Market Differentiation and the Adoption of Economic Development Strategies: Explaining Policy Adoption in Metropolitan Areas

Local government competition for private business investment is a central concern in polycentric governance. Previous research argues that competition for business investment is intense and ubiquitous across local governments (Peterson, 1981; Rubin, 1988). However, local government managers adopt policy and economic development strategies in the context of the strategies adopted by neighboring local governments. Do cities, knowing the economic development strategies of their neighboring cities, pursue similar types of businesses? Or do they strategically target different types of businesses to avoid the negative consequences of competition? Hypotheses are tested by applying product differentiation theory to policy adoption in metropolitan areas using spatial regression analysis on a sample of 2,299 cities. Results indicate that cities pursue similar development strategies as neighboring cities, but will implement increasingly differentiated strategies as population heterogeneity and political and bureaucratic incentives increase. Furthermore, this study finds that a city’s reliance on the sales tax and the costs of competing for business location impact the type of development strategy used by a city.