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 West Texas region for the next few years. Second, although the region will fare well in job growth, particularly in comparison to recent trends, future growth will focus in areas requiring a highly-trained work force.To help guide what is hoped to be 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 West 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 new 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 diffused, mutual-fund companies in Boston, the California wine industry, textile companies in North Carolina, fashion in northern Italy, 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 West 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 105 165 270 2 Miscellaneous Transportation Equipment 136 131 267 3 Water and Sanitation 98 162 259 4 Offices of Health Practitioners 96 152 248 5 Nonmetallic Minerals, Except Fuels 153 91 244 6 Carpets and Rugs 86 153 239 7 Jewelry, Silverware, and Plated Ware 112 127 239 8 Communications 92 146 237 9 Nursing and Personal Care Facilities 99 137 236 10 Luggage, Handbags, and Leather Products 111 122 232 11 Automobile Parking, Repair, and Services 78 154 232 12 Residential Care 69 162 231 13 Toys and Sporting Goods 112 119 230 14 Soap, Cleaners, and Toilet Goods 103 127 230 15 Miscellaneous Petroleum and Coal Products 134 95 229 16 Oil and Gas Field Services 155 72 227 17 Museums, Botanical, Zoological Gardens 71 156 226 18 Crude Petroleum, Natural Gas and Gas Liquids 154 72 226 19 Meat Products 115 110 225 20 Miscellaneous Transportation Services 69 155 224 21 Manufactured Products 130 93 223 22 Security and Commodity Brokers 74 148 222 23 Individual and Miscellaneous Social Services 74 148 222 24 Amusement and Recreation Services 86 133 219 25 Agricultural Services 79 138 231
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 a 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 West 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.Several industries in health care and business services are on this list. These sectors have been good job generators for the region in the recent past, have shown some affinity for the region and will likely continue to be good growth targets. These include miscellaneous health services (such as audiologists, nurses, paramedics, physician assistants, psychologists), residential care, general health practitioners and nursing and personal care facilities. Some industries that could be considered traditional for the region appear for different reasons. Obviously, this region has a long history with the oil and gas industry so that the region demonstrates a strong affinity for these industries. Unfortunately, the growth potential in this area is much more limited but based on the strong attraction of these industries to West Texas, this region may be able to gain an increasing share of a shrinking national market in the future. Agriculture, particularly meat processing also appears promising, except in this case the future growth potential seems brighter than in oil and gas. Some technology industries such as communications appear high on this list. Also included are tourism and recreation industries such as amusement and recreation services, museums, botanical gardens and other attractions.
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.