Shift economic development from hunting to gardening

What do people in Michigan want?

Overwhelmingly, jobs, good ones and lots of them. A thriving, diversified, growing economy, attractive enough to keep talented people here and bring in others from elsewhere.

In short, a prosperous Michigan.

Whether we’ll get there again remains to be seen. Obviously, the biggest factors are the dynamism and imagination of the private sector – whether the Michigan-based domestic auto industry pulls itself together, for example. But public policy can have an impact, too.

There are two basic ways to look at this:

One might be called “hunting and gathering,” in which state agencies like the Michigan Economic Development Corporation (MEDC) feverishly work to put together packages to attract or retain companies with big plants and lots of jobs. (Full disclosure: I’m the unpaid vice-chairman of the MEDC board.)

The upside of this strategy is that when you get a hit, it’s likely to be a big one. The downside is that chasing smokestacks these days may not result in lots of new jobs, even when you successfully keep or lure a major installation.

Take autos, for example. Certainly, the industry will remain at the core of Michigan’s economy. But motor vehicle manufacturers themselves are unlikely to produce many new jobs. Even if they once again thrive, they will do so by making enormous productivity gains that mean more vehicles will be built with fewer workers.

Another way to look at economic development policy is “gardening,” that is, doing what you can to encourage, nurture and help smaller home-grown companies, whether they are outright start-ups or ones that have been around for several years.

The downside of this strategy is that one little company obviously won’t produce lots of jobs. However, taken together, small companies provide at least half of all jobs in Michigan. And, most importantly, experts agree that smaller firms will produce the vast majority of future new jobs.

Lots of attention has been paid in recent years to efforts to help start-up companies, by accelerating the transfer of inventions from university laboratories into the market, or by finding venture capital firms willing to invest. This is anything but trivial for our economy.

Michigan’s three major universities — Michigan State, the University of Michigan and Wayne State — have founded something called the University Research Corridor, which is meant to help and nuture such companies. The URC calculates that its work has a $14.5 billion annual impact on the Michigan economy. So far, it has also led to the birth of 102 start-up companies.

Unfortunately, venture capital firms often jerk newly started companies to their headquarters in places like California or Massachusetts in order to keep a close eye on how they’re doing.

So let’s focus on “second-stage” companies, those that have evolved past the startup phase, but have not yet grown to maturity. A business typically enters its second stage when it approaches $1 million in sales and continues until it reaches around $50 million.

By that time, a company should have developed the professional management of a mature firm.

Second-stage companies have been in a sense the neglected stepchildren of our economic development strategy. Yet they are the ones that will provide lots of jobs if they succeed. They are the ones with roots firmly planted in Michigan soil, and far less likely to be uprooted by a venture capitalist.

Yet the needs of second-stage firms are much different from those of either startups or mature large companies, according to Dan Wyant, president of the Edward Lowe Foundation, an operating foundation that focuses on new and growing businesses.

Rob Fowler, CEO of the Small Business Association of Michigan (SBAM), based in Lansing, agrees: “Typically, second-stage firms need access to capital and to management experience,” says Fowler. “Most public economic development programs don’t really focus on the particular needs of second stage companies.”

To test their ideas, I talked with Yan Ness, CEO of On Line Tech, Inc., an Ann Arbor firm started in 2003. His firm is a classic second-stage company, with sales of around $20 million and 20 employees. Ness says he needs three key things: Executive and management training; access to skilled and experienced candidates for jobs; and capital. “Capital structured for the growth stage we’re in is crucial,” he explained. “We’re beyond the interest of the VCs (venture capital firms) and too risky for a bank, but we absolutely must have access to capital in order to grow.”

Another second-stage firm is SPACE, Inc., an office infrastructure company based in Midland. Founded in 1995, the firm now has 34 employees and $10-$15 million in sales.

“We’ve got to concentrate on our management team, says Kathie Fuce-Hobohm, SPACE’s dealer principal. “We grew very rapidly, maybe too much so, and that stressed the entire firm. And I needed extra training in financial literacy, for example. If I had known about the kind of help available to second stage companies like mine, I would have avoided lots of mistakes,” she adds.

The lesson couldn’t be more clear. Michigan needs an economic development strategy that wastes less time on unproductive “hunting and gathering,” or smokestack chasing.

We need to concentrate more on “gardening,” on nurturing and sustaining our home-grown companies. The sooner our economic development policies reflect this focus, the better.

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Editor’s Note: The Edward Lowe Foundation can be reached at 269-445-4200 or www.lowe.org. SBAM is at 517-267-2203 or www.sbam.org. Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics and a former chairman of the Michigan chapter of the Nature Conservancy. He is also the founder and president of The Center for Michigan, a bipartisan centrist think-and-do tank which is sponsoring Michigan’s Defining Moment, a public engagement outreach campaign for citizens. The opinions expressed here are Power’s own and do not represent the official views of The Center. He welcomes your comments at ppower@thecenterformichigan.net.