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

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1 Michigan Competitiveness: Creating an Economic Strategy in a Time of Austerity Professor Michael E. Porter Harvard Business School Mackinac Policy Conference June 2, 2011 For further materials on the competitiveness of states and regions: For state economic profiles: 1 Copyright 2011 Professor Michael E. Porter

2 The Economic Challenge for States in 2011 Achieving Fiscal Stability Enhancing State Competitiveness 2 Copyright 2011 Professor Michael E. Porter

3 What is Competitiveness? Competitiveness is the productivity with which a state utilizes its human, capital, and natural endowments to create value Productivity determines wages, jobs, and the standard of living It is not what fields a state competes in that determines its prosperity, but how productively it competes Businesses and government play different but interrelated roles in creating a productive economy Only businesses can create jobs and wealth States and regions compete to offer the most productive environment for business 3 Copyright 2011 Professor Michael E. Porter

4 Prosperity GDP per Capita, Michigan Performance Scorecard Position in Trend Current Position Wages Average Private Wage, Labor Productivity GDP per Worker, Job Creation Private Employment Growth, and Labor Mobilization Labor Participation Rate, New Business Formation Traded Cluster Establishment Growth, and Innovation Patents per Employee, Cluster Strength Employment in Strong Clusters, Leading Clusters Automotive Metal Manufacturing Plastics Production Technology Biopharmaceuticals State Rank 4 Copyright 2011 Professor Michael E. Porter

5 Patents per 10,000 Workers, High and declining innovation Comparative State Innovation Performance Idaho U.S. average Growth Rate of Patenting: -0.30% California 12 Massachusetts Vermont Washington (+8.0%, 13.53) 10 Minnesota Oregon (+4.9%, 10.31) New Jersey Pennsylvania Delaware Ohio Maryland Indiana New Mexico Montana (-5.7%, 1.58) Florida Louisiana (-6.0%, 1.34) Tennessee Arkansas (-6.9%, 0.76) Oklahoma West Virginia South Dakota Alaska Mississippi Low and declining innovation Connecticut New Hampshire New York Illinois Missouri Virginia South Carolina Kentucky Alabama Hawaii Michigan Colorado Texas Arizona Wisconsin Rhode Island Iowa Georgia Nebraska -5% -4% -3% -2% -1% 0% 1% 2% 3% Growth Rate of Patents per 10,000 Workers, 1999 to 2009 Source: USPTO utility patents, Bureau of Labor Statistics. Note: Growth rate calculated as compound annual growth rate (CAGR). North Carolina Wyoming North Dakota 5 Copyright 2011 Professor Michael E. Porter Kansas Nevada Maine Utah High and improving innovation rate versus U.S. U.S. average Patents per 10,000 Employees: 5.96 Low and improving innovation = 1000 patents in 2009 = 500 patents in 2009

6 Why? What Drives State Productivity? 1. Quality of the Overall Business Environment 2. Cluster Development 3. Policy Coordination among Multiple Levels of Geography/ Government 6 Copyright 2011 Professor Michael E. Porter

7 Quality of the Overall Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions Access to high quality business inputs Human resources Capital access Physical infrastructure Administrative processes (e.g., permitting, regulatory efficiency) Scientific and technological infrastructure Rules and incentives that encourage local competition, investment and productivity e.g., tax policy that encourages investment and R&D Flexible labor policies Intellectual property protection Antitrust enforcement Related and Supporting Industries Local availability of suppliers and supporting industries 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 Many things matter for competitiveness Economic development is the process of improving the business environment to enable companies to compete in increasingly sophisticated ways 7 Copyright 2011 Professor Michael E. Porter

8 Improving the Business Environment Action Items 1. Simplify and speed up regulation and permitting 2. Reduce unnecessary costs of doing business 3. Establish training programs that are aligned with the needs of the state s businesses 4. Focus infrastructure investments on the most leveraged areas for productivity and economic growth 5. Design all policies to support emerging growth companies 6. Protect and enhance the state s higher education and research institutions 7. Relentlessly improve the public education system, the essential foundation for productivity in the long run 8 Copyright 2011 Professor Michael E. Porter

9 Why? What Drives State Productivity? 1. Quality of the Overall Business Environment 2. Cluster Development 3. Policy Coordination among Multiple Levels of Geography/ Government 9 Copyright 2011 Professor Michael E. Porter

10 What is a Cluster? A geographically concentrated group of interconnected companies and associated institutions in a particular field Traded Clusters Compete to serve national and international markets Can locate anywhere Local Clusters Serve almost exclusively the local market Not exposed to crossregional competition 10 Copyright 2011 Professor Michael E. Porter

11 Example: Massachusetts Life Sciences Cluster Health and Beauty Teaching and Specialized Hospitals Cluster Organizations MassMedic, MassBio, others Surgical Instruments and Suppliers Medical Equipment Dental Instruments and Suppliers Biological Biopharmaceutical Specialized Business Banking, Accounting, Legal Ophthalmic Goods Specialized Risk Capital VC Firms, Angel Networks Diagnostic Substances Containers Research Organizations Specialized Research Service Providers Laboratory, Clinical Testing Analytical Instruments Cluster Educational Institutions Harvard, MIT, Tufts, Boston University, UMass 11 Copyright 2011 Professor Michael E. Porter

12 Example: Houston Oil and Gas Cluster Upstream Downstream Oil & Natural Gas Exploration & Development Oil & Natural Gas Completion & Production Oil Transportation Gas Gathering Oil Trading Gas Processing Oil Refining Gas Trading Oil Distribution Gas Transmission Oil Wholesale Marketing Gas Distribution Oil Retail Marketing Gas Marketing Oilfield /Engineering & Contracting Firms Equipment Suppliers Specialized Technology Subcontractors Business (e.g., Oil Field Chemicals, Drilling Rigs, Drill Tools) (e.g., Drilling Consultants, Reservoir, Laboratory Analysis) (e.g., Surveying, Mud Logging, Maintenance ) (e.g., MIS, Technology Licenses, Risk Management) Specialized Institutions (e.g., Academic Institutions, Training Centers, Industry Associations) 12 Copyright 2011 Professor Michael E. Porter

13 Strong Clusters Drive Regional Performace Specialization in strong clusters Breadth of industries within each cluster Presence of a region s clusters in neighboring regions Strength in related clusters Job growth Higher wages Higher patenting rates Greater new business formation, growth and survival Source: Porter/Stern/Delgado (2010), Porter (2003) 13 Copyright 2011 Professor Michael E. Porter

14 Clusters and Economic Diversification Jewelry & Precious Metals Footwear Financial Processed Food Business Apparel Leather & Related Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. Fishing & Fishing Agricultural Distribution Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Plastics Hospitality & Tourism Information Tech. Medical Devices Biopharmaceuticals Entertainment Aerospace Vehicles & Defense Analytical Instruments Tobacco Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Power Generation Motor Driven Furniture Heavy Construction Aerospace Engines Textiles Heavy Machinery Construction Materials Forest Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive 14 Copyright 2011 Professor Michael E. Porter

15 The Evolution of Regional Economies San Diego Climate and Geography Hospitality and Tourism Transportation and Logistics Sporting Equipment U.S. Military Aerospace Vehicles and Defense Power Generation Analytical Instruments Communications Equipment Information Technology Education and Knowledge Creation Medical Devices Bioscience Research Centers Biotech / Pharmaceuticals Copyright 2011 Professor Michael E. Porter

16 Michigan s National Employment Share, 2008 Cluster Composition of the Michigan Economy 10.0% Automotive (16.3%, -5.5%) Employment Added Jobs Lost Jobs 8.0% Plastics Metal Manufacturing 6.0% Production Technology Overall change in Michigan s Share of U.S. Traded Employment: -0.64% 4.0% Chemical Business Biopharmaceuticals Aerospace Engines Motor Driven 2.0% Michigan s Overall Share of U.S. Traded Employment: 3.07% Forest Leather and Related Power Generation and Transmission Textiles 0.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% Change in Michigan s Share of National Employment, 1998 to 2008 = 40,000 Employees in Copyright 2011 Professor Michael E. Porter

17 Michigan s National Employment Share, 2008 Cluster Composition of the Michigan Economy (continued) 3.5% Business Michigan s Overall Share of U.S. Traded Employment: 3.07% 3.0% Lighting and Electrical Equipment Transportation and Logistics Analytical Instruments Footwear 2.5% 2.0% 1.5% Forest Prefabricated Enclosures Heavy Construction Building Fixtures, Equipment and Heavy Machinery Publishing and Printing Hospitality and Tourism Sporting, Recreational and Children's Goods Entertainment Agricultural Processed Food Furniture Financial Construction Materials Distribution Education and Knowledge Creation Medical Devices Information Technology Power Generation and Transmission Textiles 1.0% 0.5% Oil and Gas and Jewelry and Precious Metals Aerospace Vehicles and Defense Communications Equipment Employment Apparel Added Jobs 0.0% Overall change in Michigan s Share of U.S. Traded Employment: -0.64% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% Change in Michigan s Share of National Employment, 1998 to 2008 Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 17 Lost Jobs = 40,000 Employees in 2008 Copyright 2011 Professor Michael E. Porter

18 Michigan s Cluster Portfolio, 2008 Jewelry & Precious Metals Financial Apparel Processed Food Leather & Related Business Fishing & Fishing Distribution Publishing & Printing Agricultural Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Plastics Hospitality & Tourism Information Tech. Medical Devices Biopharmaceuticals Entertainment Aerospace Vehicles & Defense Analytical Instruments Tobacco Communi cations Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Power Generation & Transmission Motor Driven Furniture Heavy Construction Aerospace Engines Textiles Heavy Machinery Construction Materials Forest Production Technology Metal Automotive Manufacturing Footwear LQ > 1. Sporting & Recreation LQ, or Location Quotient, measures the state s share in cluster employment relative to its overall share of U.S. employment. Goods An LQ > 1 indicates an above average employment share in a cluster. 18 Copyright 2011 Professor Michael E. Porter LQ > 4 LQ > 2

19 Cluster Development Action Items 1. Build on the state s existing and emerging clusters rather than chase hot fields 2. Pursue economic diversification within clusters and across related clusters 3. Create a private sector-led cluster upgrading program with matching support for participating private sector cluster organizations Government should listen and remove obstacles to cluster improvement 4. Align other state economic policies and programs with clusters Source: Porter/Stern/Delgado (2010), Porter (2003) 19 Copyright 2011 Professor Michael E. Porter

20 Aligning Economic Policy and Clusters Business Attraction Education and Workforce Training Export Promotion Natural Resource Protection Clusters Science and Technology Investments (e.g., centers, university departments) Standard Setting Organizations Specialized Physical Infrastructure Environmental Improvement Clusters provide a framework for organizing the implementation of many public policies and public investments to achieve greater effectiveness 20 Copyright 2011 Professor Michael E. Porter

21 Why? What Drives State Productivity? 1. Quality of the Overall Business Environment 2. Cluster Development 3. Policy Coordination among Multiple Levels of Geography/ Government 21 Copyright 2011 Professor Michael E. Porter

22 Geographic and Governmental Influences on Productivity Nation Neighboring State State Neighboring State Metropolitan Areas Metropolitan Areas Metropolitan Areas Rural Regions Rural Regions Rural Regions 22 Copyright 2011 Professor Michael E. Porter

23 Defining the State s Economic Regions Marinette Economic Area Wausau Economic Area Ontario Alpena Economic Area WI MI Ontario Detroit Economic Area Traverse City Economic Area Grand Rapids Economic Area South Bend Economic Area IN OH Fort Wayne Economic Area Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Economic Areas depicted are from the U.S. Bureau of Economic Analysis Copyright 2011 Professor Michael E. Porter

24 Average Wage, 2008 Michigan s Economic Performance in Metropolitan Areas U.S. Average Wage: $42,434 Michigan s Average Wage: $40,650 Michigan s Average Wage Growth Rate: +2.16% U.S. Average Wage Growth Rate: +3.32% Growth Rate of Average Wages, Source: Census CBP private employment; author s analysis. Note: Bubble size in chart proportional to employment in *includes Cass County, Michigan 24 Copyright 2011 Professor Michael E. Porter

25 Geographic and Governmental Influences on Productivity Nation 1. Influence and access federal policies and programs Neighboring State State Neighboring State 4. Integrate policies and infrastructure planning with neighbors Metropolitan Areas Metropolitan Areas Metropolitan Areas 2. Work with each metro area in develop a prioritized strategic agenda Rural Regions Rural Regions Rural Regions 3. Connect rural regions with proximate urban areas 25 Copyright 2011 Professor Michael E. Porter

26 Create an Economic Strategy What is the distinctive competitive position of the state or region given its location, legacy, existing strengths, and potential strengths? What unique value as a business location? For what types of activities and clusters? Define the Value Proposition Develop Unique Strengths What elements of the business environment can be unique strengths relative to peers/neighbors? What existing and emerging clusters represent local strengths? Achieve and Maintain Parity with Peers What weaknesses must be addressed to remove key constraints and achieve parity with peer locations? Economic strategy requires setting priorities and moving beyond long lists of separate recommendations. 26 Copyright 2011 Professor Michael E. Porter

27 How Should States and Regions Compete for Investment? 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 subsidies to lower / offset business costs Every city and sub-region for itself Government drives investment attraction Provide state support for training, infrastructure, and institutions with enduring local benefits Improve the efficiency of doing business Harness efficiencies and coordination across jurisdictions Government and the private sector collaborate to build cluster strength The same principles apply to municipal competition within states 27 Copyright 2011 Professor Michael E. Porter

28 Harnessing the New Process of Economic Development Competitiveness is the result of both top-down and bottom-up processes in which many companies and institutions take responsibility 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 28 Copyright 2011 Professor Michael E. Porter

29 Summary The goal of economic strategy is to enhance productivity. This is the only way to create jobs, rising wages, and wealth in the long run Improving productivity and innovation must be the guiding principles for every state policy choice Improving productivity often does not require new public resources, but using existing resources better Improving productivity demands that leaders mobilize the private sector, not rely on government alone Economic strategy is non-partisan and about getting results 29 Copyright 2011 Professor Michael E. Porter

30 Take advantage of Harvard Business School data and tools to support this effort. For further materials on the competitiveness of states and regions: For state economic profiles: For the U.S. Cluster Mapping Project: data.isc.hbs.edu/isc/ 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. 30 Copyright 2011 Professor Michael E. Porter