Das
Humankapital
Karl
Marx would never recognize the 21st 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.
Education
and Entrepreneurs |
|
Average
Annual Net
New
Bus.
(1991-2003)
|
New
Bus. Per
1,000
Pop.
(2002)
|
%
Pop.
With
B.A.
(2002)
|
Northern Virginia
|
1,291 |
0.60 |
0.47 |
Charlottesville
|
86 |
0.54 |
0.40 |
Richmond-Petersburg |
402 |
0.40 |
0.29 |
Lynchburg
|
75 |
0.35 |
0.19 |
Roanoke
|
69 |
0.29 |
0.22 |
Bristol
|
26 |
0.29 |
0.14 |
Hampton Roads |
311 |
0.20 |
0.24 |
Danville
|
12 |
0.11 |
0.11 |
|
|
|
|
Source:
Chmura Economics & Analytics. |
Notes: |
Average net
entrant firms are for firms with 10 or fewer
employees. |
Percentage
population with B.A. degree is for those 25 and
older. |
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:
-
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.
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.
|