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Economic Competitiveness and the Determinants of Sub-National Area Economic Activity, Working Paper 034 Open Access

The purpose of this paper is to review the empirical and theoretical literature on area economic competitiveness and the sub-national location of economic activity. Thus, we are interested in why economic activity locates where it does, and, from the perspective of a given sub-national area, what is it about the area and its characteristics that make it competitive, i.e., an attractive or unattractive place for the location of different kinds of economic activity. The framework we employ for our review is that of “competitive advantage.” The basic premise underlying the concept of competitive advantage is that a firm will locate in an area where it can produce and bring to market the goods and services it produces at greatest profit. The locational characteristics that determine where a firm will be able to produce at greatest profit vary by sector (the outputs the firm produces). A particular area can be thought of as competing against other areas as a potential location for economic activity. Some of its characteristics and attributes will be favorable to the location of a particular form of economic activity relative to those of other areas, while others may be unfavorable. An area will have a competitive advantage for a particular kind of economic activity if that activity can produce and bring to market its goods or services in that area and derive a greater profit than it would if it located elsewhere. Since competitive advantage conceptually relates to specific types of economic activity, an area may have competitive advantage for some kinds of economic activity but not for others. Nonetheless, the term is frequently used to characterize an area with respect to its entire economy, i.e., an area has a competitive advantage or disadvantage for the location of economic activity in general. Since the purpose of this re view is to serve as a back-drop for a study that we propose on the competitiveness of the Washington DC regional and city economies, our discussion is directed towards that end. The project will consist of two parts: research on the Washington, DC region and its competitive advantages – i.e., the determinants of the location of economic activity in the DC region relative to other regions - and research on the economy of the city of Washington, DC and, in particular, the determinants of location of economic activity within the region. This approach is consistent with the literature, which makes clear that location decisions generally consist of a two-step process with the first step consisting of a regional choice and the second, but later, decision consisting of a specific location within the chosen region (Cohen 2000). As Blair and Premus (1987) observe, after a review of surveys of business executives, for the first stage -- regional or state selection -- variations in labor availability and quality, state taxes, climate, and market proximity tend to be key determinants. In the next step, choice of a specific location within the region, factors that are available throughout the region, but vary with specific sites become predominant considerations – land costs, access to major roads, and school quality being three major factors. Anderson and Wassmer (2000) similarly argue that first a firm chooses a “market” in which to locate, which is a regional decision, and then chooses a “site,” which is a local decision within the preselected region. Fiscal characteristics of an area (including but not limited to targeted economic development incentives) become important to firms once they have reached the phase of decision-making focusing on “site” location (P.25-26).

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