Apparently the old real estate mantra “location, location, location” is taking over economic development.

While communities used to focus on traditional business incentives like tax breaks, in recent years, more locales are starting to emphasize financial, technological, and knowledge infrastructure. There has also been a growing emphasis on human capital and quality of life, and a resurgence of place-based economic policy, which emphasizes a location’s role in shaping investment in particular amenities, industries, or entrepreneurs.

 “Desirable locations will attract talented individuals who will either become entrepreneurs or attract employers who would take advantage of the available talent pool.”[i]

This trend made Michigan State researchers Laura Reese and Minting Ye curious – could location be more of a driving force behind successful economic development than we realize? “Is economic prosperity better explained by local development policy, or simple place luck?”[ii]

“Place luck” refers to local attributes that local officials have little to no control over, but which make a community desirable. California has good weather. The Research Triangle has a strong university network. The seat of national government in Washington, DC will always attract political types.

Reese and Ye wanted to know – can public policy overcome “place luck”? And what kind of public policy is most effective at doing so?

The authors analyzed development policy survey data for 233 municipalities dating back to 1989. These data supplied policy variables, including incentive use, infrastructure investment, education spending, and other public investments. They also used Census data to determine environmental variables like weather, crime, transportation, higher education, and natural features.

 “Although good weather and natural features indeed matter, policy trumps them in fostering economic growth.” – Reese and Ye

The authors found effective development policy is more instrumental to a community’s economic prosperity than “place luck.” More than 50 percent of the surveyed communities indicate that quality of life is an important factor in their economic development efforts.[iii] They also found that more traditional economic development tools like tax abatement “can create significant opportunity costs in terms of foregone local revenue.” Instead, their results show that investing in strong education and safe public spaces yields greater economic prosperity.

 “Returning to the basics of good local government – schools, services, and security – appear to present significant promise.”

 Just as homeowners know to spruce up their property before selling it, local leaders are rediscovering public investments as the key to “selling” their community. 

[i] Reese, Laura A. and Ye, Minting. (2011). Policy Versus Place Luck: Achieving Local Economic Prosperity. Economic Development Quarterly 25(3), pg. 221 –236.
[ii] See note i.
[iii] See note i.