Australian Regional Economies Conference

The University of Newcastle’s Central Coast Campus will be introducing the Ausralian Regional Economies Conference at Terrigal in May.  The following is an excerpt from the presentation he will give at the Conference.

Two concepts focused on business and regional economic development have received much attention in the US in recent years. One is economic gardening and the other is fostering a creative class.
Just as “necessity is the mother of invention”, the genesis of these ideas came from an economic slowdown and adversity in parts of the US. A similar phenomenon faces some key regions and local businesses in Australia: the inevitability of old business ideas and in turn regions being usurped by natural attrition or competition.
The moral of this story is simple—the region and its businesses need to find their creative spirit and innovate or inevitably they will slow down or die. This article provides some important lessons about why this is important and how to go about it.

Economic gardening
The stimulus for economic gardening in the US was the decline in natural resources (paradoxical given Australia’s current mining boom). Many US regions had become too reliant on mining and other commodities. Inevitably supplies of natural resources ran out (US oil production peaked in1970). Agriculture similarly has its own intricacies and vulnerability—when treated as purely a commodity it is subject to the laws of demand and supply—the recent wine glut being a good example.
Initial profits in agriculture are attractive but as productivity and technology increase and more people enter the sector, saturation is reached.
The challenges facing regional manufacturing in Australia and the Central Coast are caused mainly by the abundance of cheap sources of labour in Asia. If you are basing your manufacturing around some Intellectual Property (IP) or distribution to local markets you can succeed. If not, you are likely sooner or later to be in trouble.
The new car from Tata of India, the Nano costing $2500, is a prime example. The rise and rise of India and China seems inevitable. It is reasonable against this backdrop to excuse Central Coast businesses for throwing their hands up in despair.
Yet it’s not what Littleton in Colorado did. Instead they invested in their entrepreneurs, nurturing what they called the “economic garden”. In Littleton’s case, they went chasing “gazelles” or high growth businesses that accelerate rapidly after establishment.

If you don’t change others will
Innovation and entrepreneurship are common words in the business vernacular. But few people really know the origins.  The secret of entrepreneurship, creativity and innovation and its role in an economy was unlocked by Joseph Schumpeter in the early to mid 1900s.
Entrepreneurs innovate and add value to a business through introducing new ideas, goods, services and/or processes. Without some form of innovation, your business is inevitably going to die. This conclusion is based on business cycle analysis and what’s known as ‘creative destruction’. Someone is going to build a new widget. And if that’s a really radical widget you’re in trouble (unless you can catch on).
Radical or disruptive innovations ultimately shift playing fields (see concepts like Blue Ocean strategy). Put simply – if you don’t change, others will. Today’s slick and powerful communication mediums, changing market dynamics and accelerated business cycles force apathetic businesses out more quickly than ever. So your time horizon is much shorter.

‘Gazelles’
In Littleton’s case they went in search of their creative achievers hoping to facilitate, harness and commercialise their potential. But rather than trying to satisfy all, they focused on high growth entrepreneurial winners—called gazelles. It is important here to clarify what an entrepreneurial gazelle really looks like. So first we must establish what we mean by entrepreneur. Brian Dabson (2007) has identified five key types of entrepreneurs:

1. Aspiring entrepreneurs – those who have created an idea but are yet to get it off the ground;
2. Survival entrepreneurs - those entering business because they are buying a job or topping up income;
3. Lifestyle entrepreneurs – those earning a living through combining a lifestyle choice and running a business;
4.Growth entrepreneurs – those wanting to grow the business extensively and fulfil a vision; and,
5. Serial entrepreneurs – those successfully fulfilling a business vision but who sell-off the business to move to their next venture or alternatively build multi-faceted ventures within the existing business.

Gazelles are generally in the two latter categories. These entrepreneurial high achievers have the temperament and courage to succeed on a major scale and with this a region gains significant economic benefit. Ultimately it is through these creative spirits or entrepreneurs that regions generate ideas, and as Michael Porter (1985) suggested, create competitive advantage. Brian Dabson and the Littleton experiment have identified that very few small businesses can really grow or more importantly few actually want to grow. This is not a criticism of such businesses as there is merit and gratification in owning and running your own business. But these enterprises are therefore not the ones to be targeted.
Gazelles however are a different breed. David Birch (1986) found clusters of businesses, large and small, that were achieving 20% growth per annum over at least a four year period. That’s when he introduced the concept of gazelles. In a three stage animal metaphor he identified: the mice (businesses happy to just survive), the gazelles (fast growth businesses as described here), and the elephants (businesses who have reached a suitable size and are happy to hover).
The Global Entrepreneurship Monitor (GEM) has estimated that only 8% of global start-ups have expectations of employing 20 staff. And a large proportion of entrepreneurs do not make it to the critical 3-4 year threshold. Interestingly, there is a myth often perpetuated that “90% of new businesses fail in the first year.” Studies in the US, for example, show that two-thirds make it to 2 years and half make it to 4 years.
Increasingly, Australian small businesses are also improving hence immediate failure is far less prevalent. But from a regional benefit perspective, significant resources can be wasted on helping all entrepreneurs. The discussion above regarding the various types of entrepreneurs gives one good idea of why.

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