US Cluster Mapping Launch - Humphrey School Of Public Affairs

Reshaping Regional Economic Development:Clusters and Regional StrategyProfessor Michael E. PorterHarvard Business SchoolU.S. Cluster Mapping Launch EventUniversity of Minnesota, Minneapolis, MNSeptember 29th, 2014This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the MicroeconomicFoundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in OnCompetition (Harvard Business School Press, 2008), “Creating Shared Value” (Harvard Business Review, Jan 2011), the Social Progress Index Report (Social Progress Imperative)and ongoing related research. 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. For further materials, see the website of the Institute for Strategy and Competitiveness(www.isc.hbs.edu), FSG (www.fsg.org) and the Social Progress Imperative (www.socialprogressimperative.org).

The Challenge The US economy is slowly emerging from the deepest crisis wehave experienced in a generation However, the trajectory of the U.S. economy was already disturbingwell before 2008 and the long term trend is continuing The Midwest is no exception20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING2Copyright 2014 Professor Michael E. Porter

Disturbing TrendsRolling 10-year Compound Annual Growth Rate in Total Number of U.S.Private Nonfarm Employees, 1975-20133%1975-2001AVERAGE: ce: Bureau of Labor Statistics, Current Employment Statistics survey; author’s calculations.20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING3Copyright 2014 Professor Michael E. Porter

Disturbing TrendsPrivate, Nonfarm Employment by Type of Industry140Employment (in millions of jobs)120100INDUSTRIES SERVINGLOCAL MARKETS(CAGR 0.89%)806040INDUSTRIES EXPOSED TOINTERNATIONAL COMPETITION(CAGR 0.02%)2001998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING4Copyright 2014 Professor Michael E. Porter

Real Hourly Wage Growth by Educational Attainment1979-2000 Versus 2000-2012Compound annual growth rate1.5%1.0%0.5%0.0%-0.5%-1.0%-1.5%Less than highschoolHigh schoolSome collegeCollege degreeAdvanceddegree1979-20002000-2012Source: Economic Policy Institute, “A Decade of Flat Wages,” August 2013. Based on Current Population Survey.20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING5U.S.COMPETITIVEN5Copyright 2014 Professor Michael E. Porter

Real GDP perCapita, 2012Prosperity Performance of U.S. States2001-2012 58,000Alaska( .74%, 61,156)Delaware(-.0076%, 61,183)High but decliningprosperity versus U.S. 55,000High and rising prosperityversus U.S.WyomingConnecticutNorth DakotaNew Jersey 50,000VirginiaWashingtonCaliforniaNorth CarolinaNevadaNewHampshireMissouri 35,000UtahWisconsinArizonaFloridaNew MexicoIdaho 30,000 25,000-1.0%-0.5%Average U.S. GDPPer Capita RealGrowth Rate: .64%0.0%OklahomaKentuckySouth CarolinaLow and declining prosperityversus U.S.IowaVermontIndianaTennesseeMaineSouth de IslandPennsylvania 40,000GeorgiaMarylandTexasColoradoU.S. Average GDP PerCapita, 2012: 42,784Oregon( 3.1%, 48,069)MinnesotaIllinois 45,000( 4.6%, 55,250)New YorkMassachusetts0.5%AlabamaArkansasMontanaWest VirginiaMississippiLow but rising prosperityversus U.S.1.0%1.5%2.0%Real Growth in Gross Domestic Product per Capita, 2001 to 2012Source: BEA. Notes: GDP in real 2005 dollars. Growth rate is calculated as compound annual growth rate.20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING6Copyright 2014 Professor Michael E. Porter

Regional Economic Development: Prevailing Approaches“Open forBusiness”“Big GameHunting” Improve thegeneral businessenvironment Competeaggressively forplants and newinvestments Attempt to match thepolicies of peers Zero Sum“The NextBig Thing” Enter new hightech/ high growthindustries Many competingfor the same “Winner’s curse”industries – e.g. Long lists of areas for High cost, low returnbiotech, ‘creativeimprovement, withunless addressclass’limited progressunderlying Very few regions Table stakesweaknesseshave the assets to Neglects the existingsucceed in thembase20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING7“Build it andThey WillCome” Invest in largeinfrastructure/industrial zoneprojects Rarely offer a strongadvantage versusother regions Generic infrastructurewill not offset lack ofskills, otherweaknesses, andabsence of relatedbusinessesCopyright 2014 Professor Michael E. Porter

Towards a New Economic Development Model Traditional approaches to economic development are not working We must reshape the approach to economic development in the U.S.based on a deeper understanding of the drivers of competitiveness in themodern global economyThe New Direction Focus on competitiveness, not job creation per se Cluster-based, reflecting the core drivers of jobs and wages Build on existing and potential strengths, versus rely on reducingweakness Develop an overall strategy rather than a list of actions Prioritized and sequenced, not treating all weaknesses equally Data driven, not political or based on wishful thinking20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING8Copyright 2014 Professor Michael E. Porter

What is Competitiveness?A nation or region is competitive to the extent that firms operating there are ableto compete successfully in the regional and global economy while maintainingor improving wages and living standards for the average citizen Competitiveness depends on the long-run productivity and efficiency of alocation as a place to do business- The productivity of existing firms and workers- The ability to achieve high participation of citizens in the workforce Competitiveness is not:- Low wages- A weak currency- Jobs per se20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING9Copyright 2014 Professor Michael E. Porter

Defining the Geographic Unit for CompetitivenessNationStatesRegions Regions are essential economic units for competitiveness20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING10Copyright 2014 Professor Michael E. Porter

What Determines Competitiveness?Endowments Endowments, including natural resources, geographical location, population, and land area, create afoundation for prosperity, but true prosperity arises from productivity in the use of endowments20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING11Copyright 2014 Professor Michael E. Porter

What Determines Competitiveness?Macroeconomic CompetitivenessHuman Developmentand EffectivePolitical InstitutionsSound Monetaryand Fiscal PoliciesEndowments Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is notsufficient to ensure productivity Endowments, including natural resources, geographical location, population, and land area, create afoundation for prosperity, but true prosperity arises from productivity in the use of endowments20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING12Copyright 2014 Professor Michael E. Porter

What Determines Competitiveness?Microeconomic CompetitivenessQuality of theBusinessEnvironmentState of ClusterDevelopmentSophisticationof CompanyOperations andStrategyMacroeconomic CompetitivenessHuman Developmentand EffectivePolitical InstitutionsSound Monetaryand Fiscal PoliciesEndowments Productivity ultimately depends on improving the microeconomic capability of the economy and thesophistication of local competition revealed at the level of firms, clusters, and regions Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is notsufficient to ensure productivity Endowments, including natural resources, geographical location, population, and land area, create afoundation for prosperity, but true prosperity arises from productivity in the use of endowments20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING13Copyright 2014 Professor Michael E. Porter

Improving the Quality of the Business EnvironmentContext forFirm Strategyand Rivalry Local rules and incentives thatencourage investment and productivityFactor(Input)Conditions Improving access to high qualitybusiness inputs––––Qualified human resourcesCapital availabilityPhysical infrastructureScientific and technologicalinfrastructure– Administrative and regulatoryinfrastructure– e.g. incentives for capital investments,IP protection Sound corporate governance Open and vigorous local competition Openness to competition Strict competition lawsDemandConditions Sophisticated and demanding localneedsRelated andSupportingIndustries– e.g., Strict quality, safety, andenvironmental standards– Sophisticated demand in the privatesector or government Availability and quality of suppliers andsupporting industries Many things matter for competitiveness Successful economic development is a process of successive upgrading, in which thebusiness environment improves to enable increasingly sophisticated ways of competing20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING14Copyright 2014 Professor Michael E. Porter

The Composition of Regional Economies Serve national and globalmarkets Exposed to competition fromother regions Serve almostexclusively thelocal market Little exposureto international orcross-regionalcompetition foremploymentTradedClustersLocal Clusters Note: Cluster data includes all private, non-agricultural employment.Source: Michael E. Porter, Economic Performance of Regions, Regional Studies (2003); Updated via ClusterMapping Project, Institute for Strategy and Competitiveness, Harvard Business School (2008)20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING15Copyright 2014 Professor Michael E. Porter

Clusters and CompetitivenessMassachusetts Life Sciences20140929—US Cluster Mapping Launch Event —FINAL FOR POSTING16Copyright 2014 Professor Michael E. Porter

Institutions for CollaborationSelected Massachusetts Organizations, Life SciencesLife Sciences Industry Associations University InitiativesMassachusetts Biotechnology CouncilMassachusetts Medical Device IndustryCouncilMassachusetts Hospital Association General Industry Associations Informal networksAssociated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts Economic Development Initiatives Company alumni groupsVenture capital communityUniversity alumni groupsJoint Research InitiativesMassachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for EconomicDevelopment20140929—US Cluster Mapping Launch Event —FINAL FOR POSTINGHarvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices 17New England Healthcare InstituteWhitehead Institute For BiomedicalResearchCenter for Integration of Medicine andInnovative Technology (CIMIT)Copyright 2014 Professor Michael E. Porter