State Competitiveness: Creating an Economic Strategy in a Time of Austerity

State Competitiveness: Creating an Economic Strategy in a Time of Austerity National Governors Association Winter Meeting Washington, D.C. February 26, 2011 Professor Michael E. Porter Harvard Business School For further material on regional competitiveness and clusters: www.isc.hbs.edu/econ-clusters.htm 1 20110226 – NGA Forv0302a state economic profiles: www.isc.hbs.edu/stateprofiles.htm Copyright 2011 © Professor Michael E. Porter The Economic Challenge for Governors in 2011 Achieving Fiscal Stability Enhancing State Competitiveness • Competitiveness is the only way to achieve sustainable job growth, improving wages, and stable public finances • Creating a clear economic strategy for the state, that engages all stakeholders, is even more important in times of budget cutting and austerity 20110226 – NGA v0302a 2 Copyright 2011 © Professor Michael E. Porter Understanding State Economic Performance 1999 - 2009 $70,000 Delaware High but declining $65,000 versus U.S. U.S. GDP per Capita Real Growth Rate: 0.86% Alaska Connecticut Wyoming High and rising prosperity versus U.S. Gross Domestic Product per Capita, 2009 $60,000 New Jersey $55,000 New York Massachusetts Virginia Hawaii California Washington Maryland $50,000 Colorado Illinois Minnesota Nevada Nebraska Iowa U.S. GDP per South Dakota Capita: $46,093 Louisiana Texas New Hampshire Rhode Island $45,000 Kansas Pennsylvania Oregon Wisconsin North Carolina Oklahoma Indiana Ohio Vermont Utah Georgia Missouri $40,000 Florida Tennessee Maine Arizona Michigan $35,000 $30,000 South Carolina Low and declining versus U.S. -1.0% -0.5% Kentucky New Mexico West Virginia North Dakota Montan Alabama a Arkansas Idaho Mississippi 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009 Low but rising versus U.S. 3.0% 3.5% 4.0% Notes: Real GDP figures in 2005 chained US dollars from the Bureau of Economic Analysis. Growth rate is calculated as compound annual growth rate. D.C. excluded 20110226 – NGA v0302a 3 Copyright 2011 © Professor Michael E. Porter What is Competitiveness? • Competitiveness is the productivity with which a state utilizes its human, capital, and natural resources • Productivity determines wages and the standard of living – Productivity growth determines sustainable economic growth • Productivity depends on how a state competes, not what industries it competes in • Innovation in products and processes is necessary to drive productivity growth • Only productive businesses can create wealth and jobs • States compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy 20110226 – NGA v0302a 4 Copyright 2011 © Professor Michael E. Porter New Jersey Competitive Performance Prosperity Gross State Product per capita, 2009 • In New Jersey: • In the US: • State difference to US: Cluster $55,464 $46,093 20.3% Growth in Gross State Product per capita, real annual rate, 1999-2009 • In New Jersey: 1.15% • In the US: 0.86% Rank: 7 Rank: 21 Share of State Traded Employment in Strong Clusters, 2008 • In New Jersey: 68.5% • In the US: 41.8% Labor Mobilization Gross State Product per labor force participant, 2009 • In New Jersey: $106,667 • In the US: $92,382 • State difference to US: 15.5% Growth in Gross State Product per labor force participant*, 1999-2009 • In New Jersey: 1.06% • In the US: 1.09% $50,923 $42,435 20.0% Private wage Growth, annual rate, 1998-2008 • In New Jersey: • In the US: 3.15% 3.32% Rank: 7 7.80 6.83 Growth in total patents, annual rate, 1998-2009 • In New Jersey: -2.54% • In the US: 0.23% Traded establishment formation, annual growth rate, 1998-2008 • In New Jersey: 0.47% • In the US: 1.79% 20110226 – NGA v0302a Labor Force Participation, 2009 • In New Jersey: • In the US: 67.2 65.4 Rank: 21 4,079,180 2.93% Rank: 10 Rank: 31 Employment, 2010 (December) • In New Jersey: • % of US: Rank: 38 Rank: Employment growth, annual rate, 2000-2010 (December) • In New Jersey: -0.12% • In the US: 0.11% Unemployment, 2010 (December) • In New Jersey: • In the US: Rank: 29 5 9.1% 9.4% Rank: 35 Change in Unemployment, 2000-2010 (December) • In New Jersey: 5.4% • In the US: 5.5% Innovation Output Patents Per 10,000 Employees, 2009 • In New Jersey: • In the US: 2 Change in Share of National Employment in Strong Clusters, 1998-2008 • In New Jersey: -0.23% Rank: 37 • In the US: -0.06% Productivity Average private wage, 2008 • In New Jersey: • In the US: • State difference to US: Rank: Rank: 13 Rank: 35 Population Rank: 44 Population, 2009 • In New Jersey: • % of US: Rank: 47 Population growth, annual rate, 1999-2009 • In New Jersey: • In the US: 8,707,707 2.84% Rank: 11 0.41% 0.96% Rank: 39 Note: Ranks are among the 50 US states plus the District of Columbia. Growth 5 calculated as compound annual growth rate. *Real annual rate. Copyright 2011 © Professor Michael E. Porter What Drives State Productivity? Quality of the Overall Business Environment 20110226 – NGA v0302a State of Cluster Development 6 Policy Coordination among Multiple Geographic Levels Copyright 2011 © Professor Michael E. Porter Quality of the Business Environment Context for Firm Strategy and Rivalry • Rules and incentives that encourage investment and productivity Factor (Input) Conditions – e.g., tax policy that encourages investment and R&D – Flexible labor policies – Intellectual property protection Demand Conditions • Open and vigorous local competition • Access to high quality business inputs – – – – Human resources Capital access Physical infrastructure Administrative processes (e.g., permitting, regulatory efficiency) – Scientific and technological infrastructure • Sophisticated and demanding local needs and customers Related and Supporting Industries • Local availability of suppliers and supporting industries – e.g., Strict quality, safety, and environmental standards – Consumer protection laws – Government procurement of advanced technology – Early demand for products and services • Many things matter for competitiveness • Successful economic development is a process of improving the business environment to enable increasingly sophisticated ways of competing 20110226 – NGA v0302a 7 Copyright 2011 © Professor Michael E. Porter Improving Productivity in the Business Environment Key Issues for States • Simplify and speed up regulation and permitting • Reduce unnecessary costs of doing business • Establish training programs that are aligned with the needs of the state’s businesses • Focus infrastructure investments on the most leveraged areas for productivity and economic growth • Design all policies to support small growth businesses • Protect and enhance the state’s higher education and research institutions • Relentlessly improve of the public education system, the essential foundation 20110226 – NGA v0302a 8 Copyright 2011 © Professor Michael E. Porter Improving Productivity in the Business Environment Key Issues for States • Simplify and speed up regulation and permitting • Reduce unnecessary costs of doing business • Establish training programs that are aligned with the needs of the state’s businesses • Focus infrastructure investments on the most leveraged areas for productivity and economic growth • Design all policies to support small growth businesses • Protect and enhance the state’s higher education and research institutions • Relentlessly improve of the public education system, the essential foundation 20110226 – NGA v0302a 9 Copyright 2011 © Professor Michael E. Porter What Drives State Productivity? Quality of the Overall Business Environment 20110226 – NGA v0302a State of Cluster Development 10 Policy Coordination among Multiple Geographic Levels Copyright 2011 © Professor Michael E. Porter Composition of Regional Economies, U.S. 2008 Traded Clusters • Serve national and global markets • Exposed to competition from other regions Local Clusters • Serve almost exclusively the local market • Limited exposure to cross-regional competition for employment • 27.4% of employment • 71.7% of employment • 37.3% of income • 96.4% of patents `` • 61.8% of income • 3.5% of patents 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) 20110226 – NGA v0302a 11 Resource-based Clusters • Location determined by resource location • <1% of income, employment, patents outside of agriculture Copyright 2011 © Professor Michael E. Porter State of Cluster Development Massachusetts Life Sciences Health and Beauty Products Cluster Organizations MassMedic, MassBio, others Teaching and Specialized Hospitals Surgical Instruments and Suppliers Specialized Business Services Medical Equipment Dental Instruments and Suppliers Biopharmaceutical Products Biological Products Banking, Accounting, Legal Specialized Risk Capital Ophthalmic Goods VC Firms, Angel Networks Diagnostic Substances Specialized Research Service Providers Research Organizations Containers Analytical Instruments Cluster 20110226 – NGA v0302a Laboratory, Clinical Testing Educational Institutions Harvard University, MIT, Tufts University, Boston University, UMass 12 Copyright 2011 © Professor Michael E. Porter State of Cluster Development Houston Oil and Gas Upstream Oil & Natural Gas Exploration & Development Downstream Oil & Natural Gas Completion & Production Oil Transportation Oil Trading Oil Refining Oil Distribution Oil Wholesale Marketing Oil Retail Marketing Gas Gathering Gas Processing Gas Trading Gas Transmission Gas Distribution Gas Marketing Oilfield Services/Engineering & Contracting Firms Equipment Suppliers Specialized Technology Services Subcontractors Business Services (e.g. Oil Field Chemicals, Drilling Rigs, Drill Tools) (e.g. Drilling Consultants, Reservoir Services, Laboratory Analysis) (e.g. Surveying, Mud Logging, Maintenance Services) (e.g. MIS Services, Technology Licenses, Risk Management) Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations) 20110226 – NGA v0302a 13 Copyright 2011 © Professor Michael E. Porter Strong Clusters Drive Regional Performace • Specialization in strong clusters • Job growth • Breadth of industries within each cluster • Higher wages • Strength in related clusters • Higher patenting rates • Presence of a region‘s clusters in neighboring regions • Greater new business formation, growth and survival 20110226 – NGA v0302a Source: Porter/Stern/Delgado (2010), Porter (2003) 14 Copyright 2011 © Professor Michael E. Porter Impact of Cluster Mix and Cluster Strength on Average Traded Wages U.S. States, 2008 New York Connecticut Massachusett New Jersey California Maryland Washington Virginia Illinois Alaska Texas Colorado Delaware Louisiana Minnesota Wyoming Michigan Pennsylvania New Georgia Arizona Kansas Ohio Oregon Wisconsin North Carolina Missouri Rhode Island Florida Oklahoma Alabama Tennessee Vermont Indiana Nebraska Utah South Nevada Maine North Dakota Iowa New Mexico Kentucky West Virginia Arkansas Hawaii Idaho Mississippi South Dakota Montana -$25,000 Relative Cluster Mix “What you do” Cluster Strength: Relative Cluster Wage “How you do it” On average, the cluster strength effect is responsible for 76.3% of the difference in traded wages across states -$15,000 -$5,000 $5,000 $15,000 $25,000 $35,000 Difference to U.S. Average Traded Wages 20110226 – NGA v0302a 15 Copyright 2011 © Professor Michael E. Porter Composition of the South Carolina Economy Specialization by Traded Cluster, 1998 to 2008 6.0% Textiles (10.9%, -6.0%) South Carolina’s national employment share, 2008 Overall change in the South Carolina Share of US Traded Employment: -0.22% Motor Driven Products 5.0% Power Generation and Transmission 4.0% Forest Products Chemical Products Automotive Construction Materials Production Technology 3.0% 2.0% Heavy Construction Services Furniture Biopharmaceuticals Apparel Business Services 1.0% Entertainment Lighting and Electrical Equipment Plastics South Carolina Overall Share of US Traded Employment: 1.44% Transportation and Logistics Fishing and Fishing Products Employment 1998-2008 Added Jobs Sporting, Recreational and Children's Goods Lost Jobs 0.0% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% Change in South Carolina’s share of National Employment, 1998 to 2008 Source: Prof. Michael 20110226 – NGA v0302a E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 16 1.5% 2.0% Employees 9,000 = Copyright 2011 © Professor Michael E. Porter Related Clusters and Economic Diversification Fishing & Fishing Products Entertainment Agricultural Products Processed Food Jewelry & Precious Metals Financial Services Aerospace Vehicles & Information Defense Tech. Building Fixtures, Equipment & Services Lightning & Electrical Analytical Equipment Education & Instruments Power Knowledge Medical Generation Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Apparel Motor Driven Products Construction Materials Heavy Construction Services Forest Products Heavy Machinery Production Technology Tobacco Oil & Gas Plastics Footwear Prefabricated Enclosures Furniture Transportation & Logistics Distribution Services Business Services Hospitality & Tourism Textiles Leather & Related Products Note: Clusters with overlapping borders or identical shading have at least 20% overlap 17 20110226 – NGA v0302a (by number of industries) in both directions. Mining & Metal Automotive Aerospace Manufacturing Engines Sporting & Recreation Goods Copyright 2011 © Professor Michael E. Porter Massachusetts Cluster Portfolio, 2008 Fishing & Fishing Products Entertainment Hospitality & Tourism Agricultural Products Processed Food Jewelry & Precious Metals Business Services Financial Services Information Tech. Education & Knowledge Creation Publishing & Printing Prefabricated Enclosures Furniture Transportation & Logistics Distribution Services Textiles Building Fixtures, Equipment & Services Aerospace Vehicles & Defense Analytical Instruments Construction Materials Heavy Construction Services Lightning & Electrical Equipment Forest Products Power Generation Medical Devices Communications Equipment Biopharmaceuticals Heavy Machinery Motor Driven Products Chemical Products Production Technology Tobacco Apparel Oil & Gas Plastics Footwear Leather & Related Products LQ > 4 LQ > 2 LQ > 1. LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of 20110226 – NGA v0302a U.S. employment. An LQ > 1 indicates an above average employment share18in a cluster. Aerospace Engines Mining & Metal Manufacturing Automotive Sporting & Recreation Goods Copyright 2011 © Professor Michael E. Porter Strong Clusters Drive Regional Performace • Specialization in strong clusters • Job growth • Breadth of industries within each cluster • Higher wages • Strength in related clusters • Higher patenting rates • Presence of a region‘s clusters in neighboring regions • Greater new business formation, growth and survival • Build on the state’s existing and emerging clusters in the state rather than chase hot fields • Economic diversification usually occurs within clusters and across related clusters 20110226 – NGA v0302a Source: Porter/Stern/Delgado (2010), Porter (2003) 19 Copyright 2011 © Professor Michael E. Porter The Evolution of Regional Economies San Diego Climate and Geography Hospitality and Tourism Sporting Goods Transportation and Logistics Power Generation Aerospace Vehicles and Defense U.S. Military Communications Equipment Information Technology Analytical Instruments Education and Knowledge Creation Medical Devices Bioscience Research Centers 1910 20110226 – NGA v0302a 1930 1950 Biotech / Pharmaceuticals 1970 20 1990 Copyright 2011 © Professor Michael E. Porter What Drives State Productivity? Quality of the Overall Business Environment 20110226 – NGA v0302a State of Cluster Development 21 Policy Coordination among Multiple Geographic Levels Copyright 2011 © Professor Michael E. Porter Geographic Influences on Competitiveness Nation Neighboring States State Metropolitan Areas Rural Regions 20110226 – NGA v0302a 22 Copyright 2011 © Professor Michael E. Porter Defining the State’s Economic Regions Massachusetts in BEA Economic Areas Albany-Schenectady-Amsterdam Economic Area (NY, VT, NH, MA) Boston-WorcesterManchester, Economic Area (MA, NH, VT, RI) Hartford-West Hartford-Willimantic, Economic Area (CT, MA) New York-Newark-Bridgeport Economic Area (NY-NJ-CT-PA) Source: U.S. Bureau of Economic Analysis 20110226 – NGA v0302a 23 Copyright 2011 © Professor Michael E. Porter Geographic Influences on Competitiveness Nation • Influence and access federal policies and programs Neighboring States • Integrate policies and infrastructure with neighbors State Metropolitan Areas Rural Regions 20110226 – NGA v0302a 24 • Assist each metro area in developing its own strategy • Connect rural regions with urban areas Copyright 2011 © Professor Michael E. Porter Creating a State Economic Strategy State Value Proposition • What can be the distinctive competitive position of the state given its assets, location and potential strengths? Achieving and Maintaining Parity with Peers Developing Unique Strengths • What elements of the business environment can be distinctive strengths relative to peers? • What weaknesses must be addressed to relax key constraints and achieve parity with peer locations? • What strong or emerging clusters can be built upon? • State economic strategy requires setting priorities and moving beyond long lists of discrete recommendations 20110226 – NGA v0302a 25 Copyright 2011 © Professor Michael E. Porter How Should States Compete with Each Other? Tactical (Zero Sum Competition) Strategic (Positive Sum Competition) • Focus on attracting new investments • Also support greater local investment by existing companies • Compete for every plant • Reinforce areas of specialization and emerging cluster strength • Offer generalized tax breaks • Provide state support for training, infrastructure, and institutions with enduring benefits • Provide subsidies to lower / offset business costs • Improve the efficiency of doing business • Every city and sub-region for itself • Harness efficiencies and coordination across jurisdictions • Government drives investment attraction • Government and the private sector collaborate to build cluster strength 20110226 – NGA v0302a 26 Copyright 2011 © Professor Michael E. Porter The Shifting Process of Economic Development Old Model New Model • Government drives economic development through policy decisions and incentives • Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations • Competitiveness is the result of both top-down and bottom-up processes in which many companies and institutions take responsibility 20110226 – NGA v0302a 27 Copyright 2011 © Professor Michael E. Porter Aligning Economic Policy and Clusters Education and Workforce Training Business Attraction Export Promotion Clusters Natural Resource Protection Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Standard setting Specialized Physical Infrastructure Environmental improvement • Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development to achieve greater effectiveness 20110226 – NGA v0302a 28 Copyright 2011 © Professor Michael E. Porter Organizing for Economic Development South Carolina Council on Competitiveness South Carolina Council on Competitiveness Executive Committee   Chaired by a business leader and reporting to the governor Convenes working groups, provides direction and strength, holds working groups accountable Coordinating Staff Cluster Committees Task Forces Automotive Apparel Cluster Activation Education / Workforce Hydrogen / Fuel Cells Agriculture Research / Investment Start-ups / Local Firms Textiles Travel and Tourism Distressed / Disadvan. Areas Measuring Progress • Effective economic policy also requires coordination within government 20110226 – NGA v0302a 29 Copyright 2011 © Professor Michael E. Porter Concluding Remarks • The goal of economic strategy is to enhance productivity and thus fundamental competitiveness. This is the only way to create jobs in the long run • Improving productivity and innovation must be the guiding principles for every state policy choice • Improving competitiveness does not require new resources, but using existing resources better • Improving state competitiveness will require governors to mobilize the private sector, not rely on government alone • Economic strategy is not about ideology, but getting results • The prosperity of the U.S. economy will depend more on the success of states in improving competitiveness than what happens in Washington 20110226 – NGA v0302a 30 Copyright 2011 © Professor Michael E. Porter

State Competitiveness: Creating an Economic Strategy in a Time of Austerity

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