6 Rules for Better, More Inclusive Economic Development in Cities

Miami has become one of the top 10 startup clusters in the U.S. Photo by Joe Skipper/Reuters.

Until recently, there was a growing understanding among city-builders and economic developers that handing over taxpayer-funded incentives to large corporations is wasteful and ineffective. That is, until Amazon’s HQ2 search threw a wrench in that, bringing real pressure from business and political leaders to compete for the big prize.

In more than three decades, I have never seen a setback for economic development like HQ2. I have heard from dozens of professionals in the field who feel the HQ2 debacle knocked it badly off course.

What the backlash to the HQ2 process—and Amazon’s pullout from New York City in the wake of pressure from politicians and activists—show beyond a shadow of a doubt is that we need to put incentives behind us. But that’s just one of six steps we must take to get urban economic development back on track, outlined below.

1. Just Say No to Incentives

Companies, especially large, data-driven ones like Amazon, know where they want to go to begin with. But they essentially set up fake competitions to game the process and extract incentives. Politicians play the game to the hilt, even when they know it’s bad policy, because they think vying for the trophy makes them look good and wins votes.

While HQ2 may be the most egregious example of this, it is far from the only one. Just look the economic nightmare of handouts to Foxconn in Wisconsin. The process is so insidious that despite what researchers and practitioners know, the total dollar value of incentives has soared to record highs, driven by mega-deals. Amazon’s withdrawal from New York could be a tipping point in the battle over incentives. It is high time for those engaged in economic development—especially the progressive mayors of this nation’s largest and most successful cities—to say enough is enough and begin to work together and cooperatively to limit the use of revenue-draining incentives.

2. Invest in Local Clusters and Ecosystems

The past couple of decades have seen a veritable revolution in economic-development thinking and practice. Michael Porter and other researchers have documented the effectiveness of acting to build on local clusters and ecosystems. We have seen it play out not only in superstar cities like New York and tech hubs such as the Bay Area, but in (for example) Nashville, which has leveraged its music cluster, and Pittsburgh, which has revitalized around a series of high-tech clusters. The Knight Foundation has helped make Miami one of the 10 leading startup clusters in the United States.

3. Work Closely With Anchors

Doing this right means working hand in hand with local universities. Another big stride in economic development theory and practice has been the organizing and involvement of “anchor institutions” as key drivers of local clusters and ecosystems. This may have begun organically with the role of universities like Stanford in the rise of Silicon Valley. But other, later-developing regions have actively involved local research universities and medical centers in their development.

I was there to witness (and contribute to) Carnegie Mellon and the University of Pittsburgh fostering Pittsburgh’s high-tech revitalization. New York City has made substantial investments in a new high-tech research campus anchored by Cornell and the Technion–Israel Institute of Technology. One of the few positive things to arise from the HQ2 process was Virginia’s pledge to spend $1 billion to create a new campus for Virginia Tech in Northern Virginia.

In a growing number of cities across the country, anchor institutions have helped generate economic development by focusing on local purchasing, investing in local place-making, upgrading jobs, and seeking broad community improvement. Some cities have established anchor collaboratives that bring together their major universities, hospitals, and corporations as a unified force.

4. Leverage Talent (and Define it More Broadly)

Yet another big breakthrough in economic development has been the idea that talent is a major contributor. Previously, it was thought that only businesses drive economic development, and that talent follows jobs, a thesis which helped fuel the use of incentives. But several decades of research by urban economists has shown that talent is a key driver of local economic development, whether measured by level of education or by highly skilled occupations. And the field has come to realize this is not a chicken-and-egg question. Talent, firms, and jobs reinforce one another in a virtuous circle.

Most talent-led economic-development strategies to date have focused on attracting and retaining highly educated people. As more advantaged groups of people have streamed back into cities, this strategy has worked inadvertently to deepen economic and geographic divides. It is time to extend talent-driven strategies to encompass the entire workforce and all residents. This means paying workers more and pushing to upgrade low-wage, low-skill service jobs by actively involving workers. For example, when retail workers are paid more and involved in company decisions, they can develop new shop-floor innovations and provide better customer service, and are less likely to leave for other jobs. In turn, these strategies help bolster the productivity and profits of firms as well as boosting workers’ wages.

5. Foster Quality of Place for Everyone

We’ve also come to realize that the quality of place matters in the attraction of talent and business. This is not a new idea—it goes straight back to Jane Jacobs. So cities have focused on adding “amenities” by planting trees, creating parks, installing bike lanes, and using other strategies that make places more attractive. But like talent-attracting approaches, these have had a unbalanced and uneven effect, drawing in the affluent and, in some cases, spurring gentrification and the inequality that comes with it.

The next generation of these strategies must focus on making quality of place inclusive. Cities need to explicitly recognize and take into account—and counter—what have been uneven effects. This means pairing investment in less advantaged neighborhoods with housing and anti-displacement strategies that ensure local residents can remain in their homes.

6. Make Equity and Inclusion a Priority

When I talk with mayors, economic-development leaders, and city officials around the country, it is clear that equity and inclusion have become central to their thinking. Inclusion must cut across every aspect of economic development, from cluster-building and talent attraction to quality of place and anchor-led development strategies. And this cannot just trickle down from the top. It needs to involve players and stakeholders at all levels—local governments, anchor institutions, community-development organizations, labor organizations, and civic and neighborhood groups.

On the supply side, it means not just building more housing but focusing on much-needed affordable and workforce housing. On the demand side, it means boosting the incomes of blue-collar workers, low-paid service workers, and the truly disadvantaged by lifting local minimum wages, upgrading jobs, and providing housing vouchers and basic-income guarantees where necessary.

We are in the infancy of this shift to inclusive development. Just as it took 20 or 30 years of experimentation to develop the current economic-development toolkit (much of which I have described above), it will take time to fully integrate the principle of inclusivity into practice. Going forward, it must be a main pillar.

Now that the Amazon HQ2 process is (hopefully) behind us, it’s time to get back to the truly important task of building stronger, more resilient, more inclusive urban and regional economies.

CityLab editorial fellow Nicole Javorsky contributed research and editorial assistance to this article.

Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a university professor in the University of Toronto’s School of Cities and Rotman School of Management, and a distinguished fellow at New York University’s Schack Institute of Real Estate and visiting fellow at Florida International University.