How To Create Thriving Regional Economies Make A Commitment To Innovation and Investment

By: Doug Henton & Trish Kelly

Long-term prosperity requires a commitment to innovation and investment. This is difficult to do without a public policy focus, a strategy, clearly identified investment priorities and a willingness to build public and private support behind that long-term investment strategy.

Now is the time to make developing an economic strategy at the state and regional levels a permanent activity. There should be a continuous economic strategy process that engages the regions and industry clusters in a dialogue on changing economic needs and strategic choices. This process will help Californians adjust to ongoing changes and, with a focus on innovation and investment, build a strong foundation for long-term prosperity.

State And Regional Roles In The Economy

What can the State of California and its regions do to achieve these strategic goals? While there is always a strong tendency for governments to intervene in support of a specific industry or help a particular company, the most important role for government is to create a strong foundation for economic prosperity by focusing on the key factors of production-people, capital and technology-and creating an environment that encourages innovation and investment by people and firms. Since firms tend to cluster within regions that provide the critical ingredients for economic success, and no one size fits all in terms of service delivery approaches, the logical place to focus implementation of the economic strategy is at the regional level.

Several entities over the years-the California Research Bureau, the California Economic Strategy Panel, the California Association for Local Economic Development and the California Budget Project, among others-have noted that the way the State is organized to deliver economic development services and resources is not aligned with the needs of the 21st Century California economy. Discussion of an economic strategy must address the appropriate role of each of the partners in creating the foundation for long-term prosperity.

State and regional economic strategy should have three major elements:

• State government should continue the approach used during the preparation of the last economic strategy, of working from the "bottom up" with industry clusters and key partners within each region to determine critical needs and identify actions that can be taken at both the state and regional levels. State government should work with the regions to help them develop and implement economic development strategies appropriate to their unique clusters.

• State government should focus on investments in the critical building blocks of the economy – education/workforce systems and core physical infrastructure systems. These systems are essential for economic success, but current investments are fragmented, out of alignment with regional and industry needs, and inadequate, in most cases.

• Regions should create the environment for entrepreneurship and innovation required by successful industry clusters. This involves connecting entrepreneurs to universities, creating business support networks and services, and increasing access to risk capital. State government should support the regions by providing technical assistance and resources for the local economic development delivery network (closer to the "customer"), removing barriers that impede innovation, and facilitating regional strategies and investments in core infrastructure.

The focus of strategic initiatives should be on all industries, not simply a narrow slice of so-called "high tech" industries. The narrow focus on high tech, especially the recent focus on Internet industries, is one of the causes of the recent boom/bust situation. Too much capital was invested in too narrow a band of industries. Following the logic of Schumpeter, it was inevitable that the frenzy in that one industry would lead to overcapacity and sharply declining profits or losses.

All industries-whether agriculture, manufacturing or services-can use technology to become more productive. Communities need to focus on their core competitive advantages and build their technology infrastructure so that all industries can become knowledge-based, leading to greater productivity and higher wage jobs. Workers should be provided with the skills to meet the requirements of the knowledge-based jobs.

The goal of an economic strategy should be to promote innovation and investment across all industries and regions, and support the essential investments in human and physical infrastructure required to help those industries be successful over the long-term. This will be best accomplished through strong partnerships and collaboration between the State and the regions.

Ensuring Prosperity-Some Recommendations

The National Governors Association announced recently that a high priority for the coming year is to help states develop policies that allow them to "compete and thrive in the global economy." Efforts will focus on "nurturing clusters of innovation in our states-regions where industry, higher education and governments bring together skilled workers, state-of-the-art infrastructure, venture capital and intellectual capital." (National Governors Association, news release, Aug. 7, 2001)

What steps can we take to provide the foundation for our State's long-term prosperity? How can we reposition ourselves to succeed in the global economy? Some key elements include the need to:

• Expand our strategic thinking and [focus]

• Collaborate anew with additional partners

• Reinvest in our core workforce and physical infrastructure systems

• Take the time to catch up and to plan for the next cycle of growth

• Be a problem solver

Economy

There is no more important need than to have a State economic strategy, informed by and developed in collaboration with the economic regions of California. In addition, State government should support the regions in the preparation of their own strategies, which also will inform the State's strategy. State government should:

• Designate a lead entity that is charged with preparing and continuously updating the State's economic strategy. This could occur under the aegis of the existing California Economic Strategy Panel, a state agency such as the Technology, Trade and Commerce Agency, a public/private sector partnership, or an interagency partnership, including especially the California Workforce Investment Board, which has a critical need for timely and strategic information on the economy, as well as policy guidance.

• Provide the lead entity with formal oversight for implementing the strategy and requiring accountability to the Governor and the Legislature.

• Provide consistent funding and staff support for the preparation and updating of the economic strategy.

• Provide technical assistance and resources to assist regions in preparing economic strategies.

• Provide oversight and technical assistance to all state agencies, as well as all levels of education, to ensure that state programs and resources are aligned with the goals of the State's strategy and regional strategies.

Research, Education & Communication

Policy makers and investors need continuous, current and accurate information about economic conditions, issues and emerging challenges and opportunities. Better economic intelligence is required, as well as the ability to communicate findings, educate people about findings, provide for data-driven public policy and investment decisions, and work in partnership to develop and implement proactive state and regional implementation strategies. State government should:

• Reinstitute the process the California Economic Strategy Panel used to prepare the 1996 economic strategy, with regional industry cluster forums, other regional information forums, and broad partnerships to generate timely information on emerging industry needs. Another function would be to provide capacity for regions to implement methodologies such as industry cluster analyses.

• Expand the role and function of the Technology, Trade and Commerce Agency's Division of Economic Research and Strategic Initiatives in both economic research and information dissemination. This information is necessary for state decision makers, including the California Workforce Investment Board, and to support local and regional economic development.

• Create an advisory economic council to provide wide-ranging expertise to the entity responsible for preparing the State's economic strategy and monitoring and reporting on the economy on an ongoing basis. This Council would provide invaluable support for the Governor, the Legislature, and the California Workforce Investment Board. The Council could also provide timely research and reporting on emerging issues. Credentials would be defined to ensure requisite technical expertise diversity of views.

• Provide information on emerging issues, best practices and education about the needs of regions and the State in the new economy.

Coordination, Collaboration &Partnerships

A valuable function for implementation the State's economic strategy is to guide and coordinate the State's approach to economic development and to coordinate the process of collaboration between the State and the regions. State government should:

• Implement a mechanism for interagency planning and coordination. The Technology, Trade and Commerce Agency already acts in this capacity in an ad hoc way, but this function needs to be formalized.

• Implement a mechanism that fosters partnerships between State government and the economic regions. Proposed legislation to do so through a reverse request for proposal process, in which regions would identify and request State agency participation in regional problem-solving teams, did not advance. This opportunity should be reassessed, as well as other models such as regional compacts.

• Direct State investments in economic development to regionally approved plans.

Physical Infrastructure

We not only need to make up for past deficits, we need to maintain and enhance existing systems and prepare for new growth. Now more than ever we need to make a commitment to ongoing, continual investment, and explore creative strategies to make the best use of our resources – financial, human, and physical. State government should:

• Commit to sustained annual investment in the State's core infrastructure systems. This should be part of the State's capital investment plan for infrastructure across all agencies and programs.

• Create a State infrastructure investment account in the State budget, supported by an annual allocation from the General Fund (with protection from economic downturns through a trigger mechanism). Investments should be linked to economic development.

• Aggressively explore and implement opportunities offered by technology, innovation (including sustainable development practices) and strategies such as demand management to help improve capacity, meet modernization needs, and reduce the need for new facilities.

• Address the state/local fiscal relationship, thereby improving the stability of local revenue streams and increasing the ability of local governments to invest in local and regional infrastructure.

• Provide State incentives to encourage regional collaboration to meet priority infrastructure needs

• Leverage resources from the federal government, foundations and through business and third sector partnerships to meet regional infrastructure and economic development needs. This includes problem solving and advocacy when the ability to respond to regional needs is constrained by the federal government.