Michigan must nurture innovators and ideas

A shortened version of the following appeared in the Lansing State Journal on Sunday, March 18, 2007 (see the link for the short version).

Comerica’s decision to move its headquarters from Detroit to Dallas is one more piece of bad news for the state. But what does it mean? Are we to surmise that the tax environment remains too onerous for business, despite the elimination of the Single Business Tax at the end of 2007? Although Texas ranks 6th, and Michigan 27th, on the Tax Foundation’s State Business Tax Climate Index for 2007, Comerica’s CEO Ralph Babb, Jr. did not cite taxes as a major reason for the move. And he’s probably right, at least about the fact that taxes did not prompt the company to leave Michigan. Research we have been conducting in the Michigan Center for Innovation & Economic Prosperity suggests that the tax environment is not the key deterrent to business activity in Michigan by state residents; there are enough other obstacles to overcome! But our research does suggest that companies considering moves to Michigan do consider the tax environment an obstacle. One could say the following about Comerica’s decision: the company left Michigan for business reasons, but Texas’ low tax environment made it an attractive location relative to the company’s other choices. Comerica’s other major markets are Arizona (ranked one spot behind Michigan at 28th), California (ranked 45th), and Florida (ranked 5th). Texas may have won because it provided a low tax environment close to the majority of the company’s customer base.

But saying that taxes didn’t matter to Comerica’s decision to leave Michigan doesn’t let the state off the hook! Comerica is a financial services company, and thrives when it operates in an environment where people are starting up new businesses and existing companies are growing. Comerica can find funds anywhere (notice, it will keep its branch facilities open in Michigan), but its company operations need to be near its commercial and investment customers. And they, in turn, need to be in a location conducive to business startup and expansion. Michigan’s bureaucratic and regulatory structure right now is not designed promote entrepreneurial activity. And that needs to change.

The state’s economic focus continues to be jobs, jobs, jobs. I understand the motivation behind that focus, but it needs to shift. We need to focus on creating an environment conducive to innovation and to encouraging companies to serve customers around the world. The focus on jobs comes from the old notion that capitalism is about the accumulation of capital and the employment of labor. We assumed for decades that economic growth in Michigan was built on wedding the capital of companies like GM and Ford to our labor. Instant prosperity. Except that it wasn’t their capital and our labor that were the real keys to that prosperity. It was their innovation and the world’s demand. Innovation is about people having new ideas about how to use things. Increased demand is also about people having new ideas about how to use things. In short, the economy is not first and foremost about capital and labor: it is about people, ideas, and things. Thomas Edison, Henry Ford, Ransom Olds, and the Kellogg brothers understood that. We somehow forgot it along the way, settling instead for jobs, any jobs.

How do we move as a state from a conception of economic development built upon the old economy to one that helps people find new ideas and new ways to use things? We need to streamline the process of business startup and expansion: reducing the confusion of paperwork and office-jumping would help; a real one-stop shop would be even better. We need to stop trying to pick “winners” (companies that will provide lots of jobs in Michigan) and provide an incentive structure that encourage Michigan entrepreneurs to devote their activity to serving customers around the globe. We need to facilitate the interaction of entrepreneurs and innovators in our universities with entrepreneurs and innovators in the private sector. Perhaps most of all, we need not only to upgrade our children’s education, but connect them more often to activities of private sector businesses and non-profit organizations so that they can become people who have new ideas about how to use things.