public infrastructure in economic development and growth: evidence from rural manufacturers

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PUBLIC INFRASTRUCTURE INECONOMIC DEVELOPMENT ANDGROWTH: EVIDENCE FROMRURAL MANUFACTURERSJohn M. Halstead a & Steven C. Deller ba University of New Hampshire , Durham, NewHampshireb University of Wisconsin-Madison , Madison,WisconsinPublished online: 10 Dec 2009.

To cite this article: John M. Halstead & Steven C. Deller (1997) PUBLICINFRASTRUCTURE IN ECONOMIC DEVELOPMENT AND GROWTH: EVIDENCE FROM RURALMANUFACTURERS, Journal of the Community Development Society, 28:2, 149-169,DOI: 10.1080/15575339709489780

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Journal of the Community Development Society Vol. 28 No. 2 1997

PUBLIC INFRASTRUCTURE IN ECONOMIC DEVELOPMENT

AND GROWTH: EVIDENCE FROM RURAL MANUFACTURERS

By John M. Halstead and Steven C. Deller

ABSTRACT

The role of public infrastructure in economic development and growth is examined and reported here. Specific attention is paid to the importance of infrastructure to small rural manufacturing firms in upper New England and Wisconsin. Study results suggest that while infrastructure is important to small manufacturing firms, other community attributes such as overall community attitudes toward change and the underlying forces of firm start-ups are more important. While adequate investments in infrastructure may be necessary for economic development and growth, it is not sufficient.

INTRODUCTION

The role of public infrastructure in economic development and growth remains at the center of a large and growing academic and policy debate. The common perception is that investment in public infrastructure sets the cornerstone for economic growth and development. Numerous studies purport to have revealed empirical relationships between investments in public infrastructure and economic development and growth (e.g., Aschauer, 1993; Humphrey & Sell, 1975; Kusmin, Redman & Sears, 1996; Smith, Deaton, & Kelch, 1978; Steinnes, 1990).

Based on these results, numerous economic development groups have called for significant new investments in public infrastructure. The Business and

John M. Halstead is Associate Professor of Resource Economics and Development, University of New Hampshire, Durham, New Hampshire. Steven C. DeIler is Associate Professor of Agricultural and Applied Economics, University of Wisconsin-Madison, Madison, Wisconsin. New Hampshire Agricultural Experiment Station Scientific Contribution Number 1952. This project has been funded through grants from the USDA National Research Initiative program, the New Hampshire Agricultural Experiment Station; University of New Hampshire, under NHAES Project H335; and the University of Wisconsin-Madison. The authors wish to thank David Draper for data analysis and the reviewers of the Journal for helpful comments.

©1997, The Community Development Society

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150 Journal of the Community Development Society

Industry Association of New Hampshire recently stated that "states which invest more in public infrastructure have a competitive advantage for attracting economic activity" (1996, p. 37).

The logic here is that businesses, as the engines of economic growth and development, use public infrastructure in their production processes much the same as labor or private capital. If the existing infrastructure is insufficient, business production will be hindered, hence hindering economic growth and development. Many argue that if the stock of public infrastructure falls below some critical level, business productivity will actually decline and the economy will begin to contract (e.g., Aschauer, 1989, 1990).

Pat Choate and Susan Walters suggest that "America's public facilities are wearing out faster than they are being replaced. The deteriorated condition of basic public facilities that underpin the economy present major structural barriers to the renewal of our national economy" (1981, p. 3). The National Council on Public Works Improvement (1988) concluded that America's infrastructure is barely adequate to support current needs and that the deteriorated condition of public infrastructure may place a barrier on future economic growth and development.

For community economic development policy, the implications appear to be straightforward: in order to encourage new or expanded economic activity in a community residents must invest in their stock of public infrastructure. Unfortunately, evidence of this strategy' s success is somewhat mixed, which is problematic given the expense of these types of investments. While many studies have revealed an empirical relationship between investments in infrastructure and local economic development and growth, the notion of causation has not been adequately established (Doeksen & Allen, 1991). As noted by Henry et al. (1989, p. 13) "it can not be deduced from research that infrastructure investment will lead a priori to regional development improvement." Insufficient levels of infrastructure may cause a bottleneck in the economy; local policy makers then must decide whether investing limited public resources in infrastructure will spur economic growth and development.

Our intent here is to review current thinking about public infrastructure and how it fits into community development policy. Clearly, the economic development and growth puzzle has numerous dimensions. Drabenstott and Smith (1995) and Marcouiller (1997), for example, find in today's environment that natural resource-based amenities are the major contributors to the economic "success" of many rural areas. Others suggest that community attitude is at the crux of successful communities (e.g., DeWitt, Batie, & Norris,1988; Dykeman, 1990). Aggressive community leaders with a can-do attitude, coupled with effective local institutions, can often be the separating factor between those communities that move forward and those that lag behind. Public infrastructure is only one part of this complex puzzle. But in order to adequately grasp the complexity of the whole community system it is imperative that we fully

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Halstead and Deller 151

understand the individual pieces of the puzzle. Hence, this study will focus on the narrow aspect of public infrastructure.

In addition, we introduce new evidence relating the role of infrastructure in firm location and expansion decisions using data gathered from a survey of small rural manufacturing firms in New Hampshire, Maine, Vermont, and Wisconsin. We focus on small firms (i.e., less than 100 employees) for several reasons. First, while such a size definition may appear to be arbitrary, it is consistent with the literature (Harrison, 1994). Second, for our study area, 91 percent of rural manufacturing firms are classified as small. Third, there is a growing interest in smaller firms because these firms are believed to be a more reliable source of job growth, provide stronger linkages to the local community, and more nimbly adapt to changes in technology and markets than the more traditional branch plant (Levy, 1990; Pulver & Dobson, 1992; Winders & Inman, 1997; Young, Francis, & Young, 1994). Miller (1993) reports that a growing number of local development officials see working with small and medium-sized enterprises as an attractive alternative to recruitment strategies. In addition, smaller rural manufacturers tend to have greater location stability than do branch plants (Anderson & Barkley, 1982). Fourth, there is growing evidence that manufacturing is going through a transition from large plants to smaller, more flexible operations (Barkley & Hinschberger, 1992; Carlsson, 1989; Sengenberger, Loveman, & Piore, 1990).

While numerous hypotheses have been advanced to explain this transition in manufacturing, ranging from the arguments of David Birch (1987) (i.e., small business development as the engine of economic growth through entrepreneurship), to productive decentralization (i.e., the spinning off of specialized manufacturing operations by larger companies; Harrison, 1994; Sengenberger, Loveman, & Piore, 1990; Young, Francis, & Young, 1994), the debate about the causes of the transition to smaller firms is far from conclusive. Recent analyses suggest that this transition is particularly prevalent in rural areas (Majchrowicz, 1997). Finally, when communities invest in infrastructure as an economic development policy, the goal of the effort is generally to improve the competitiveness of industries that are high-infrastructure demanders, such as manufacturing (Pulver, 1990; Sears, Rowley, & Reid, 1990).

The four additional sections of this article proceed as follows. Next, we review the current status of our nation' s infrastructure and outline the rationale behind current concerns. We then review the logic and empirical literature linking investments in infrastructure and economic development and growth. An alternative way of thinking about public infrastructure and community economic development is then outlined. We introduce new evidence from our survey of manufacturing firms. We close with a review of the key findings from the literature, provide new empirical evidence, and suggest a new way to craft infrastructure investment policy.

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A CAUSE FOR CONCERN?

Defining infrastructure and how to measure its level of quantity and quality presents difficult technical questions. Some have taken a relatively narrow view and provide a tangible listing of certain items such as transportation systems, municipal solid waste disposal systems, water and sewer systems, and telecommunication networks (e.g., Congressional Budget Office, 1983). Others have taken a broader perspective and refer to infrastructure as fixed capital investments, or the physical installations supporting socioeconomic activities within a region (Aschauer, 1993; Fox, 1988; Hite, 1989; Sears, Rowley, & Reid, 1990). Many national studies have tended to adopt these narrow concepts of infrastructure.

An alternative, and perhaps complicating, approach views infrastructure as having no basic intrinsic value. Infrastructure's value is derived from the demand for services that it helps produce (Arsen, 1997; Chicoine, 1986; Fox, 1988, 1990). The value of a section of road in and of itself is only worth the next highest use of the right of way, gravel, and concrete that went into its construction. The true value of the road is derived from its use as a means of transporting items or persons from one location to another. The ability, or inability, to measure this service flow is at the heart of a complex problem relating investments in infrastructure to economic development and growth.

Despite the appeal of thinking about infrastructure as a flow of services, most of the concern about the current status of the stock of our infrastructure is inherently tied to "bricks and mortar." Specifically, as first noted by the National Council on Public Works Improvement (1988), the percentage of national resources devoted to infrastructure investment has steadily declined over the past thirty years (Figure 1). In short, the overall level of investment in public infrastructure has slowed considerably during the last quarter century in relation to heightened demand due to growth and environmental concerns (Andreassen & Berman, 1994). Non-military capital outlays by local, state, and federal governments now represent only 2.4 percent of gross domestic product, down from 3.2 percent in 1959. While absolute levels of expenditures on infrastructure have grown throughout the period examined, the rate of growth is well below the pace of national economic growth.

The most commonly cited cause of this slowdown in infrastructure investment is the lack of sufficient funding (Deller & Halstead, 1991; Hulten & Peterson, 1984; Walzer and Chicoine, 1987; Walzer & Deller, 1993, 1996). In short, increasing rates of deterioration of existing infrastructure require more extensive repairs and/or maintenance schedules. The Congressional Budget Office (1983) argues that much of the nation's infrastructure is beyond its engineered "design life" and that the associated aging problems are compounded by the cumulative effects of inadequate maintenance and repair.

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4

3.5

3 a

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0 B-0 -0 _ate 0

0 0:-B_ _ 3-13

*\*

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0 1959

*--A- *-*

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1969

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1984 1988

1993 -E-State & Local Total -*- State & Local Roads —U.S. Total Non-Military

Source: Statistical Abstract of the United States (various years)

Figure 1. Infrastructure Investment as a Percent of Gross Domestic Product

The rural road network, for example, was constructed during an era of relatively slow travel and many bridges were constructed in the early 1900s or during the 1930s. Repairs have been made, but with growth in automobile and truck usage, heavier loads, and greater reliance on the road system after deregulation of the rail and trucking industries, many structures are depleted or are no longer sufficient to accommodate current demands. Indeed, higher levels of demand have accelerated rates of deterioration. Unfortunately, this increase has not been sufficiently compensated for by a higher level of public resource commitment for repair and/or replacement.

There are several reasons why infrastructure projects do not receive the attention they deserve at the local level. One reason is that once infrastructure investments have been made, the services derived from that investment are taken for granted. Sewer and water systems are subject to the "out-of-sight-out-of-mind" syndrome and little thought is given to the system by the voting public until a line rupture occurs. When a street has potholes, for example, patches are made to bring the road back into service, but little attention is paid to the deteriorating structural condition.

A second reason is that infrastructure expenditures appear postponable. A street can be repaired and made to serve for another year. A bridge not yet in critical condition will accommodate traffic for several years. The importance of preventive maintenance as an ultimate cost-saving management practice is often not well understood.

Third, infrastructure projects are usually expensive. Given today's environment of devolution, the financial responsibility of an accelerated repair

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schedule, along with new investments, is falling increasingly on local governments. Local governments now provide one-half of the monies spent on public works compared to less than 40 percent during the 1960s (National League of Cities, 1987). With increasing demands placed on limited local resources, the option of increased repair and/or maintenance schedules may not be a viable alternative for many local governments, rural or urban. In a recent study of county highway officials, Walzer and Deller (1993) report that deferring maintenance of the local road system was a top strategy used to respond to short- and long-term budget reductions. The fact that this strategy ranks so highly among short-term expenditure reduction strategies is a real cause for concern: deferment of regularly scheduled maintenance will accelerate deterioration of our public infrastructure and will result in much more costly repairs and reconstructions in the future.

In addition to expressed concerns about the status of our current stock of infrastructure, there are increasing concerns about the need for new, previously nonexisting infrastructure. Changes in environmental regulations, such as the Safe Water Drinking Act and the Clean Water Act for wastewater treatment, and recent shifts in local economies have created new demands for infrastructure (Hackett & Busson, 1986). Sprawling suburban areas and rural areas that are experiencing renewed growth find themselves in need of expanded road networks, new wastewater treatment facilities, telecommunications infrastruc-ture, safer municipal waste disposal systems, and modern public facilities such as courthouses and public schools. Many communities face infrastructure problems on two fronts: the repair and replacement of existing infrastructure, and the building of new infrastructure.

While the exact magnitude of public infrastructure improvements may be open to debate, there is a strong consensus about the inadequacy and the need for more investments. The challenge facing local policy makers is that the growing scarcity of public dollars makes investment decisions increasingly difficult. The competition for limited dollars between alternative types of infrastructure is intense and necessarily dictates not meeting some vital needs. Inadequate planning and foresight can mean disastrous investment decisions.

IS THERE A LINK BETWEEN INVESTMENT AND GROWTH AND DEVELOPMENT?

In the public debates about how to invest limited public resources in infrastructure, the notion of economic development and growth often comes to the forefront. Many of those advocating devoting more public resources to infrastructure correctly argue that communities without sufficient levels of infrastructure may find it difficult to support economic development and growth. In addition, insufficient levels of economic activity may make it difficult to finance the necessary maintenance and/or replacement of existing infrastructure.

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To break the apparent catch-22, communities must invest now and hope that expanded economic activity pays for the investment. Indeed, in many states large public projects must now be justified within the guise of economic development and growth.

The linkage between the level of the stock of infrastructure and economic development and growth, however, is not very well understood. The recent rash of empirical studies has unfortunately not shed much light on this fundamental policy question. Part of the confusion stemming from the literature rests on the numerous approaches used in testing a fundamental policy question: does an investment in infrastructure lead to enhanced levels of economic development and growth?

Most studies can be grouped into two broad classifications. Those studies fitting into the first classification tend to be more macro oriented and focus on changes in broad measures of economic activity, such as national or regional productivity levels. Their basis in growth theory tends to render these studies more academic in approach and discussion. The second classification of studies is rooted in firm location theory and tends to focus on policy implication and design. Inconsistencies in research findings within and across classifications have greatly confused the policy discussion. It is important to note that both approaches use secondary, as opposed to primary, data for their analysis.

Specific examples of the first classification, or growth theory approach, include studies by Aschauer (1989, 1990, 1993), Duffy-Deno and Eberts (1989), Munnell (1990), Berndt and Hansson (1992), Shah (1992), Nadiri and Mamuneas (1994) and most recently Morrison and Schwartz (1996) and Dalenberg and Partridge (1997). These particular studies find that public infrastructure contributes importantly to industrial output, economic growth, and wage structures. Depending on the specifics of the study, between 5 and 20 percent of the slowdown in national and regional productivity growth rates can be explained by the slowdown in infrastructure investment. In contrast, a number of researchers using similar approaches, including Holtz-Eakin (1988, 1994), Hulten and Schwab (1984, 1991) and Garcia-Mila and McGuire (1992), found a negligible role for public infrastructure. While these studies shed some light on the role of infrastructure in overall economic performance, they shed little light on the importance of infrastructure to specific locales.

Those studies in the second classification, given their focus on firm location, tend to reveal more about the importance of infrastructure to specific locales. Unfortunately, studies falling into this classification also yield inconsistent results. Dorf and Emerson (1978), for example, found that access to interstate highways or water transportation systems was not necessary to attract small to medium-sized firms. Miller's (1979) research suggested that rural areas with limited access to interstate highways continued their expansion of employment opportunities. Humphrey and Sell (1975) found that access to highways was secondary to other variables related to economic development.

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Briggs (1980, 1981, 1983) found that the presence of a highway had little if any effect in remote, less developed rural areas, but industrial base, government policies, and amenities did influence levels of economic activity. Lichter and Fuguitt (1986) found the effects of highways on net out-migration to be most pronounced in remote rural areas and that highways promote employment growth in tourism-related service industries. They uncovered little evidence of highway influence on demographics through manufacturing employment growth or in-migration. Finally, in a study of both high- and low-technology manufacturing firms in rural areas of the western United States, Barkley, Dahlgran, and Smith (1988) found that access to highways had little influence on firm performance.

Yet, Smith, Deaton, and Kelch (1978) found that access to highways did increase the likelihood of a firm moving to an area, although several other variables such as site-specific characteristics and the quality of fire protection had greater influence than highway access. In a study of rural Missouri, Kuehn, Braschier, and Shonkwiler (1979) found sufficient evidence to suggest that access to a quality water system played an important role in plant location. In addition, Doeksen and Allen (1991) report that the availability of sewer systems is increasingly important to land developers. More recently, Steinnes (1990) found that infrastructure was important to the growth of rural manufacturing, and Fox and Murray (1990) have noted that highway expenditures in Tennessee encouraged firm openings. Eberts (1991) found that growth in the local stock of infrastructure increased the "birth rate" of small firms in 40 metropolitan areas, but had no influence on openings of large firms. In a classic study of county economic growth, Carlino and Mills (1987) have determined that highway density levels greatly influenced overall levels of total employment, manufacturing employment, and population growth. Using state-level data, Goss (1994) found that after controlling for expenditures on economic development efforts, expenditures on infrastructure significantly influenced the rate of new firm startups. Finally, in a study of regional economic stability and growth, Wagner and Deller (1998) ascertained that regions described as possessing high levels of transportation infrastructure had higher growth rates in income and corresponding higher levels of economic stability.

Given the inconsistencies in research findings both within and across study classifications, a consensus seems to be developing. Despite the fact that many of these studies report a statistical relationship between investments in infrastructure and economic development and growth, the policy implications must be somewhat discounted because causality has not been adequately established (Doeksen & Allen, 1991). Specifically, whether investments in various types of infrastructure cause or result in higher rates of economic growth and development has not been firmly established.

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AN ALTERNATIVE WAY OF THINKING ABOUT THE PROBLEM

Within the literature, economists and regional analysts appear to have reached a consensus about the role of infrastructure in economic development and growth: while infrastructure supports economic activity, one cannot conclude that infrastructure can be used as a policy tool to stimulate economic growth and development in any particular locale. But this begs the question: can research help to determine where and when infrastructure investments should be made, and in what form?

One way of thinking about this question hinges on the characteristics of the region or community. Hansen (1965) suggested that regions be classified into one of three types—"high," "medium," and "low." He envisioned "high" regions as rapid growth areas that can be characterized as congested when the current levels of the infrastructure stock are a barrier or constraint to future growth. These areas tend to be rapid growth urban centers and suburban fringes that need new infrastructure investments to support new, higher levels of economic activity. Here an investment in infrastructure is in response to congestion resulting from economic development and growth.

It is important to note that the investment in infrastructure is not causing or resulting in growth; rather, the growth causes the infrastructure investment. Many of the empirical studies described above have been criticized for misinterpreting the nature of this relation. In brief, the empirical models identify a positive statistical relation between investment and growth, and then misinterpret the nature of the causation.

Hansen visualized "medium" regions as demonstrating the potential for economic growth and development. Those with high "potential" had a sufficient level of social capital—an abundance of quality labor, inexpensive energy, a high level of amenities, or quality of life among other factors. Here, an investment in infrastructure may serve as a catalyst sufficient to foster rates of economic development and growth at levels such that the benefits derived by the public outweigh the costs.

Regions defined as "low" by Hansen are characterized by low levels of social capital—a low standard of living, an untrained labor force, poor levels of amenities, and a poor quality of life. Generally, these regions are viewed as having low potential for sustainable economic growth and development. Investments in public infrastructure as a pure economic development and growth strategy may not have the desired outcomes. The costs associated with the investment will likely outweigh the benefits.

Johnson (1990) and Sears, Rowley, and Reid (1990) put a slightly different spin on Hansen' s concepts by centering on those of necessary and sufficient conditions. Similar to Hansen' s view, three possible situations can be described. One involves situations requiring an investment in infrastructure that is necessary and sufficient for economic development and growth. Here, an

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investment in infrastructure will guarantee growth and development. Unfortunately, few if any cases will fall into this category since such an investment in and of itself will probably not have the desired effect.

The second case involves situations in which investments in infrastructure are necessary but not sufficient. More investment in infrastructure must occur prior to increasing rates of economic development and growth but will not ensure their realization. For example, for certain types of development, water and sewer lines or telecommunication infrastructure must be in place prior to development, but the investment in those infrastructures does not guarantee occurrence of the desired type of development. In this case infrastructure investments represent one piece of the economic development and growth puzzle.

The final case corresponds to Hansen's "low" regions: investments in infrastructure are neither necessary nor sufficient. Regions in this category suffer from some significant deficiencies in their local economic and social structure. Such deficiencies may include weak and declining financial markets, poor quality labor pools, weak and ineffective governmental institutions, or overdependence on stagnating or declining industries. Until these more fundamental deficiencies are addressed, the costs of any investment in infrastructure will far outweigh the benefits. In short, infrastructure cannot overcome an unskilled labor force or a lack of financial capital.

In light of Hansen's conceptualization of the problem, and the use of necessary and sufficiency conditions to view it, Fox's (1988) conclusion seems to be the most reasonable. The stock of infrastructure and the flow of services produced by it can be viewed as a constraint to local economic development and growth. If some part of the infrastructure mix is acting as a binding constraint, then investing in that infrastructure effectively lifts the constraint and the economy may realize growth.

At the same time, however, numerous other constraints exist as well, including factors such as labor, financial, institutions, or even community attitudes. If these constraints are binding the growth and development process, then lifting only the infrastructure constraint will not result in the desired outcomes. The economic growth and development process is a complex puzzle of which public infrastructure is only one piece, and it may or may not be the missing piece for any given community.

NEW EVIDENCE FROM SMALL RURAL MANUFACTURERS

To gain additional insight into why we cannot draw the policy conclusion that investment in infrastructure will cause economic development and growth a priori, we will briefly review the results of an ongoing study on the role of infrastructure in the growth of small rural manufacturing firms. For this study we

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surveyed 2,000 small (i.e., less than 100 employees) rural manufacturing firms in Upper New England (Maine, New Hampshire, and Vermont) and Wisconsin.

The survey itself consisted of four parts: background information, characteristics of the type of infrastructure used by the firm, an assessment of local factors, and a hypothetical firm site location question. The first three parts of the survey were essentially comprised of two types of questions. The first type was designed to gather information about the importance of traditional infrastructure items to the business operation, while the second type gathered quantifiable data about the use of infrastructure by the firm.

In each of the four study states, 500 small manufacturing firms were identified for inclusion in the study. In Maine, New Hampshire, and Vermont, the Tower Manufacturer's Directory was used to identify the firms; in Wisconsin, the Directory of Wisconsin Manufacturers compiled by the Wisconsin Manufacturers and Commerce was employed. Firms identified for the study received five separate mailings: an introductory letter, the survey itself, a reminder letter, and two additional copies of the survey, with each mailing timed at one-week intervals. Firms responding to earlier mailings did not receive subsequent mailings. A total of 741 useable surveys were returned for a response rate of about 37 percent (individual state response rates were ME-45.8%; NH-32.0%; VT-31.4%; and WI-40.2%). This response rate is typical of other studies surveying businesses (Barkley & McNamara, 1994).

Before turning to the survey results it is important to note the potential difficulties with business surveys. Barkley and McNamara (1994) provide an excellent critique of such surveys and conclude that great care must be taken in survey design and data interpretation. They identify three primary advantages to directly surveying businesses in relation to location issues: 1) the survey can be targeted directly to the person making the relevant decision, gaining insight lost to secondary data; 2) both minor and major factors affecting the specifics of the decision can be identified; and 3) nonacademics find survey results more palatable than statistical coefficients and test statistics. Barkley and McNamara also identify four serious disadvantages or potential problem areas to business surveys: 1) identifying the correct person to complete the survey; 2) factors influencing a firm' s decision may be beyond the control of communities; 3) respondents may try to rationalize the current decision; and 4) the respondent may be less than truthful in hopes of influencing public policy.

Indeed, Nishioka and Krumme (1973: p. 195) warn about relying too heavily on direct business surveys in that "[i]nherent inconsistencies, biases, and mere inadequacies...pose obvious dangers for use by regional policy and planning authorities...." Dillman (1978) also notes that survey response rates are sensitive to survey design and structure and that poorly thought out surveys will greatly reduce response rates and study accuracy. In an analysis of branch plants in South Carolina and Georgia, Barkley and McNamara (1994: p. 44) conclude

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that "...firms' statements regarding the importance of location factors are sometimes at odds with county-level measures for these determinants." In general, the more obvious the characteristics (e.g., proximity to a metropolitan area), the greater the level of consistency. Given these difficulties and limitations of business surveys, care must be taken in interpreting the results presented below.

Two important issues for economic development policy makers are business stability and an area's ability to attract businesses, nurture new businesses from within the community, and retain and help expand existing local businesses. Although it is difficult to measure these factors directly, extrapolation can be made by assessing the time a firm occupies its current site and what percent of firms have relocated to their current location from another area.

For the sample of small rural manufacturing firms from the four-state study area the typical firm has been in its current location for almost 24 years and the majority (75%) are still in the same location as when funded. This apparent lack of mobility becomes particularly important when one considers that a majority of businesses (61%) are located at their present site because the owner of the business lives in that area (Table 1). As one survey respondent stated: "Wind an area that you want to live, then start your business."

Equally important is the relatively low importance placed by these businesses on more "traditional" factors predicted by economic growth and firm location theory, such as access to customers or suppliers, or the skill of the local labor force. It is important to note the consistency in results across the four study states. One may reasonably expect similar patterns across the three New

Table 1. Reasons for Business Location at Present Site

WI NH VT ME Total

percent responding

Owner lives in the area 52 65 68 61 61

Access to customers 24 23 15 21 21

Access to suppliers 13 12 11 8 11

Cost advantages 33 26 18 23 25

Skilled workforce 15 13 13 10 13

Source: 1994 Survey of Rural Manufacturers, Universities of New Hampshire and Wisconsin-Madison.

Note: Percentages may sum to more than 100 because respondents were allowed to make multiple choices.

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England states, but the consistency of results with Wisconsin lends credibility to their generalizability. The slightly higher level of importance in cost advantages over location of the owner for Wisconsin can be explained in part by that state's geographic location between the Chicago and Minneapolis-St. Paul metropolitan areas.

While these descriptive results do not speak directly to the role of infrastructure in economic development and growth, they do have some strong policy implications. Based on these data coupled with other research results, the majority of rural manufacturing growth comes from within the community itself either through new entrepreneurial activity or expansion of existing businesses. Very little growth in the manufacturing sector appears to come from firm relocation. This result is consistent with the recent findings of Bodenman, Smith, and Jones (1996). In their study of hardwood processors, they found that the majority of firms in their sample did not go through any formal search process and commonly located in their current site due to personal ties to the area.

Firms also were asked to rate sixteen factors, ranging from labor costs and property taxes to municipal solid waste disposal to technical training programs, which were thought to influence their ability to effectively operate their business. Business owners were asked to rate each item on a scale of one to five with one being unimportant and five being very important. Amenities and quality of life clearly received the highest rating for each of the four study states (3.90), while government inducements for relocation had the second lowest rating (1.64) (Table 2).

Of the factors describing infrastructure, telecommunications was rated the highest (3.11), ranking fifth among the sixteen, followed closely by access to four-lane highways (2.83), which is ranked sixth. Demands for quality communications center more on what might be considered basic telephone and fax services; quality modem services for access to the Internet and/or cellular phone services are not deemed particularly important at this time.

The relatively high importance of access to four-lane highways is due primarily to the fact that the majority of these manufacturing firms rely on trucking to ship inputs and outputs. Indeed, for the sample of firms, 63 percent of non-labor inputs and 57 percent of outputs are transported by truck. Less than 1 percent of the respondents rely on rail services or water transport as a means of shipping.

Air freight services (1.77, ranked fourteenth out of sixteen items), which would be associated with access to airports, appear to be relatively unimportant. Parcel post, however, accounts for about one-third of all non-labor inputs and outputs shipped. But, because parcel post companies tend to rely on air freight services, access to airports appears to take on a different level of importance. For small manufacturing firms direct access to airports is not important; rather, the shipping services upon which these firms rely seem to need ready access to airports in order to provide timely and affordable services. The question then

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becomes one of whether or not local access to an airport is important to the ability of parcel post companies to provide their services, a question that cannot be directly addressed by this study (see Reeder & Wanek, 1995).

For these manufacturing firms, waste disposal (2.12) and sewer and water capacity (2.20) appear to be relatively unimportant. Generation of non-hazardous solid waste, hazardous waste, and waste water varied considerably among firms. For example, the average firm responding to the survey produced about 5,000 gallons of waste water per year, but over 70 percent of these firms produced less than 5,000 gallons. On average, 161 tons of solid waste were produced per firm; 94 percent of the respondents generated less than 100 tons of hazardous waste per year, with many producing none at all. Given the small size (i.e., less than 100 employees) of our targeted sample, it appears that many small rural manufacturers have a limited need for significant levels of waste disposal infrastructure. This may not be the case for larger manufacturers.

It also is important to note that incentive programs, or inducements, offered by local government do not seem important to these firms. Government inducements ranked fifteenth of sixteen factors, with an average rating of only 1.64. This finding is particularly important today in light of increasing appearances of such packages. Research by Anderson and Wassmer (1995) suggests that communities offer inducements to emulate, and hopefully neutralize, incentives offered by other communities. In short, because so many communities are offering inducements, the remaining communities fear that they too must offer inducements if they are to compete on equal grounds.

Gabe (1996) recently concluded that because communities often lack sufficient information on what firms are truly seeking, any inducement package will be inefficient and somewhat wasteful. The results presented in Tables 1 and 2 concur with these other studies and suggest that because the bulk of rural manufacturing firms look to other factors, government inducements are an unnecessary drain on limited local resources.

The policy implication of these research results is straightforward: investments in infrastructure should be targeted at promoting the efficient operation of businesses already located within the community. Infrastructure investments based on convincing firms to relocate appear to be a risky policy. Proponents of business retention and expansion programs suggest that business visitation programs can help local officials identify potential bottlenecks in the local economy that can help target limited development resources (Smith, Morse, & Lobao, 1992). Businesses' consistent identification of difficulties with, for example, telecommunications services, provides guidance to local officials in addressing an existing problem. Conversely, if local manufacturing firms do not mention problems with physical facilities and potential sites for expansion, then investing limited dollars in a speculative industrial park can be prevented. In addition, as noted by Young and Francis (1993), these bottlenecks extend beyond infrastructure issues and include a range of business skills-related

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issues such as product development and technology, marketing, and aid with contracts and financing.

From a policy perspective these results also suggest that designers of regional development policy might want to concentrate on defining what "quality of life" means to individuals in their communities. In a review of twenty firm location studies, Gottlieb (1994) found that community amenities, something often overlooked by analysts and development officials, is a strong predictor of firm location. In short, Gottlieb found that business owners are looking more at whether they themselves would want to live in the community than at traditional factors such as highway access. The implication is that policy makers should consider investing limited public resources on those aspects of a community that make it a pleasant place to live. Resources and policy need to be directed where they will most benefit the entire community, including infrastructure, and not just in those features that benefit industry. Then, even if industry were not attracted, residents would benefit. It appears that devoting limited public resources to narrowly defined and targeted incentive programs is a misuse of valuable resources.

CONCLUSIONS

Public infrastructure remains a vital piece of the economic development and growth puzzle. Concerns about lower levels of investments, accelerated deprecation rates, and the growing need for new investments in infrastructure have called into question the future of the competitive advantage of our economy. Economic growth theory and the theory of economic location suggest that public infrastructure plays a cornerstone role in economic growth and development. Insufficient levels of infrastructure mean bottlenecks in the economy. From a national perspective, assurances that adequate resources will be devoted to our infrastructure are a prerequisite to a healthy economy.

From a community perspective the role of infrastructure in local economic development and growth is not as clear. Obviously, insufficient levels of infrastructure may prove to be barriers to future growth and development. Will investment of limited public resources in expensive infrastructure projects a priori lead to growth and development, however? Despite confusion within the empirical literature, a consensus amongst policy analysts is forming around the central idea that infrastructure investment, ceteris paribus, will not lead to or cause economic growth and development. In other words, investment in public infrastructure tends to be necessary for local economic development and growth, but it is not sufficient. Other critical factors such as a quality labor pool, or robust financial markets are equally important.

Based on a survey of small manufacturing firms in Maine, New Hampshire, Vermont, and Wisconsin, research results presented in this article suggest that quality of life factors influence firm location decisions to a greater extent than

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more traditional factors such as public infrastructure. For these smaller firms, which dominate manufacturing in rural areas, the personal location preferences of the business owner dominate the location decision. As one survey respondent stated, "Wind an area you want to live, then start your business."

This result is not intended to discredit the importance of infrastructure; in fact, it casts its importance in a different light. Rather than investing limited public resources on an infrastructure project in the hopes that it will spur economic activity, investments should be made with the intent of aiding those businesses within the community. Infrastructure also plays a direct role in a community's quality of life. Obviously, a deteriorating road system, water delivery system, or waste disposal system detracts from the quality of life within a community. Investing in these systems to improve quality of life will not only directly benefit residents, but also heighten the community's economic development and growth potential.

Rather than approaching major investments in infrastructure in an "if you build it, they will come" frame of mind, local decision makers should be determining which investments will make a community a better place to live. The same investments might be made, but for the right reasons.

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public infrastructure in economic development and growth: evidence from rural manufacturers

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