State Competitiveness: Creating an Economic Strategy in a ... Files/2011... · Competitiveness Achieving Fiscal Stability • Competitiveness is the only way to achieve sustainable

1 Copyright 2011 © Professor Michael E. Porter 20110226 – NGA v0302a

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

For state economic profiles: www.isc.hbs.edu/stateprofiles.htm

http://www.isc.hbs.edu/econ-clusters.htm



http://www.isc.hbs.edu/stateprofiles.htm


The Economic Challenge for Governors in 2011

Enhancing State

Competitiveness

Achieving Fiscal Stability

• 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


$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

U.S. GDP per

Capita: $46,093

High and rising

prosperity versus U.S.

Understanding State Economic Performance 1999 - 2009

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

U.S. GDP per Capita

Real Growth Rate: 0.86%

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009

Gro

ss

Do

mes

tic P

rod

uct

pe

r C

ap

ita,

20

09

High but declining

versus U.S.

Low and declining

versus U.S.

Low but rising

versus U.S.

Illinois

Wyoming

North Dakota

South Dakota

Delaware

Alaska Connecticut

Wisconsin

Nevada

Arizona

New York New Jersey Massachusetts

California

West Virginia

Mississippi

Vermont Oklahoma

Iowa Nebraska

North Carolina

Georgia Florida

Michigan

Idaho South Carolina

Texas

Oregon

Rhode Island Louisiana

Pennsylvania Kansas

New Hampshire

Arkansas

Maine

Colorado

Washington

Virginia

Minnesota

Hawaii Maryland

Alabama Montan

a

Kentucky New Mexico

Missouri Ohio

Indiana Utah

Tennessee


What is Competitiveness?

• 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

• 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


New Jersey Competitive Performance

Note: Ranks are among the 50 US states plus the District of Columbia. Growth calculated as compound annual growth rate. *Real annual rate.

Gross State Product per capita, 2009 Share of State Traded Employment in Strong Clusters, 2008

• In New Jersey: $55,464 Rank: 7 • In New Jersey: 68.5% Rank: 2

• In the US: $46,093 • In the US: 41.8%

• State difference to US: 20.3%

Change in Share of National Employment in Strong Clusters, 1998-2008

Growth in Gross State Product per capita, real annual rate, 1999-2009 • In New Jersey: -0.23% Rank: 37

• In New Jersey: 1.15% Rank: 21 • In the US: -0.06% • In the US: 0.86%

Gross State Product per labor force participant, 2009 Labor Force Participation, 2009

• In New Jersey: $106,667 Rank: 7 • In New Jersey: 67.2 Rank: 21

• In the US: $92,382 • In the US: 65.4

• State difference to US: 15.5%

Employment, 2010 (December)

Growth in Gross State Product per labor force participant*, 1999-2009 • In New Jersey: 4,079,180 Rank: 10

• In New Jersey: 1.06% Rank: 31 • % of US: 2.93%

• In the US: 1.09%

Employment growth, annual rate, 2000-2010 (December)

Average private wage, 2008 • In New Jersey: -0.12% Rank: 38

• In New Jersey: $50,923 Rank: 5 • In the US: 0.11%

• In the US: $42,435

• State difference to US: 20.0% Unemployment, 2010 (December)

• In New Jersey: 9.1% Rank: 29

Private wage Growth, annual rate, 1998-2008 • In the US: 9.4%

• In New Jersey: 3.15% Rank: 35 • In the US: 3.32% Change in Unemployment, 2000-2010 (December)

• In New Jersey: 5.4% Rank: 35

• In the US: 5.5%

Patents Per 10,000 Employees, 2009

• In New Jersey: 7.80 Rank: 13 • In the US: 6.83

Population, 2009

Growth in total patents, annual rate, 1998-2009 • In New Jersey: 8,707,707 Rank: 11

• In New Jersey: -2.54% Rank: 44 • % of US: 2.84%

• In the US: 0.23%

Population growth, annual rate, 1999-2009

Traded establishment formation, annual growth rate, 1998-2008 • In New Jersey: 0.41% Rank: 39

• In New Jersey: 0.47% Rank: 47 • In the US: 0.96% • In the US: 1.79%

Population

Innovation Output

ClusterProsperity

Labor MobilizationProductivity


What Drives State Productivity?

Policy

Coordination

among Multiple

Geographic

Levels

Quality of the

Overall

Business

Environment

State of Cluster

Development


Quality of the Business Environment

Context for Firm

Strategy and Rivalry

Related and Supporting Industries

Factor (Input)

Conditions

Demand Conditions

• Sophisticated and demanding local

needs and customers – e.g., Strict quality, safety, and

environmental standards

– Consumer protection laws

– Government procurement of

advanced technology

– Early demand for products and

services

• Rules and incentives that encourage

investment and productivity – e.g., tax policy that encourages

investment and R&D

– Flexible labor policies

– Intellectual property protection

• 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

• Local availability of suppliers and

supporting industries

• Many things matter for competitiveness

• Successful economic development is a process of improving the business environment to enable increasingly sophisticated ways of competing


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


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



Policy

Coordination

among Multiple

Geographic

Levels

Quality of the

Overall

Business

Environment

State of Cluster

Development


Composition of Regional Economies, U.S. 2008

``

Local Clusters

• Serve almost

exclusively the

local market

• Limited exposure

to cross-regional

competition for

employment

• 71.7% of

employment

• 61.8% of income

• 3.5% of patents

• 27.4% of

employment

• 37.3% of income

• 96.4% of patents

Traded Clusters

• Serve national and

global markets

• Exposed to competition

from other regions

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)

Resource-based Clusters

• Location determined by

resource location

• <1% of income,

employment, patents

outside of agriculture

Note: Cluster data includes all private, non-agricultural employment.


Research Organizations

Biological

Products

Specialized Risk Capital VC Firms, Angel Networks

Biopharma-

ceutical

Products

Specialized Business

Services Banking, Accounting, Legal

Specialized Research

Service Providers Laboratory, Clinical Testing

Dental Instruments

and Suppliers

Surgical Instruments

and Suppliers

Diagnostic Substances

Containers

Medical Equipment

Ophthalmic Goods

Health and Beauty

Products Teaching and Specialized Hospitals

Educational Institutions Harvard University, MIT, Tufts University,

Boston University, UMass

Cluster Organizations MassMedic, MassBio, others

State of Cluster Development Massachusetts Life Sciences

Analytical

Instruments

Cluster


Equipment

Suppliers

(e.g. Oil Field

Chemicals,

Drilling Rigs,

Drill Tools)

Specialized

Technology

Services

(e.g. Drilling

Consultants,

Reservoir Services,

Laboratory

Analysis)

Subcontractors

(e.g. Surveying,

Mud Logging,

Maintenance

Services)

Business

Services

(e.g. MIS Services,

Technology

Licenses,

Risk Management)

Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations)

State of Cluster Development Houston Oil and Gas

Oil & Natural Gas

Completion &

Production

Oil & Natural Gas

Exploration &

Development

Oil

Trans-

portation

Oil

Trading

Oil

Refining

Oil

Retail

Marketing

Oil

Wholesale

Marketing

Oil

Distribution

Gas

Gathering Gas

Processing

Gas

Trading

Gas

Transmis-

sion

Gas

Distribution

Gas

Marketing

Upstream Downstream

Oilfield Services/Engineering & Contracting Firms


Strong Clusters Drive Regional Performace

Source: Porter/Stern/Delgado (2010), Porter (2003)

• Specialization in strong clusters

• Breadth of industries within each

cluster

• Strength in related clusters

• Presence of a region‘s clusters in

neighboring regions

• Job growth

• Higher wages

• Higher patenting rates

• Greater new business

formation, growth and survival


Impact of Cluster Mix and Cluster Strength on Average Traded Wages U.S. States, 2008

-$25,000 -$15,000 -$5,000 $5,000 $15,000 $25,000 $35,000

MontanaSouth Dakota

MississippiIdaho

HawaiiArkansas

West VirginiaKentucky

New MexicoIowa

North DakotaMaine

NevadaSouthUtah

NebraskaIndiana

VermontTennessee

AlabamaOklahoma

FloridaRhode Island

MissouriNorth Carolina

WisconsinOregon

OhioKansasArizonaGeorgia

NewPennsylvania

MichiganWyoming

MinnesotaLouisianaDelawareColorado

TexasAlaskaIllinois

VirginiaWashington

MarylandCalifornia

New JerseyMassachusett

ConnecticutNew York

Difference to U.S. Average Traded Wages

On average, the

cluster strength

effect is responsible

for 76.3% of the

difference in traded

wages across states

Cluster Strength:

Relative Cluster Wage

“How you do it”

Relative Cluster Mix

“What you do”


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

Change in South Carolina’s share of National Employment, 1998 to 2008

So

uth

Caro

lin

a’s

nati

on

al

em

plo

ym

en

t s

hare

, 2

00

8

Employees 9,000 =

Composition of the South Carolina Economy Specialization by Traded Cluster, 1998 to 2008

South Carolina Overall Share of US

Traded Employment: 1.44%

Overall change in the South

Carolina Share of US Traded

Employment: -0.22%

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Added Jobs

Lost Jobs

Employment

1998-2008

Textiles (10.9%, -6.0%)

Motor Driven Products

Automotive

Forest Products

Plastics

Production

Technology

Lighting and

Electrical

Equipment Heavy Construction

Services

Construction Materials

Chemical Products

Power Generation and

Transmission

Furniture

Apparel

Sporting, Recreational and Children's Goods

Entertainment

Biopharmaceuticals

Fishing and Fishing

Products

Transportation and Logistics Business Services


Furniture Building

Fixtures,

Equipment &

Services

Fishing &

Fishing

Products

Hospitality

& Tourism Agricultural

Products

Transportation

& Logistics

Related Clusters and Economic Diversification

Plastics

Oil &

Gas

Chemical

Products

Biopharma-

ceuticals

Power

Generation

Aerospace

Vehicles &

Defense

Lightning &

Electrical

Equipment

Financial

Services

Publishing

& Printing

Entertainment

Information

Tech.

Communi-

cations

Equipment

Aerospace

Engines

Business

Services

Distribution

Services

Forest

Products

Heavy

Construction

Services

Construction

Materials

Prefabricated

Enclosures

Heavy

Machinery

Sporting

& Recreation

Goods

Automotive

Production

Technology Motor Driven

Products

Mining & Metal

Manufacturing

Jewelry &

Precious

Metals

Textiles

Footwear

Processed

Food

Tobacco

Medical

Devices

Analytical

Instruments Education &

Knowledge

Creation

Note: Clusters with overlapping borders or identical shading have at least 20% overlap

(by number of industries) in both directions.

Apparel

Leather &

Related

Products


Furniture

Building

Fixtures,

Equipment &

Services

Fishing &

Fishing

Products

Hospitality

& Tourism Agricultural

Products

Transportation

& Logistics

Plastics

Oil &

Gas

Chemical Products

Biopharma-

ceuticals

Power

Generation

Aerospace

Vehicles &

Defense

Lightning &

Electrical

Equipment

Financial

Services

Publishing

& Printing

Entertainment

Information

Tech.

Communi-

cations

Equipment

Aerospace

Engines

Business

Services

Distribution

Services

Forest

Products

Heavy

Construction

Services

Construction

Materials

Prefabricated

Enclosures

Heavy

Machinery

Sporting

& Recreation

Goods

Automotive

Production

Technology Motor Driven

Products

Mining & Metal

Manufacturing

Jewelry &

Precious

Metals

Textiles

Footwear

Processed

Food

Tobacco

Medical

Devices

Analytical

Instruments Education &

Knowledge

Creation

Apparel

Leather &

Related

Products

Massachusetts Cluster Portfolio, 2008

LQ > 4

LQ > 2

LQ > 1.

LQ, or Location Quotient, measures the state’s share in cluster employment relative to its overall share of

U.S. employment. An LQ > 1 indicates an above average employment share in a cluster.


Strong Clusters Drive Regional Performace

Source: Porter/Stern/Delgado (2010), Porter (2003)

• 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

• Specialization in strong clusters

• Breadth of industries within each

cluster

• Strength in related clusters

• Presence of a region‘s clusters in

neighboring regions

• Job growth

• Higher wages

• Higher patenting rates

• Greater new business

formation, growth and survival


The Evolution of Regional Economies San Diego

U.S.

Military

Communications

Equipment

Sporting Goods

Analytical Instruments

Power Generation

Aerospace Vehicles

and Defense

Transportation

and Logistics

Information Technology

1910 1930 1950 1990 1970

Bioscience

Research

Centers

Climate

and

Geography

Hospitality and

Tourism

Medical Devices

Biotech / Pharmaceuticals

Education and

Knowledge Creation



Policy

Coordination

among Multiple

Geographic

Levels

Quality of the

Overall

Business

Environment

State of Cluster

Development


Geographic Influences on Competitiveness

State

Metropolitan Areas

Neighboring States

Nation

Rural Regions


Defining the State’s Economic Regions Massachusetts in BEA Economic Areas

Source: U.S. Bureau of Economic Analysis

Boston-Worcester-

Manchester, Economic

Area (MA, NH, VT, RI)

Hartford-West Hartford-Willimantic,

Economic Area (CT, MA)

Albany-Schenectady-Amsterdam

Economic Area (NY, VT, NH, MA)

New York-Newark-Bridgeport

Economic Area (NY-NJ-CT-PA)


Geographic Influences on Competitiveness

State

Metropolitan Areas

Neighboring States

Nation

Rural Regions

• Influence and access

federal policies and

programs

• Integrate policies and

infrastructure with

neighbors

• Assist each metro area

in developing its own

strategy

• Connect rural regions

with urban areas


State Value Proposition

Creating a State Economic Strategy

Developing Unique Strengths Achieving and Maintaining Parity

with Peers

• What elements of the business

environment can be distinctive

strengths relative to peers?

• What strong or emerging clusters can

be built upon?

• What weaknesses must be addressed to

relax key constraints and achieve parity

with peer locations?

• What can be the distinctive competitive position of the

state given its assets, location and potential strengths?

• State economic strategy requires setting priorities and moving beyond long

lists of discrete recommendations


How Should States Compete with Each Other?

Tactical

(Zero Sum

Competition)

Strategic

(Positive Sum

Competition)

• Focus on attracting new investments

• Compete for every plant

• Offer generalized tax breaks

• Provide subsidies to lower / offset

business costs

• Every city and sub-region for itself

• Government drives investment

attraction

• Also support greater local investment

by existing companies

• Reinforce areas of specialization

and emerging cluster strength

• Provide state support for training,

infrastructure, and institutions with

enduring benefits

• Improve the efficiency of doing

business

• Harness efficiencies and

coordination across jurisdictions

• Government and the private sector

collaborate to build cluster strength


The Shifting Process of Economic Development

Old Model

• Government drives economic

development through policy

decisions and incentives

New Model

• 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


Aligning Economic Policy and Clusters

Specialized Physical

Infrastructure

Natural Resource

Protection

Environmental improvement

Science and Technology

Infrastructure

(e.g., centers, university

departments,

technology transfer)

Education and Workforce Training Business Attraction

Export Promotion

• Clusters provide a framework for organizing the implementation of many public

policies and public investments directed at economic development to achieve greater

effectiveness

Standard setting

Clusters


Organizing for Economic Development South Carolina Council on Competitiveness

South Carolina Council

on Competitiveness

Research /

Investment

Executive

Committee

Measuring

Progress

Chaired by a business leader and reporting

to the governor

Convenes working groups, provides

direction and strength, holds working groups

accountable

Task Forces

Education /

Workforce

Coordinating

Staff

Cluster Committees

Start-ups /

Local Firms

Cluster

Activation

Distressed /

Disadvan.

Areas

Hydrogen /

Fuel Cells

Travel and

Tourism

Apparel

Agriculture

Automotive

Textiles

• Effective economic policy also requires coordination within government


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

State Competitiveness: Creating an Economic Strategy in a ... Files/2011... · Competitiveness Achieving Fiscal Stability • Competitiveness is the only way to achieve sustainable

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