In today’s virtual world, it’s easy to downplay the significance of place. Yet when it comes to regional prosperity, geography matters.
Income and job growth is not random but rather spills over from one region to another, meaning that merely being next to a prosperous region will make your own economy more vibrant.
“It’s in a region’s best interest to have neighbors who are growing,” says Ryan James, an economic geographer and assistant professor at NIU. “For example, look at the Boston and New York areas. The vibrant growth of these economic areas spilled over and brought up the counties and communities in between. Simply by being next to two prosperous areas, these communities were able to reap the benefits.”
This might sound like a no-brainer, but until recently it’s been hard to prove from a statistical perspective.
By using new models that factor in location and by blending microeconomic ideas with macro ones, James and researchers at the Edward Lowe Foundation’s Institute for Exceptional Growth Companies (IEGC) and University of North Carolina at Charlotte (UNC-C) have advanced the longstanding theory of regional income convergence – and revealed new insights about the geographic dynamics of the U.S. economy.
Convergence theory maintains that capital and wealth shift over long periods of time, spreading from richer areas to lagging ones, which allows these poorer areas to catch up to national averages.
Although income convergence is a geographic process, most studies have ignored geographic relationships, says Harrison Campbell, an associate professor of geography and public policy at UNC-C and the study’s principal investigator. “Some have looked at industry composition, and a few have looked at how neighboring regions affect each other, but none have looked at how individual companies affect convergence.”
Leveraging data from IEGC, Campbell, James and fellow researcher Gary Kunkle studied 177 regions over a 20-year period (1990-2010). The team used both a traditional model and one with spatially explicit tools, which yielded two sets of results to compare. Key findings include:
- Convergence is happening, but at a slower rate than previous studies have indicated – about one-third slower (or 1.3 percent per year as opposed to 2 percent per year).
- The economic health of one region has a definite spillover effect on neighboring regions.
- Particular kinds of establishments, known as sustained growth companies, accelerate the convergence process through their ability to create jobs.
- The presence of these sustained growth companies has a bigger impact in rural areas than non-rural areas.
The concept of sustained growth companies builds upon previous research done by Kunkle, IEGC’s research fellow. Although these companies represent different sizes and different industries and are located in different places, they share a common hallmark: the ability to generate repeated growth over long periods of time.
“Sustained growth companies are the hidden allocators of new jobs in the economy,” Kunkle says. “This paper shows that they also play a significant role in allocating income growth as well – and help determine which regions experience faster income growth than others. Thus, income growth is not limited just to owners and employees of sustained growth companies, but extends throughout their neighboring communities.”
The fact that sustained growth companies have a larger impact in rural areas was a surprise, Campbell says. “Previous literature suggests that these firms will perform better if they cluster in urban areas. Yet our results reveal the opposite – they had a negligible or slightly negative effect on income growth and convergence in metro areas.”
The dramatic impact of sustained growth companies in rural areas might be explained by the fact that they are big fish in small ponds. Too many “big fish” can actually have an adverse economic impact, James says.
“It’s good to have one or two big fish, but there’s definitely a scale effect – a region can have too much of a good thing,” he says.
“When a large city has more than its fair share of sustained growth companies, they can cannibalize the growth of other firms or each other,” he added. “So from a regional planning perspective, a region might be best off nurturing what it has or getting more growth from its existing sustained growth firms. It’s more important to keep those firms growing than to bring in new firms that will cannibalize existing resources.”
Innovative modeling and data
To achieve this, the researchers leveraged new types of spatially explicit tools and introduced new geographic units: 177 economic areas defined by the U.S. Bureau of Economic Analysis. Smaller than a state and larger than an MSA, these multicounty areas approximate the extent of a labor market.
One of the benefits of the geographic model was that it produced far fewer outliers, which gave the researchers more confidence in their results. “The theory of income convergence is in itself geographical,” James says. “It suggests that capital is going to flow from capital rich areas to capital poor ones. Yet traditional models don’t take into account the performance of neighboring regions, which is extremely important.”
Another hallmark of the study: factoring in the role of individual business establishments. Past studies have looked at location attributes and regional conditions, such as population density, access to interstate highways, land quality and water supply, instead of looking at the individual actors responsible for economic growth.
The National Establishment Times Series (NETS) data set, which IEGC made available, was essential to studying the sustained growth company connection.
“This research couldn’t have been done without it,” Campbell says. “NETS is an extraordinary data set that’s potential is still unknown to most people. Past studies have relied on industries, which are like cruise ships; their averages turn very slowly because they consist of many different firms. In contrast, NETS enabled us to track individual U.S. establishments, the DNA of what really makes our economy run.”
The researchers’ findings provide statistical evidence that spatial relationships are extremely significant to regional prosperity. “So there’s basis, at least for certain projects, for regions to start think beyond their own borders and work more cooperatively,” Campbell says.
Connecting the dots between sustained growth companies and regional prosperity is equally important.
“This study begs a whole new set of questions about how firms manage themselves,” Campbell says. “If we can understand what makes the sustained growth companies tick, we may be able to reorient our approach to economic development and introduce policies that positively impact these important firms.”
Other policy implications revolve around regional income convergence.
“Part of IEGC’s mission is to get unique establishment time-series data into the hands of capable researchers so they can shed new light on the U.S. economy and the role of exceptional growth companies,” says Gregg Cole, information technology research leader at the Edward Lowe Foundation, which launched IEGC in 2011. “This study is a wonderful example of how researchers are using the data not only to make new discoveries, but also reexamine traditional observations and improve on previous models.”
The Institute for Exceptional Growth Companies was created by the Edward Lowe Foundation through a three-year grant from the NASDAQ Educational Foundation. IEGC is creating new datasets and using existing data in innovative ways to track and better understand exceptional growth companies, their impact on community and economic development, and their relationship with equity funding sources.