Why Local Economic Development

It may seem paradoxical, and yet it is true: One of the main reasons why local economic development (LED) is receiving increasing attention is globalization. This is so for a number of reasons:

• As national borders become less important, national markets become more accessible to foreign competitors, and therefore the competitive pressure on domestic producers is rising. Domestic companies undertake all sorts of efforts to raise their competitiveness. One of the important strategies is to focus on core competencies and to externalize all those functions which are not creating a competitive advantage. This is creating demands for the environment, and in particular the local environment, in terms of availability of suppliers, service providers and supporting institutions. A dense fabric of supporting industries and institutions becomes ever more important.
• For many industries the number of viable locations increases. The mobility of companies increases as well. A competition between locations emerges – they want to keep or attract companies to raise taxes and create employment. Not only companies but also locations – cities, regions – have to consider how to increase their competitiveness.

But local development is not only about attracting companies. It is also about the endogenous potential. It is not rare to find local economic development actors with just one thing on their mind: how to attract the one big external investor who brings thousands of jobs. But these investors are rare. It is often more promising to enhance the competitiveness of companies which are already there, and to stimulate and support the emergence of new companies (i.e. stimulate entrepreneurship). This is the endogenous potential.

Moreover, local economic development is not only about integration into external markets. Sure, this is often the main preoccupation, and there can be little doubt that it is a main justification for local economic development. But local economic development ought to be more than that. It is an approach which is also important for locations which are hardly touched by the forces of globalization. A further rational for local economic development is to close local loops. Local economies are often fragmented. Business opportunities are not exploited since they are not visible. Local companies look for suppliers and customers to the outside, rather than in their location. Stimulating interaction between local businesses creates new business opportunities.

What then is the difference between LED and traditional centralized approaches, such as a national industrial policy? The big difference has to do with scope. Industrial policy used to be a specialized activity, implemented by a specialized agency (such as the Ministry of Industry). It used to be clearly separated from other activities, such as technology policy (implemented by the Ministry of Technology), skills development (implemented by the Ministry of Manpower), regional development (implemented by the Ministry for Regional Integration), and so forth. LED may sometimes occur in a likewise fragmented way. But it ought to pursue a systemic approach which cuts across different portfolios. And it has a fair chance to do so. Fragmentation at the national level is not just due to political factors. It also reflects the fact that there has to be some division of labor, as otherwise a nation state cannot be governed: it is simply too complex. A locality is necessarily less complex than a nation state. Therefore, at the local level it is possible to pursue an integrated, systemic approach which links skills development with SME support, technology upgrading with R+D, supplier development with upgrading of associations, employment promotion with infrastructure upgrading, and all of them among each other.

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