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Finding the Keys Part II

By wmadministrator

University of Kentucky researchers identify opportunities for greater prosperity


As part of the UK study on economic growth in Kentucky, researchers spoke with consultants who specialize in helping businesses select sites and with officials in economic development offices in the comparison states (Alabama, Georgia, Tennessee and North Carolina). Inquiries with site consultants were structured around two basic questions.

First, what factors did the site consultants and ED officials feel were limiting opportunities for firms to locate and expand in Kentucky? Second, what programs in other states played a significant role in promoting economic development?
The first question asked to site consultants was designed to complement the empirical analysis in the UK report. In particular, researchers wanted to determine whether important factors and additional insights were missed in their analysis.

The second question for site consultants and economic development officials was designed to see if specific ED efforts in other states had been particularly successful and might explain why the comparison states experienced faster growth than Kentucky over this period.

The researchers asked site consultants and ED officials in other states to describe economic development programs and activities in their states. (Please note that the UK researchers did not recommend any particular economic development program or approach in this report.)

An educated workforce is essential to business
Every site consultant to whom researchers spoke said the primary limitation to firms locating or expanding in Kentucky is the lack of training and poor education of the state’s workforce. Every economic development official in competing states said the single most important reason for their state’s economic growth over the previous three to four decades was an emphasis on education and workforce development. This coincides with the empirical results of UK’s research that the primary reason for Kentucky’s slow economic growth is Kentucky’s low stock of knowledge. According to site consultants, the lack of a trained workforce is particularly acute in the rural areas and is the main limiting factor to economic development in rural Kentucky.

Businesses do not believe they can recruit necessary workers in Kentucky, nor do they believe they will be able to hire the workers they need if their business is to grow in the future. Site selection consultants made it clear: Competitor states are better than Kentucky at coordinating workforce development and training efforts to meet new and expanding businesses’ needs. One consultant said, “The states with which Kentucky competes had similar limitations but addressed these problems over a decade ago.”

Consolidation of economic development efforts
In the comparison states (North Carolina, Alabama, Georgia, Tennessee), there is close interaction between state officials in charge of economic development and those responsible for workforce development. In North Carolina, Georgia and Alabama, the office responsible for economic development and the office responsible for workforce development and training are both in the same agency. In all these states, economic development officials work closely with workforce development and training officials to ensure workers receive the skills needed by businesses considering locating in these states as well as businesses expanding their operations in these states. All three states use federal Workforce Investment Act (WIA) funds to develop training programs for new and expanding businesses. Businesses locating in these states indicate the type of training their workers will need. This training is provided by the local workforce investment board, then workers are hired directly out of the training program.

Working with community and technical colleges
In addition, economic development officials in the comparison states work closely with community and technical colleges in their states to ensure these colleges develop training programs for new or expanding businesses. In North Carolina and Georgia, officials consult with community college officials on almost all major efforts to attract specific businesses to the state. Georgia employs a direct liaison between economic development officials and community and technical college officials.

In Alabama, economic development office officials sit on the board overseeing the community college system. State agencies can quickly develop programs to train workers for new and expanding businesses. For example, Alabama economic development and technical college officials were able to develop a new welding program in three months to train the welders necessary for a new shipbuilder locating in Mobile.

Legislators in these states understand the important role workforce development plays in overall economic development and support these programs because the agencies are now sending a unified message.

Another significant limitation to economic growth, site consultants said, is Kentucky’s inability to attract innovative firms and highly skilled workers. These two items are nearly identical since innovative firms are started and run by highly skilled people. This is consistent with research showing Kentucky is less able to attract educated workers than the comparison states. UK’s findings show Kentucky gets fewer total in-migrants and that these new residents possess less-valuable skills than the comparison states’ in-migrant populations.

K-12 and postsecondary education
Discussions with site consultants indicate Kentucky’s main limitation in attracting these firms and people is a perceived poor quality of life – by which they primarily mean the poor quality of schools. Site consultants feel Kentucky lacks quality education at both the K-12 level and at public universities. A lack of quality public schools is of particular concern, again, in the rural parts of Kentucky. One consultant indicated rural Kentucky could be doing much better with a relatively small investment in rural public education. The site consultants also indicate a lack of amenities in the state’s big cities, such as fine dining, viable public transportation, urban residential options and cultural activities, hurts Kentucky’s ability to attract young professional workers.

Several site consultants said Kentucky does a relatively poor job marketing the state’s attributes, which is consistent with the findings that Kentucky is unable to attract educated, highly skilled people to the state. Other than the Kentucky Derby (and perhaps University of Kentucky and University of Louisville basketball), most people do not know anything about Kentucky.

One site consultant describes Kentucky as “… a state of small cities. Many of these cities such as Bowling Green, Elizabethtown/Bardstown, London/Somerset, Paducah, Owensboro are quite attractive, but no one knows about them.” The fact that these cities are unknown makes it difficult to convince people to move to these cities and raise a family.

Tourism and economic development
The comparison states focus significant effort on attracting people to visit and view these efforts as a key part of economic development. In both Georgia and North Carolina, the state tourism office is part of the same agency as economic development; officials from both offices work together to promote economic growth. Both states are particularly active in marketing their state as a good place to live and both include information about the quality of life in the state on their economic development Web sites.

Economic development in Georgia actively pursues events such as the 1996 Summer Olympics and the Tour de Georgia cycling race in an effort to get people to visit the state. Officials in Georgia and North Carolina say tourism is more than just getting people to visit and spend money; it is also a way to get people to visit, become interested in the state and perhaps eventually relocate there. In this way, tourism becomes an important link in economic development. These states treat tourism as a tool to introduce their states rather than an industry to create jobs. (Editor’s note: Kentucky will host golf’s Ryder Cup this year and the Alltech 2010 FEI World Equestrian Games in 2010).

Attracting innovative companies
Economic development officials in Georgia and North Carolina said their states made major investments in their higher education systems over the past 40 years and that the investment paid off in terms of economic growth and development. Both states are home to prestigious public universities and use this fact when recruiting businesses. Georgia and North Carolina officials  indicate they work closely with state universities when trying to attract innovative companies and the R&D divisions of companies. Alabama officials said the state’s investment in its university system – particularly in the medical school – has nurtured an environment for economic growth.

Georgia and North Carolina ED officials said their states have made significant investments in research parks since 1970. This is particularly true of North Carolina’s Research Triangle Park (RTP). North Carolina officials said they actively promote RTP and attribute it to attracting the research arms of major pharmaceutical companies as well as the research units of major companies such as IBM. They feel these investments really paid off in the 1990s when North Carolina experienced significant growth in both innovative activity and average earnings.

Attracting young professionals, expatriates, and retirees
As part of their economic development efforts, officials in North Carolina surveyed CEOs of major companies currently in North Carolina or considering locating their businesses there to find out exactly what attributes of a state were important for these executives. The responses were used to guide development efforts.

North Carolina, Georgia and Tennessee have all focused on redeveloping the downtown areas of their major cities as a way to attract young professionals. Site consultants indicate that young professionals are valuable workers, and efforts to attract young professionals have to focus on urban areas so both they and a partner can find employment. YPs place a high value on amenities found exclusively in cities.

In an effort to promote economic growth in rural areas, several ED officials discussed attracting retirees to the state. North Carolina has long focused on attracting retirees to the mountain area of the state, and officials view these efforts as being largely successful. In conjunction, North Carolina actively promotes tourism, particularly through folk art in the mountain region – most notably around Asheville.

Alabama has followed the lead of several other states and obtained information on former state residents – such as college graduates – then worked on trying to bring them back when they reach retirement age. Mississippi (while not one of the comparison states) has been fairly innovative in its efforts to attract retirees by exempting all retirement income from state personal income taxes.

A number of site consultants said their impression is that the urban areas of Kentucky, in particular Louisville, Lexington and Northern Kentucky, had experienced significant growth in recent years; the difficult problem in Kentucky is promoting growth in the small cities and rural areas. As previously indicated, poor education of the workforce in rural areas is a significant problem for Kentucky. These factors make it difficult to convince business owners to move their businesses and families to smaller cities and rural areas. Also, many people simply do not know about the rural areas of Kentucky, and better marketing of the state may help.

Linking urban and rural areas
Consultants suggest Kentucky should form economic development regions around cities such as Louisville, Lexington, Elizabethtown/Bardstown, Bowling Green, Paducah, Owensboro/Henderson, Somerset/London and Ashland. Promoting economic development in these cities would then spill over into surrounding rural areas. Other states have developed corridors of opportunity, which are development efforts that explicitly tie rural and urban areas together and help create growth in the rural areas.

Competing with Kentucky
The site consultants with whom the researchers spoke praise the staff of the Kentucky Cabinet for Economic Development for their efforts to promote Kentucky and for the state’s efforts at traditional economic development. They indicate that the staff is knowledgeable and quick to provide information when requested. They also said Kentucky is very aggressive in its use of incentives. However, most consultants said incentives are only useful in the last steps of a deal. Kentucky needs to overcome other problems such as workforce development, poor quality of life and a lack of knowledge about the state before incentives can even become an issue.

Use of incentives
Although Kentucky is aggressive in its use of incentives, a number of consultants indicated Kentucky’s incentives are too restrictive – they are targeted toward certain industries or for firms locating in certain regions. If a region does not have the necessary inputs, such as a qualified labor force, a firm will not locate in a region just for an incentive. The consultants feel Kentucky needs to have more flexible incentives so they can be used for all types of firms considering locating in any part of the state. In addition, the consultants indicate that for many businesses, financial help with infrastructure, such as new roads, rail spurs or other transportation infrastructure, is more valuable than an explicit incentive. Finally, it is worth mentioning that site consultants said some of Kentucky’s competitors, such as Tennessee and North Carolina, have less attractive incentives and do not offer or promote incentives to the extent that Kentucky does. However, both of these states have experienced more rapid growth over the period analyzed in this study.

Empirical results in this report lead to some general conclusions about slow income growth in Kentucky. First, a primary reason for the slow income growth has been the lack of innovative companies in Kentucky. A second primary reason is the lack of skilled workers and Kentucky’s inability to attract skilled workers to the state. A final major reason for overall slow state growth is the slow income growth in rural areas of Kentucky and the fact that the more-rapid growth in urban areas does not spill over to rural areas to the extent seen in the comparison states of Georgia, North Carolina and Tennessee.

In the consultants’ opinion, the primary reasons for slow growth in Kentucky are the lack of skilled workers and the inability to attract innovative businesses and skilled workers to the state. These problems are acute in the rural areas of the state. Growth in Kentucky’s urban areas is similar to other major urban areas in the South.

Site consultants also said that while Kentucky’s Cabinet for Economic Development performs the traditional economic development functions very well, the state suffers from a lack of coordination among economic development, workforce development, community and technical colleges, public four-year universities, research parks and tourism.

Economic development officials in comparison states work closely with officials at the public universities and research centers in their state to attract innovative businesses and skilled workers. They also work with tourism officials to market the state to people who might potentially relocate to the state. Finally, economic development officials in other states indicate they work closely with individuals involved in workforce development, higher education and tourism to ensure that their legislators recognize that all these parts of state government are integral components of economic development and need adequate financial support.

Keys to prosperity
Comparing Kentucky’s demographics with comparison states and evaluating conversations with site consultants leads to the same conclusion – the primary limitation to economic growth in Kentucky is the low skill of its workers. Until this problem is addressed, all other efforts at economic development will be unsuccessful. Discussions with economic development officials in other states show that these states dealt with similar problems by recognizing that the leaders of workforce development, community and technical colleges, public four-year universities and tourism development are all key partners in economic development. Throughout this report researchers repeatedly found that the keys to economic growth are:

• Ensuring Kentucky has the inputs necessary for businesses to continue to grow

• Providing an adequate supply of skilled workers

• Creating a lifestyle and environment where people want to live and raise a family

• Promoting the positive attributes of Kentucky
Other states have tried to accomplish these objectives by adopting a much more expansive view of economic development than has been adopted in Kentucky.

Editor’s note:
The Center for Business and Economic Research (CBER) at the University of Kentucky’s Gatton College of Business and Economics prepared a report titled “Economic Growth in Kentucky: Why Does Kentucky Lag Behind The Rest Of The South?”

Research was funded by the Partnership Board for the Kentucky Cabinet of Economic Development. The study was conducted by Dr. Kenneth R. Troske, director of CBER, Christopher Jepsen and Kenneth Sanford.

The report evaluates Kentucky’s growth over recent decades in relation to other Southern states and arrives at conclusions and recommendations to aid Kentucky’s policymakers in planning future economic growth, higher per capita incomes and a better quality of life for Kentuckians.

The Lane Report has edited the report to provide a concise overview of the research. Part II of the UK research (published in this issue) examines limitations to growth in Kentucky and economic development efforts in other states.

Part I (published in the May issue of The Lane Report) assisted the reader in evaluating Kentucky’s growth over several decades with the growth of other Southern states.  Finding the Keys – Parts I and II are also published online at www.lanereport.com.

A copy of the full report with footnotes may be viewed and downloaded at http://gatton.uky.edu/cber/Downloads/CBER_Econ_Develop_Report_final_Jan2008.pdf.

Study Part of State Effort To Improve Quality of Life

There were no surprises for state economic development officials in the findings of a study conducted by the Center for Business and Economic Research at the University of Kentucky’s Gatton College of Business and Economic. In fact, the report, “Economic Growth in Kentucky: Why Does Kentucky Lag Behind The Rest of the South?” largely confirmed their intuitive feelings.

John Hindman, secretary of the Cabinet for Economic Development, said commonwealth economic development officials hope to roll out a series of initiatives later this year in line with the findings from this study and others.

Hindman will present proposed modifications to the state’s economic development strategic plan when the Partnership Board for the Kentucky Cabinet for Economic Development meets at the end of the month. Action will especially target the commonwealth’s rural areas, where the most bang for the buck is likely, he said, but will include the state’s metropolitan and micropolitan areas.
Since assuming the secretary’s reins a year ago, Hindman has traveled the state gathering ideas from county judge-executives, mayors and local economic development leaders. This information along with the CBER study report and other data are being used to formulate strategic plan proposals, he said.

“You’ll see a lot of focus on looking at what we can do to buoy up what’s going on in rural communities, to see what we can do to find companies that already exist in rural Kentucky and want to expand,” Hindman said.

Cabinet for Economic Development staff also has been examining ways to upgrade collaboration with other state agencies.