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This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic
Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On
Competition (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).
Reshaping Regional Economic Development:
Clusters and Regional Strategy
Professor Michael E. Porter Harvard Business School
U.S. Cluster Mapping Launch Event
University of Minnesota, Minneapolis, MN September 29th, 2014
Copyright 2014 © Professor Michael E. Porter 2 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
The Challenge
• The US economy is slowly emerging from the deepest crisis we
have experienced in a generation
• However, the trajectory of the U.S. economy was already disturbing
well before 2008 and the long term trend is continuing
• The Midwest is no exception
Copyright 2014 © Professor Michael E. Porter 3 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
-1%
0%
1%
2%
3%
1975 1981 1987 1993 1999 2005 2011
Disturbing Trends Rolling 10-year Compound Annual Growth Rate in Total Number of U.S.
Private Nonfarm Employees, 1975-2013
Source: Bureau of Labor Statistics, Current Employment Statistics survey; author’s calculations.
1975-2001
AVERAGE: 2.12%
2013
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
0
20
40
60
80
100
120
140
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Em
plo
yme
nt
(in
millio
ns o
f jo
bs)
INDUSTRIES SERVING
LOCAL MARKETS
(CAGR= 0.89%)
INDUSTRIES EXPOSED TO
INTERNATIONAL COMPETITION
(CAGR= 0.02%)
Disturbing Trends Private, Nonfarm Employment by Type of Industry
U.S. COMPETITIVENESS PROJECT 5
Source: Economic Policy Institute, “A Decade of Flat Wages,” August 2013. Based on Current Population Survey.
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Less than high
school
High school Some college College degree Advanced
degree
Co
mp
ou
nd
an
nu
al gro
wth
ra
te
1979-2000
2000-2012
Real Hourly Wage Growth by Educational Attainment 1979-2000 Versus 2000-2012
Copyright 2014 © Professor Michael E. Porter 6 20140929—US Cluster Mapping Launch Event —FINAL FINAL
U.S. Average GDP Per
Capita, 2012: $42,784
Average U.S. GDP
Per Capita Real
Growth Rate: .64%
High but declining
prosperity versus U.S.
High and rising prosperity
versus U.S.
Low and declining prosperity
versus U.S.
Low but rising prosperity
versus U.S.
Source: BEA. Notes: GDP in real 2005 dollars. Growth rate is calculated as compound annual growth rate. Real Growth in Gross Domestic Product per Capita, 2001 to 2012
Prosperity Performance of U.S. States 2001-2012
Real GDP per
Capita, 2012
$58,000
Alabama
Alaska (+.74%, $61,156)
Arizona
Arkansas
California
Colorado
Connecticut
Delaware (-.0076%, $61,183)
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota (+4.6%, $55,250)
Ohio
Oklahoma
Oregon (+3.1%, $48,069)
Pennsylvania Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah Vermont
Virginia Washington
West Virginia
Wisconsin
Wyoming
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
Copyright 2014 © Professor Michael E. Porter 7 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Regional Economic Development: Prevailing Approaches
“Open for
Business”
“The Next
Big Thing”
“Big Game
Hunting”
• Attempt to match the
policies of peers
• Long lists of areas for
improvement, with
limited progress
• Table stakes
“Build it and
They Will
Come”
• Improve the
general business
environment
• Compete
aggressively for
plants and new
investments
• Zero Sum
• “Winner’s curse”
• High cost, low return
unless address
underlying
weaknesses
• Neglects the existing
base
• Enter new high
tech/ high growth
industries
• Many competing
for the same
industries – e.g.
biotech, ‘creative
class’
• Very few regions
have the assets to
succeed in them
• Invest in large
infrastructure/
industrial zone
projects
• Rarely offer a strong
advantage versus
other regions
• Generic infrastructure
will not offset lack of
skills, other
weaknesses, and
absence of related
businesses
Copyright 2014 © Professor Michael E. Porter 8 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
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 the
modern global economy
The 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 reducing
weakness
• 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 thinking
Copyright 2014 © Professor Michael E. Porter 9 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
• Competitiveness depends on the long-run productivity and efficiency of a
location 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 se
A nation or region is competitive to the extent that firms operating there are able
to compete successfully in the regional and global economy while maintaining
or improving wages and living standards for the average citizen
What is Competitiveness?
Copyright 2014 © Professor Michael E. Porter 10 20140929—US Cluster Mapping Launch Event —v4
Defining the Geographic Unit for Competitiveness
Regions
States
• Regions are essential economic units for competitiveness
Nation
Copyright 2014 © Professor Michael E. Porter 11 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Endowments
What Determines Competitiveness?
• Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
Copyright 2014 © Professor Michael E. Porter 12 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Endowments
Macroeconomic Competitiveness
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
What Determines Competitiveness?
• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not
sufficient to ensure productivity
• Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
Copyright 2014 © Professor Michael E. Porter 13 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
Endowments
Human Development
and Effective
Political Institutions
Sound Monetary
and Fiscal Policies
What Determines Competitiveness?
• Productivity ultimately depends on improving the microeconomic capability of the economy and the
sophistication 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 not
sufficient to ensure productivity
• Endowments, including natural resources, geographical location, population, and land area, create a
foundation for prosperity, but true prosperity arises from productivity in the use of endowments
Copyright 2014 © Professor Michael E. Porter 14 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Improving the 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
– e.g., Strict quality, safety, and
environmental standards
– Sophisticated demand in the private
sector or government
• Many things matter for competitiveness
• Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing
• Local rules and incentives that
encourage investment and productivity
– e.g. incentives for capital investments,
IP protection
• Sound corporate governance
• Open and vigorous local competition
− Openness to competition
− Strict competition laws • Improving access to high quality
business inputs
– Qualified human resources
– Capital availability
– Physical infrastructure
– Scientific and technological
infrastructure
– Administrative and regulatory
infrastructure • Availability and quality of suppliers and
supporting industries
Copyright 2014 © Professor Michael E. Porter 15 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
The Composition of Regional Economies
``
• Serve almost
exclusively the
local market
• Little exposure
to international or
cross-regional
competition for
employment
Local Clusters
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)
Note: Cluster data includes all private, non-agricultural employment.
Copyright 2014 © Professor Michael E. Porter 16 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Clusters and Competitiveness Massachusetts Life Sciences
Copyright 2014 © Professor Michael E. Porter 17 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Institutions for Collaboration Selected Massachusetts Organizations, Life Sciences
Economic Development Initiatives
Massachusetts Technology Collaborative
Mass Biomedical Initiatives
Mass Development
Massachusetts Alliance for Economic
Development
Life Sciences Industry Associations
Massachusetts Biotechnology Council
Massachusetts Medical Device Industry
Council
Massachusetts Hospital Association
General Industry Associations
Associated Industries of Massachusetts
Greater Boston Chamber of Commerce
High Tech Council of Massachusetts
University Initiatives
Harvard Biomedical Community
MIT Enterprise Forum
Biotech Club at Harvard Medical School
Technology Transfer offices
Informal networks
Company alumni groups
Venture capital community
University alumni groups
Joint Research Initiatives
New England Healthcare Institute
Whitehead Institute For Biomedical
Research
Center for Integration of Medicine and
Innovative Technology (CIMIT)
Copyright 2014 © Professor Michael E. Porter 18 20140929—US Cluster Mapping Launch Event —v17
Traded Cluster Composition of the Minneapolis Economy
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Added
Jobs
Lost Jobs
Employment
2001-2012
Business Services
Education and Knowledge Creation
Marketing, Design, and Publishing
Medical Devices (+.065%, 4.9%),
Lighting and Electrical Equipment
(+1.1%, 2.9%)
Performing Arts
Oil and Gas Production and Transportation
Biopharmaceuticals
Electric Power Generation and Transmission
Distribution and Electronic Commerce
Insurance Services
Financial Services
Information Technology and Analytical Instruments
Hospitality and Tourism
Transportation and Logistics
Production Technology and Heavy Machinery
Printing Services
Food Processing and Manufacturing
Metalworking Technology
Plastics
Construction Products
and Services
Downstream Metal
Products Paper and Packaging
Automotive
Upstream Metal Manufacturing
Furniture
Wood Products
Aerospace Vehicles
and Defense
Communications Equipment and Services
Downstream Chemical Products
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
-0.75% -0.50% -0.25% 0.00% 0.25% 0.50% 0.75%
Minneapolis Share of National Employment
2001-2012
Change in Minneapolis Share of National Employment 2001-2012
Minneapolis Overall
Share of US Traded
Employment: 1.7%
Overall change in the Minneapolis Share
of US Traded Employment: -.055%
Employees 15,000 =
0.85%
Copyright 2014 © Professor Michael E. Porter 19 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Strong Traded Clusters Drive Regional Performance Research Findings
Source: “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)
• Presence of strong clusters
• Breadth of industries within each
cluster
• Job growth
• Higher wages
• Higher patenting rates
• Greater new business formation,
growth and survival
• Resilience in downturns
• Build on the region’s existing and emerging clusters rather than chase hot fields
Copyright 2014 © Professor Michael E. Porter 20 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Marine
Equipment
Related Clusters and Economic Diversification
Furniture Building
Fixtures,
Equipment &
Services
Fishing &
Fishing
Products
Hospitality
& Tourism Agricultural
Products
Transportation
& Logistics
Plastics
Oil & Gas
Products
Chemical
Products
Biopharma-
ceuticals
Power
Generation &
Transmission
Aerospace
Vehicles &
Defense
Lighting &
Electrical
Equipment
Financial
Services
Publishing
& Printing
Entertainment
Information
Technology
Aerospace
Engines
Business
Services
Distribution
Services
Forest
Products
Heavy
Construction
Services
Construction
Materials
Prefabricated
Enclosures
Heavy
Machinery
Automotive
Sporting,
Recreational &
Children’s
Goods
Production
Technology Motor Driven
Products
Metal
Manufacturing
Jewelry &
Precious
Metals
Textiles
Footwear
Processed
Food
Tobacco
Medical
Devices
Analytical
Instruments Education &
Knowledge
Creation
Apparel
Leather &
Related
Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
Communications
Services Coal &
Briquettes
Copyright 2014 © Professor Michael E. Porter 21 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Strong Traded Clusters Drive Regional Performance Research Findings
Source: “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)
• Presence of 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
• Resilience in downturns
• Build on the region’s existing and emerging clusters rather than chase hot fields
• Economic diversification usually occurs within clusters and across related clusters
Copyright 2014 © Professor Michael E. Porter 22 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
• An overall agenda for creating a
more competitive and
distinctive position for a
country or region, based on its
particular circumstances
• Implementing best practices in
each policy area
• There are a huge number of
policy areas that matter
• No region or country can (or
should try to) make progress in
all areas simultaneously
Policy
Improvement
Economic
Strategy
What is an Economic Strategy?
Copyright 2014 © Professor Michael E. Porter 23 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Regional Value Proposition
Developing a Regional Economic Strategy
• What is a distinctive competitive position for the region given its
location, legacy, existing strengths, and potential strengths?
– What unique advantages as a business location?
– For what types of activities and clusters?
– What roles in the surrounding regions, countries, and the global economy?
Developing Unique Strengths Achieving and Maintaining Parity
with Peers
• What elements of the business
environment can be unique strengths
relative to peers/neighbors?
• What existing and emerging clusters
can be built upon?
• What weaknesses must be addressed to
remove key constraints and achieve parity
with peer locations?
• Priorities and sequencing are fundamental to successful economic development
Copyright 2014 © Professor Michael E. Porter 24 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
• Leverages the power of spillovers and linkages to drive rapid economic
development
• A vehicle for policies and investments that strengthen multiple related
firms/institutions simultaneously
• Enhances the efficiency and effectiveness of traditional economic policy
areas, such as training, R&D, export promotion, FDI attraction, etc.
Clusters as a Tool for Economic Policy
Copyright 2014 © Professor Michael E. Porter 25 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Clusters
Specialized Physical
Infrastructure
Natural Resource Protection
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
Quality and Environmental
standards
Market Information
and Disclosure
Organize Public Policy around Clusters
Copyright 2014 © Professor Michael E. Porter 26 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
Clusters as a Tool for Economic Policy
• Leverage the power of spillovers and linkages to drive rapid economic
development
• A vehicle for policies and investments that strengthen multiple related
firms/institutions simultaneously
• Enhances the efficiency and effectiveness of traditional economic policy
areas, such as training, R&D, export promotion, FDI attraction, etc.
• A forum for collaboration between the private sector, trade associations,
government, educational, and research institutions
– A mechanism for constructive business-government dialog
• Brings together firms of all sizes, including SME’s
• Clusters initiatives are a powerful private/public vehicle to identify and get
alignment on problems and action recommendations
• Cluster upgrading fosters greater and more sophisticated competition rather
than distorting the market
• Sound cluster policy addresses all existing and emerging clusters, and does
not pick winners
Copyright 2014 © Professor Michael E. Porter 27 20140929—US Cluster Mapping Launch Event —FINAL FINAL FOR POSTING
U.S. Cluster Mapping
• National economic initiative based at HBS and sponsored by the U.S.
Department of Commerce’s Economic Development Administration. To help drive
better regional economic strategy, the interactive website provides data to:
– Help regions understand their current competitiveness and sources of potential differentiation
– Help clusters assess their competitive position and highlight areas for potential growth
– Help Institutions for Collaboration engage with peers within and beyond their home region and cluster