EMPLOYEE OWNERSHIP PROGRAMS
"To Own or Not to Own,
That is the Question"

Overview: Economic Development Strategies

Special Focus: Theory behind EO

Overview

Theorists will argue that numerous economic development strategies, of which EO is one, can be grouped into five categories:

1. Export Based
2. Adjustment
3. Technology Diffusion
4. Entrepreneurship: Niche Filling
5. Entrepreneurship: Niche Finding


Each of the categories provides a different means to achieve the common goals of wealth creation and maintenance.  Let's focus on the first two groups of strategies: export-based and adjustment strategies.  Each of the strategies within these categories seeks to answer a certain question or group of questions concerning the relationship between the economy and place.  For example, export-based strategies seek to answer how a place grows.  Although adjustment strategies are also concerned with growth, these group of strategies seek to help a place rebound (or adjust to) from economic decline.  The focus of the questions is slightly different, but both draw upon the Neoclassical and Culmulative-Causation models.  The diagram below maps the connection between the classification of strategies (i.e. export-based or adjustment), the key questions these strategies seek to answer, and the major economic growth theories underpinning the strategies.

Theory behind EO

• One of the key differences between EO and the export-based strategies is that EO focuses on INDIVIDUALS rather than FIRMS.
• EO approaches the economic adjustment process from a MICRO rather than MACRO level.
• EO seeks to answer the question, "How can we stop this region or city or neighborhood from declining?" by looking inside the structure of the firm at the individuals, or workers, or laborers.
• In contrast, export-based strategies (i.e. location incentives, sports complexes, and casino gambling) all strive to answer the question, "How do regions grow?" from a macro level.  With export-based strategies, there is a greater emphasis on the firm and the impact at the state or regional level.  Export-based strategies do not seek to examine the inner structures or relationships of the firm; they simply want to attract businesses to an area and reap the economic benefits of serving a population which often does not live in the immediate area.
• The two economic growth theories which can be used to justify EO programs are the Neoclassical model and the Culmulative Causation model.
• The Neoclassical model is a staple in the world of economics.  One of its fundamental assumptions is the Constant Returns to Scale Production function.  According to this function, capital (K) and labor (L) are completely separate entities.  According to the Neoclassical model, a place will be able to adjust to an economic shock without any outside intervention.  The model goes on to argue that any intervention may actually be harmful in the adjustment process.  However, by its very nature, EO changes the relationship between capital and labor.
• The Cumulative Causation model may not be as familiar to those trained in the economic mainstream.  Developed during the 1950's and 1960's, the Cumulative Causation model is basically a descriptive model which relaxed the constant returns to scale assumption.  Once this assumption is relaxed, according the Cumulative Causation model an economy may experience a shock and not be able to recover on its own.  Therefore, some sort of intervention is required to help the economy recover.  EO can play the role of the intervenor and thus help the place recover from the economic shock.  For example, a large branch manufacturing plant may be closing in a small town because the private rate of return on the investment in that particular plant does not meet the headquarter office's standards.  However, if the employees take ownership of the plant, they may be willing to accept a lower, social rate of return, and thus keep the plant in operation.

Definition	Theoretical Justifications
History: US Context	Role of Economic Developer
Key Success Factors	Framework for Evaluation
State Agencies	Resources and Other Links