States, Business Build New Alliances

To stimulate economic growth, state leaders are moving public resources into private hands

AS state governments tighten their budget belts and worry about being left in the dust of a high-powered "globalized" economy, a new way to stimulate jobs and productivity is emerging around the country. Dubbed the "third wave" by proponents, it is based on two essentials: cooperative networking among companies, and a lower-profile but more effective role for state government as catalyst, broker, and facilitator.

Key elements include worker training, public education down to the primary grade level, and partnerships between business and higher education to discover and advance new technologies. There is also a strong emphasis on using limited state funds to leverage private support for such efforts.

"All across this country - and in Europe, too - it has moved to the center of debate and discussion," says Doug Ross, president of the Corporation for Enterprise Development, a nonprofit research and consulting firm in Washington, D.C. Mr. Ross and other analysts cite these examples of theory becoming practice:

* Michigan's "Strategic Fund" has brought together leaders in finance, manufacturing, education, and government to leverage private resources for small business. Michigan, Indiana, and Ohio have launched joint regional manufacturing networks.

*-In Kansas, aerospace subcontractors used a state challenge grant to launch an apprenticeship program for machinists at community colleges.

* Ohio now has nine Edison Technology Centers, which combine the resources of government, industry, and universities. One of these is the Edison Welding Institute in Columbus.

*-The North Carolina Rural Economic Development Center (a private, nonprofit agency) provides technical assistance and business capital to communities.

*-Pennsylvania's Industrial Resource Center Network has worked with some 600 firms to help them compete more effectively in international markets.

These exemplify "a sea change in the theory and practice of state economic development," says Daniel Pilcher of the Denver-based National Conference of State Legislatures. He points to quasi-public strategic planning bodies in five states: the Oregon Progress Board, Oklahoma Futures, Kansas Inc., the Indiana Economic Development Council, and the Maine Development Foundation.

Mr. Pilcher calls these "state versions of Japan's MITI [Ministry of International Trade and Industry] for public-private partnership in strategic planning for economic development."

Oregon in particular, says Pilcher, "is doing more on education, the sectoral approach to economic development, and work-force training than any other state - and they're doing it all at once." [See related story.]

The history behind this trend was a "first wave" in which states "chased smokestacks" to attract manufacturing from other regions. The "second wave," which began in the mid-1970s, involved considerable state spending to bolster technological development, marketing, and work-force training. This included more than 100 public investment funds and more than 200 programs to spur technological innovation.

But in the end (and especially during recession), such programs helped "only at the margins," says Pilcher, typically affecting no more than 2 percent of all firms in a state.

AT the same time, manufacturing employment began shifting from large corporations to small and medium-sized companies. David Birch, a researcher at the Massachusetts Institute of Technology, figures smaller firms accounted for 80 percent of all new jobs in the 1980s. This proves "the real issue isn't size; it's industrial organization," says Robert Howard, associate editor of the Harvard Business Review.

"The key unit of production is no longer the individual company but a decentralized network of companies," he wrote recently. "These networks make possible continual innovation through a delicate balance of competition and cooperation, demands and supports."

But this does not happen automatically, Mr. Howard adds. "It takes managers willing to redefine how they interact with suppliers, customers, and competitors.

And it requires government, trade associations, unions, and other social groups to create an institutional context - think of it as a new kind of infrastructure."

"Businesses do cooperate, they want more cooperation," says C. Richard Hatch, who works with several states as head of the Manufacturing Network Project in Englewood, N.J. "They are looking for help in forming cooperative groups."

Increasingly, state political leaders, like Gov. Lawton Chiles in Florida, have said they want to move public resources out of centralized agencies into the hands of communities and private organizations better positioned to stimulate the economy.

And typically states are doing this with challenge grants or seed money that also require private or local government financial commitments.

What's being realized, says Walt Plosila, president of the Montgomery High Technology Council in Maryland, is that "you can't run everything from the state capital." Mr. Plosila launched Pennsylvania's Ben Franklin Partnership Trust, which links universities and companies to develop new technologies and new products.

Ben Franklin "has had a pretty good success rate in bringing in venture capital," says Plosila. "But more important, it has built relationships between companies, between companies and universities, and between companies and economic development groups and organizations."

What Doug Ross of the Corporation for Enterprise Development finds particularly interesting - and positive - about the "third wave" is that it is not just the traditional conservative call for less government or the liberal urge for heavy-handed bureaucracies.

"This is beyond left and right," he says. "It says we want active governance. But in the information age it is possible to do it without big bureaucracies and instead [by putting] it in the hands of active citizens."

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