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Retooling the Midwest’s Business Climate

The Trustbelt
January 1, 2014
By Michelle Comerford & Tracey Hyatt Bosman

It’s true. The past quarter century has taken a toll on the Midwest’s reputation. Struggling industries, labor union strikes, bureaucratic issues, heavy tax burdens and regulations, and corporate flight led to the unfortunate nickname “The Rustbelt” – coined to reflect cities in economic decline with shuttered plants and rusty smokestacks.

Yet many areas of the Midwest have faced their challenges head-on. This hasn’t happened overnight, but the Midwest is creating a better business climate, grabbing the attention of business leaders, and successfully attracting new investment across a diverse range of industries. Here are some contributing factors:

Tax Reform

Michelle Comerford

Michelle Comerford

Taxes are a big factor in any business climate. States in the Midwest were traditionally known for having heavy tax burdens that were prohibitive to doing business. Recently, however, some states have made strides to change this through tax reform policies.

For example, Ohio has recently lowered tax burdens by more than half, eliminated taxes on inventory, corporate income, and investments in equipment. It was phased in over five years for existing companies, and taxes were waived for any new company locating in the state. As a result, companies have taken note and view Ohio as a more competitive business climate. In fact, in a recent Chief Executive magazine survey, responding CEOs ranked Ohio as the “Most Improved State to do Business.”

In 2013, Indiana also made some big changes to its tax laws by passing the largest state tax cut in its history which included a reduction of corporate income taxes from 7.5% to 6.5%. Indiana also received accolades in the 2013 Chief Executive magazine survey, ranking fifth “Best State for Business.”

Right to Work

For decades, the Southeastern U.S. states have been successfully luring manufacturers from other parts of the country by touting (among other benefits) “right-to-work” laws. (Such laws grant employees of unionized facilities the right to make an individual decision regarding whether to join the union, rather than being required to join a union if one is present at the facility.) Companies perceive the presence of these laws as being an indicator of a favorable business environment, flexible workforce, and reduced risk of work stoppages. Many companies, especially manufacturers, eliminate non-right-to-work states from consideration when siting a new plant.

Meanwhile, Northeastern and Great Lakes states, and some of their neighbors, have remained steadfastly non-right-to-work – until recently. In 2012, Indiana made a big statement by passing a right-to-work law – the first of its kind in the Midwest since Kansas passed its legislation in 1958. Michigan followed suit last year, shocking many political and industry observers.

While it can be argued that right-to-work legislation doesn’t have a direct impact on the likelihood of a union election or the flexibility of existing work rules in a unionized facility, it is undoubtedly used by corporate executives as a measure of a location’s business friendliness. And Indiana and Michigan have sent a clear message to the business community that they want to attract new investment.

New Economy Industry Targets

When people think about the Midwest, they probably think first of the automotive industry, farming equipment, agriculture, and heavy industry. Today’s Midwest looks vastly different than the stereotype, with data centers, e-commerce distribution facilities, life sciences, wind farms, digital start-ups, and other New Economy operations appearing on a daily basis.

For example, the Chicago metro offers a thriving colocation market, boasting the largest data center in the world, 365 Cermak, which was once home to the printing press for the Yellow Book and Sears Catalog.

That doesn’t mean, however, that the traditional industries have gone away. To the contrary, the Midwest is seeing a vibrant transformation of these operations – from traditional automotive to electric vehicle production and battery technology development, from glass bottle manufacturing to solar panel manufacturing, and from basic farming to leading biotech technologies—applying the region’s traditional core strengths to today’s industries.

Based on geographic location and proximity to major customer markets in the Midwest and Northeast U.S., Central Ohio has long been attracting traditional distribution centers, especially for big box retailers. This target has evolved today to e-commerce fulfillment operations, which also tend to include big investments in equipment and technology, and require a more skilled workforce. Muskingham County, Ohio, was recently successful in the attraction of a 500,000-square-foot fulfillment center for Fanatics, an e-commerce company that fills orders for sports apparel for professional and collegiate sports teams.

The region’s transformation has by no means been accidental. Midwestern states are deliberately creating new tools to nurture the development of these new industries. Targeted economic development incentives are one such tool. Examples include:

  • Indiana recently passed legislation allowing its communities to incentivize data centers with property tax abatements for servers and computer equipment.

  • Since 2002, Ohio has offered funding under its Third Frontier program to support “existing industries that are transforming themselves with new, globally competitive products and fostering the formation and attraction of new companies in emerging industry sectors.” Over the course of its existence, this program has supported everything from research and development of advanced energy and biomedical products to commercialization of new technology. The program is valued at $2.3 billion and is currently approved through 2015.

  • The Midwest Technology Corporation High-Tech Industrial Expansion program is an incentive program designed to transform “Missouri through the power of entrepreneurship and technology-based innovation… [resulting in] high-paying jobs in its targeted biotech and high-tech clusters with an emphasis on those that leverage Missouri’s rich agricultural history.”

Midwestern communities are also finding ways to proactively create a “home” for New Economy companies, including preparing sites for them, such as the dedicated effort of AEP, a multi-state, Ohio-based utility, to identify, certify, and market select properties in its territory as data center sites.

The Kansas City Animal Health Corridor illustrates the convergence of a wide range of tools, seizing the opportunity to transition the area’s tradition of raising livestock into a multifaceted initiative, bringing together universities, funding sources, R&D institutions, private companies, and targeted incentives programs to “cultivate a climate of opportunity for companies competing in and supporting the animal health and nutrition industry.”

Focus on Innovation

Tracey Hyatt Bosman Tracey Hyatt Bosman

Complementing a focus on New Economy industries, many Midwestern states and communities have also committed to promoting innovation locally to help grow their future economies.

A focus on innovation also means fostering entrepreneurs to support their growth into successful and sustainable businesses. In Illinois, the Chicagoland Entrepreneurial Center (CEC) is a non-profit organization that was developed with this mission in mind. Their flagship project, 1871, is a workspace where entrepreneurs can gather to work on their projects independently and network among peers. Members pay a small monthly fee for Internet-accessible desk space, conference room access, printing, and other office amenities. The biggest benefit, however, is the networking opportunities available for entrepreneurs to share ideas and look for partners with which to collaborate to take business concepts even further.

Wisconsin offers a similar program on a state-wide basis, called Wisconsin Innovation Network (WIN). While WIN isn’t focused on providing physical workspace, it does share 1871’s objectives of providing a venue for entrepreneurs to network and connect with the managerial, financial, and technology resources to help them launch their ideas.

Grand Rapids, Michigan, is proving that innovation doesn’t require a big city to thrive. Entrepreneur Rick Devos is leading the town to new heights with one innovative idea after another. In addition to the international ArtPrize competition and 5×5, the city is now home to Start Garden, a new kind of venture capital fund and accelerator program that encourages the entire city to take part in choosing which ideas should receive funding.

Iowa City is another trail-blazer, offering a wide range of creative endeavors, including Iowa’s Creative Corridor, TechBrews and a monthly coworking “jelly” – building on its successful hosting of TEDx, the Mission Creek Music Festival, and Startup Weekend.

Same Base, New Attitude

It was a tough decision to remain faithful to manufacturing given the dramatic shifts of recent decades, but the Midwest accepted the changes, made necessary adjustments and is now seeing the emergence of a healthy, high-tech, advanced manufacturing sector. This has not occurred by happenstance. Manufacturing councils, chambers of commerce, governments and other organizations are working hard to nurture the industry, expanding vocational training, joining with the National Association of Manufacturing to promote manufacturing careers, and winning changes in union work rules. Acknowledging the importance of the industry to its economy, Michigan recently passed a property tax exemption for manufacturing equipment to help retain and attract production facilities.

The transformation has been – and will still be – decades in the making. There is still a lot of retooling to be done, just as the Southeast didn’t make an overnight recovery when the textile industry began shuttering factories. Yet there are many, many shining examples of what the region’s states, communities, and business leaders are doing right.

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