Building Prosperity in Northeast Ohio with Open Source Economic Development

Ed Morrison Executive Director Case Center for Regional Economic Issues ed.morrison@case.edu Weatherhead School of Management May, 2005
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Table of Contents Overview! Part 1: What"s Changed!

Building wealth in the industrial era ! The rst wave of globalization! The second wave of globalization ! The perfect storm of globalization! From command and control to collaboration! The changing dynamics of economic development! The competitive advantage of networks ! The increasing importance of brainpower!

4 6
7 8 10 11 12 13 14 15

Part 2: Open Source Economic Development !

Components of Open Source Economic Development ! Building brainpower! Converting brainpower into wealth !
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16
17 18 19
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Building quality connected places ! Branding our region: Understanding the experience ! Building civic habits of Purposeful Dialogue !

20 21 22

Building clusters with Open Source Economic Development! 23 Our Universities Collaborative ! Colleges and universities as civic spaces ! Get linked! 24 25 26

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Overview
We are moving from an economy based on large industrial organizations to an economy built on collaborative networks. This shift -- which the Internet has accelerated -- profoundly changes the character of economic development. Civic leaders need to move from thinking that economic development is the primary responsibility of a handful of people -- the mayor, the county commission, the chamber of commerce board. In today"s globally connected economy, a region"s economic development is everyone"s business. Economic prosperity emerges from strong networks of engagement. In Northeast Ohio, we need to rebuild our civic spaces in order to compete in an economy based on networks. This strategy carries important competitive consequences. The regions with strong civic collaborations will be able to learn faster; they will be able to spot business opportunities faster; and they will be able to act faster. The purpose of this report This report outlines the evolving challenges of economic development in Northeast Ohio. .The report is divided into two parts. Like the rest of the U.S. economy, Ohio is caught in a perfect storm of globalization. Part 1 explore how economic development has shifted, and how we must shift our thinking if we are going to remain globally competitive. Ohio is not alone in making these adjustments. Every advanced economy is faced with the same set of circumstances -- a at earth in which competition can come at us from any direction.1 The second part of this report explores how Open Source Economic Development, an ew approach to economic development, can help Northeast Ohio adjust to these new realities. Open Source Economic Development starts with the premise that our economy exists as a set of networks embedded in other networks. The Open Source model provides practical guidance to civic leaders on how to build these networks or clusters. Applying Open Source Economic Development For the past eighteen months, the Center for Regional Economic Issues at Case has been deploying and rening the Open Source model. We have uncovered important new clusters emerging in our region. These new opportunities include creative digital media, preventive health care, biofuels, wind energy, advanced logistics, electric commuter vehicles, sustainable building design and green materials.
1

See Thomas Friedman, The World is Flat (2005). ! ! www.rei.case.edu

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The Case Center for Regional Economic Issues The Center for Regional Economic Issues (REI) is a think and do tank based at the Weatherhead School of Management at Case Western Reserve University. Founded in 1984, REI has established a national reputation for thought leadership in regional economic development. We focus our activities in four areas: Conducting advanced and applied research in regional economic development; Designing analytic frameworks and practical tools for civic leaders and economic development practitioners; Building collaborative networks to accelerate regional economic development; and Conducting training and public education initiatives in regional economic development

Ed Morrison Ed Morrison authored this report. He is REI"s Executive Director. For over nineteen years, he has been conducting strategy projects with economic developers in the U.S. His work won the rst Arthur D. Little Award for excellence in economic development presented by the American Economic Development Council in 1985. Ed is the architect of the strategic economic development action plan that has transformed Oklahoma City"s regional economy. Ed also authored the 1998 report for the Commission on the Future of the South, chaired by former Kentucky governor, Martha Layne Collins. From 1998 to 2003, Ed managed the community assessment program for the Kentucky Cabinet for Economic Development. This initiative improves development prospects throughout rural Kentucky. Since 1998, Ed has taught economic development strategy at the Economic Development Institute at the University of Oklahoma. Ed also travels to China frequently, where he has negotiated and guided a joint venture in Xi"an. Prior to starting his economic development work, Ed worked for Telesis, a corporate strategy consulting rm. In this position, he served on consulting teams for clients such as Ford Motor Company, Volvo, and General Electric. He conducted manufacturing cost studies in the U.S., Japan, Mexico, Canada, Italy, Sweden, and France. Ed started his career in Washington, D.C., where he has served as a legislative assistant to Ohio Congressman Charles A. Vanik, staff attorney with Robert Reich in the Ofce of Policy Planning at the Federal Trade Commission, and staff counsel for the US Senate Democratic Policy Committee. He holds a BA degree from Yale University and MBA and JD degrees from the University of Virginia. You can contact him at ed.morrison@case.edu
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Part 1: What"s Changed

We should start with a clear understanding of how communities in Ohio build wealth. A community or region prospers when businesses trade outside the region and import income. These traded businesses provide the engine power to move an economy forward. Income circulates within the economy with local businesses, such as restaurants, retail stores and most service businesses. This framework outlines the three basic strategies of economic development: 1. Increase good money: Increase wealth by strengthening businesses that trade outside the region; 2. Circulate neutral money: Extend the circulation of income in the region by strengthening local businesses; and 3. Reduce the ow of bad money: Cut down the income owing out of the region through purchases and brain drain.2
2

Import income into the region with traded businesses Circulate the income in the region with local businesses and workers Reduce the leakage by reducing outside purchases and workers Rest of the World

Sales

Traded Businesses Purchases and paychecks 3

Another region

Local Businesses
Your eco n

Brain Drain and Purchases

omy

In any economy, traded businesses generate wealth based on relatively high levels of productivity. In any economy a relatively small portion of the workforce -- about 30% -- is engaged in traded activities. This estimate comes from Michael Porter at the Harvard Business School.

David Morganthaler provided REI with the terminology of good, neutral and bad money. ! ! www.rei.case.edu

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Building wealth in the industrial era

In the past, Ohio built its wealth with large, vertically integrated enterprises. The steel industry is a good case in point. Rubber is another. Unfortunately, like just about everything else, circumstances change. Good times do not last forever. Technology analysts call these changes the S Curve. Civic leaders need to pay attention to these S curves, and prepare today for what"s next.
S-Curves deliver one message: Nothing lasts forever. Hulett ore unloaders were unique to the Great Lakes. They unloaded ore for the expanding steel industry in the region.

Prosperity

Time

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The rst wave of globalization

The rst wave of globalization hit Ohio"s shores in the 1970"s. Collapsing cost curves undermined the competitive position of some of our major industries. These collapsing costs accelerated the S Curves underlying our key Ohio industries: steel, rubber, autos, metal parts. We are continuing to see the impacts of low cost competition. Manufacturing is the most visible sector facing these pressures.
Collapsing cost curves led to the rst wave of globalization to hit Ohio.
Cost index 120 100 80 60 40 20 0 1930 1940 1950 1960 1970 1980 1990 2000
Source: World Bank

Sea Freight Air Transport Telephone Satellite

We will see additional plant closings as relentless cost pressures continue to undercut older industrial enterprises.

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Impacts on Northeast Ohio We can see the impact of S-Curves, in Cleveland and Cuyahoga County. The contraction of the steel industry led to a loss of population and wealth. The civic leadership in Northeast Ohio did not see the impact of S Curves coming. They did not anticipate the changes in underlying technology of economic growth. So, for example, Northeast Ohio missed out on the major developments in electronics that fueled economic growth in computers and telecommunications.

The decline of U.S. steel production in the 1970;s led directly to the loss of population in Cuyahoga County and Cleveland.
Millions of tons 160

140

120

100

80

60

40 Steel production

20

0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: American Iron and Steel Institute

Population 1,800,000 1,600,000 Cuyahoga County 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Cleveland

Source: U.S Census Page 9 of 27 ! ! ! www.rei.case.edu

The second wave of globalization

No one anticipated the second wave of globalization triggered by the Internet. Developed beginning in the 1960"s as a defense project, the Internet moved into popular commercial application with the Netscape"s invention of the web browser in 1994. The explosion of Internet use has opened new ways of collaborating and building competitive advantage. The Internet is our rst interactive mass medium. We are just starting to understand the implications of this new technology on our businesses, our organizations, our communities, and ourselves.
Netscape invented the web browser in 1994, and this technology accelerated the popular use of the Internet.
Internet host count, in millions 180 160 140 120 100 80 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 180 160 140 120 100 80 60 40 20 0

Source: Internet Systems Consortium

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The perfect storm of globalization

The continuing collapse of costs and the explosion of the Internet have created a perfect storm of globalization. There is no place to hide from these global realities. Throughout Ohio we are losing manufacturing jobs, as companies continue to shift their production overseas. Global competition is relentless. In the years ahead, we can expect even more pressure, as low wage countries like China and India engage in increasingly sophisticated businesses.

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From command and control to collaboration

The growth of the Internet is having other impacts. Our organizations are changing. Information is now more open and available. Older organizational forms are breaking down. Companies are coming to understand that command and control must be balanced with collaboration and teamwork.
New models of innovation are emerging based on collaboration

Command and control organizations are giving way to organizations based on collaboration and teamwork...The reason: information now ows freely.

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The changing dynamics of economic development

The practice of economic development is changing as well. More and more community leaders recognize that they have to collaborate regionally to compete globally. This approach makes sense. Economic development takes place in the civic space outside the four walls of any one organization. No command and control structures work here. Instead, communities need to build networks of collaboration: clusters of economic activity
A lot of organization are involved in economic development in our communities. They come together in the civic space.
The Civic Space

The Civic Space

The key to successful economic development has become building networks in the civic space. Some economists call these clusters. They are networks in which the participants engage in complex learning.

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The competitive advantage of networks

Communities, regions and states with thick networks of collaboration will have a competitive advantage. They will learn faster. They will spot opportunities faster. And they will be able to mobilize resources faster. In today"s world, where wealth is generated through knowledge and networks, communities need to build connections and networks in order to compete. This relationship is often expressed as Metcalfe"s Law, named after Robert M. Metcalfe, inventor of Ethernet (an original computer networking technology). According to Metcalfe: "The power of the network increases exponentially by the number of computers connected to it. Therefore, every computer added to the network both uses it as a resource while adding resources in a spiral of increasing value and choice."3
We can illustrate the value of networks with this simple example. What is the value of one fax machine? Answer: Zero. But as the number of fax machines increases the number of connections increases dramatically. Why? Because a lot more connections are possible.

Number of connections

75 60 45 30 15 0 1 2 3 4 5 6 7 8 9 10
Number of fax machines

See http://www.infonortics.com/vc/1999/tidwell/tsld007.htm ! ! www.rei.case.edu

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The increasing importance of brainpower

Globalization is having another impact: It is increasing the importance of brainpower. We see this shift in the growing connection between education and earnings. In today"s global world, a high school diploma is no longer a ticket to a stable future. Much worse, dropping out of school amounts to a lifetime economic disability. Brainpower has become our most important competitive asset.
In an era of global competition, the earnings prospects for high school dropouts is deteriorating dramatically.

Average weekly earnings, 2002$

$600 $450 $300 $150 $0 1979

Men

Women

2002

Meanwhile, the earnings prospects for college graduates have improved steadily.

$1,500 $1,125 $750 $375 $0 1979

Source: U.S Bureau of Labor Statistics

Men

Women

2002

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Part 2: Open Source Economic Development

We need a new way to think about regional economic development. Open Source Economic Development provides that framework. Rather than seeing our economy as a collection of vertically integrated companies, Open Source Economic Development sees our economy as networks embedded in other networks. The key comes in building these networks -- clusters of relationships that lead to productive, innovative investments.

Case REI is working with Valdis Krebs and InFlow software to apply social network analysis to clusters. See http://www.orgnet.com

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Components of Open Source Economic Development

Open Source Economic Development posits that any competitive regional economy needs exible, productive networks to: 1. Build brainpower; 2. Convert brainpower to wealth through innovation and entrepreneurship; 3. Create quality, connected places to attract, nurture and retain people; 4. Promote the region with effective branding and marketing; and 5. Developing civic habits of purposeful dialogue.
Quality, Connected Places Innovation Networks Purposeful Dialogue

Brainpower

Branding

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Building brainpower
Ina global economy, brainpower matters. Any region"s competitive advantage starts with developing brainpower. Advances in brain science teach us that brain development continues throughout our lifetime, but the years 0 to 5 are particularly important. In other words, workforce development begins with a pregnant mother. Case REI has been promoting the connection between early child care and our region"s long term prosperity. Brainpower raises other important issues. As we develop strong clusters of innovative businesses, we must continuously align our education and training programs to these new opportunities. Now, our regional education and training programs are only weakly connected to the market.
Quality, Connected Places

Brainpower

Brainpower

Purposeful Dialogue

Innovation Networks

Branding

Prominent business groups, led by the Committee for Economic Development, are now calling for more investment in early childhood education.

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Converting brainpower into wealth

Innovation and entrepreneurship networks convert brainpower into wealth. Michael Porter of the Harvard Business School has called these networks, clusters. Clusters represent thick networks of relationships -- open innovation systems -- that lead to wealth through innovation.
Purposeful Dialogue

Innovation Networks

Brainpower

Quality, Connected Places

Innovation Networks

Branding

Businesses that trade outside a region create wealth. Northeast Ohio has a strong base of traded clusters on which to build. In addition to established clusters, we have emerging opportunities in areas such as creative digital media, preventive health care, advanced logistics, and new energy sources.

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Building quality connected places

Smart people and knowledge-based businesses can locate anywhere. They will tend to cluster in regions that build quality, connected places.. Richard Florida"s theories of a Creative Class are largely focused on creating spaces that attract young knowledge workers. Our concept of quality, connected places goes deeper. We are embracing sustainable development as a guide to our future. Sustainable development focuses on ensuring a better quality of life for everyone, now and for generations to come. A widely used international denition is development which meets the needs of the present without compromising the ability of future generations to meet their own needs. 4 Our denition extends to the concept of connectivity. In an economy in which wealth comes from knowledge, connectivity becomes critical to our prosperity.
4
Purposeful Dialogue

Quality, Connected Places

Brainpower

Quality, Connected Places

Innovation Networks

Branding

This denition comes from the Bruntland Report, Our Common Future. The World Commission on Environment and Development issued this report in 1987. It is often called the Bruntland report after the chairperson of the commission, the then Prime Minister of Norway, Mrs Gro Harlem Bruntland.
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Branding our region: Understanding the experience

Branding is perhaps the most misunderstood dimension of regional economic development. Branding focuses on the deep stories that dene our region, the common threads that hold us together. Our shared story embraces our past as a way to see our future. We uncover and develop our brand by focusing on the experiences we share in our region. More important, focusing on experiences opens new doors to wealth creation. .
Brainpower

Branding

Purposeful Dialogue Quality, Connected Places

Innovation Networks

Branding

In their book The Experience Economy, Joseph Pine II and James Gilmore offer an insightful framework for thinking about the changing structure of human aspirations, economic demands and business opportunities. Gilmore is based in Cleveland and consults with Case REI.
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Building civic habits of Purposeful Dialogue

In many ways, the last component of Open Source Economic Development is the most critical. Because economic development happens in the civic space, we cannot command and control our way to prosperity. We must seek alignment through conversation. Fortunately, we have some guidelines to follow. Appreciative Inquiry (AI), developed by David Cooperrider here in Northeast Ohio, provides a framework for building alignment through pragmatic dialogue. Other approaches can contribute. Deliberative Discussion provides an approach for exploring particular issues in detail. Open Space guides a group through a process to uncover the opportunities within it. All of these approaches share common element: they balance open participation with leadership direction.

Pragmatic Dialogue

Brainpower

Purposeful Dialogue Quality, Connected Places

Innovation Networks

Branding

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Building clusters with Open Source Economic Development

Cluster Growth Engine

Open Source Economic Development provides the roadmap to build our innovation economy in Northeast Ohio. Building knowledge-based clusters requires managing a continuous series of conversations and action plans: strategic doing. One important insight from Appreciative Inquiry is that people move in the direction of their conversations. Open Source Economic Development guides the type of conversations we need to have in the region in order to build wealth.

Innovative Businesses: Cluster Development What management and nancial support is needed to grow businesses in the cluster? What university-business channels need to be established or developed? What outside businesses can serve to anchor the cluster?

Branding Innovative Businesses Branding Quality, Connected Places: Infrastructure and Amenities Purposeful Dialogue Quality Places Brainpower What infrastructure is required to grow the cluster? How can we make this development sustainable? What initiatives do we need to improve the along critical dimensions of sustainability and connectivity? What's our story?

Brainpower: Work skills What numbers of people with what skills are needed in the cluster and when? Are there immediate needs that need to be met with recruitment? What training is needed for existing people in the cluster? What new courses or changes to existing courses are needed to meet business needs? Who are emerging business leaders we need to attract?

Dialogue: Collaborative Partnerships What partnerships are needed to bridge gaps? How can these partnerships be managed and nanced?

Anchor

Stage 1 Clusters typically start from a seed investment in a technology platform

Stage 2

Stage 3

Stage 4 Cluster continues to evolve with split-offs and outside investment

Supporting networks Networks continue to form begin to form with by attracting public and private rms and brainpower support 20 to 30 years

Clusters take time to evolve. They emerge from a continuous process of complex learning and the fast alignment of resources to pursue these opportunities. This process takes place through conversation around the right questions.
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Our Universities Collaborative

The global economy is hitting Ohio hard. In the years ahead, the pressure will not relent. We have a choice. We can sit back and continue to watch as big chunks of our old industrial structure falls to the relentless pressures of global competition. Or, we can reinvent ourselves. We can call on our deep traditions of innovation and creativity and build competitive, new business opportunities. Redening our future economy begins with new thinking about collaboration. Economic change is sweeping the world. New technologies develop constantly, and new markets are opening. New competitors emerge alongside remarkable new opportunities. One common theme ties these changes together. Our future depends on how well we develop and deploy our brainpower. Our colleges and universities are the foundation of the infrastructure that we need to compete globally.

Provides capital and expertise Start-up rms

Venture investor and entrepreneur networks

Provides ideas, incubators and smart people

Adds new rms to technology clusters

Recruits smart people Colleges and Universities Provides R&D partners Provides training support to clusters Recruits and trains smart people

Creates wealth to expand investment

Technology clusters

Skilled talent pool

Recruits and supplies smart people

Source: This drawing is based on a systems diagram developed at Carnegie Mellon University.

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Colleges and universities as civic spaces

In a network economy, colleges and universities provide the civic spaces that enable people to come together and dene new collaborations. For example, a range of opportunities in Northeast Ohio. have emerged from discussions at REI.Tuesday. Each Tuesday from 4PM to 6PM, REI hosts a discussion on some aspect of the economic transformation now underway in our region. REI.Tuesday is an example of how to apply Open Source Economic Development to identify the opportunities for innovation in our region. Here are some of the initiatives that are now underway: ! Real NEO, an open source community of economic development initiatives (http://www.realneo.us); ! The New Energy Roundtable to explore our energy future in Northeast Ohio; ! Ramtech, an initiative to establish an collaboration among small component manufacturers to accelerate automation and provide Just in Time training; ! TransTech, an advanced logistics and transportation cluster. TransTech is working on the Genesis project a pilot project in electric commuter vehicles and a bio-diesel distribution company, the rst in Northeast Ohio; ! Green City, Blue Lake, a cluster of sustainability organizations throughout the region; ! Center for Health and Disease Management, an initiative to support an emerging cluster in preventive health care; ! An emerging Creative Industries cluster that is focusing on creative digital media and a new technology transfer center at the Cleveland Institute of Art;

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! A new collaboration on Teleworking. The European Union and cities like Tampa have embraced teleworking as a means to reduce trafc congestion and improve the productivity and exibility of organizations. ! East Cleveland 2010, a series of initiatives to build a new foundation for the economy of East Cleveland;

Get linked
If you are interested in learning more about Open Source Economic Development, contact Ed Morrison at ed.morrison@case.edu If you are interested in learning more about the Universities Collaborative, contact Steve Minter at sminter@urban.csuohio.edu If you want to learn more about REI.Tuesday, contact Betsey Merkel at bmerkel@weatherhead.cwru.edu If you want to learn more about REI, visit our web site at http://www.rei.case.edu or contact susan.altshuler@case.edu If you are interested in learning more about Appreciative Inquiry visit the web site of the Case Center for Business as an Agent of World Benet http://worldbenet.case.edu/ If you are interested in RealNEO visit RealNEO at http://www.realneo.us or contact Norm Roulet at norm@icearth.com If you want to learn more about social network analysis, visit http://www.orgnet.com or contact Valdis Krebs at valdis@orgnet.com

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If you want to learn more about Entrepreneurs for Sustainability, visit their web site at http://www.e4sustainability.org or contact Holly Harlan at holly@e4sustainability.org If you want to know more about the Green City Blue Lake network, contact David Beach at david@ecocitycleveland.org If you are interested in learning more about Ramtech, the collaboration of small component manufacturers, contact Maybeth Mathews at mbmatt356@yahoo.com If you are interested in learning more about TransTech, the cluster of advanced logistics and transportation initiatives, contact Herb Crowther at hcrowther@capling.com If you are interested in creative digital media and the initiatives of the Cleveland Institute of Art, contact Jurgen Faust at jfaust@gate.cia.edu If you are interested in East Cleveland 2010, contact Alfred Miller at alfredtmillerjr@yahoo.com If you are interested in the teleworking initiative, contact Vic Voinovich at vvoinovich@comcast.net If you are interested in Open Space technology or the emerging network of facilitators in Northeast Ohio, contact Jack Ricchuitto at jack@designinglife.com If you are interested in Deliberative Discussion contact Kim Sebaly at Kent State at kpsebaly@kent.edu If you are interested in the emerging network of regional leadership groups, contact Suzanne Fleming at Youngstown State at sheming@ysu.edu

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