Christian Ketels, Harvard
Business School researcher
development should spur region-wide productivity, not special deals for
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Audrey Clay, Janis Clay, Paul Gilje (coordinator), Dan Loritz
(chair), Dana Schroeder, Clarence Shallbetter. By phone: Richard
McDonald, Marcela Merino.
Summary: According to
School researcher Christian Ketels, the old view of economic
development was that government's role was simply to attract new
businesses. But, he says, the new view is that economic development is
the process of improving the business environment to enable companies
to compete in increasingly sophisticated ways. New trends, which are
changing the reality of state economic development, call for
strengthening the role of regions in fostering economic development;
emphasizing job creation from within; supporting advanced
manufacturing; helping meet industry demands for talent; raising
expectations for universities to foster commercialization from
research; and increasing business export initiatives.
He reports that
Minnesota is one of 15 states with high and rising prosperity compared
with the U.S. But Minnesota should work on its labor force
productivity, which is below the national average. In recent years,
Minnesota has retained its high rankings among the states on four of
eight economic measures, but the state's rankings on seven of the
eight measures are trending downward. He notes that, despite ranking
low in overall cluster strength, Minnesota had five business clusters
that ranked high nationally in 2009: medical devices, publishing and
printing, analytical instruments, processed food and information
Ketels emphasizes that
regional economic development must ensure more competition and rivalry
within and between business sectors. He says less rivalry, which may
make an individual company more profitable, is not a good thing for a
region, because it reduces the pressure for higher productivity and
more innovation. He argues that government's role must be to create an
environment where businesses can be more productive and compete more
efficiently. Giving special deals or free access to government money
to certain businesses does not increase productivity.
Ketels is a member of the Harvard Business School faculty at
Prof.Michael Porter's Institute for Strategy and Competitiveness. He
is president of TCI, a global network of professionals in the field of
competitiveness, clusters and innovation. He is Honorary Professor at
the European Business School Oestrich-Winckel and Senior Research
Fellow at the Stockholm School of Economics.
Ketels has led cluster
and competitiveness projects in many parts of the world, has written
widely on economic policy issues and is a frequent speaker on
competitiveness and strategy in Europe, North America and Asia. He
holds a Ph.D. in economics from the London School of Economics and
further degrees from the Kiel Institute for World Economics and CologneUniversity.
Translating analysis of regional economies to real change is the hard
have good tools for analyzing regional economies," began Christian
Ketels, "but translating analysis to real change is still somewhat of
an art form. It depends a lot on the local context."
The old view of state
economic development was attracting big investment. This focused on taxes,
sites, infrastructure, skills, amenities and a creative class, Ketels
said. "This is still the reality of what economic development is about
in parts of the country."
New trends are
changing the reality of state economic development. "We see that things are
changing," he said. "There's more of a recognition that a lot of the
work needs to happen within your region. It's great to attract
investment and that's part of what you need to do, but a lot of the
job creation comes from existing companies."
The new trends include:
Strengthening the relationship
between the state and its regions in fostering economic development;
Emphasizing job creation within
Strengthening state support for
Creating partnerships to meet
industry demands for talent;
Raising expectations for
universities to bridge the gap between research and
Increasing business export
Even within national
economies like the U.S., there's a huge variety of performance among
economic regions that isn't easily explained. A comparison among
states based on Gross Domestic Product (GDP)
per capita and growth in GDP per capita from 2000
to 2012 shows rich states that are doing well and not so well and poor
states that are doing well and not so well.
Minnesota is one of
15 states with high and rising prosperity compared with the U.S.
Included in the same category are states like Massachusetts,
New York, Texas and North Dakota. "You really need to understand not
only national policies, but also what's going on in the states,"
Local factors really
said the same GDP comparison among economic regions within Minnesota
would show a similar variety of performance.
Ketels explained that
important local factors include geographic location; natural assets;
size; density; culture/social capital; business environment quality,
including infrastructure and skills; government capacity; and
He said research shows
that key drivers of regional performance include:
Social capital. The culture and the trust you have
in your society that enable you to draw on other assets are very
important. This social capital seems to drive the economic
performance of regions.
Performance is often better when you have access to a more educated
workforce that meets the demands of your companies.
Specialization patterns. You need to think about your
performance in areas in which you are strong. Enhance your capacity
in those types of activities in which you happen to be strong and in
which you happen to have strong specialization patterns.
Recent evidence shows
the presence of clusters is related to strong economic outcomes.
defined a cluster as a geographically concentrated group of
interconnected companies and associated institutions in a particular
field of related industries.
He said that there is
now ample evidence that having a higher share of regional employment
in strong clusters translates into:
Higher prosperity: Higher wages, higher productivity,
higher job growth and more innovation.
Greater entrepreneurship: More new business formation in
new and existing industries; better survival of new firms; and
higher job growth in new firms.
Easier emergence of new clusters:
Driven by the numbers and
kinds of existing clusters.
There is no one
silver bullet in achieving sustained economic growth. Ketels pointed out that
a range of factors matters and that the individual factors are
interdependent in their impact on regional prosperity. For example, he
said, it's good if your region gets a research institution, but
companies will only make changes in their activities based on that if
you also have an advanced workforce. And it is those changes in
companies that ultimately drive prosperity gains. He added that the
value of education or infrastructure depends on how good the region is
in other areas.
To move your region
to action, you have to diagnose where the region stands economically.
believes the diagnostic process needs to be open and inclusive of all
relevant stakeholders. "You must be clear that this is a team effort,"
he said. It's important that the parties speak the same language and
establish a common set of facts, that is, to agree on the baseline of
where the region stands now economically. "Diagnostics are critical to
make sure everybody gets to the same baseline," he said. "The
analytics need to be sound, but having an expert who is 100 percent
right is of little value if there is no ownership of the findings
among regional decision makers.
"You need to establish a
common understanding on where the region stands. Then you can
fruitfully debate the conclusions to draw," Ketels said, "and argue
about what is right for this region now. If you don't agree on what
the current circumstances are, that discussion will be all about
ideology and individual beliefs, not about facts."
He outlined three areas
the diagnostic process needs to cover:
How are we doing in exports, innovation rates, investment rates and
These are things that you can affect and that ultimately drive
economics outcomes. Where do we stand on education, infrastructure,
business environment quality, and quality of institutions?
These are very important. "Part of your performance reflects the
deck that you've been dealt: where you're located, who your
neighbors are, whether you're on a trade route and what your natural
resources are," Ketels said.
A 2012 scorecard
shows that in recent years, compared with other states, Minnesota has
retained high rankings on four of eight economic performance measures,
but seven of these eight measures are trending downward.
Retained high rankings:
Labor Mobilization (Proportion of working age
population in the workforce): Ranked 1st in 2000 and 2nd
(Patents per employee): 6th in 2000 and 6th in
(Average private wage): 11th in 1998 and 13th
per capita): 13th in 2000 and 12th in 2010.
This is the only measure whose ranking improved in recent years.
Currently at middle
New Business Formation (Traded cluster establishment
growth): 15th from 1998 to 2000 and 19th from
2007 to 2009.
Labor Productivity (GDP per workforce participant): 19th
in 2000 and 21st in 2010.
Job Creation (Private employment growth): 20th
from 1998 to 2000 and 24th from 2007 to 2009.
Retained low ranking:
Cluster Strength (Employment in strong clusters): 30th
in 1998 and 39th in 2009.
Despite ranking low in
overall cluster strength, Minnesota
had five high-ranking clusters nationally in 2009 (measured by
employment size): medical devices (4th); publishing and printing
(7th); analytical instruments (8th); processed food (9th); and
information technology (12th).
Minnesota should work
on its labor force productivity. Looking at productivity
as measured by national GDP per labor force participant, Minnesota
ranks below the national average. But its productivity grew slightly
faster than the national growth rate from 2000 and 2010. "This should
be on Minnesota's action agenda," Ketels said. "Why is our
productivity not higher and how can we drive this forward?"
higher than the national average in innovation performance (measured
as patents per 10,000 workers) and its performance is improving at a
faster rate than the national average. "This is so important,"
Ketels said, "because this is where policy can act." There are other
performance measures that a region can't address directly.
is the process of improving the business environment to enable
companies to compete in increasingly sophisticated ways. Referring to the
"diamond" of business environment conditions, a framework introduced
by Michael Porter in the 1990s, Ketels noted that the quality of the
overall business environment can be addressed directly through:
Rules and incentives
that encourage local competition, investment and productivity, such
as tax policy that encourages investment and research and
development (R&D), flexible labor policies, intellectual property
protection and antitrust enforcement.
Access to high-quality business
inputs, such as human
resources, capital access, physical infrastructure, permitting and
regulatory efficiency, and scientific and technological
Local availability of suppliers and
Addressing sophisticated and
demanding local needs and customers through things like strict quality,
safety and environmental standards; consumer protection laws;
government procurement of advanced technology; and encouraging early
demand for products and services.
Ketels said that
economic development attempts must address the fundamental conditions
of the economy at this level to have a sustained impact. Short-term
measures to artificially create jobs or support exports do not work
over time, if they do not change the underlying competitiveness of the
are characterized by two kinds of clusters: traded clusters and local
Both are important, Ketels said, but they have very different dynamics
and react very differently to changes in the business environment.
Traded clusters are companies that serve national
and international markets. They can locate anywhere and represent 30
percent of employment. "If they don't find Minnesota a good place to
locate activities, they will go away," Ketels said. "They represent
only 30 percent of employment, but it's the higher wage part, the
much higher productivity growth part, the much higher innovation
part. More than 95 percent of patents are in these sectors."
Local clusters are companies that serve almost
exclusively the local market and are not directly exposed to
cross-regional competition. They represent 70 percent of employment.
defined the old model of economic development; collaborative action
defines the new model. Under the old model,
Ketels said, government was seen as the driver of economic development
through policy decisions and incentives. Under the new model, economic
development is a collaborative process involving government at
multiple levels, companies, teaching and research institutions and
private sector organizations.
"There are many actors
who have to be involved and who have relevant information to identify
what needs to be done in a specific location," Ketels said. "It's a
collaborative process where you have to have trust, a shared language
and a common view of reality. Because there are no generic 'silver
bullets' for economic development, you need to start with the
diagnostics of where you stand as a location. To then get to a joint
agenda, the collaborative process is already critical at that stage."
"But, Ketels continued,
"it's not only the diagnostics and policy design, it's also the
approach towards action that needs to change: in this new model there
is a recognition that many individuals need to act to make change
happen and that you can't order them to do what is required. You can
only try to convince them. The hope is that people will do things
trusting that other people in the system will do complementary things.
That will make it more valuable for me to make that investment."
parts of six economic regions, all of them spilling into or out of
neighboring states. The six regions are (1)
the Minneapolis-St. Paul economic area, which spills
into Wisconsin and South Dakota; (2) the Duluth economic
area, which spills into Wisconsin; (3) the Grand Forks
economic area, which spills into Minnesota; (4) the Fargo
economic area, which spills into Minnesota; (5) the Sioux Falls
economic area, which spills into Minnesota; and (6) the La
Crosse economic area, which spills into Minnesota.
Different levels of
government have different roles in economic development. "Do
you have a clear view of what the regional/local level can and should
do?" Ketels asked. "The regional/local level leverages the investments
and tools provided by the national and state governments. Should we
try to attract funding for a new community college? Should we try to
get money for a new research center? Or should we go after some new
infrastructure investment? You need to decide at the local/regional
level what you want to try to get from higher levels of government."
can use cluster data and cluster groups to decide what dimensions of
the business environment to strengthen, what networks to mobilize and
what skills, firms and investors to attract. Ketels said
cluster-based policy does much more to put the region in focus, build
on the region's existing capabilities and move policy design and
implementation into a public/private partnership, where the different
actors work together.
The state government
has more tools, power and capacity to do economic development, but, in
terms of businesses and clusters, the state is not the most relevant
asked whether the state can do things that work in different parts of
the state or whether it should give different parts of the state the
ability to do things themselves. If it stays at the state level, there
must be a strategy that acknowledges differences among different areas
of the state. If the state gives substate regions the power to do
things themselves, there must be capacity at that level to do these
things. "Otherwise," he said, "you're pushing things down into a
There must be
competition within sectors and between sectors. An interviewer asked
about how to account for breaks for certain companies, import
restrictions, public pensions and other things that tip the balance
away from a competitive environment to a noncompetitive one. Ketels
said we must distinguish between tools that make economic activity in
businesses that form a sector privately more profitable vs. those that
make activities in those sectors more productive. The sectors argue
for a lot of the subsidies and market restrictions because it makes
their activities more profitable. But it doesn't make them more
"We must be very clear
that we're not primarily interested in the profitability of your
company; that is your job as a business leader, " he said. "But we
want to create an environment where you can be more productive. That
doesn't mean special deals or free access to government funds."
"It's important that
government leaders understand the principle of competitiveness," he
continued. "Competitiveness doesn't mean special deals to the sectors
that are most important to our economy, but it means making everyone
more productive and more able to compete effectively."
He said less rivalry may
seem good individually, because it makes an industry more profitable
for an individual company. "But it's not a good thing for a region,
because it takes away from the pressure for higher productivity and
for higher levels of innovation. If we come together for regional
economic development, we want to make sure there is more competition
and rivalry, not less."
businesses from local or state governments basically shift money from
one to the other, because the governments think there will be more
benefits than costs. Ketels replied that it's
important to think about how to tie the investor to the location. It's
better to provide more things to investors on the ground that would
stay, even if an investor leaves. "If you think more about the
regional economic strategy, we should try to make sure we're able to
tell companies we're particularly good at certain things for their
industry," he said. "Take it away from the kind of competition that's
only decided by the lowest tax rate. You need to make sure there's a
broader spectrum than that."
units are not necessarily aligned with the real economic units, coming
up with the right kind of institutions across these political borders
is very important. Ketels gave the example
of the decision to create a joint port authority between New York City
and New Jersey. "It was absolutely critical," he said. "It allowed all
kinds of things to move to New Jersey that created space for new
things to happen in Manhattan.
That wouldn't have been possible if there were still a New York City port
authority that tried to defend its turf."
If things are
happening that make Minnesota less attractive for certain companies,
giving them money doesn't necessarily help in the long run. An interviewer
pointed out that in the 2013 session, the Legislature gave the Mall of
America, the Mayo Clinic and 3M major amounts of money, because these
institutions are very important to us. Ketels said he is somewhat
skeptical of efforts like that, but it depends on what the money is
used for. "Ultimately you do want to create an environment where these
companies want to stay because they think this is the best place to
be," he said. "But giving them money can at best be a short-term part
of a long-term strategy."
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