Wednesday, May 27, 2009

Geographic Arbitrage

Today's post is brought to you by George Nemeth and the Brewed Fresh Daily crew. Yesterday, I dropped a term, "geographic arbitrage". The reference comes from a story about entrepreneurial activity in Bend, Oregon. Bend can compete with Silicon Valley for talent because of a lower cost of living. There are other considerations and Ohio is trying to leverage them to its benefit:

A number of cities, such as Kalamazoo, Mich., and Toledo, Ohio, are offering grant money and tax breaks to high-tech start-ups, just as the usual venture-capital hot spots, such as Silicon Valley and Boston, continue to see a pullback in venture lending. Many of the nontraditional cities require that start-ups receiving grants invest in their area, leaving companies little choice but to locate -- or relocate -- their businesses.

Firms also are being lured by the lower cost of doing business in such cities. And, as the number of high-tech start-ups increases in these areas, existing companies find that as they grow, they no longer have to leave Ohio, Michigan and other states that traditionally have had less to offer in the way of high-tech communities and investors.

We are seeing glimpses of the re-ordering of the startup landscape and it bodes well for Rust Belt cities such as Youngstown. Venture capital is becoming less "spiky" as the Flat World paradigm gains traction. This is great news for utopian cities such as Bend. And it could be a boon for the movers and shakers who dream of returning to their home in the Tech Belt.

Tempering enthusiasm is the Silicon Valley advantage. The Spiky World paradigm helps us understand why innovation tends to thrive in expensive places to business. In particular, the concentration of services is a big attraction:

The least-developed part of Pittsburgh's Entrepreneurship Commons is the professional services infrastructure, especially the lawyers. There are plenty of lawyers in Pittsburgh who spend all of their time representing entrepreneurs. There are relatively few lawyers in Pittsburgh who spend much time building an legal infrastructure for entrepreneurship. (At our law school, we're working on programs to help fill that need. Watch for more - next Fall.)

What I do I mean by that? I'll elaborate in a later post. But here's a taste. Question: In the Silicon Valley, if you're a grad student who would rather start a tech company than finish a Ph.D., who do you call? Answer: Your next-door neighbor will know -- and he or she will tell you to call one of a relatively small number of very well-known business lawyers. The Valley has a sophisticated and deep entrepreneurial infrastructure, and the lawyers play major roles in shaping it. Question: In Pittsburgh, if you're a grad student who would rather start a tech company than finish a Ph.D., who do you call?

The still missing piece in Ohio and other Rust Belt states is the entrepreneurial infrastructure. But as Mike Madison suggests, we could build it. Once we do, then the geographic arbitrage play becomes much more viable.

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