I get many questions about local economic development these days. The specific geography is usually either Grand Forks, city, county or metropolitan area, or the counties in northeast North Dakota. These questions come on the radio, from newspaper reporters, and general conversations from the public. The basic form of the question is, “What can or should Grand Forks do to grow and develop?”

There are two typical answers to this: 1) diversify the economy and 2) innovate/respond to growth by others. We’ll save the detailed numbers for a later discussion and right now deal with these ideas in the abstract. I am doing this because for the most part I do not like either of these choices and I will explain why.

Diversification

I think it is commonly accepted that diversification yields benefits in investing, at least in the personal finance context. So why not apply it to a regional economic portfolio? My concern here is that we likely fool ourselves into believing we have removed or reduced risk. The point of diversification is to reduce risk exposure and improve returns to the holdings.

Let’s start with the fact that a regional economic portfolio is not the same as a personal portfolio of assets. Different sectors in the local economy generate different returns and with different variances, but does a local area really have the ability to add or subtract these as municipal bonds in a portfolio? The fact of the matter is that at any given time the local area has its endowments of productive resources and industries and changing them takes significant time and effort. Sometimes it takes a great deal of effort in addition to incentives provided by the local area too. Even with this factors it is not clear to me that local areas really have the control of the portfolio necessary to make such a change.

A prerequisite to doing this correctly is being honest about your communities assets and liabilities. Discussions about the direction of growth too often romanticize the local area or seek to excuse away current problems as bad luck or advantages given to other communities. (There is a certain amount of cheerleading the local area required of economic development professionals.) All of this may or may not be true, but it seldom helps deal with the problem of looking forward.

So the two questions needing answers are: 1) What do we have now that can be a foundation for further growth? and, 2) What industries/sectors should we expand or invite to enhance economic growth and development?

Innovate?

There are still many choices left to discuss. Should we create a brand new industry unknown in the area before this? Should there be a more strategic element, acting as a part of the supply chain for industries in a different area? Again, there are no easy answers to these questions. There are advantages and disadvantages to both.

It is risky to bring new industries into areas where they previously did not exist. There may be a very good reason they did not exist, such as inadequate labor resources, or lack of technical training in the workforce. This could necessitate large changes in other local industries or institutions to create optimal growth and development conditions, not to mention a significant amount of time to realize those gains. Is the waiting game possible in the area?

It is no less risky being a part of the supply chain for another areas economic growth engine. In such a situation you cede control over your local economic policy, such as it is, to become the supplier of their needs. Your economic cycles then become based on the other regions performance. This is likely less risky in terms of the immediate gains, but long run returns are possibly even more uncertain here than with internal regional development. Is perhaps the only advantage that you clearly give up control over your local economic development?

Like I said earlier, I remain unconvinced that local areas have the ability to diversify in a meaningful way. A separate problem I have not dealt with yet, and will need to wait for another post, is that I am not convinced that diversification actually implies lower risk in this context. Ask people with well diversified portfolios how they did in September 2008? There are times and places when all such strategies become overwhelmed by larger economic events.

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