growth and value.
For example, Harrisburg, Pa., financed numerous projects via grants and public money from the Harrisburg Authority. This municipal entity’s mission was to manage the drinking water, but it morphed into a venture capital firm on steroids. These projects were “sold” by the mayor as providing development that would provide immediate jobs and economic growth for the city. By the time this escapade ended, Harrisburg was bankrupt and its citizens were on the hook for $1.5 billion.
Before undertaking any economic development project, leaders should ask two simple questions.
First, would an entrepreneur (who must bear the risk of loss) launch this project? If the answer is no, then chances are it is not a viable venture.
Risking the public’s tax dollars should be carefully considered. Funds are not “free” and resources are scarce. Few government officials have the entrepreneurial talent to impassively and rationally appraise a development project. Instead, they become emotionally attached to a venture and are unable to critically think through the advantages or risks of the project long term (or beyond their term).
The major argument politicians make for economic development projects is a lack of for-profit firms willing to create these “public goods,” necessitating government intervention.
This is a true statement — entrepreneurs are not willing to invest their funds in such projects because they do not produce economic value, which should be a warning. Instead, subjective claims of “culture,” “quality of life” or “community enhancing” benefits of such projects are extolled. These arguments hide the actual economic costs by ennobling the civic benefits.
The second question is: What else could be done with the capital if the proposed project is rejected? The omission to include opportunity costs in the development process is the reason for many project failures. Opportunity cost is the value of the next-best alternative when a decision is made; it is what is given up. Instead of investing in arenas, museums and such, government can choose to spend taxpayer money on a variety of things — roads, bridges, airports, police or education.
Government has a role to play in improving the quality of life for its citizens via economic development. Development done properly can provide enormous benefits to society. Yet, if bias and narrow decision-making is permitted, the outcome is always dreadful. The solution is an entrepreneurial mindset in government.
Shelley Morrisette is associate professor of management and entrepreneurship at the John L. Grove College of Business at Shippensburg University. His email is firstname.lastname@example.org.