US cities expand efforts to lure, hold businesses

City governments increasingly are taking some major new functions: carefully courting new businesses and nurturing older ones thinking of leaving or expanding outside city limits.

Hit sharply by budget cuts in Washington and in state capitols, and criticized by taxpayers for even mentioning tax hikes, many cities now look to economic development as the only possible source of new revenue and growth.

Chicago, for instance, which lost 11 percent of its population and much of its manufacturing strength over the last decade, upgraded in January its five-year-old Economic Development Commission to a city department. The city doubled the commission's staff and tripled its budget. And just last week city and state leaders kicked off a $6 million ''My Kind of Town'' campaign to try to convince businesses and tourists that the city's assets are substantial.

''The harsh reality is that cities don't face much in the way of a choice,'' says Dr. George Sternlieb, director of the Center for Urban Policy Research at Rutgers University. ''There are no more fairy godmothers. . . . It's every city for itself. It can only look to its own pockets.''

And as cities gear up for the job of more effectively attracting and retaining businesses, they're finding that it pays to adopt a broader perspective.

''For a long time there was smokestack chasing - any big new firms from outside were considered the plums,'' notes Scott Fosler, vice-president of the Committee for Economic Development, a business policy organization. ''But now there's a growing realization that it's equally, if not more, important to pay more attention to existing businesses within the city and try to help them solve problems that might make them leave or keep them from growing.''

Accordingly, an increasing number of cities now see their economic development role as stretching beyond traditional chamber-of-commerce boosterism and the dangling of tax incentives. The cities' new role includes the larger job of surveying available land, seeing that necessary sewer, water, and road supports are in place, carefully assessing area strengths and weaknesses, and taking a long-range look at where the city wants to go and how it intends to get there.

That kind of stock-taking is something many cities have long resisted. They do it now only because they feel they have no choice, since it is one way of strengthening their hand in a competitive business.

''Cities are realizing they now have more than a reactive role to play in economic development,'' notes Wilford L'Esperance, a professor of economics at Ohio State University. ''They have an active, leadership role, shared with the private sector, of putting together long-term goals and carrying them out in a systematic way.''

In the process, some cities have discovered a need to couple economic development more closely with job placement and training efforts. A number of cities are finding that businesses transferring in often bring their own employees or hire local residents who weren't working before, not those in the traditional ranks of the unemployed.

''Typically, the responsibility of bringing capital to a city and job creation or placement have been kept separate,'' says Mr. Fosler, a member of the Montgomery County (Md.) Council, a governing body that has just merged those two functions into one office. He says another possibility is stipulating that local employment and job training programs be considered as a first source when hiring is done - as Portland, Ore., recently did in negotiating with a German electronics firm building a plant there.

But experts concede that a formidable new responsibility comes with this new aggressiveness to recruit more new business and keep the old. Deciding how much a city can afford to give in the hope of future gains and negotiating terms fair to all involved are complex tasks, new to many local governments.

''In a sense, city halls are really not geared to this managerial merchandising role of deciding what you sell as a bargain and what you sell at full price,'' says Rutgers's Dr. Sternlieb. ''Most have been busy with such questions as, 'How do I take care of the alderman in Ward 3?' It's a whole new area for cities to be in the building and preservation business. . . . They have to decide how hungry they are and what will give them the best growing power - the biggest bang for the buck. You can't give everything away to everybody.''

Indeed, part of the problem is that one ''sweetheart deal'' usually leads to demands for more. It also can lead to increased skepticism on the part of business and taxpayers watching from the sidelines. They must be convinced that any deal reached is in their collective best interest over the long run.

''It's a real selling job that's needed,'' notes Dr. Sternlieb. ''Politically it can be very tough, but the mayor as merchant in chief has to get the message across that unless the city gets a new coat of paint, 'We're all going to rust.' ''

Economic development experts insist that other factors besides tax lures are often key in determining whether a business locates in one place rather than another. Some argue, for instance, that relaxed regulation and red tape can better serve as a ''carrot.''

''Most of the evidence suggests that tax incentives aren't as important as the cost and availability of labor, energy, transportation, and a number of other factors,'' observes Roy Bahl, director of the Metropolitan Studies Program at Syracuse University. ''Any number of surveys indicate that taxes are pretty far down the line.''

Though no business would probably ever admit that any tax break was anything but crucial in a location decision, many experts say financial lures may be more important as signals that the area is hospitable to business than for their dollar-and-cents value.