Are Rural Economies Terminal?

In December, the New York Times published an article about rural America that painted a bleak picture of declining populations, declining employment, increasing opioid addiction and death. The article suggested that the decline is inevitable and perhaps irreversible. “This is the inescapable reality of agglomeration, one of the most powerful forces shaping the American economy over the last three decades. Innovative companies choose to locate where other successful, innovative companies are,” said the authors.

To paraphrase Mark Twain, I think the rumors of the death of rural economies are greatly exaggerated. It is undoubtedly true that some small communities are vanishing, having to close their schools due to lack of enrollment, and eventually losing their post offices, local governments and local businesses. And, I have met folks from across the country who are proud that they have fought off any development efforts from anyone with outside capital.

On the other hand, all across this country, I’ve visited (and lived in) small towns from Maine to Indiana to Virginia to Colorado to New Mexico that are flourishing. Sometimes the ones that are flourishing are just miles away from those that aren’t, providing a natural experiment to determine what makes a difference and what works. There are quite a few commonalities among the towns that are doing well.

One that stands out is that these thriving places have high-speed internet service and reliable cell service. What seemed like a “nice to have” only twenty years ago is absolutely a baseline requirement these days to attract and retain citizens and businesses.

Another commonality is what some people call “place-making.” Most of these towns have invested in themselves. They spruced up downtowns with new sidewalks and street lights. They helped landlords repair and enhance storefront facades. They supported the real estate investors who come in and rehabilitated signature, historical buildings, like old textile mills in New England, tobacco warehouses in North Carolina, Victorian-era houses in Colorado mining towns and adobe buildings in New Mexico. Most of all, these towns celebrate their history, rather than tear it all down.

A third commonality is civic engagement. In many of these places, a major anchor entity –Colby College in Waterville, ME; Corning Glass in Corning, NY; the Naval Surface Warfare Center in Crane, IN – makes a commitment that goes beyond enlightened self-interest and starts to invest in the community and takes a leadership role, bringing others along with them. Often, these moments of civic engagement occur because of a crisis, or a generational change in leadership – a base closure; a weather-related disaster like a flood or tornado; a major plant closing. Smart leaders know the value of a good crisis – it’s a window of opportunity when resistance to change is lowest, and the willingness to try something new is highest.

But the most important thing that all of these thriving small towns have is an entrepreneurial spirit. There are entrepreneurs who are thriving in Maine’s small towns and in small towns across the country. In these places, you will meet intrepid entrepreneurs who have seen a need and created a product to meet it.

  • Joshua Davis and Bruno Tropeano, two recent college graduates, decided it was too bad that they couldn’t get gelato in Brunswick, ME. So, they opened their flagship store, Gelato Fiasco, on Maine Street in 2007. Today, their gelato is distributed nationwide.
  • Shannon Kinney, Founder of Dream Local Digital in Rockland, ME, came home after years of traveling and working with large corporate clients. She started an internet marketing agency in 2009 and had grown to nearly 40 employees, supporting clients all over the US and in Maine too.
  • Hannah Kubiak started Sea Bags on the Portland, ME waterfront fourteen years ago. When Beth Shissler learned about the company in 2006 and joined in, a dynamic entrepreneurial team was born. Sea Bags makes custom, fashionable tote bags and other accessories out of used sails. Now with eighteen company retail locations, a corporate sales arm and distribution in specialty stores nationwide, this company leads the way in sustainability, and is bringing back traditional textile work.

Visit most any small town with a thriving downtown, and you are highly likely to find a great coffee shop that’s locally owned, a co-working space or a maker’s space, restaurants serving food from India, Thailand, and Greece, as well as locally sourced, farm-to-table meals with micro-brewed beer. Talk to folks in these places and you will probably meet young, well-educated people, who have moved home with their families because it’s affordable, they can find interesting work, and be part of a community. No, these rural places aren’t dead, not by a long shot.

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Nostalgia for the “Old Days” is Misplaced

A recent op-ed written by a local economic developer about the rural economy in Maine generated a lot of comments showing clearly the live wire he touched. Leaving aside the usual name-calling and insults that unfortunately inhabit most comment sections, several points of view emerged. One was the idea that if people don’t find opportunity where they live, they should move elsewhere. Another was that we should revive the traditional ways of making a living (i.e., forest products, fishing, agriculture) and embrace them. A third was that reliable cell service and high-speed internet offer people a way to make a living where they are. Perhaps all of these things are valid to some extent.

What many of the comment writers, and indeed, the author of the piece all have in common is nostalgia for the “old days” when the rural economy was strong, when young people didn’t leave to move to the “big city” and when you didn’t need a college education to make enough money to raise a family. A great narrative to be sure, but there’s a problem. These “old days” never existed. Whether you go back a generation to the 1950s or to the start of the last century, rural communities have always been characterized by hard work and marginal living. Young people have always heard the lure of anywhere but where they grew up. And more education has always been correlated with higher incomes.

Like it or not, shift happens. Economies change. Places change. People (sometimes) change. For rural economies today, this means that new technologies are changing and potentially reviving traditional ways of making a living. Whether this is the advent of aquaculture or bio-based products made from wood pulp, or the use of sensors and drones in agriculture, nothing stays the same for long. The race is won when people, and their leaders, see the opportunities ahead and seize them.

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Erick James Innovation Award

Yesterday, at the 6th annual Innovation Engineering Conference, I was touched to be included in a group of IE pioneers to be awarded the Erick James Innovation Award. Erick was a truly amazing innovator who passed away a number of years ago after a horrific car accident. Erick was one of those guys who was absolutely fearless when it came to innovation. No idea was too crazy to say out loud. No test was too difficult to try. No obstacle was too much to overcome.

I remember being on a team with him at a learning session. The goal was to create new ideas for a guitar maker. We came up with the idea of a guitar that would change its sound based on the type of music you were playing. The wild part was the prototype that Erick constructed in about five minutes to demonstrate the idea. He cobbled together his iPad, some cardboard for the neck of the guitar, and programmed the iPad to play different genres of music. It got the idea across and the client loved it! Most of the rest of us (including me) would have been fearful of showing the idea that way. Erick was triumphant instead.

IE teaches that meaningfully unique ideas, the big ones, come from stimulus (new information), leveraged by diversity, and undeterred by fear. Erick embodied that ideal, and taught us all so much. We miss him terribly.

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Celebrating Success

Amazing! The Portland Press Herald, our local newspaper, actually had an editorial this week that said that innovation and entrepreneurship was the key to economic growth in Maine! Now this isn’t a radical statement at all. What’s amazing is to hear this nuanced statement from the media! The PPH was writing about a local company, Howe and Howe, this is being bought by a large conglomerate, Textron. Howe and Howe is a defense contractor that has developed several innovative projects, like a remote controlled tank, based on government-funded R&D. The company is 13 years old, and has grown organically to 50 employees, a success story by any standards.

Two things surprised me about the editorial. One, the paper didn’t call this a small business. Rather, they did distinguish between Main Street businesses and an innovation-based business like Howe and Howe. Second, they didn’t cry about this exit taking money out of Maine. Many local companies get acquired by large companies from “away;” (there aren’t very many large companies that aren’t from “away.”) And, when local entrepreneurs have their success validated and monetized, they and their workers have the opportunity to reinvest in the local economy, whether the company stays local or not. In most cases, the companies do stay local because the quality of Maine workers and the cost of doing business here are both very competitive.

All of this points to the great value of local success stories. They inspire local entrepreneurs, and also put a place on the map in the broader context. So congrats to Howe and Howe and the many other Maine entrepreneurs who have had exits this year.

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A Clear and Compelling Vision for Economic Growth

You can tell from the nearly constant attack ads on television during the evening news that we’re in the middle of at least two contentious campaigns this fall here in Maine: one for Governor and one for the 2nd Congressional District, where a Republican Congressman is trying to keep his seat. Both races are very close. However, in all the noise, one thing is startlingly missing: a clean and compelling vision for how to improve Maine’s economic prospects. This is because the choices continue to be framed as less taxes and regulation for business against more rights and benefits for workers.

I recently reread Rob Atkinson and Stephen Ezell’s 2012 book, Innovation Economics, which reminded me that the answer is something completely different from this false paradigm. There are only three ways to get an economy to grow: increase productivity, create new firms or add activities that create new value. You increase productivity by increasing the revenue of each employee: improve processes, add technology to increase output, or add new products and services. Similarly, new firms or activities that create new value boost economic activity overall. Atkinson and Ezell say there are three things that build vibrant, healthy business establishments in globally traded sectors in order to improve economies: business leaders who will take risks, do research and development or create new products, and add new plant and equipment; workforce that supports these changes instead of being afraid of new technology; and government that supports investing in the future.

There are bright lights in many of the communities where I work, where entrepreneurs are taking risks, where business leaders recognize the need to invest in creativity and where civic leaders are adopting innovation and entrepreneurship as guiding principles for their cities, towns and states. Here’s hoping that grassroots change will save the day.

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Seize the Day

Summer is fleeting in Maine. One minute, it’s the first warm beach day; the next, it’s what my grandmother called “the Fall-ish change.” We learned quickly to get in as much outdoors time as possible in June, July and August, take every opportunity to eat lobsters, corn-on-the-cob, and blueberry pie, and savor each moment against the reality of winter ahead!

Many involved in economic development, however, don’t recognize how fleeting their opportunities are. But the world around us is changing so fast that by the time we understand what’s happening, the window to act is already closing. Policy windows, especially, can be very narrow. The time leading to a gubernatorial election, for instance, is short, but often the only real chance in eight years to influence an incoming administration. The time when an industry or region is in crisis, and previously antagonistic players are willing to work together is also usually short.

Fear can interfere with the willingness to “Seize the Day.” But we must overcome this fear in order to take advantage of the opportunity. So, I’m taking the afternoon off to go kayaking. What are you doing to do today that you might not be able to do tomorrow?

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Don’t Fall in Love with your First Idea

I have had the great privilege of working with an entrepreneur since February as a mentor in Maine Center for Entrepreneurship’s Top Gun accelerator program. We were part of the first ever aquaculture cohort, in cooperation with Focus Maine, the Gulf of Maine Research Institute, Maine Aquaculture Association, Maine Aquaculture Innovation Center and CEI.

The entrepreneur and I worked on customer discovery during the 16-week period, and by the end, we thought we had come up with a great idea that really addressed an important problem in aquaculture. Imagine our surprise when he pitched the whole idea at one of the sessions and the feedback was, “We don’t get it. What problem?”

Our first reaction was annoyance, and denial, but then we thought, “We’re not telling the story well enough.” We went back to the source (customers!) and refined our problem statement. In fact, we uncovered a much bigger and more important problem, one that meshed even better with our idea.

When the entrepreneur pitched at the regional pitch-off, the final version with this bigger and “badder” problem statement was well received, and he is continuing to have productive and impactful conversations with potential backers using the pitch deck we worked on.

Lesson learned: Keep digging. Keep asking questions, especially of potential customers. Don’t fall in love with your first idea, a better one may be just around the corner.

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Maine’s Innovation Progress (or lack thereof)

Our new study, Maine Knowledge Economy: A Snapshot of 2017 shows an increase in the relative importance of the state’s technology sectors, but also a corresponding lack of progress in the state’s economic competitiveness overall. All of the seven targeted technology sectors designated back in 1999 except forestry, exceeded Maine’s economy as a whole over the last decade. As predicted, those sectors with high science and engineering content, even those with a natural resources connection such as agriculture and aquaculture, have thrived.

On the other hand, when compared to the other New England states, this growth is not as robust. Maine continues to lag in the percentage of firms and employment that are “high technology” compared to our neighbors. The percentage of our jobs that are science, technology, engineering or mathematics (STEM), is lower than our neighbors, contributing to our lower per capita income.

Explanations for this lagging growth include the low level of investment in research and development, both at our academic institutions and in our businesses, with resulting lower patenting, venture capital and SBIR awards. While our rate of business formations is reasonably consistent with our neighbors, many of these new businesses in Maine are in non-technology sectors such as real estate, construction and hospitality.

The growth of some of the technology sectors with high employment, such as Information Technology and Engineering Services, is constrained by the lack of qualified workers: the level of working age adults, 25-44, with Bachelor’s degrees is lower in Maine than in the rest of the region, although there is some progress here. Almost 35% of degrees in Maine are in STEM fields, approximately the same as in MA.

Given that Maine has had a strategy to improve many of these indicators dating back over 20 years, the continuation of past trends is discouraging. And, it begs the questions, is it time for a different strategy? Or, is it simply that past public investments are been too low and erratic to be effective.

The answer is probably yes to both questions. Looking at the national landscape (and, indeed, some international models), those states and regions that have improved their competitiveness in the Innovation Economy are largely places that have invested heavily in research and development, entrepreneurial support, access to capital and workforce preparedness. Examples include Washington, Virginia, Maryland, Colorado, Utah, Connecticut, all in the top 10 states according to the 2017 New Economy Index. Laggard states, without significant state investment in innovation, include all but two of the bottom ten states. (Maine is number 36 of 50 on this list, down from rankings in the high 20s for most of the past twenty years.)

However, another critical difference between the successful state initiatives and Maine’s effort is how the money is spent. At some point, Maine policy makers started equating investment in research and development with investment in buildings where research and development occurs. And, because getting bonds approved in the legislature and through the public approval process is easier than identifying new money in the biennial budget, and bond money is constrained in its use to capital investments, over the years one-third of the $715 million of public investment went towards buildings. In contrast, only one percent went to the entrepreneurial support organizations that directly work with startup companies. The only program dedicated to encouraging businesses to patent was completely defunded a number of years ago. In contrast, most other states have significant investments focused on startups, and commercializing the research coming out of their universities.

What would I do? Here’s several thoughts:

1. Continue to fund the Maine Economic Improvement Fund. This is critical to keeping our level of research and development at UMaine high. Expansion would encourage other campuses, notably USM, to do more research, an effort that has been abandoned in recent years. Add $1 million/year to fund earmarked for patenting support statewide, to be provided by UMaine Orono to other schools as well.
2. Dramatically increase the funding available for entrepreneurship programs, up from $100,000 to $750,000. Use this funding to deepen the capacity of existing programs to serve more entrepreneurs across the state.
3. Rework or replace the existing R&D tax credit so that more companies in Maine can take advantage of this incentive. Expand the amounts available (by corresponding decreases in Pine Tree Zone, BETR and BETE programs), to get companies to increase their focus on innovation and bringing new products and services to market.
4. Support Maine Technology Institute at their current level, but use some existing funds for program equivalent of old Maine Patent Program.
5. Help companies scale-up past the startup phase by establishing funding (at MTI or FAME) for businesses to apply for substantial loans for purchase of equipment, training for workers, patenting, and marketing to expand product and service offerings.

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Innovation First

Recently, I was emailing with a friend of mine who lives in Cheyenne, WY. We’ve been following an initiative of the Governor of Wyoming for economic development in the state. In December, the recommendations came out. “Rick,” I wrote. “This is great! They included some entrepreneurship strategies.” “I don’t agree,” he wrote back. “There’s nothing on innovation.” At first, I was taken aback. After all, the recommendations were pretty standard stuff. But then, I realized that Rick was 100% completely right.

We tend to focus on entrepreneurship, and sometimes R&D, but rarely on innovation in our public policy recommendations. And, innovation is actually the critical step. It’s the link between ideas and the market. It’s the key piece that allows companies, big and small, old or new, to produce something meaningful for their customers. Without innovation, there’d be no entrepreneurs! So innovation has to come first.

From a policy perspective, what can be done to support innovation? First, we can educate. Everyone can learn to be more innovative. It’s a process. There’s a system. Second, we can incentivize companies to do innovation. One effective tool is R&D tax credits, but likely they need to be redefined to include all innovation activities, not the old style R&D alone. Other tools include grants and loans to support innovation learning and implementation, grants and technical assistance for patenting, and for market research.

Thanks Rick, for the insight.

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Size Doesn’t Matter

When discussing economic growth, many politicians talk about the importance of small businesses and their importance to the local region. This is particularly true in rural areas, especially ones that have lost major, large manufacturing employers over the last fifteen years. While this sounds right, and reflects the federal focus through the Small Business Administration and programs like the Small Business Development Centers and small business set-asides, it’s not actually true.

According to a forthcoming book by Robert D. Atkinson and Michael Lind
titled “Big is Beautiful: Rebutting the Mythology of Small Business” (MIT Press,
2018), on virtually every economic indicator, including wages, innovation, exports, and even job creation, large firms in the United States outperform small ones. Moreover, states with larger average firm sizes outperform states with smaller firms.

Furthermore, many small firms stay small, and that’s what their founders intend. They have no desire to grow; they just want to work for themselves. So small business lending and other preferences aimed at businesses just because of their size are not contributing to economic growth.

What matters is intent and execution. Does a new business want to grow? Does it bring outside money into an economy, rather than just from local clients? Does the business have a demonstrable and meaningfully unique advantage that will add value, increase productivity or solve a critical societal problem? These are the businesses to invest in and accelerate, regardless of their age or size.

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