The Importance of Theory to Practice

1. The Importance of Theory to Practice • Theory vs Practice • Theory is an abstraction of reality that explains something. Theory is developed so that a causal model can be developed. It is developed to guide our actions. • Practice is the actions that are undertaken to change the world. Practice should be guided by theory, but not beholden to it (free will). • Why Understanding Theory is Important • “Theories used by economic developers determine, either explicitly or implicitly, how these developers understand economic development, the questions they ask about the process, the information they collect to analyze development, and the development strategies they pursue.” (From EDA’s Overview of Economic Development web page.) • How These Theories Can Help You as a Practitioner • To help you arrive at your own understanding of the realities and workings of the economic development process. • To help you understand how others may think about and approach economic development.

2. Economic Base Theory • Categorizes the Economy: Basic vs Non-Basic Sectors • Definition of Development: A quantitative increase in the rate of growth of output (products), income, or employment • Essential Dynamic: External demand for a region’s products drives the local economy; Economic base multiplier effects • Strengths: Very simple to apply; Data available to measure these changes; VERY popular theory ; Good for short-term prediction; Identifies/Emphasizes the importance of most critical local industries • Weaknesses: Overemphasis on the basic sector; Only indirectly points to the need to develop the non-basic sector; Arbitrary distinction between basic and non-basic; Does not recognize that regional economies are an “integrated whole of mutually dependant activities” • Applications: Industrial recruitment and promotion; Facilitate expansion of existing export industries; Improve efficiency of the export economy through infrastructure upgrades; Use of economic base analytical techniques (LQ, Shift-share, Base Multipliers, etc.)

3. Staple Theory • Categorizes the Economy: Prime Exporting Industry vs Non-exporting Industries • Definition of Development: Export-led and dominated economic growth • Essential Dynamic: Successful production and marketing of export staple(s) in world markets. • Strengths: A historical and political perspective for economic development; Provides insights into local values, politics, and wealth; Explains how growth over time (in the early stages) is often due to a local staple • Weaknesses: Hard to apply the theory; Better at explaining past development than providing guidance for local actions • Applications: Practitioners should focus resources and policies upon the local staple as long as it remains competitive; Government intervention should occur to improve the competitiveness of the staple; Do not focus on diversifying local industry as long as the staple is strong

4. Sector Theory • Categorizes the Economy: Primary (Agri., Forestry, Fish.) Secondary (Manu. and Mining), and Tertiary (Trade and Services) sectors • Definition of Development: Greater sectoral diversity and higher productivity • Essential Dynamic: Per capita increases and labor productivity drive technology which leads to sectoral diversity • Strengths: Focuses on the internal economic structure; Provides theory for the detailed analysis of the local economy; Measures structural change in the economy; Can be empirically tested • Weaknesses: Very simplified categories, too crude to provide real insights (especially the tertiary sector); Doesn’t directly take into account role of exports in local growth • Applications: Reminds practitioners that strengthening the internal economy is an equally viable way to achieve economic development; Allows practitioners to compare the relative prospects of different industries, thereby indicating where efforts might best be focused

5. Theories of Concentration and Diffusion • Categorizes the Economy: Industries • Definition of Development: Diffusion of growth; Growth in surrounding region (Structural change, Increasing incomes) • Essential Dynamic: Propulsive industries attract growth (poles of growth) which leads to trickle-down effects (or backwash) for surrounding areas • Strengths: Investigate how growth works across space; Takes into account the agglomerative tendencies of firms; Highly popular and operationalized family of theories; • Weaknesses: Highly abstract and vague; Theory can be applied many ways; An unclear definition of what a “growth center” (aka pole) actually is; Assumes strong linkages between individual cities and their periphery; Results of application of theory have been very poor • Applications: Growth center policies have long been a hallmark of economic development efforts (major infrastructure investments, hi-tech/research parks, etc.); A common strategy for depressed small town/rural areas

6. Neoclassical Growth Theory • Categorizes the Economy: Looks at entire economy as a whole • Definition of Development: Increasing rate of growth (per capita) at the regional or national level • Essential Dynamic: Savings and investment promote capital formation, which drives the economy; The national/regional economy naturally gravitates towards equilibrium • Strengths: A supply-side model; Widely popular theory • Weaknesses: Does not recognize the role of the demand-side; Accepts decline of areas; Implies a limited governmental role • Applications: Early NGT emphasized free trade, lack of government role; Neoclassical economics now argues for an important governmental role --> Fostering business development through infrastructure provision, business services, providing information on markets, etc.; Government should promote economic integration both nationally and internationally; Government should tolerate social inequality and spatial dualism

7. Interregional Trade Theory • Categorizes the Economy: Commodities, including attributes of price and quantity • Definition of Development: Greater consumer welfare leading to more spending and continued growth (and more consumer welfare) • Essential Dynamic: Equilibrium is arrived at through the trade of goods • Strengths: Unique emphasis upon consumer welfare and price effects; Belief in power of the free market; Pursuit of the lowest cost goods, freeing resources to be used more efficiently; Evidence that trade is a means of equilibrium across regions/countries • Weaknesses: Doesn’t address how development occurs; Narrow theory focused exclusively on trade and trade relations; Evidence that trade is not mutually beneficial; Ignores negative social effects of growth that are not included in the prices of goods • Applications: Governments should promote free trade, programs to do this include infrastructure investments, lowering tariffs, more efficient government; Government help to move resources out of inefficient industries

8. Product-Cycle Theory • Categorizes the Economy: Product stages: New, Maturing, Standardized, Declining • Definition of Development: Continuous creation and diffusion of new products • Essential Dynamic: Innovation (aka “Creative destruction”); A good product mix is the foundation of a strong economy • Strengths: Describes relationship between innovation, structural change, and economic development outcomes; Describes the research and production process very well; A theory of “development” not growth • Weaknesses: Poor at explaining the services sector; Does not take into account product differentiation; Unclear on issues of ownership and control • Applications: Analyze local economy to determine its ability to compete for either new or standardized products; Identify and support industries that are producing new products; Promote a good local product mix; Provide incentives to firms and entrepreneurs that are more likely to develop new products

9. Theories of Flexible Production • Categorizes the Economy: Production regimes; Industrial organization • Definition of Development: Quantitative increases (growth) through agile production, innovation, and specialization • Essential Dynamic: Flexibility among producers allows for competitiveness and growth • Strengths: Emphasizes structure and fast-changing characteristics of the post-modern economy; Uncertainty is dealt with by the theory; Recognizes the internal structure of the firm as important to development (industrial organization matters!) • Weaknesses: Does not recognize that business flexibility leads to worker and community hardship (firm relocation; periodic unemployment, child labor, etc.); Theory does not take into account local economic structure • Applications: Encourage flexibility; Three aspects of flexibility to be addressed: 1) flexibility in machinery (hard costs), 2) flexibility in the organizational structure (soft costs), 3) flexibility at the economy level; Encourage technological upgrades; Develop industry networks and “industry clusters”; Movement towards “just-in-time” (JIT) production

10. Entrepreneurship Theories • Categorizes the Economy: Entrepreneurs vs non-entrepreneurs • Definition of Development: Resilience, Diversity • Essential Dynamic: Innovation process; New products and new combinations (Schumpeter); Human agency drives development • Strengths: Recognizes/Emphasizes the important role of entrepreneurs; Recognizes importance of capital in business formation; Emphasizes potential change in economy over the current structure • Weaknesses: The very high rate of entrepreneurial failure is overlooked; Does not take into account existing economic structure (ability to innovate); Relevance to rural areas, small towns is unclear • Applications: Support Entrepreneurs!!; Business development strategies* (incubators, loans); Lower barriers to market entry by minimizing costs for taxes, space, services; *Must recognize difference between 1) new business development, 2) small business development, and 3) entrepreneurial business development

11. Human Capital Theory • Categorizes the Economy: Does not, Looks at the workforce • Definition of Development: Value-Added Services and Goods • Essential Dynamic: Development is based on the skills and value–added capacity of the workforce • Strengths: Fits recent research into ED… Clear connection between skills of workers/education and economic growth; Helps locals as well as new residents; Emphasis on cultural and economic diversity and openness • Weaknesses: Not well-formulated as a strategy yet; Expensive and complex to implement; Social capital theory has been found to be ineffective at predicting economic development success • Applications: Support skill-building in the workforce; Invest in people through education and skills training; Investments in amenities for individuals, not businesses (Quality of Life)

12. The “Complete” Theory of Econ Dev Local economic structure (EB, Sect.) Political and historic forces (Stap., Sect.) Savings and investment, Role of capital (NGT, Entr.) Industrial organization (TFP) The workings of the market (NGT, Trade) Human agency, Innovators (Entr.) Creativity (HCT) A Complete Theory Commodities (Trade) Creative destruction (Entr., PCT) Product cycle (PCT) Human capital (HCT) Exports (EB, Stap.) Diversity vs Staple (EB, Sect. vs Stap.,Trade, C&D) A means to analyze and quantify the local economy (Most) Geography (C&D) Internal economic structure (Sect.) Internal economic structure (Sect.) Agglomeration and Diffusion (C&D)