Reshaping Regional Economic Development:
Clusters and Regional Strategy
Professor Michael E. Porter
Harvard Business School
U.S. Cluster Mapping Launch Event
University of Minnesota, Minneapolis, MN
September 29th, 2014
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic
Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On
Competition (Harvard Business School Press, 2008), “Creating Shared Value” (Harvard Business Review, Jan 2011), the Social Progress Index Report (Social Progress Imperative)
and ongoing related research. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical,
photocopying, recording, or otherwise - without the permission of Michael E. Porter. For further materials, see the website of the Institute for Strategy and Competitiveness
(www.isc.hbs.edu), FSG (www.fsg.org) and the Social Progress Imperative (www.socialprogressimperative.org).
The Challenge
• The US economy is slowly emerging from the deepest crisis we
have experienced in a generation
• However, the trajectory of the U.S. economy was already disturbing
well before 2008 and the long term trend is continuing
• The Midwest is no exception
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Copyright 2014 © Professor Michael E. Porter
Disturbing Trends
Rolling 10-year Compound Annual Growth Rate in Total Number of U.S.
Private Nonfarm Employees, 1975-2013
3%
1975-2001
AVERAGE: 2.12%
2%
1%
0%
-1%
1975
1981
1987
1993
1999
2005
20112013
Source: Bureau of Labor Statistics, Current Employment Statistics survey; author’s calculations.
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Copyright 2014 © Professor Michael E. Porter
Disturbing Trends
Private, Nonfarm Employment by Type of Industry
140
Employment (in millions of jobs)
120
100
80
INDUSTRIES SERVING
LOCAL MARKETS
(CAGR= 0.89%)
60
40
20
INDUSTRIES EXPOSED TO
INTERNATIONAL COMPETITION
(CAGR= 0.02%)
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Real Hourly Wage Growth by Educational Attainment
1979-2000 Versus 2000-2012
Compound annual growth rate
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Less than high
school
High school
Some college
College degree
Advanced
degree
1979-2000
2000-2012
Source: Economic Policy Institute, “A Decade of Flat Wages,” August 2013. Based on Current Population Survey.
U.S. COMPETITIVENESS PROJECT
5
Real GDP per
Capita, 2012
Prosperity Performance of U.S. States
2001-2012
$58,000
High but declining
prosperity versus U.S.
Alaska
(+.74%, $61,156)
Delaware
(-.0076%, $61,183)
$55,000
High and rising prosperity
versus U.S.
Wyoming
Connecticut
North Dakota
New Jersey
$50,000
Virginia
Washington
California
North Carolina
Nevada
New
Hampshire
Missouri
Ohio
Maine
Florida
Idaho
$30,000
-0.5%
Average U.S. GDP
Per Capita Real
Growth Rate: .64%
0.0%
Oklahoma
Alabama
Arkansas
South Carolina
$25,000
-1.0%
Vermont
Kentucky
New Mexico
Low and declining prosperity
versus U.S.
Iowa
Kansas
Indiana
Tennessee
Arizona
South Dakota
Utah
Wisconsin
Michigan
$35,000
Nebraska
Hawaii
Louisiana
Rhode Island
Pennsylvania
$40,000
Georgia
Maryland
Texas
Colorado
U.S. Average GDP Per
Capita, 2012: $42,784
Oregon
(+3.1%, $48,069)
Minnesota
Illinois
$45,000
(+4.6%, $55,250)
New York
Massachusetts
0.5%
Montana
West Virginia
Mississippi
Low but rising prosperity
versus U.S.
1.0%
1.5%
2.0%
Real Growth in Gross Domestic Product per Capita, 2001 to 2012
Source: BEA. Notes: GDP in real 2005 dollars. Growth rate is calculated as compound annual growth rate.
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Copyright 2014 © Professor Michael E. Porter
Regional Economic Development: Prevailing Approaches
“Open for
Business”
“Big Game
Hunting”
• Improve the
general business
environment
• Compete
aggressively for
plants and new
investments
• Attempt to match the
policies of peers
• Zero Sum
• Long lists of areas for
improvement, with
limited progress
• Table stakes
“The Next
Big Thing”
• Enter new high
tech/ high growth
industries
• Many competing
for the same
• “Winner’s curse”
industries – e.g.
• High cost, low return
biotech, ‘creative
unless address
class’
underlying
• Very few regions
weaknesses
have the assets to
• Neglects the existing
succeed in them
base
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“Build it and
They Will
Come”
• Invest in large
infrastructure/
industrial zone
projects
• Rarely offer a strong
advantage versus
other regions
• Generic infrastructure
will not offset lack of
skills, other
weaknesses, and
absence of related
businesses
Copyright 2014 © Professor Michael E. Porter
Towards a New Economic Development Model
• Traditional approaches to economic development are not working
• We must reshape the approach to economic development in the U.S.
based on a deeper understanding of the drivers of competitiveness in the
modern global economy
The New Direction
• Focus on competitiveness, not job creation per se
• Cluster-based, reflecting the core drivers of jobs and wages
• Build on existing and potential strengths, versus rely on reducing
weakness
• Develop an overall strategy rather than a list of actions
• Prioritized and sequenced, not treating all weaknesses equally
• Data driven, not political or based on wishful thinking
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What is Competitiveness?
A nation or region is competitive to the extent that firms operating there are able
to compete successfully in the regional and global economy while maintaining
or improving wages and living standards for the average citizen
• Competitiveness depends on the long-run productivity and efficiency of a
location as a place to do business
- The productivity of existing firms and workers
- The ability to achieve high participation of citizens in the workforce
• Competitiveness is not:
- Low wages
- A weak currency
- Jobs per se
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Defining the Geographic Unit for Competitiveness
Nation
States
Regions
• Regions are essential economic units for competitiveness
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What Determines Competitiveness?
Endowments
•
Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
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What Determines Competitiveness?
Macroeconomic Competitiveness
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
Endowments
•
Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not
sufficient to ensure productivity
• Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
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Copyright 2014 © Professor Michael E. Porter
What Determines Competitiveness?
Microeconomic Competitiveness
Quality of the
Business
Environment
State of Cluster
Development
Sophistication
of Company
Operations and
Strategy
Macroeconomic Competitiveness
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
Endowments
•
Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication of local competition revealed at the level of firms, clusters, and regions
• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not
sufficient to ensure productivity
• Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
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Copyright 2014 © Professor Michael E. Porter
Improving the Quality of the Business Environment
Context for
Firm Strategy
and Rivalry
• Local rules and incentives that
encourage investment and productivity
Factor
(Input)
Conditions
• Improving access to high quality
business inputs
–
–
–
–
Qualified human resources
Capital availability
Physical infrastructure
Scientific and technological
infrastructure
– Administrative and regulatory
infrastructure
– e.g. incentives for capital investments,
IP protection
• Sound corporate governance
• Open and vigorous local competition
− Openness to competition
− Strict competition laws
Demand
Conditions
• Sophisticated and demanding local
needs
Related and
Supporting
Industries
– e.g., Strict quality, safety, and
environmental standards
– Sophisticated demand in the private
sector or government
• Availability and quality of suppliers and
supporting industries
• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
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The Composition of Regional Economies
• Serve national and global
markets
• Exposed to competition from
other regions
• Serve almost
exclusively the
local market
• Little exposure
to international or
cross-regional
competition for
employment
Traded
Clusters
Local Clusters
``
Note: Cluster data includes all private, non-agricultural employment.
Source: Michael E. Porter, Economic Performance of Regions, Regional Studies (2003); Updated via Cluster
Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School (2008)
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Clusters and Competitiveness
Massachusetts Life Sciences
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Institutions for Collaboration
Selected Massachusetts Organizations, Life Sciences
Life Sciences Industry Associations



University Initiatives
Massachusetts Biotechnology Council
Massachusetts Medical Device Industry
Council
Massachusetts Hospital Association




General Industry Associations



Informal networks
Associated Industries of Massachusetts
Greater Boston Chamber of Commerce
High Tech Council of Massachusetts



Economic Development Initiatives




Company alumni groups
Venture capital community
University alumni groups
Joint Research Initiatives
Massachusetts Technology Collaborative
Mass Biomedical Initiatives
Mass Development
Massachusetts Alliance for Economic
Development
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Harvard Biomedical Community
MIT Enterprise Forum
Biotech Club at Harvard Medical School
Technology Transfer offices



17
New England Healthcare Institute
Whitehead Institute For Biomedical
Research
Center for Integration of Medicine and
Innovative Technology (CIMIT)
Copyright 2014 © Professor Michael E. Porter
Traded Cluster Composition of the
Minneapolis Economy
Minneapolis Share of
National Employment
2001-2012
3.5%
Medical Devices
(+.065%, 4.9%),
Overall change in the Minneapolis Share
of US Traded Employment: -.055%
Information Technology
and Analytical Instruments
Printing Services
3.0%
Lighting and Electrical
Equipment
(+1.1%, 2.9%)
Insurance
Services
Metalworking Technology
2.5%
Transportation
and Logistics
Performing
Arts
2.0%
Marketing, Design,
and Publishing
Financial
Services
Distribution and
Electronic Commerce
Downstream
Metal
Paper and
Products
Packaging
Business
Services
Production Technology
and Heavy Machinery
1.5%
1.0%
Food Processing
and Manufacturing
Upstream Metal
Manufacturing
Downstream
Chemical Products
Wood
Products
Hospitality
and Tourism
Automotive
0.5%
0.0%
-0.75%
Electric Power
Generation and
Transmission
Construction
Products
and Services
Communications
Equipment and Services
Aerospace
Vehicles
and Defense
-0.50%
Education and
Knowledge Creation
Furniture
Plastics
Minneapolis Overall
Share of US Traded
Employment: 1.7%
Biopharmaceuticals
Employment
2001-2012
Oil and Gas Production
and Transportation
Added
Jobs
Lost Jobs
-0.25%
0.00%
0.25%
0.50%
Change in Minneapolis Share of National Employment 2001-2012
0.75% 0.85%
Employees 15,000 =
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Copyright 2014 © Professor Michael E. Porter
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Strong Traded Clusters Drive Regional Performance
Research Findings
•
Presence of strong clusters
•
Job growth
•
Breadth of industries within each
cluster
•
Higher wages
•
Higher patenting rates
•
Greater new business formation,
growth and survival
•
Resilience in downturns
•
Build on the region’s existing and emerging clusters rather than chase hot fields
Source: “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)
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Copyright 2014 © Professor Michael E. Porter
Related Clusters and Economic Diversification
Fishing &
Fishing
Products
Entertainment
Hospitality
& Tourism
Agricultural
Products
Processed
Food
Jewelry &
Precious
Metals
Business
Services
Financial
Services
Aerospace
Vehicles &
Defense
Information
Technology
Building
Fixtures,
Equipment &
Services
Lighting &
Electrical
Equipment
Analytical
Education &
Instruments
Power
Knowledge
Medical
Generation &
Creation
Devices
Transmission
Communications
Publishing
Services
& Printing
Biopharmaceuticals
Chemical
Products
Apparel
Footwear
Furniture
Transportation
& Logistics
Distribution
Services
Textiles
Prefabricated
Enclosures
Oil & Gas
Products
Construction
Materials
Heavy
Construction
Services
Forest
Products
Coal &
Briquettes
Heavy
Machinery
Motor Driven
Products
Production
Technology
Tobacco
Plastics
Aerospace
Engines
Leather &
Related
Products
Metal
Automotive
Manufacturing
Sporting,
Marine
Recreational & Equipment
Children’s
Goods
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
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Copyright 2014 © Professor Michael E. Porter
Strong Traded Clusters Drive Regional Performance
Research Findings
•
Presence of strong clusters
•
Job growth
•
Breadth of industries within each
cluster
•
Higher wages
•
Higher patenting rates
•
Greater new business formation,
growth and survival
•
Resilience in downturns
•
•
Strength in related clusters
Presence of a region‘s clusters in
neighboring regions
•
Build on the region’s existing and emerging clusters rather than chase hot fields
•
Economic diversification usually occurs within clusters and across related clusters
Source: “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)
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Copyright 2014 © Professor Michael E. Porter
What is an Economic Strategy?
Policy
Improvement
Economic
Strategy
• Implementing best practices in
each policy area
• An overall agenda for creating a
more competitive and
distinctive position for a
country or region, based on its
particular circumstances
• There are a huge number of
policy areas that matter
• No region or country can (or
should try to) make progress in
all areas simultaneously
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Copyright 2014 © Professor Michael E. Porter
Developing a Regional Economic Strategy
Regional Value Proposition
• What is a distinctive competitive position for the region given its
location, legacy, existing strengths, and potential strengths?
– What unique advantages as a business location?
– For what types of activities and clusters?
– What roles in the surrounding regions, countries, and the global economy?
Achieving and Maintaining Parity
with Peers
Developing Unique Strengths
• What elements of the business
environment can be unique strengths
relative to peers/neighbors?
• What existing and emerging clusters
can be built upon?
• What weaknesses must be addressed to
remove key constraints and achieve parity
with peer locations?
• Priorities and sequencing are fundamental to successful economic development
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Clusters as a Tool for Economic Policy
•
Leverages the power of spillovers and linkages to drive rapid economic
development
•
A vehicle for policies and investments that strengthen multiple related
firms/institutions simultaneously
•
Enhances the efficiency and effectiveness of traditional economic policy
areas, such as training, R&D, export promotion, FDI attraction, etc.
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Copyright 2014 © Professor Michael E. Porter
Organize Public Policy around Clusters
Business Attraction
Education and
Workforce Training
Export Promotion
Market Information
and Disclosure
Clusters
Specialized Physical
Infrastructure
Natural Resource Protection
Science and Technology
Infrastructure
(e.g., centers, university
departments, technology
transfer)
Quality and Environmental
standards
• Clusters provide a framework for organizing the implementation of many
public policies and public investments directed at economic development
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Copyright 2014 © Professor Michael E. Porter
Clusters as a Tool for Economic Policy
•
Leverage the power of spillovers and linkages to drive rapid economic
development
•
A vehicle for policies and investments that strengthen multiple related
firms/institutions simultaneously
•
Enhances the efficiency and effectiveness of traditional economic policy
areas, such as training, R&D, export promotion, FDI attraction, etc.
•
A forum for collaboration between the private sector, trade associations,
government, educational, and research institutions
–
A mechanism for constructive business-government dialog
•
Brings together firms of all sizes, including SME’s
•
Clusters initiatives are a powerful private/public vehicle to identify and get
alignment on problems and action recommendations
•
Cluster upgrading fosters greater and more sophisticated competition rather
than distorting the market
•
Sound cluster policy addresses all existing and emerging clusters, and does
not pick winners
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Copyright 2014 © Professor Michael E. Porter
U.S. Cluster Mapping
• National economic initiative based at HBS and sponsored by the U.S.
Department of Commerce’s Economic Development Administration. To help drive
better regional economic strategy, the interactive website provides data to:
– Help regions understand their current competitiveness and sources of
potential differentiation
– Help clusters assess their competitive position and highlight areas for
potential growth
– Help Institutions for Collaboration engage with peers within and beyond
their home region and cluster
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Copyright 2014 © Professor Michael E. Porter