Competitive Advantage, Economic Development, and the Effective Use of Local Public Dollars

Communities continue to offer subsidies to improve their comparative advantages while areas with high-cost labor offset this disadvantage with technology that increases productivity. Access to natural resources or large markets is also offset by changing technologies. The declining importance of comparative advantages under-scores the value of formulating policies that accept two basic premises. Any economic advantage from factor costs is vulnerable to lower factor costs elsewhere, and an economic advantage based on competitiveness and the culture of competition is less likely to be replicated or subsidized into existence. To help communities focus on competitiveness, a method for identifying competitive rather than comparative advantages is presented. The local economy of Indianapolis is analyzed using this technique, and specific local industries are identified that have a competitive, not merely a comparative, advantage. The policy options for local governments having this information are then addressed in our conclusions.