SD5 - Virginia Sustained Growth Study: Understanding How Businesses Expand and How Economic Development Can Help (SJR 242, 2015)

Executive Summary:
*This report was replaced in its entirety by the Virginia Economic Development Partnership and the Department of Housing and Community Development on Tuesday, March 1, 2016.

Sustained growth is the ultimate objective of most for-profit companies, yet such growth is surprisingly rare. Companies that seek sustained growth face a variety of unique operational challenges that have not been well understood or properly addressed by economic development policy or practice anywhere in the nation. However, attracting and nurturing these businesses should be a top priority for economic developers because they generate the majority of new and lasting jobs in the economy.

Virginia is taking a leadership role. This is the first study to investigate both the drivers behind firm-level sustained growth and ways state and local economic development agencies can increase the number of these companies in their regions.

This study tracked 613,657 business establishments that operated in Virginia over the 2009-2014 period. Of these, only half had been in business for five years or more; the rest being newborns. Only 1% of these ‘survivors’ grew employment two or more years over the five-year period. These 3,019 ‘sustained growers’ created 61% of the net new jobs generated by all survivors. This averages 19 new jobs each (for 165% growth) and totaled more than 58,000 new and lasting jobs over the period.

Aside from direct job creation, sustained growers are also a powerful source of economic diversification and rising social equity. These are some of the reasons:

• Sustained growers are found in all regions of Virginia and all types of industries.

• They offer employment opportunities to workers of all skill levels and socio-economic backgrounds.

• They share the profits of their growth with their employees by providing much richer benefits packages and more opportunities for advancement and ownership than other companies.

• They are more civic-minded, with a higher tendency to champion a charity, environmental or social cause.

• Communities with higher proportions of sustained growth companies enjoy faster wage growth for all workers in their areas.

To better understand how these exceptional companies are different from other companies we surveyed 516 business leaders using a 60-question survey that took an average of 49 minutes to complete(*1). We asked about the nature of their industry, how they create competitive advantage, operational practices and decision making, as well as their past interactions with economic development services. We also asked them what could be done to strengthen business growth in Virginia.

Of the 516 companies surveyed, 240 were considered ‘sustained growers’, averaging 3.6 years of growth over the past five years, and adding 65 net new jobs. This compares to an average of one year of job loss and 15 lost jobs among the other 276 participating companies. Among the sustained growers, 96% reported that they plan to hire additional new employees in Virginia over the next 24 months!

The results are stunning. We found a distinctive pattern of behavior that distinguishes sustained growers from other companies. This pattern transcends the entire organization. Fortunately, this knowledge is fairly easy to understand and can be shared with any company that seeks sustained growth.

Sustained growers create positive feedback loops that continuously increase their ability to generate greater amounts of new resources from available resources(*2). These loops, or ‘Virtuous Growth Cycles’, are based on the self-reinforcing components of intention, action, learning, and repetition. Each time a company completes a cycle, they are more likely to repeat the cycle again. And every cycle means growth.

Just to give one example: consider employee benefits. When employees share in the rewards of their firm’s growth, they are more likely to be committed to the success of the firm. They work harder and are less likely to leave. By improving workforce motivation and retention the likelihood that the firm will grow again increases, leading to new profits that can be shared back with the workforce in the form of even more benefits. As this is repeated the cycle become more efficient, and the odds increase that it will be performed yet again.

We have found virtuous cycles throughout sustained growers’ operations: from leadership and planning, to human resources, finance, sales, and new product/service development.

Why is this finding important?

Because the top request of all companies surveyed is assistance inlearning how to repeat growth. The insights found in this report can become the foundation of this knowledge sharing.

Respondents want economic development tailored specifically to their growth needs; from start-up, all the way through their companies’ growing life. This includes access to best practices, peer networks, and recognition for their success. And they want incentives that help them plow back more of their profits into more growth.

And they want more of the same services that have helped them grow in the past: workforce readiness, technical help such as export assistance, and special economic zones.

Sustained growers appreciate economic development. We found that they are far more likely to use ED services and, when they do, they rank their satisfaction higher than other companies. They know what helps, and they want more!

Based on our findings, we suggest a number of ways that Virginia could improve the ability of its companies to sustain growth.These include:

• Maintaining contact with sustained growers to provide them with information and program access when they are positioning for an expansion;

• Providing a source for the sharing of growth ‘best practices’ that helps companies build virtuous growth cycles;

• Aligning the menu of technical assistance programs to better meet the needs of sustained growth companies;

• Building peer networks of growing companies to encourage knowledge sharing and supplier networks;

• Encouraging charitable activities from sustained growers, to both enhance their growth prospects and to improve their ties with their communities;

• Creating tax incentives that encourage more companies to save and invest in expansions within Virginia;

• Building a Virginia brand based on being the ‘best place for profitable sustained growth’;

• Targeting sustained growers in other states for investment attraction.

The implication for state-level economic development is clear. More effort needs to be focused on providing policies and services that are tailored specifically to the needs of sustained growth companies. These services will also help other companies that strive to attain lasting growth. While some assistance can be provided directly from state agencies to companies, others can empower local ED partners to increase their ability to engage and bolster the growth of companies in their own regions. On the local level, economic development partners need to build a long-term relationship with the sustained growth companies so that they are ready and able to assist them when an expansion opportunity or growth challenge arises.

As we shall see, the insights contained in this report challenge many of the long-held assumptions about why and how companies sustain growth over time and, by implication, the role of economic development in fostering their success. We also take a look at Economic Gardening, one of the more recent ED initiatives aimed at helping firms grow, to evaluate if it is suitable for encouraging sustained growth.

This paper is just the first step to understanding how a support system can be developed. We have uncovered the companies that are making the most significant contribution to growing the Virginia economy and improving social welfare. We have identified the drivers of growth within these companies and begun to distill them to the point where they can be shared productively with other companies. And we have put a spotlight on a number of ways Virginia’s economic development efforts can be fine-tuned towards better meeting the needs of sustained growers and other companies that want to join their elite ranks.

The next step is for policy leaders and program administrators to incorporate these findings into their work to improve conditions for increased business competitiveness. It begins with sharing and discussing the findings of this study with all concerned stakeholders and building the consensus needed to move forward with renewed purpose, resources, and vigor.
(*1) This was a statistically significant sample size given the research design. See Appendix A for more information regarding overall study methodology and survey validity.
(*2) These valuable resources are money, knowledge, and goods and services.