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What drives economic development

Minnesota’s policymakers and economic development officials can use ideas about what creates growth as a reality check to assess the potential for specific economic development initiatives. The following list summarizes notable concepts regarding how regional economies develop and grow.

Human capital. The human capital that people bring to the workplace – skills, knowledge and ideas – can drive innovation, productivity improvements and economic growth. Because workers can move from place to place, regions need to improve their livability, or quality of life, as a way to keep the talent they have and draw in new talent, also. As the mix of skills and occupations becomes increasingly important to the economic well-being of regions, quality-of-life factors increasingly influence economic development.

Financial capital. Investment drives growth. Increased private investment – made in response to existing markets or emerging opportunities – creates new jobs, which increase local income, which leads to greater local demand for goods and services, which in turn leads to more private sector investment and continues the cycle of growth.

Productivity. Increased productivity means fewer resources – labor, material and equipment – are used to produce the same or more output. The unused resources are freed up for other productive purposes, and this drives economic growth. Productivity improvements can yield higher wages, profits and levels of capital investment.

Specialization & trade. Businesses in a region can capitalize on efficiencies and productivity advantages to specialize in goods and services for sale to buyers in their own geographic area and for trade with other regions. Regions benefit from trade to the extent that they are able to focus on the types of production best suited to local inputs, including knowledge, skill, technology, natural resources and the base of strong businesses and supplier firms.

Entrepreneurialism. Research shows that high levels of entrepreneurship contribute to economic growth and job creation. Entrepreneurs contribute to the capacity and dynamism of a regional economy. Regions can capitalize on new business development if the economic, cultural and regulatory environments are favorable for entrepreneurialism.

Place & space. Geography affects how economic activity spreads across places, as businesses balance their need for access to labor, materials and consumer markets against the costs for land and transportation. The catalyst and outlook for economic development in an area, then, is often tied to the characteristics of place and space.

Clusters or agglomeration. Economic geographers have long noted the tendency of dominant firms in an industry to develop or locate relatively close to each other. This pattern of clustering, or agglomeration, is no surprise: Businesses cluster to take advantage of access to buyers or to production inputs. While a force in regional economics, however, clusters are counterbalanced by the tendency of production to spread out over time as an industry matures and moves through its product life cycle.

Product life cycles. Regional growth may be affected by the “life cycle” of a product as it moves from the start-up phase to standardized, or mass, production. The initial production of new products and services is likely to happen in locations where the innovation occurred and the entrepreneur first set up shop. However, production will spread out to other locations as the industry matures and the production process becomes routine.

Export base & import substitution. Outside sales bring dollars into the region and drive other local economic activity. The greater the level of “export” sales, the greater the volume of dollars flowing into the region. Once they flow in, those outside dollars multiply as they roll around the regional economy as income that local owners and workers spend at businesses in the area. As a flip side to exports, import substitution aims to reduce the share of dollars leaking out of the regional economy by encouraging local businesses to meet a greater share of the local demand that otherwise would be met by businesses located outside the region.

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