by Niles Anderegg, research and content development associate, ICMA

Economic development has always been a high priority for local governments. This was reaffirmed recently by the National League of Cities in its State of the Cities 2018 report, which found that economic development is a top priority. The question that most local governments face is how best to achieve economic development goals. 

For some communities, economic development involves trying to entice new business to open within their boundaries, whereas for other places it is to help existing business grow and expand in order to provide more jobs and economic activity. There are many factors that local governments have to consider for the approach that is right for their economic environment.  

The first approach of trying to get new business to come to a community is exemplified by Amazon’s search for its new headquarters, called HQ2. Local governments that are competing for the project have come under criticism for giving Amazon too much in terms of tax incentives and other potential benefits. This has reignited questions on whether localities should be giving tax incentives to big companies like Amazon. 

The argument goes that the money that a city or county is spending on tax incentives could be spent on other programs, either for small businesses or for social programs. In addition, these arrangements can leave communities beholden to large companies that have no real connection to the localities in which they operate. This has already been seen with legacy industries that move their operations overseas and leave communities struggling to replace the jobs that are lost when these companies relocate. 

The alternative economic development model is to focus on current local and small businesses that are connected to and rooted in the community. These companies can build on a community’s strength. In Frostburg, Maryland, for example, the city worked with local education institutions to determine what types of jobs and employers fit with the community. Of particular importance was trying to keep college graduates from a local university to stay in Frostburg. This focus on community fundamentals shows that Frostburg is trying to help small financial firms and backend businesses that fit the community’s profile. 

This local focus approach has its own drawbacks. One is that the rate of growth can be slow and the small business sector can be volatile, with many companies not lasting more than a few years. Another drawback is political; luring a big company like Amazon has an immediate political effect even if the economic benefits are still years away. Elected officials can promote their effectiveness in office by pointing to the new big employer they help bring to town, whereas helping small and existing businesses does not pack the same political punch. 

Whichever economic development model a community enacts, there are benefits and challenges to consider. Local governments must look at both the short- and long-term effects in order to come to the decision that is right for them. 

Related Content 

4 Resources for Working with Small Businesses. This 2018 blog post compiled ICMA resources to help local governments work with small business in their communities.

Marketing Basics for Successful Business Attraction. In another 2018 blog post, the focus is on how best to market a community to attract business.

Local Governments in a Restructuring Economy. This blog post also from 2018 looks at new ways local governments can sustain their economies as old models no longer work.