Bacon's Rebellion

James A. Bacon

Das Humankapital

Karl Marx would never recognize the 21^st century world in which human capital trumps financial capital. This historic shift changes all the rules – including those of economic development.

Rick Claus is one of Virginia Tech’s star researchers. Besides directing the Fiber and Electro Optics Research Center, which has spun off 21 companies over the past 16 years, he serves as president of NanoSonic, Inc. A leader in moving nanotechnology from the lab to the marketplace, the Blacksburg company bills its 50 employees as “artisans of revolutionary new materials.”

One of the company’s promising products, dubbed “metal rubber,” conducts electricity like a metal but stretches to up to several hundred percent of its original length. Constrained by lab space, Claus’ team can produce only four square-foot tiles per day. The challenge now is to transition to an automated process, employing robots instead of graduate students, which can boost production to 30 square feet per minute. Having visited a number of possible locations around the country, Claus has discovered that his nano-technology is quite the hot property. Economic developers, he says, are already vying to lure his production facility to their locales.

NanoSonic epitomizes the limitation of the economic development profession in the Knowledge Economy. Economic developers became interested in Claus only when he was ready to build a manufacturing facility. Now they’re stumbling over each other to offer real estate incentives and tax breaks. But the critical consideration for Claus isn’t real estate or even financing: It’s human capital. Wherever he goes, he says, he will need to hire people with critical skills in engineering and chemistry. “If we were to move out of the Blacksburg area, it would be to a place where we had a good environment of bright people we could work with.”

Now, here’s a mind-bending idea for economic developers to consider: Instead of competing to recruit Claus’ manufacturing facility – which would still leave Claus and his research team back in Blacksburg spitting out ideas for even cooler technology to come – what if were possible to recruit Claus himself in order to capture not one deal but the follow of technological innovation and new enterprises to emanate from his genius?

Universities raid one another’s star talent all the time, but rarely in collaboration with local economic developers. Every metropolitan region in Virginia possesses educational institutions that grapple with the challenge of recruiting and retaining the best and brightest faculty they possibly can. For every prodigy in materials science like Claus, there’s a superstar in biotech, computer science, wireless telecom or aerospace engineering that some Virginia university wants to hire.

Economic developers don’t “do” university professors, however. They don’t recruit artists either, no matter how much economic activity and positive renown an enterprise like, say, the Dave Matthews Band might bring to Charlottesville and Albemarle County. Economic developers don’t recruit high-profile business executives looking to settle into a pre-retirement community, no matter how many of them wind up financing, mentoring or running new business enterprises. Indeed, economic developers don’t even have it in their job descriptions to help existing businesses in their recruitment of executives, managers and scientists.

The dynamics of economic development have changed radically in the four decades since Virginia started aggressively targeting out-of-state investment. Human capital now surpasses financial capital as the driver of economic growth. Roll over, Karl Marx. The concept of "the ownership of the means of production" is less and less relevant in a Knowledge Economy in which workers, and the knowledge they possess, are the means of production.

Knowledge workers are supplanting capitalists as drivers of economic progress. Old institutions and practices adapted to the industrial era are losing thier relevance. If Virginia’s economic development professionals don’t radically rethink their strategies for the Knowledge Economy, they could soon find themselves as obsolete as stitchers and lathe operators.

The Primacy of Human Capital

When Cisco Systems Chairman John Morgridge addressed the Greater Richmond Technology Council a few months ago, he explained Cisco’s decision to build a major facility in North Carolina’s Research Triangle: “We went where the nerds are.”

In the Knowledge Economy, the force driving the movement of capital investment is not the price of commercial real estate, access to roads and utilities, tax rates or even financial grants and inducements. It’s the availability of employees with particular skill sets. Companies don’t out-source to China and India just because the labor is cheap, Morgridge asserted: They outsource because China and India have abundant human resources.

Every economic developer I’ve talked to comprehends the truth of Morgridge’s observation – it’s a reality they deal with every day. They are investing more in analyzing the characteristics of their regional workforces, but they don't play an active role in shaping the workforce. Although there are signs of change in Richmond and the New Century regions, economic developers still function, as they always have, to close industrial and commercial real estate deals.

Virginia’s economic developers are among the best in the country at what they do, continually receiving awards and kudos from their peers. Virginia has the second fastest-growing economy in the country right now. One might legitimately ask, If it ain’t broke, why fix it?

Here’s the answer: It may not be broken yet, but the machinery is leaking oil and hissing steam. In a globally competitive economy, multinational corporations have greater latitude than ever before where to locate their facilities. Increasingly, Virginians find themselves competing head to head with Chinese, Indians and Mexicans for capital investment. Virginians still can win those face-offs, but the deals are getting harder to close. When Virginians do win, they owe their success to factors that economic developers can’t control such as high workplace productivity and the availability of specialized skills.

A glance at the deals assisted by the Virginia Economic Development Partnership over the past 12 months is instructive. (See the list here.) Announced expansions accounted for a total of 9,251 new jobs (perhaps as many as 10,000 if we include the Coors Brewery expansion, a major project for which employment numbers were not available).[1] That compares to total job creation in the Virginia economy of 124,000 between July 2003 and June 2004, the most recent 12-month period available from the Bureau of Labor Statistics. In other words, traditional economic development efforts played a role in the creation of about one job in 12 during that period.

Even the casual observer will be struck by a remarkable imbalance in the VEDP list: Of all the projects reported, only six of 62 were located in Northern Virginia – despite the fact that Northern Virginia has been one of the top job-creating regions in the nation over the past two years! With its entrepreneurial economy built around technology services, Northern Virginia has moved to a higher plateau than the rest of the state. When it comes to economic development, NoVa and RoVa (the Rest of Virginia) are two different worlds.

What, then, accounts for the creation of those jobs in Northern Virginia that aren’t picked up by Virginia’s traditional economic development metrics? Take a look at the PriceWaterhouse Money Tree survey for the second quarter of 2004. (See summary here.) In one quarter, 19 Virginia companies reaped $96.5 million in venture funding.

That’s just one quarter -- and the venture numbers reflect only the tip of an equity iceberg that includes angel funding, private equity investments, offerings in the public equity markets, mergers and acquisitions, and more. Not coincidentally, this list is the converse of the VEDP list: All but three companies landing venture funding are located in Northern Virginia.

Observing the success of Silicon Valley, Boston and now Northern Virginia, some people learn the wrong lesson: that venture capital is the critical economic development bottleneck. Such a conclusion results from a misunderstanding of what venture capitalists do. Yes, they supply risk capital, but they also play key roles in assembling management teams. Venture capitalists tap their networks of professional relationships to find executives whose experience and skills match up with the business proposition under consideration.

Money is not the scarce commodity among the technology companies funded by venture capitalists – human capital and deal flow are. Venture activity took off in Northern Virginia in the early 1990s because the wealth of expertise in the Internet, networking and  telecommunications sectors had reached critical mass, spitting out an abundance wealth of high-quality business plans. Northern Virginia is rich not only in network engineers and software programmers but seasoned CEOs, CFOs, veeps of business development, and assorted professionals, from attorneys who understand intellectual capital to real estate brokers who know how to structure a flexible, short-term lease.

Figures provided by Chmura Economics & Analytics shows a powerful correlation between the level of education, measured here by the percentage of the population over 25 possessing a B.A. degree, and the rate of new business formation. It is no coincidence that Northern Virginia and Charlottesville lead the pack in both educational attainment and the rate of new business formation.

In sum, human capital is the fundamental precondition for sustainable economic development in the Knowledge Economy. When a critical mass of human capital exists, as it does in Northern Virginia, it sparks entrepreneurial energy, attracts venture capital and even lures technology companies from other regions to invest, simply to be where the action is. Without human capital, it’s impossible to force feed the rest.

Joined at the Hip: Economic Development and Workforce Development

The challenge of economic development in the 21st century United States, I would argue, is to develop human capital with the expectation of (1) stimulating new businesses and (2) attracting investment from outside the region to access the productivity and creativity of the workforce.

Everyone intuitively understands the importance of education in a Knowledge Economy, but few have thought systematically about how education, training and workforce development efforts tie to economic development. Conceptually, there are three facets to the problem, one of which is properly the domain of educators and industry, but two of which fall naturally to economic developers.

Education and training. Every community should provide its inhabitants with the skills required to function in an information-intensive society and knowledge-intensive workplace. This is the job mainly of educators. I would add only that economic developers should insist upon having a voice in the setting of regional educational priorities. It does no good to teach young people skills they can’t apply in the local workforce – it only induces them to find employment elsewhere. Educators should be investing in skill sets that either improve the competitiveness of local industry or help recruit new business from the outside.

Recruitment. As the massive cohort of baby boomers begins to retire, the U.S. economy will encounter chronic labor shortages. Businesses will be unable to grow unless they succeed in replacing older workers with younger ones – many from outside the region. Attention will focus disproportionately on the so-called “young & the restless” – the 25- to 34-year-old bracket – who are particularly open to moving to new locales. But effort also should be devoted as well to targeting high-impact individuals like artists, executives and research scientists – the Rick Clauses of the world -- who create an immediate impact on economic activity.

Increasingly, economic developers will be called upon to augment the recruiting programs of existing businesses, not to mention universities and other knowledge-creating institutions, by (1) targeting geo-demographic groups that match up with the region’s assets, (2) branding their regions as cool places for the targeted demographic to live and pursue a career, and (3) developing ancillary materials, such as websites, magazines and brochures, that entice people to relocate.

Retention. The flip side of recruitment is retention. As regions compete more intensively for mobile, young professionals, communities need to develop an ambience that attracts them or risk losing them to more glamorous locations. Because business, political and civic leaders are older, they tend to be out of touch with what young people are looking for. Regions must find a way to identify and build the physical amenities and social institutions that appeal to younger people and give them a stake in the community.

The Challenges Ahead

The economic development profession faces several challenges in the new millennium. They include:

• Developing metrics that fully describe the breadth and depth of human capital in their regions. Economic developers need hard numbers both to pitch outside industry and to calibrate the allocation of educational resources and priorities.

• Inventorying “quality of life assets” encompassing everything from crime rates to school performance, from traffic congestion to the cost and availability of housing, from livable neighborhoods to the availability of Starbucks, nightclubs and music festivals.

• Creating tools to help businesses recruit employees to the region.

• Guiding political and civic leaders in allocating scarce public resources in projects -- from baseball stadiums and performing arts centers to bike paths and entertainment districts – that help the region in its recruitment/retention efforts.

• Collaborating with industry and academia to recruit super-star executives and scientists.

The bad news for Virginia economic developers is this: They have to learn new skills themselves. The good news is this: So do economic developers everywhere. If Virginians are the first to start the long, hard task of mastering economic development in the Knowledge Economy, the rewards will be incalculable.

-- October 4, 2004

1. Note: This essay was written before the recent announcement that IBM would create more than 1,000 high-paying jobs in Fairfax County, a deal in which the VEDP was involved and an incentive from the Governor's Opportunity Fund was instrumental in making it happen.