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Harvard professor: Stop incentivizing out-of-state companies and build up Idaho ones

JD Claridge, developer of the the X PlusOne,

JD Claridge, developer of the the X PlusOne, a drone sold by the Coeur d’Alene company xCraft. A Harvard professor visiting the state encouraged economic development officials to build up emerging industries such as drone development in Northern Idaho and food processing in Southern Idaho, instead of trying to attract outside companies that might leave once their subsidies expire. File photo.

Innovation, wages and employment growth can be found in industry clusters around the United States. Idaho needs to work on its clusters, Christian Ketels, principal associate at Harvard Business School, told Idaho industry and economic development leaders at an Idaho Technology Council event.

An industry cluster is a group of companies from the same field in close proximity to each other. One example is the social media cluster in Silicon Valley where Facebook, Twitter, Linkedin and Instagram all have headquarters. A smaller cluster is the food processing industry in Idaho’s Magic Valley.

To be considered an industry cluster, an area must have an undefined critical mass of companies working within the same line, Ketels said. When enough of these companies are in an area, competition between them drives innovation. Support businesses rise up in the area, increasing access to material and to knowledgeable employees.

“People recognize clusters are good things because they help build networks, but clusters are also hard on businesses,” Ketels said at his talk April 5. “They force companies to compete for talent and to move quickly to innovate before someone else with a similar idea jumps into their growing market.”

Idaho might be able to cultivate some clusters within the industries it has traditionally relied upon such as agriculture, or seen developing over the last few decades such as technology.

Sen. Jeff Agenbroad

Sen. Jeff Agenbroad

An example is the giant yogurt manufacturer Chobani in the Magic Valley.

“Decades of milk production attracted Chobani to the Magic Valley and its addition to the area has helped attract other food producers so that the industry is now growing off itself,” said Sen. Jeff  Agenbroad, R-Nampa.

The U.S. Cluster Mapping Project, created by Harvard Business School and the U.S. Economic Development Association, maps where specific industries are located and shows that almost all innovation, wages and job creation come from a select few clusters around the country.

About 40 percent of advanced economy jobs and 55 percent of wages can be found in those clusters, said Ketels. He added that the clusters account for 95 percent of all patents.

The importance of being in those clusters often outweighs incentives offered by economic developers, such as low tax rates and inexpensive property. Several of the largest industries clusters are in Silicon Valley, Boston and New York City. Companies accept the high cost of doing business in those areas because the networks there are so valuable.

To build its own cluster, Idaho needs to help its existing businesses grow. Then it can attract out-of-state companies organically, Ketels said.

Dr. Christian Ketels

 Christian Ketels

“Your existing businesses and organic clusters are important for identifying the certain sectors you have a shot to build expertise in,” Ketels said. “Once you start with what is already in the area, the question becomes what do we do to propel it forward? Because just attracting companies to your area won’t drive your economy forward. You first have to build the engine.”

“We need to think more broadly about what makes up clusters, and get for instance the med tech guys talking to the healthcare analytics groups and the health providers,” said Steve Frinsko, an attorney at Hawley Troxell. “If we do that we could have a cluster.”

Cooperation among competitors can help all involved

It isn’t easy to convince businesses they need to collaborate with their competitors to create talent pipelines that will  benefit all. Some areas have started initiatives that help companies in different industries with a common problem.

“In Seattle, we obviously have Amazon, but our second biggest tech company is Starbucks, which surprises people,” said Michael Schutzler, CEO of the Washington Technology and Industry Association. “It is the same thing with Boeing. Instead of trying to find manufactures, they are all trying to find software developers and all of these companies are competing with each other. We have realized all of these different industries have overlap in tech and we are trying to assist there.”

Austin, Texas is experiencing a similar situation.

“Moving forward, all companies will be tech and it is an area where a lot of collaboration can happen,” said Barbary Brunner, CEO of the Austin Technology Council. “We have a chocolate factory that is a member because of what it takes to create its chocolates and the type of employees it needs.

“There is no silver bullet to this stuff. What matters most is identifying what you already have and trying to grow that.”

About Benton Alexander Smith

Benton Alexander Smith is a reporter for the Idaho Business Review, covering the Idaho Legislature, new business, technology and financial services.