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
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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
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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
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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
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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%
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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
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State of Cluster
Development
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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
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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
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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
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Copyright 2011 © Professor Michael E. Porter
What Drives State Productivity?
Quality of the
Overall
Business
Environment
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State of Cluster
Development
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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)
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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
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Laboratory, Clinical Testing
Educational Institutions
Harvard University, MIT, Tufts University,
Boston University, UMass
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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)
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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
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Source: Porter/Stern/Delgado (2010), Porter (2003)
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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
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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
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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
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(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
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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
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Source: Porter/Stern/Delgado (2010), Porter (2003)
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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
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1930
1950
Biotech / Pharmaceuticals
1970
20
1990
Copyright 2011 © Professor Michael E. Porter
What Drives State Productivity?
Quality of the
Overall
Business
Environment
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State of Cluster
Development
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Policy
Coordination
among Multiple
Geographic
Levels
Copyright 2011 © Professor Michael E. Porter
Geographic Influences on Competitiveness
Nation
Neighboring States
State
Metropolitan Areas
Rural Regions
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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
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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
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• 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
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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
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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
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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
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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
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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
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Copyright 2011 © Professor Michael E. Porter