Prior to 2005, Indiana did economic development in the same way many states do it: poorly, or at best, so-so. The state’s Department of Commerce ran itself like any other bureaucracy. Businesses outside the state were approached with loads of incentives. The state spent far too much on each job it tried to attract. There was little strategy and hardly any real negotiation.

It’s no surprise that Indiana’s business climate was never regarded as top-tier.

By 2012, Indiana was ranked 5th in the nation on Chief Executive’s Best States for Business rankings. The Hoosier state had moved up from 16thplace in 2010.

One CEO surveyed by Chief Executive summed up an emerging consensus view one hears more and more about Indiana:

Indiana is centrally located, has a balanced budget and excess reserves on hand, is a low overall tax environment, is business friendly and is now a right to work state. If you want to locate in the Midwest, there is no other state in its class.

Another CEO described Indiana more personally:

Indiana is like a breath of fresh air. I have operated on both coasts, the southeast, and Chicago, and Indiana is where I will keep my manufacturing operations.

What created such a dramatic sea change in what was a relatively short time period? Indiana’s fiscal strength is well-known, as Mitch Daniels’ success in this area has garnered national attention. This undoubtedly caught the eye of executives outside the state, as the CEO’s testimonial above shows.

What is less-known nationally but just as significant for reformers outside Indiana who want to learn from the Hoosier state was the creation of the Indiana Economic Development Corporation (IEDC). IEDC was established as a public-private entity with greater flexibility to establish contracts and conduct business deals than its predecessor Department of Commerce. The legislation that created IEDC also abolished numerous boards, commissions, and public organizations vested with various economic development missions over the years. It cut the board size in half and focused the IEDC’s mission more clearly on attracting new jobs and investment. In short, IEDC was created to execute economic development in a way that any private sector executive would recognize as rational, unlike the disorganized and irrational cross-purposes of the past.

IEDC was a priority from the start. It was the first piece of legislation Mitch Daniels put forward as Governor in January 2005. It followed on the heels of the Executive Order he signed his first day in office eliminating collective bargaining for state employees. Taken together, these actions showed at the outset that Indiana was open for business like never before. Daniels made it clear that, unlike the past when state officials nurtured pet projects and favored industries (exhibit A: Indiana’s film industry, which had a commission devoted to it), IEDC would focus solely on job-creating investments.

Daniels communicated this message everywhere he went, both in and outside the state. In cabinet meetings the IEDC director sat immediately next to the Governor and always gave the first report. It was clear to everyone involved that economic growth was priority number one.

The results of such a singular focus on growth speak for themselves.

• Since 2005, Indiana has seen $31 billion in new investment and nearly 160,000 jobs as 1,390 companies have decided to make Indiana their home for business.
• Since the low point of the economic downturn in 2009, Indiana has seen a job growth rate of 6.2 percent compared to the national 3.4 percent rate.
• As commentators lament the loss of U.S. manufacturing, Indiana has seen a 14.1 percent growth rate in its manufacturing sector jobs.
• Indiana rose from 18th place nationally in 2004 to 6th place in 2011in Site Selection magazine’s “Best Business Climate” rankings.
• Chief Executive magazine ranked Indiana as the nation’s 5th best state for business in 2012.
• In 2004 Indiana did not even make the top 25 states in Pollina Corporate’s “Top 10 Pro-Business States” rankings. By 2012, Indiana was ranked 5th on the list.

IEDC has been at the center of much of this progress. What made it work?

From “Incentivizer” to Dealmaker: The Indiana Model

Creating IEDC was not a novel concept. For instance, Michigan had created its own economic development corporation in 1999. In fact, Governor Daniels and his team deliberately modeled their design of the IEDC on Michigan’s model. Indiana’s uniqueness, as in other areas in which Indiana has emerged as a national model, was found in how it structured and staffed IEDC.

Perhaps the most important shift IEDC made in Indiana’s approach to economic development was how it assumed the role as chief negotiator for the state. Previously, state officials would dangle every possible incentive in front of companies to lure them to the state, utilizing the good, old “take it or leave it” approach to dealmaking. Prior to IEDC, Indiana’s Department of Commerce was spending roughly $30,000 in incentives for each job brought to Indiana.

By the end of Daniels’ first term, that number had dropped to nearly $7,000. And yet the quality and volume of new jobs in Indiana has been on the rise. The reason? IEDC refashioned itself as a negotiator and dealmaker instead of an incentivizer.

Instead of maximizing incentive offers at the outset, IEDC began approaching companies outside Indiana as if it were negotiating a private-sector business deal. It didn’t always lead with its best offer. Its officials sat around the table with company executives and began hashing out the terms.  Among Daniels’ early directors of the IEDC were a successful businessman who had negotiated big deals his entire career and an M&A lawyer with experience doing international deals. They and the teams they built around them brought their expertise acquiring and growing companies to the service of the state. IEDC employees learned how to control offers. The culture changed.

Another important change at IEDC was its performance culture. Throughout state government, Daniels implemented bonuses and an overall merit culture. At IEDC, given the flexibility under its authorizing statute, he was able to go even further. The Department of Commerce’s low morale gave way to a new culture in which performance was rewarded and pay raises were possible outside of the normal state employee conditions. Employees that didn’t function in this new environment were replaced with new ones who embraced the agency’s dealmaking mentality.

The performance culture was rooted in a new style that emphasized an aggressive, proactive approach to dealmaking rather than the more passive style of the past. Instead of advertising incentive and waiting for deals to come, the new IEDC leadership sought out deals, did the research, made the trips, and tried to outfox the competition. This type of culture cannot be cultivated by adopting “best practices” or focusing on the technicalities of various models of economic development. The key to this type of aggressive dealmaking lies entirely in the kinds of people and standards a state puts in place. Daniels insisted on having an aggressive crew at the helm, and it paid off.

Build the Sandbox

Anyone who has spent any time around Mitch Daniels knows the term “sandbox.” Daniels is fond of talking about how Indiana’s efforts at tax reform, deregulation, elimination of red tape, and investment in infrastructure help to create a sandbox in which entrepreneurs and CEOs want to  create, build and bring their businesses.

The sandbox, according to a 2012 Atlantic article on Daniels:

includes things like heavy investments in infrastructure, including a shiny new airport in Indianapolis that opened in 2008. In February, Indiana became the 23rd “right-to-work” state, a law which allows union workers to opt out of paying dues, or, in other words, weaken unions. (Indiana is the only Midwestern state with such a law.) Daniels cites the state’s lower worker’s compensation and unemployment insurance rates, and touts the state’s quick turnaround approving environmental permits.

“‘Time is money’ is not a figure of speech, it’s a literal truth in business,” he said. “And I’ve told our people from the beginning, they’re tired of hearing it, we will operate at the speed of business, not the speed of government. So we measure the amount of time it takes to get various permits.”

Getting Indiana’s fiscal house in order and pursuing legislation such as right-to-work were a big part of building the sandbox. IEDC was also central to the sandbox effort. Like a lot of government economic development agencies, IEDC’s predecessor Department of Commerce had grown too focused on itself than Indiana’s economy. It had more offices around the state than it needed, it had overseas offices that were not generating much, if any, value for the state, and it was infused with a government rather than enterprise culture.

Such an agency cannot by its very nature look out for the best interests of the state. Not long after IEDC was created, the Daniels team closed half of the state offices and shut down all but the essential overseas offices. As stated earlier, it hired people who knew how to do deals and replace a government bureaucracy with an enterprise culture.

These changes, together with the closure of duplicative boards and commissions upon IEDC’s founding, silenced all of the distractive “noise” generated through unnecessary activity and created instead an environment in which deals could become the singular focus. In short, Indiana became easier to work with.

As a result, the state was able to build upon its core economic sectors faster than anytime in recent memory. Indiana has strong competitive advantages in life sciences, logistics, agriculture and manufacturing. Rather than running away from struggling sectors such as manufacturing to “diversify” the economy, a trend in other states, Daniels and IEDC deliberately pursued out-of-state manufacturers with considerable success. Indiana ranks #1 nationally in manufacturing jobs per capita. Life sciences continued to grow, and in 2012, Indiana had risen to share the #1 spot with New Jersey on the Batelle/BIO list of national bioscience leaders.

By the time Indiana became the nation’s 23rd right-to-work state in early 2012, its efforts to attract companies into its appealing sandbox had greased the skids so well that the law created a new avalanche of interest. Less than a year after the right-to-work law was passed, more than 90 companies outside Indiana had communicated to IEDC that the new law had made them consider Indiana as a destination, and of those 67 were already under development. They represented $2.5 billion in new investment and 9,000 new jobs.

An important part of creating a sandbox is making sure that executives outside the state know you are looking after their chief interests rather than your own programmatic interests. Creating IEDC the way Daniels did was Indiana’s way of showing it had learned that lesson.

A Present, Activist Governor

Daniels’ persistent personal involvement in recruiting businesses was essential to demonstrating to executives in other states and countries that Indiana was open for business like never before.

While a Governor needs capable executives running an organization like IEDC, he or she cannot delegate the role of Chief Economic Development Officer. Daniels took that role seriously. All observers family with Indiana’s economic trajectory over the past eight years agree that it’s difficult to account for Indiana’s economic progress without recognizing Daniels’ activism.

The first way Daniels lived out this principle was hitting the pavement, figuratively speaking. Within two months of his election, he was  in Japan meeting with automakers and other industrial recruits. Before Daniels, no Indiana governor had been to Asia in 16 years. Daniels went every year for the next seven years, and used the trips as an opportunity to grab what he considered low-hanging fruit. When the head of Toyota was asked about states in the U.S. who reached out to him when Toyota announced its intent to build a new plant in America, he said that he received a number of calls from governors – but only one governor took the time to visit him. The Toyota plant in Princeton, Indiana, is humming along today. So is the Honda plant in Greensburg, Indiana, that opened in 2006. The list goes on.

Daniels also actively traveled throughout the U.S. and spent countless hours on the phone in a non-stop effort to lure companies to the Hoosier State. He would travel regularly to the BIO conference in Boston to bring more life sciences investment to Indiana. He would pick up the phone and call CEOs in every conceivable corner of the country when he would get word that they might be growing restless where they currently were located.

In summary, Daniels has a reputation among business leaders as a highly aggressive recruiter. Those who worked with him on business attraction all say the same thing: if they had a lead or a good idea on a potential opportunity, Daniels would personally make the call that day. He also pursued his own ideas and reached out to companies he thought would be good for the state.

The second important way in which Daniels was an activist was by joining the national discussion about fiscal reform and stability. Most observers think of Daniels’ presence in the media, on op-ed pages, and at national events in the context of testing the waters for the 2012 presidential nomination. But they typically miss that Daniels was bringing Hoosier wisdom to the national debate – which was good for the Hoosier state. By promoting Indiana’s fiscal, health care, and related reforms, Daniels effectively communicated to executives all across America that Indiana was a place where your investment would not only be safe but prosperous.

Governors who artfully elevate their successful reforms to the national stage can do their state a big economic development favor. There probably has not been another Governor in the past few decades who understood this, and acted upon it, as well as Daniels.