The Competitive Advantage of Regions Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Prepared for The Columbus Partnership Retreat John F. Kennedy School of Government February 27, 2004 This presentation draws on ideas from Professor Porter s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report 2001, (World Economic Forum, 2001), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 1998), the Clusters of Innovation Initiative, a joint effort of the Council on Competitiveness, Monitor Group, and Professor Porter. Additional content is drawn from the work of the Initiative for a Competitive Inner City, www.icic.org. 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. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu
Columbus Partnership Presentation 2004.02.27 RB 2 TOPICS Foundations of regional competitiveness A new model for inner city revitalization
Columbus Partnership Presentation 2004.02.27 RB 3 What is Competitiveness? Competitiveness is determined by the productivity with which a region uses its human, capital, and natural resources. Productivity sets a region s standard of living (wages, returns to capital) Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced. It is not what industries a region competes in that matters for prosperity, but how firms compete in those industries Productivity in a region is a reflection of what both domestic and foreign firms choose to do in that location. The productivity of local industries is of fundamental importance to competitiveness, not just that of traded industries Regions compete in offering the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy
Productivity, Innovation, and the Business Environment Factor (Input) Conditions Presence of high quality, specialized inputs available to firms Human resources Capital resources Physical infrastructure Administrative infrastructure Information infrastructure Scientific and technological infrastructure Natural resources Context for Firm Strategy and Rivalry A local context and rules that encourage investment and sustained upgrading e.g., Intellectual property protection Meritocratic incentive systems across all major institutions Open and vigorous competition among locally based rivals Related and Supporting Industries Access to capable, locally based suppliers and firms in related fields Presence of clusters instead of isolated industries Demand Conditions Sophisticated and demanding local customer(s) Local customer needs that anticipate those elsewhere Unusual local demand in specialized segments that can be served nationally and globally Successful economic development is a process of successive economic upgrading, in which the business environment in a nation or region evolves to support and encourage increasingly sophisticated ways of competing Columbus Partnership Presentation 2004.02.27 RB 4
Columbus Partnership Presentation 2004.02.27 RB 5 Clusters and Competitiveness The California Wine Cluster Winemaking Equipment Grapestock Fertilizer, Pesticides, Herbicides State Government Agencies (e.g., Select Committee on Wine Production and Economy) Barrels Bottles Caps and Corks Grape Harvesting Equipment Irrigation Technology Growers/Vineyards Wineries/ Processing Facilities Labels Public Relations and Advertising Specialized Publications (e.g., Wine Spectator, Trade Journal) California Agricultural Cluster Educational, Research, & Trade Organizations (e.g. Wine Institute, UC Davis, Culinary Institutes) Tourism Cluster Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. Food Cluster
Columbus Partnership Presentation 2004.02.27 RB 6 Shifting Responsibilities for 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 institutions for collaboration
Composition of Regional Economies United States, 2001 Traded Clusters Local Clusters Natural Resource- Driven Industries Share of Employment Employment Growth, 1990 to 2001 31.6% 1.7% 67.6% 2.8% 0.8% -1.0% Average Wage Relative Wage Wage Growth $46,596 133.8 5.0% $28,288 84.2 3.6% $33,245 99.0 1.9% Relative Productivity 144.1 79.3 140.1 Patents per 10,000 Employees 21.3 1.3 7.0 Number of SIC Industries 590 241 48 Note: 2001 data, except relative productivity which is 1997 data. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
Specialization of Regional Economies Select U.S. Geographic Areas Seattle-Bellevue- Everett, WA WA Aerospace Vehicles and and Defense Fishing and and Fishing Products Analytical Instruments Denver, CO CO Chicago Leather and and Sporting Goods Communications Equipment Oil Oil and and Gas Gas Processed Food Aerospace Vehicles and and Defense Heavy Machinery Wichita, KS KS Pittsburgh, PA PA Aerospace Vehicles and and Construction Materials Defense Metal Manufacturing Heavy Machinery Education and and Knowledge Oil Oil and and Gas Gas Creation Boston Analytical Instruments Education and and Knowledge Creation Communications Equipment San Francisco- Oakland-San Jose Bay Area Communications Equipment Agricultural Products Information Technology Raleigh-Durham, NC NC Communications Equipment Information Technology Education and and Knowledge Creation Los Angeles Area Apparel Building Fixtures, Equipment and Services Entertainment Atlanta, San San Diego GA GA Construction Leather and and Sporting Goods Materials Transportation Power Generation and and Logistics Houston Business Education and and Knowledge Services Heavy Construction Services Creation Oil Oil and and Gas Gas Aerospace Vehicles and and Defense Note: Clusters listed are the three highest ranking clusters in terms of share of national employment Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 8
Columbus, Ohio Metropolitan Area and Economic Area Columbus Partnership Presentation 2004.02.27 RB 9 Columbus, OH Metropolitan Area Columbus, OH Economic Area
Economic Performance Indicators Columbus Metropolitan Area Economic Performance Employment 1,, 2001 in in Columbus: 773,508 (rank 37) 2 % of of US: 0.67% Innovation Output Patents per 10,000 employees, 2001 in in Columbus: 4.69 (rank 149) in in the US: 7.71 Employment growth per year, 1990 to to 2001 in in Columbus: 2.45% (rank 117) Growth in in patents per year, 1990 to to 2001 in in the US: 1.91% in in Columbus: 5.0% (rank 142) in in the US: 5.9% Unemployment rate, December 2003 in in Columbus: 4.1% (rank 93) in in the US: 5.4% Traded establishment formation, 1990 to to 2001 in in Columbus: 4.2% (rank 125) Average local wages, 2001 in in the US: 4.0% in in Columbus: $27,511 (rank 53) in in the US: $28,288 Columbus as as % of of US: 97.2% Average traded wages, 2001 in in Columbus: $ 43,501 (rank 53 53 )) in in the US: $ 44,956 Columbus as as % of of US: 96.8% Traded wage growth per year, 1990 to to 2001 in in Columbus: 5.27% (rank 100 )) in in the US: 4.53% 1 Employment data includes all employees on firm payrolls; excludes government and agricultural employees and the self-employed. 2 Ranks are among 318 US metro areas. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 10
Rank in US Financial Services 16 Business Services 35 Distribution Services 29 Education and Knowledge Creation 46 Hospitality and Tourism 52 Heavy Construction Services 48 Transportation and Logistics 45 Metal Manufacturing 31 Processed Food 30 Plastics 18 Communications Equipment 10 Construction Materials 1 Publishing and Printing 41 Automotive 48 Chemical Products 22 Production Technology 32 Information Technology 44 Entertainment 59 Building Fixtures, Equipment and Services 51 Analytical Instruments 61 Lighting and Electrical Equipment 21 Motor Driven Products 39 Heavy Machinery 48 Prefabricated Enclosures 36 Power Generation and Transmission 44 Biopharmaceuticals 51 Furniture 72 Medical Devices 89 Forest Products 114 Agricultural Products 95 Apparel 106 Oil and Gas Products and Services 80 Jewelry and Precious Metals 57 Leather and Related Products 83 Footwear 17 Aerospace Vehicles and Defense 94 Textiles 138 Sporting, Recreational and Children's Goods 131 Tobacco 72 Fishing and Fishing Products 93 Aerospace Engines 149 Employment By Traded Cluster Columbus Metropolitan Area 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Columbus MA overall employment rank = 37 of 318 Employment, 2001 Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 11
3.5% Specialization By Traded Cluster Columbus Metropolitan Area 3.0% Construction Materials 2.5% Share of National Cluster Employment in 2001 2.0% 1.5% Chemical Products Financial Services Communication Equipment 1.0% Business Services Plastics Distribution Services Lighting and Electrical Equipment Footwear Columbus Metro Area Share of National Employment: 0.67% 0.5% 0.0% Motor Driven Products Education and Knowledge Creation -0.70% -0.35% 0.00% 0.35% 0.70% 1.05% 1.40% Employment: = 0 999 Change in Share, 1990 2001 Power Generation and Transmission Transportation and Logistics = 1,000 3,999 = 4,000 7,999 = 8,000 29,999 = 30,000+ Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 12
1.4% Specialization By Traded Cluster Columbus Metropolitan Area 1.2% Financial Services 1.0% Share of National 0.8% Cluster Employment in 2001 0.6% 0.4% 0.2% 0.0% Business Services -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2% 0.3% 0.4% Change in Share, 1990 2001 Employment: Education and Knowledge Creation Plastics Metal Manufacturing Publishing and Printing Automotive Analytical Instruments Aerospace Vehicles and Defense Heavy Machinery Building Fixtures, Equipment & Services = 0 999 = 1,000 3,999 = 4,000 7,999 = 8,000 29,999 = 30,000+ Columbus Metro Area Share of National Employment: 0.67% Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 13 Chemical Products Distribution Services Production Technology Processed Food Hospitality an Tourism Lighting and Electrical Equipment Heavy Construction Services Entertainment Furniture Transportation and Logistics Information Technology Tobacco Prefabricated Enclosures Sporting, Recreational and Children s Goods Apparel
Job Creation By Traded Cluster Columbus Metropolitan Area 25,000 20,000 15,000 10,000 5,000 Net traded job creation, 1990-2001: +46,840 Job Creation, 1990-2000 0-5,000 Financial Services Business Services Transportation and Logistics Distribution Services Communications Equipment Heavy Construction Services Information Technology Hospitality and Tourism Entertainment Construction Materials Power Generation and Transmission Prefabricated Enclosures Plastics Lighting and Electrical Equipment Furniture Apparel Medical Devices Tobacco Sporting, Recreational and Children's Goods Processed Food Jewelry and Precious Metals Production Technology Biopharmaceuticals Footwear Fishing and Fishing Products Aerospace Engines Textiles Forest Products Agricultural Products Leather and Related Products Heavy Machinery Oil and Gas Products and Services Building Fixtures, Equipment and Services Chemical Products Publishing and Printing Aerospace Vehicles and Defense Education and Knowledge Creation Metal Manufacturing Automotive Analytical Instruments Motor Driven Products Benchmark for traded job creation= +47,872 Indicates expected job creation at rates achieved in national benchmark clusters, i.e. percent change in national benchmark times starting local employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 14
Financial Services Cluster Specialization by Subcluster Columbus Metropolitan Area Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 15
Financial Services Cluster Employment by Sub Cluster Columbus Metropolitan Area Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 16
Financial Services Cluster Wages by Subcluster Columbus Metropolitan Area Indicates national benchmark average wage. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 17
Financial Services Cluster Job Creation by Subcluster Columbus Metropolitan Area Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Columbus Partnership Presentation 2004.02.27 RB 18 Indicates expected job creation at rates achieved in national benchmark clusters, i.e. percent change in national benchmark times starting local employment.
Columbus Partnership Presentation 2004.02.27 RB 19 Inner City Economic Revitalization Premises of the New Model Traditional Model Reduce Poverty Focus on Deficiencies and Social Needs Economic Space: Neighborhood New Model Create Jobs and Wealth Focus on Competitive Advantage and Investment Economic Space: Region Lead: Government Lead: Private Sector
Columbus Partnership Presentation 2004.02.27 RB 20 Competitive Advantages of the Inner City Strategic location Underutilized workforce Large pool of available workers amid long-term labor shortages Located near central business district Close proximity to regional transportation networks Inner City Linkage to industrial/ regional clusters E.g., back-office support to clusters such as entertainment and financial services Underserved local market Large and diverse consumer and business market currently being underserved
Columbus Partnership Presentation 2004.02.27 RB 21 The Role of Inner Cities in Regional Prosperity Equity Inner city vitality frees up resources now required to address social and economic disadvantage Enhances the return to public investment in transportation infrastructure, expands the housing stock, and mitigates urban sprawl Eases constraints to regional economic growth through utilizing the inner-city s labor force, land, and infrastructure more fully More efficient spatial organization of regional industry Substantial growth and profit opportunities in the inner city itself
Columbus Partnership Presentation 2004.02.27 RB 22 Columbus Inner City 2001 Columbus Inner City Key Facts Inner city Columbus is home to 188,000 residents or 26% of the city's total population. Inner city Columbus is home to over 6,000 establishments employing 37,000 workers. Employment growth of negative 1.3% in Inner City Columbus is far below the rest of the MSA (+4.2%). 0 1 2 4 6 Miles The largest industry clusters in inner city Columbus: Local Commercial Services Local Health Services Local Real Estate, Construction, and Development Local Hospitality Establishments Financial Services Legend Green = Inner City Areas White = Columbus boundary Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City
Columbus Partnership Presentation 2004.02.27 RB 23 Columbus Inner City 2000 Resident Prosperity Income Distribution (% Households in Range) Inner City Rest of City Rest of MSA 35% Population Size 187,743 523,901 828,513 30% Median Household Income $25,333 $43,089 $52,338 25% Unemployment Rate 9.7% 3.5% 3.3% 20% High School/ College Attainment 68% / 14% 89% / 34% 88% / 29% 15% Minority Population 55% 25% 7% 10% Population 25 and under 59% 63% 66% 5% Homeownership Rate Income Density ($MM per sq. mi.) 39% 57 50% 73 75% 7 0% $15k and below 15k-30k 30k-45k 45k-75k 75k and above Source: US Census 2000; ICIC Analysis Source: US Census 2000; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City
Columbus Partnership Presentation 2004.02.27 RB 24 Columbus Inner City 2001 Business Vitality Inner City Rest of City Rest of MSA Total Employment 36,533 352,978 367,162 Total Establishments 6,095 10,083 21,215 Employment Growth (1995 2001)CAGR -1.3% 1.6% 4.2% Establishment Growth (1995 2001) CAGR 0.2% 0.2% 4.4% Nominal Payroll Growth (1995 2001) CAGR 2.7% 6.0% 9.0% Business Startups (>1 year old) 5.3% 5.8% 5.4% Bankruptcies (per 1000 establishments) 2.0 2.9 2.6 Source: US Census Zipcode Business Pattern Data and Dun & Bradstreet; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City
Columbus Partnership Presentation 2004.02.27 RB 25 Columbus Inner City 2001 Inner City Employment Growth VS. Inner City Share of MSA Employment (Largest 15 Inner City Clusters by Employment) 1998-2001 Inner City Columbus Employment CAGR 20% 15% 10% 5% 0% -5% -10% Local Financial Services Local Hospitality Establishments Business Services 1 2 Local Food & Beverage Processing & Distribution Local Real Estate, Construction, & Development Heavy Construction Services Local Commercial Local Health Services Services Local Community & Civic Organizations Local Entertainment & Media Education and Knowledge Creation Financial Services Transportation and Logistics 10% 20% 30% 40% 50% 2001 Columbus IC Share of Columbus MSA Employment Note: 1 = Local Motor Vehicle Products and Services; 2 = Distribution Services; Bubble Size Corresponds to Cluster Employment Source: US Census Zipcode Business Patterns 1998 & 2001; ICIC Analysis Source: State of the Inner City Economies Project, Initiative for a Competitive Inner City