CHICAGO – William Testa is vice president and director of regional programs in the research department at the Federal Reserve Bank of Chicago. In part three of a three-part Q&A, Testa sat down with international expert Michael Muth to discuss cautionary but hopeful prospects for Chicago.

Michael Muth: Why do you think Chicago is only a respectable middle of the pack in terms of VC investment?
William Testa: There have been a lot of reasons proposed. Being more conservative and mature creates a risk-averse culture. The fundamental paradigm is it takes a long time to build up a VC culture. You have to have many start-ups that grow up with VCs. It helps to have some huge successes to spur venture capital.

Beyond that, it’s difficult to pin down. VC’s have to look at a lot of deals if they are to be active in a given city or region. That’s a geographic phenomenon.

In addition to numbers, you also need density. Chicago could perhaps become a center for that because of its large size and because of its central position in the Midwest. Chicago could become a center for the review of the region’s innovative start-ups. For example, Warsaw, Ind. is the world leader in prosthetics and nearby Madison, Wis. is active in biotech start-ups.

MM: Does Max Palevsky (the son of Polish immigrants from the northwest side of Chicago who moved to California and founded Scientific Data Systems and eventually Intel) ever get back to town and contribute much to the local tech community?
WT: I don’t know how much we see of him. I ran across his story because he made a large contribution to the University of Chicago. He has certainly helped our economy and its prospects in that regard.

MM: Is there some way to transfer Chicago’s historical manufacturing strength to high-tech industries?
WT: It’s a question of balance between old and new. Do you create new industries such as IT and biotech or do you build off your existing base? We haven’t built off our existing base enough. There was a nanotech conference held here at the bank.

We brought in big local companies such as Caterpillar and BP to meet with emerging nanotech scientists and identify future technical needs of Midwest companies so our scientists might try to meet them.

I don’t see a trend one way or another in Chicago. Advertising is an example of an industry having some problems in this regard. Marketing campaigns are increasingly global and consistent throughout the world, which has resulted in some consolidation in the very largest global cities (specifically New York).

MM: How big an advantage is it to have the second-highest concentration of management consultants (behind Atlanta) if they’re not here four days of the workweek?
WT: It’s generally lucrative to produce goods and services and send them out in trade. We produce the tools here in Illinois (such as construction and farm equipment). While it would be nice if we did construction machinery building in Peoria, Ill., it’s nothing to wring your hands about.

We get the same misconception with “brain drain”. Having great colleges is a capital goods industry. Educating people generates healthy incomes for those of us here who do so. Similarly, consultants have great ideas and needed technology. They’re highly skilled and well paid. They regenerate their own business.

There’s an interesting history of consulting in Chicago. A new book called “The Encyclopedia of Chicago” has histories of industries here. The management consulting industry was born here. It emerged from professors at the University of Chicago and Northwestern. The financial center of the U.S. was New York City early in the 19th century.

Those New York companies didn’t want to place their own people here to monitor our heavy industrial companies and local accounting professors began to take outsourced business. They then started their own industry advising those same companies in the 1920s.

It’s also a boon to our working executives here. They can go to school at night and learn from the world’s greatest professors. Meanwhile, we get a good crack at out-of-state and foreign students who might not otherwise see Chicago at all. They can also spread the gospel of Chicago wherever they go.

MM: What percentage of Chicagoans do you think know about exchange rate derivatives and do you think they realize their global impact?
WT: I think it’s a small percentage and that is a shame. It’s important for every place and person to understand their own economy.

You can’t successfully chase your neighbor’s economy. It’s important not to squash your own vitality through unintelligent or exploitive regulation and taxation. It’s also important to support the local business base with complementary public services (such as education, training and infrastructure).

It’s referred to as a good business climate. While business associations can help in this, sometimes they pursue the needs of only a subset of local businesses. It’s also critical for governments to do this. There has to be a voice of active dialogue between what industry needs and what government provides. It’s an important part of continued growth.

Part of the art is also to borrow what might be helpful from other regions without getting caught up in what Ned Hill calls “rubeaphobia,” which is faddishly chasing the economy of your neighbors as your ill-fated dream. You can never know another place as well as you know your own. In coveting thy neighbor’s, it’s sometimes difficult to separate fact from fiction.