Directions for Growth
The preceding analysis of statewide and regional economic trends attests to a couple of concerns about the future direction of the region and the state. First, growth seems likely to slow in Texas and in the Central Texas region for the next few years. Second, although the region will experience a slowdown from the very rapid growth of the 1990s, much of this future growth will focus in areas requiring a highly trained work force.To help promote a brighter economic future both in the number of wage earners and the amount of wages earned, this section of the report will examine likely growth prospects for various industries in the Central Texas region. In particular, this section examines both the traditional approach to seeking industries that have a comparative advantage in the region and the newer approach to identifying industry clusters as the driving force of economic development–industries that display a competitive advantage. Using both approaches and the advanced geographical concepts embedded in the Comptroller’s 13-region economic model, this section identifies industries likely to be the cornerstones of future economic development in the region.
Comparative Advantage, Industry Clusters and Competitive Advantage
The traditional model of industrial development held that a region would tend to specialize in industries for which it held a comparative advantage. The source of this comparative advantage was usually access to some key raw material, transportation mode or a labor supply with particularly scarce skills. Because the presence of this advantage allowed producers in the region to underbid other producers, the industry flourished.
More recently, in a much more interconnected world in which transportation costs are a much smaller component of production and workers and their skills are more mobile, industrial development experts have come to note another trend in the location of jobs.
The economic growth of regions now involves “clusters” of interrelated industries that reinforce each other and foster the development of competitive advantage rather than basing development targets on the older and less dynamic theory of comparative advantage.
Economic clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries and associated institutions such as universities and trade associations, that compete but also cooperate. [1]
Today’s economic landscape is littered with industry clusters, some with household names such as Silicon Valley, Hollywood or Wall Street. Other clusters may be more anonymous or more geographically diffuse—mutual-fund companies in Boston, the California wine industry, textile companies in North Carolina, insurance companies in Hartford, recreation in Florida.
Oddly, clusters are becoming more prevalent just when geographical location seems to be less of a business determinant because of worldwide outsourcing, just-in-time inventory and commerce over the Internet. In some important ways, however, things have changed.
In the old economy, in which production costs were heavily based on input costs, locations with some key attribute or endowment—a raw material, a natural harbor, cheap labor—often enjoyed a comparative advantage over other sites. This advantage persisted for long periods of time and encouraged the growth of industry capitalizing on the particular attribute.
For example, the development of the steel industry along the Great Lakes was the result of cheap transportation bringing together iron ore from the upper Great Lakes with the coal of Western Pennsylvania, Ohio and New York. Later, the low cost of labor led to the migration of New England’s textile industry to the South, and ultimately, overseas.
In the modern economy, competition is global, not local or regional. Transportation modes are more efficient and faster. And competitive advantage based on making more productive use of inputs through continual innovation many times outweighs comparative advantage based on costs of production.
This has not led to the death of geography as a factor in business success, but it has certainly changed how geography affects profitability. Harvard Business School professor Michael Porter notes, “The enduring competitive advantages in a global economy lie increasingly in local things, such as knowledge, relationships, motivation—things that distant rivals cannot match.” [2]
Competitive and Comparative Advantage
The idea that economic clusters support economic growth and development is best presented by Porter in his book, The Competitive Advantage of Nations. [3] Porter argues what has long been appreciated by economists, that a region’s economic vitality is a direct product of the competitiveness of local industries. Porter’s contribution is to document that conditions affecting competitiveness are not always simply cost-related or attributable to the availability of natural resources, particularly in “new economy” firms in which input costs are a small component of total costs. Instead, he notes that other conditions affecting a firm’s ability to compete in the international marketplace are related in the degree to which it has successfully faced competition locally, and the degree to which the local economic environment supports the firm.
Porter says that any intense competition a firm faces in its local market is desirable because companies that survive a tough local market become stronger international competitors. This is contrary to older, conventional wisdom that geographic isolation shields a producer from the unhealthy competition of a major rival, thus allowing the company to survive.
Porter sees the geographic concentration of competitors as a positive for long-term economic growth and innovation in the region instead of ruinous, cutthroat and ultimately destructive competition between major employers that undermines the region’s economy.
Porter’s second contribution—that local linkages between suppliers, purchasers and other organizations supporting an industry’s competitiveness can also be a source of increasing competitive strength—is largely a recasting of an older economic concept of agglomerative economies of scale or the reductions in costs enjoyed by firms that locate near suppliers, purchasers or labor markets. Clusters of competing and cooperative firms together strengthen the competitive abilities of the affected industries. And in strengthening the competitive advantage of local firms, these same forces strengthen the local economy.
Measuring Comparative and Competitive Advantage
This concept of the balancing of both competitive and cooperative factors in defining a healthy local business environment has greatly complicated efforts to use simplistic tools to identify industry clusters. Tools such as the location quotient or shift-share analysis discussed in the previous chapter help identify industries that have flourished in the region in the past or at least are showing signs of relative strength. But such measures, while useful, are incomplete. Instead, a more unified approach is needed, taking into account not only what industries are found in the local area and in what concentrations, but also what industries are found in all other regions, in what concentrations, and how these concentrations interact.
One of the best tools available is the framework offered by Regional Economic Modules Inc. (REMI) in constructing their composite cost indexes for industries across the nation. [4] These indexes summarize the relative cost of production for an industry located in a region based on access to material inputs, labor market conditions, labor productivity and other important cost components such as the local cost of construction, electricity and other fuels. If a region contains an abundant supply of materials critical to production or occupational types used by the industry, then the industry’s composite cost index in the region should be low.
In addition, REMI has an index that rates the various industries in the region relative to the national average based solely on labor costs. This index incorporates the agglomerative effects of having a readily available labor supply of key occupational needs. As such, it is a crucial rating of how the region compares to a national norm based on labor costs.
Unfortunately, neither a low composite cost index, a high location quotient or a strong upward trend in shift-share measures can assure that an industry is a good growth prospect for the future. Some industries, because of international pressures, shifting consumer tastes or technological change simply are not in a growth mode. While it is possible for a region to gain an increasing share of a declining industry, as good public policy, pursuing such “hospice” industries is probably not an effective tool for economic development.
Accordingly, any list of industries purporting to rate prospects for future development must combine both comparative and competitive strength in a region with likely growth prospects for the industry as a whole either in the nation or in an area much larger than the region. Table 9 brings these considerations together to define a ranking for each industry in the region based on its location quotient, regional industry growth differential, composite price index, labor cost index and likely national and state growth potential over the next five years.
TABLE 9
Top 25 Potential Employment Growth Targets for the Central Texas Region
2000-2005
(Projected)
(1) Based on rankings on location quotient, regional industry growth differential, composite total production costs and composite labor costs.
Average
Regional
Applicability
Rank (1)Average
Employment
Growth Potential
Rank During
2000 to 2005Total
Rank1 Health Services 103 165 268 2 Communications 110 147 257 3 Agricultural Services 106 140 245 4 Security and Commodity Brokers 95 149 244 5 Nursing and Personal Care Facilities 104 139 243 6 Trucking and Warehousing 126 115 240 7 Offices of Health Practitioners 88 153 240 8 Funeral Service and Crematories 105 130 235 9 Research and Testing Services 71 163 234 10 Residential Care 71 163 234 11 Local and Interurban Passenger Transit 83 150 233 12 Management and Public Relations 71 160 231 13 Educational Services 97 135 231 14 Automobile Parking, Repair and Services 76 155 231 15 Personal Services 102 127 229 16 Museums, Botanical, Zoological Gardens 71 157 228 17 Meat Products 116 111 227 18 Watches, Clocks and Parts 60 166 226 19 Water and Sanitation 138 86 224 20 Miscellaneous Plastics Products 113 111 224 21 Electric Utilities 136 86 222 22 Beauty and Barber Shops 96 126 222 23 Gas Utilities 136 86 222 24 Concrete, Gypsum and Plaster Products 124 97 221 25 Luggage, Handbags and Leather Products 98 123 221
Note: Ranks may not add exactly due to rounding.SOURCES: Carole Keeton Rylander, Texas State Comptroller of Public Accounts; and REMI.
The first column of Table 9 is regional advantage index in which the industry’s average ranking in the region among all industries based on the location quotient in the region, shift-share competitive trends, the composite price index and the labor cost index. [5] The second column is a growth potential ranking based on the projected national growth trends for the industry and the state growth trends for the industry. [6] The third column is the overall ranking of the industries for future development potential based on adding together the regional advantage ranking and the growth potential ranking.
Using this methodology, Table 9 presents the top 25 ranked industries for the Central Texas region based on both their display of some advantage within the region relative to the rest of the country and the likely growth potential of the industry.
On this list are several industries that are well recognized sources of economic strength in the Central Texas region. Top on the list is health services along with communications—both industries Central Texas tends to specialize in and also industries likely to grow over the next few years. Moreover, the presence of a number of health-related industries on this list underscores Central Texas’ importance as a center for medical services. The region’s geographic positioning also serves to identify this area as having a prime potential for increased transportation services.
Endnote[1] Massachusetts Technology Collaborative, “The New Economy—What’s a Cluster?” (http://www.mtpc.org/cluster/clustermore.htm).
[2] Michael E. Porter, “Clusters and the New Economics of Competition,” Harvard Business Review (November-December 1998), p. 77.
[3] Michael Porter, The Competitive Advantage of Nations (New York: Free Press, 1990).
[4] The composite price indexes in REMI’s modules which reflect new economic geography concepts of agglomeration have just been released in a new beta version of REMI. For further information contact REMI in Amhearst, Mass. (413) 549-1169 or info@remi.com.
[5] The industries with a higher rank indicated a better fit for the region.
[6] As in the regional advantage index, this growth index was scaled so that the industry with the best growth prospects was given a higher ranking.