Duke Research Advantage

Duke Strategy Professor Will Mitchell argues that rather than bailing out firms, we should build stronger businesses and employees via reorganization and education.

Recently, I filed a post on the value of allowing firms to reorganize, while using public resources to support education rather than bail outs. Today, let’s look at an example of the success of this strategy, which is right here in North Carolina.

Learn from North Carolina. North Carolina is a great example of the success of education and reorganization. I have been here eight years. In that time, the state has largely lost its tobacco and textile industries, and has lost much of its historical furniture manufacturing base. Rather than being in a deep slump, however, the state is one of the most dynamic economies in the country. The reasons are simple to state, even if somewhat complex to implement in practice.

1. Allow low margin business to go abroad. Rather than remaining stuck in what had become low margin businesses, the state allowed businesses that had become globally uncompetitive to move operations to Asia and Mexico or simply to fail. This unquestionably has disrupted some communities and been painful for many individuals. But, because of the next four points, most people and communities have been able to adapt and thrive

2. Encourage high-value added investment. For the past four decades, the state has encouraged high value added firms to invest here. The creation of Research Triangle Park (RTP) in Durham is the most visible example of this. Indeed, RTP is a model for technology intensive industrial parks in China and elsewhere. In turn, technology-intensive and knowledge-intensive businesses in the life sciences, computing, information technology, financial services, and other sectors have expanded to many other locations of the state, particularly along the I-40 and I-85 corridors.

3. Allow foreign entry. Many of the firms that have contributed to the dynamics of the North Carolina economy are based in the U.S. In addition, though, the state has welcomed foreign firms who want to operate in the state, whether by creating greenfield sites (e.g., Eisei’s life sciences facility) or by acquiring the operations of U.S. firms (e.g., Lenovo’s acquisition of IBM’s laptop business and Glaxo’s acquisition of SmithKlineBeecham).

4. Invest in education. The state has created the most important incentive for high-value added investments by investing in education. Firms based in RTP have access to graduates, labs, and other resources at three world-renowned universities and at a large set of more regional universities that have very important focal strengths. The UNC state university system is one of the strongest in the country. The state has invested in K-12 education, both by creating high profile magnet high schools – the North Carolina School of Science and Mathematics in Durham and the North Carolina School of the Arts in Winston-Salem, both of which are also part of the UNC university system – and by treating K-12 education as the “last to cut and first to invest” as the economy fluctuates. Although tax breaks have provided important incentives for many investing firms, the key incentive is that they have access to high quality local talent.

5. Let failing firms fail. Finally, the state has avoided the temptation to prop up firms that are struggling. Firms regularly fail in RTP and throughout the state. When this happens, though, the economy has become strong enough to absorb people and valuable parts of the failing businesses – which contributes to the strength of the new and growing firms and, in turn, to the health of a dynamic economy.