From GOVERNING MAGAZINE: Instead of trying to lure big companies with tax incentives, more and more places are trying to increase the number of local businesses to boost their economies.

“Nearly 30 years ago, city officials in Littleton, Colo., put a novel theory to test: Could a small group of local businesses, with assistance from the city, boost Littleton out of its downward spiral?

The Denver suburb was reeling in 1987 after its then-major employer, missile manufacturer Martin Marietta (today Lockheed Martin) left town, laying off about 7,800 people over an 18-month period. The company also left about 1 million square feet of industrial and office space. That year, the city council directed its economic team to figure out how to not just fill the hole but to make sure Littleton was never that vulnerable again.

“As good a citizen as Martin Marietta was, they were headquartered out east,” says Chris Gibbons, Littleton’s business director at the time. “Our future was being determined by people far, far away. They didn’t have to see the people in the grocery store on Saturday that they laid off.”

Soon after, Gibbons and his team connected with a Denver think tank, the Center for the New West, that was anxious to test a theory developed by a Massachusetts Institute of Technology economist economist David Burch. That theory was that so-called Stage 2 companies, employing between 10 and 100 people and with annual revenue of at least $1 million, create the best kind of jobs that will improve an economy. As opposed to small shops that create mostly minimum wage jobs, these mid-sized companies were growing the middle class workforce. Nationally speaking, Stage 2 businesses make up 10 percent of the business population — but they create 35 percent of the jobs. The thinking was that if such companies had the proper push they could drive a local economy upward.”

Read more