South Carolina Economic Summit Douglas P. Woodward Director, Division of Research Moore School of Business University of South Carolina

Overview of Remarks Porter’s main points about competitiveness Long-run prosperity: raise per capita income Support clusters Develop innovative capacity How do we measure up against other states? Per capita income Innovative capacity and human capital

Porter’s Stages of Competitive Development Factor-Driven Economy Investment-Driven Economy Innovation- Driven Economy Input Cost Unique Value Efficiency Through Heavy Investment Source: Porter, Michael E., The Competitive Advantage of Nations, The Free Press, 1990

Clusters advance competitiveness What are clusters? A critical mass of firms in a particular industry and related industries Shared activities, technologies, channels, customer relationships, logistics and transportation Geographically concentrated, deeply rooted

Cluster participants Supplier industries Downstream or channel industries Providers of specialized services Financial institutions Infrastructure providers Educational and training institutions

Clusters and Productivity Clusters increase productivity and efficiency Efficient access to specialized inputs, services, employees, information, institutions, and “public goods” (e.g. training programs) Ease of coordination and transactions across firms Rapid diffusion of best practices Ongoing, visible performance comparisons and strong incentives to improve vs. local rivals 2 2

Higher Per Capita Income Higher productivity = higher income How does South Carolina rank? Are we building a higher-income economy?

Per Capita Income in South Carolina in 2004 United States average: $33,041 S.C. as percent of U.S.: 82.2 % Up from 81.8 % in 2000 Rank: 43rd in the nation

SC Relative Per Capita Income

Average Per Capita Personal Income 2001-2003 Source: US Census Bureau

Growth Per Capita Personal Income 2001-2003 Source: US Census Bureau

Three-Year-Average Median Household Income, 2001-2003 Source: US Census Bureau

States with similar patterns These states are not statistically different from South Carolina, according to average per capita personal income and average median household income

Similarities and Differences Bachelor's degree or higher, 2000 Labor Force Participation rate, 2003 Poverty Rate, 2003 Alabama 19 62.4 15 Florida 22.3 61.8 12.7 Idaho 21.7 68.3 10.2 Kentucky 17.1 62 14.4 Louisiana 18.7 60.8 17 North Dakota 22 70.7 9.7 South Carolina 20.4 63.7 South Dakota 21.5 73.8

South Carolina & United States Households Income and Benefits (2003 inflation adjusted-dollars) Source: US Census Bureau- American Community Survey 2003 Multi-Year Profile 2003.

Long-run Competitiveness Innovative capacity Creative, knowledge occupations Supports cluster development Measures: creative occupations and innovation capacity by state How does South Carolina rank?

Long-run Competitiveness Indicators Knowledge occupations Managers, professional, and technicians as a share of total workforce Educational attainment of the workforce Innovation capacity High-tech jobs R & D as a percentage of Gross State Product Patents per 1,000 workers

Determinants of Per Capita Income, 1 Per Capita Income Level 2002 Explanatory variables Human capital (Percent of population with BS degree) Patents University R&D R-squared: The fraction of variation in the dependent variable that is explained by variation in the independent variable. A high value indicates a strong relationship between the two variables. Regression with human capital (BS percent), patents, and Univ R&D explains has R-squared of 56% with each variable significantly positive at better than the 1% level. With state controls, the R-squared is 62% and each variable maintains a positive and significant impact)

Determinants of Per Capita Income, 2 Per Capita Income Growth Explaining variation in per capita income growth from 1997 to 2002 with the same variables Regression on levels of: BS percent, patents, university R&D, and initial per capita income level (and state controls) This has an R-squared of 26%..   The variables are significant and the right sign Positive for BS Percent, Patents, University R&D, and negative for initial income level (consistent with conditional convergence).   Patents are significant at the 3 percent level, Everything else at better than 1 percent.

Knowledge Occupations There is a high correlation between education attainment and managerial and professional occupations Knowledge Occupations Source: US Bureau of Census South Carolina in both cases is below the U.S. average

Knowledge Jobs, Creative Class Percentage of management, professional and related occupations as a share of total workforce Bachelor’s degree or higher (percentage of persons age 25 +) Source: U.S. Bureau of Census and Science and Engineering indicators 2004.

Innovation Capacity—R&D as a Percentage of Gross State Product The top five states and South Carolina Source: Science & Engineering indicators 2004.

Innovative Capacity A state with a high intensity of R&D activity supports higher proportion of high tech jobs. Source: Science & Engineering indicators 2004.

Innovative Performance: Patents per 1,000 Workers Patent per workers as a measure of new product innovation shows minor changes among the top ten states. Only the significant improvement of Idaho and Vermont and the modest increase of New Jersey. South Carolina is behind the U.S. average. Source: US Patent and Trademark Office and US Bureau of Census.

Porter’s Path Clusters Porter’s theory Prosperity Productivity Clusters Innovative Capacity Talking Points: 1) Low cost to high value: prosperous regions are not those with a low cost structure, but rather those with high innovation output. 2) Focus on regions: Important decisions are made in Washington DC, but increasingly it is local strategies that most affect a region’s competitiveness and prosperity. 3) The current economic troubles are cyclical not structural. Economic stimulus policies from Washington are important, but long term prosperity will depend more on increasing innovation. This depends largely on decisions made in the regions. Porter’s theory “There are no low-tech industries, only low-tech firms”

Porter’s Prescription: 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, private companies, teaching and research institutions, and new institutions for collaboration