THE LOOMING CHALLENGE OF U.S. COMPETITIVENESS: IMPLICATIONS FOR PHILADELPHIA
Michael E. Porter (and Jan W. Rivkin)
Harvard Business School
Innovation Leadership Speaker Series
Fox School of Business
March 11, 2014
• 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?
U.S. COMPETITIVENESS PROJECT 2
-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
U.S. COMPETITIVENESS PROJECT
Source: Bureau of Labor Statistics, Current Employment Statistics survey; author’s calculations.
1975-2001
AVERAGE: 2.12%
3
2013
0
20
40
60
80
100
120
1998 2000 2002 2004 2006 2008 2010
Em
plo
yme
nt
(millio
ns o
f jo
bs)
Note: CAGR is over the period 1998-2011. Source: Prof. Michael E. Porter, U.S. Cluster Mapping Project, Harvard Business School; Richard Bryden, Project Director; 2014 Benchmark Cluster Definition (Delgado-Porter-Stern 2013) Underlying data drawn from U.S. Census Bureau County Business Patterns.
INDUSTRIES SERVING LOCAL
MARKETS
(CAGR= 0.80%)
INDUSTRIES EXPOSED TO
INTERNATIONAL COMPETITION
(CAGR= –0.18%)
DISTURBING TRENDS PRIVATE, NONFARM EMPLOYMENT BY TYPE OF INDUSTRY
2011
4 U.S. COMPETITIVENESS PROJECT
0.0
0.5
1.0
1.5O
il a
nd
Ga
s P
rod
uctio
n a
nd
Tra
nsp
ort
atio
n
Ed
uca
tio
n a
nd
Kn
ow
led
ge
Cre
atio
n
En
vir
on
me
nta
l S
erv
ice
s
Co
al M
inin
g
Pe
rfo
rmin
g A
rts
Me
tal M
inin
g
Bu
sin
ess S
erv
ice
s
Vid
eo
Pro
du
ctio
n a
nd
Dis
trib
utio
n
Ag
ricu
ltu
ral In
pu
ts a
nd
Se
rvic
es
Dis
trib
utio
n a
nd
Ele
ctr
on
ic C
om
me
rce
Ho
sp
ita
lity
an
d T
ou
rism
Ele
ctr
ic P
ow
er
Ge
ne
ratio
n a
nd
Tra
nsm
issio
n
Me
dic
al D
evic
es
Ma
rke
tin
g, D
esig
n, a
nd
Pu
blish
ing
Fo
od
Pro
ce
ssin
g a
nd
Ma
nu
factu
rin
g
Bio
ph
arm
ace
utica
ls
Wa
ter
Tra
nsp
ort
atio
n
Liv
esto
ck P
roce
ssin
g
Tra
nsp
ort
atio
n a
nd
Lo
gis
tics
Insu
ran
ce
Se
rvic
es
Co
nstr
uctio
n P
rod
ucts
an
d S
erv
ice
s
Fin
an
cia
l S
erv
ice
s
Mu
sic
an
d S
ou
nd
Re
co
rdin
g
Up
str
ea
m C
he
mic
al P
rod
ucts
Ae
rosp
ace
Ve
hic
les a
nd
De
fen
se
No
nm
eta
l M
inin
g
Fis
hin
g a
nd
Fis
hin
g P
rod
ucts
Pro
du
ctio
n T
ech
no
log
y a
nd
He
avy M
ach
ine
ry
Me
talw
ork
ing
Te
ch
no
log
y
Co
mm
un
ica
tio
ns E
qu
ipm
en
t a
nd
Se
rvic
es
Do
wn
str
ea
m C
he
mic
al P
rod
ucts
Do
wn
str
ea
m M
eta
l P
rod
ucts
Pla
stics
Fo
restr
y
Pa
pe
r a
nd
Pa
cka
gin
g
Up
str
ea
m M
eta
l M
an
ufa
ctu
rin
g
Info
rma
tio
n T
ech
no
log
y a
nd
An
aly
tica
l In
str
um
en
ts
Wo
od
Pro
du
cts
Pri
ntin
g S
erv
ice
s
Le
ath
er
an
d R
ela
ted
Pro
du
cts
Au
tom
otive
Re
cre
atio
na
l a
nd
Sm
all E
lectr
ic G
oo
ds
Tra
ile
rs, M
oto
r H
om
es, a
nd
Ap
plia
nce
s
To
ba
cco
Lig
htin
g a
nd
Ele
ctr
ica
l E
qu
ipm
en
t
Vu
lca
niz
ed
an
d F
ire
d M
ate
ria
ls
Fu
rnitu
re
Je
we
lry a
nd
Pre
cio
us M
eta
ls
Fo
otw
ea
r
Te
xtile
Ma
nu
factu
rin
g
Ap
pa
rel
U.S. TRADED CLUSTER EMPLOYMENT 2011 VERSUS 2001
Ra
tio
of
20
11
to
20
01
Em
plo
yme
nt
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
2001 Employment Level
2011 Traded Employment Has Declined to 93% of 2001
5 U.S. COMPETITIVENESS PROJECT
62%
66%
70%
74%
78%
1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008
DISTURBING TRENDS U.S. LABOR FORCE PARTICIPATION RATE
U.S. COMPETITIVENESS PROJECT 6
Note: Rolling 12-month average in civilian labor force (not seasonally adjusted) over civilian noninstitutional population. Source: Bureau of Labor Statistics, author’s calculations.
1982
1997
POPULATION AGED
16-64 INVOLVED IN
THE WORKFORCE
2014
90
95
100
105
110
115
120
125
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
U.S. COMPETITIVENESS PROJECT 7
Note: Household income includes wages, self-employment, retirement, interest, dividends, other investment, unemployment, disability, alimony or child support, and other periodic income. Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.
95th PERCENTILE
80th PERCENTILE
60th PERCENTILE
40th PERCENTILE
20th PERCENTILE
Pre
-ta
x re
al h
ou
se
ho
ld in
co
me
(all s
eri
es in
de
xed
to
19
90
= 1
00
) DISTURBING TRENDS
REAL HOUSEHOLD INCOME BY QUANTILE, 1990-2012 (INDEXED)
WHO COMPETES WITH THE U.S. FOR BUSINESS INVESTMENT?
U.S. COMPETITIVENESS PROJECT 8
Source: HBS Survey on U.S. Competitiveness
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 9 U.S. COMPETITIVENESS PROJECT
Research Organizations
Biological Products
Specialized Risk Capital VC Firms, Angel Networks
Biopharma-
ceutical
Products
Specialized Business
Services Banking, Accounting, Legal
Specialized Research
Service Providers Laboratory, Clinical Testing
Dental Instruments
and Suppliers
Surgical Instruments
and Suppliers
Diagnostic Substances
Containers
Medical Equipment
Ophthalmic Goods
Health and Beauty Products Teaching and Specialized Hospitals
Educational Institutions Harvard, MIT, Tufts,
Boston University, UMass
Cluster Organizations MassMedic, MassBio, others
STATE OF CLUSTER DEVELOPMENT: MASSACHUSETTS LIFE SCIENCES
Analytical
Instruments
Cluster 10
REGIONS AND COMPETITIVENESS
• Economic performance varies significantly across sub-national regions (e.g.,
provinces, states, metropolitan areas)
• Many essential levers of competitiveness reside at the regional level
• Regions specialize in different sets of clusters
• Regions are a crucial unit in competitiveness
• Each region needs its own distinctive strategy and action agenda
• Business environment improvement
• Cluster upgrading
• Improving institutional effectiveness
11 U.S. COMPETITIVENESS PROJECT
ASSESSMENT OF THE U.S. BUSINESS ENVIRONMENT
U.S. COMPETITIVENESS PROJECT
U.S
. tr
aje
cto
ry
12
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Current U.S. position
Strength and Improving
Weakness and Deteriorating Strength but Deteriorating
Weakness but Improving
U.S. COMPETITIVENESS PROJECT
U.S
. tr
aje
cto
ry
ASSESSMENT OF THE U.S. BUSINESS ENVIRONMENT
13
UNIVERSITIES ENTREPRENEURSHIP
INNOVATION
CLUSTERS CAPITAL MARKETS PROPERTY RIGHTS
FIRM MANAGEMENT
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Current U.S. position
Strength and Improving
Weakness and Deteriorating Strength but Deteriorating
Weakness but Improving
ASSESSMENT OF THE U.S. BUSINESS ENVIRONMENT
U.S. COMPETITIVENESS PROJECT
U.S
. tr
aje
cto
ry
14
LOGISTICS
INFRASTRUCTURE
COMMUNICATIONS
INFRASTRUCTURE
UNIVERSITIES ENTREPRENEURSHIP
SKILLED LABOR
FLEXIBILITY IN
HIRING AND
FIRING
INNOVATION
CLUSTERS CAPITAL MARKETS PROPERTY RIGHTS
FIRM MANAGEMENT
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Current U.S. position
Strength and Improving
Weakness and Deteriorating Strength but Deteriorating
Weakness but Improving
U.S. COMPETITIVENESS PROJECT
U.S
. tr
aje
cto
ry
15
ASSESSMENT OF THE U.S. BUSINESS ENVIRONMENT
LOGISTICS
INFRASTRUCTURE
COMMUNICATIONS
INFRASTRUCTURE
TAX CODE
K-12 EDUCATION
SYSTEM
UNIVERSITIES ENTREPRENEURSHIP
SKILLED LABOR
FLEXIBILITY IN
HIRING AND
FIRING
INNOVATION
REGULATION
CLUSTERS CAPITAL MARKETS
MACRO
POLICY
POLITICAL
SYSTEM
PROPERTY RIGHTS
LEGAL
FRAMEWORK
FIRM MANAGEMENT
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Current U.S. position
Strength and Improving
Weakness and Deteriorating Strength but Deteriorating
Weakness but Improving
-20
-15
-10
-5
0
5
10
ADULT EDUCATIONAL COMPETENCY U.S. VS. INTERNATIONAL PEERS, BY AGE COHORT
Definition of Y axis (performance) = % of U.S. adults in top two proficiency categories - % of all int’l. adults in top two proficiency categories. Source: Goodman, M., Finnegan, R., Mohadjer, L., Krenzke, T., and Hogan, J. (2013). Literacy, Numeracy, and Problem Solving in Technology-Rich Environments Among U.S. Adults: Results from the Program for the International Assessment of Adult Competencies 2012: First Look (NCES 2014-008). U.S. Department of Education. Washington, DC: National Center for Education Statistics.
U.S. COMPETITIVENESS PROJECT
U.S
. a
dva
nta
ge
Literacy Problem-solving Numeracy
16-24 25-34
35-44
45-54
55-65
16-24
16-24
25-34
25-34
35-44
35-44
45-54
45-54
55-65
55-65
U.S
. d
isa
dva
nta
ge
16
REAL HOURLY WAGE GROWTH BY EDUCATIONAL ATTAINMENT- 1979-2000
U.S. COMPETITIVENESS PROJECT 17
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
REAL HOURLY WAGE GROWTH BY EDUCATIONAL ATTAINMENT- 1979-2000 VERSUS 2000-2012
U.S. COMPETITIVENESS PROJECT 18
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
EMPLOYMENT TO POPULATION RATIOS BY EDUCATIONAL ATTAINMENT
U.S. COMPETITIVENESS PROJECT 19
Note: Cohorts include persons 25 to 64 years old. Source: National Center for Education Statistics, Digest of Education Statistics, 2012. Based on U.S. Department of Labor, Bureau of Labor Statistics, Office of Employment and Unemployment Statistics.
40
50
60
70
80
90
1975 1980 1985 1990 1995 2000 2005 2010
Pe
rce
nt
of
Co
ho
rt
Less than
high school
High school
Some college
Bachelor’s or
higher degree
COMPARATIVE METRO WAGE PERFORMANCE 2001 - 2011
Notes: Average wage for private, non-agricultural employment. Growth calculated as compound annual growth rate. 50 largest MSAs displayed.
Ave
rage
Wa
ge
, 2
01
1
High but declining
versus U.S.
Low and declining
versus U.S.
Low but rising
versus U.S.
High and rising wages
versus U.S.
U.S. Average Wage Growth Rate: +2.8%
U.S. Average Wage,
2011: $45,535
Growth in Average Wage, 2001 to 2011
Source Census CBP
20 U.S. COMPETITIVENESS PROJECT
New York
Los Angeles
Chicago
Washington
Houston
Dallas
Philadelphia
San Francisco
Boston
Atlanta
Miami
Seattle
Minneapolis
Detroit (+1.95, $48,621)
Phoenix
San Jose (+3.3%, $89,857)
San Diego
Denver Baltimore
Portland
St. Louis, MO
Charlotte
Pittsburgh
Tampa
Riverside
Kansas City, MO
Cleveland
Orlando
Indianapolis Cincinnati
Columbus
Sacramento
Austin
Las Vegas
Hartford
Milwaukee
Bridgeport, CT (+3.0%, $77,922)
San Antonio
Nashville
Virginia Beach
New Orleans (+4.2%, $44,486)
Salt Lake City Providence
Memphis
Richmond
Jacksonville
Oklahoma City (+3.8%, $40,114)
Louisville
Raleigh
Birmingham
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
$65,000
$70,000
2.0% 2.5% 3.0% 3.5%
Source: BLS. 50 largest MSAs displayed.
COMPARATIVE METRO LABOR MOBILIZATION PERFORMANCE 2008 - 2012
Low but rising labor force
participation versus U.S.
Pro
po
rtio
n o
f W
ork
ing A
ge
Po
pu
lati
on
in
th
e W
ork
forc
e, 2
01
2
Change in Proportion of Working Age Population in the Workforce, 2008-2012
High but declining labor force
participation versus U.S.
Low and declining labor force
participation versus U.S.
High and rising labor force
participation versus U.S.
U.S. Change in Labor Force
Participation Rate: -2.3%
U.S. Labor Force
Participation Rate: 63.7%
21 U.S. COMPETITIVENESS PROJECT
Atlanta
Austin
Baltimore
Birmingham
Boston
Bridgeport
Charlotte
Chicago
Cincinnati
Cleveland
Columbus
Dallas
Denver
Detroit
Hartford
Houston
Indianapolis
Jacksonville
Kansas City, MO
Las Vegas Los Angeles
Louisville
Memphis, TN
Miami
Milwaukee
Minneapolis
Nashville
New Orleans
New York
Oklahoma City
Orlando Philadelphia
Phoenix
Pittsburgh
Portland
Providence
Richmond
Riverside
Sacramento
St. Louis, MO
Salt Lake City
San Antonio
San Diego
San Francisco San Jose
Seattle
Tampa
Virginia Beach
Washington
55%
60%
65%
70%
75%
-7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3%
Change in Philadelphia Share of National Employment, 2001 to 2011
Ph
ila
de
lph
ia N
ati
on
al E
mp
loym
en
t S
ha
re,
20
11
Employees 7,000 =
TRADED CLUSTER COMPOSITION OF THE PHILADELPHIA REGION 2001 - 2011
Added
Jobs
Lost Jobs
Employment
2001-2011
Overall change in the Philadelphia Share of
US Traded Employment: -.104%
Philadelphia Overall Share of US
Traded Employment: 2.25%
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.
Marketing, Design,
and Publishing
Distribution and
Electronic Commerce
Education and Knowledge Creation
Transportation and Logistics
Aerospace Vehicles and Defense
Biopharmaceuticals (5.5%)
Performing Arts
Agricultural Inputs and Services
Footwear
Business Services
Financial Services
Insurance Services
Information Technology and Analytical Instruments
Printing Services
Downstream Chemical Products
Automotive
Electric Power Generation and Transmission
Communications Equipment and Services
Furniture
Water Transportation
Upstream Metal Manufacturing
Oil and Gas Production and Transportation
Upstream Chemical Products
Vulcanized and Fired Materials
Wood Products
Textile Manufacturing
Nonmetal Mining
Jewelry and Precious Metals Leather and Related
Products
Trailers, Motor Homes, and Appliances
Forestry Fishing and Fishing Products
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
RESTORING U.S. COMPETITIVENESS WHAT WASHINGTON SHOULD DO
U.S. COMPETITIVENESS PROJECT
1. Create a sustainable federal budget, combining greater revenue
(including fewer exemptions) and less spending
2. Ease the immigration of highly skilled individuals
3. Simplify the corporate tax code with lower statutory rates
and no loopholes
4. Tax overseas profits earned by American multinational companies
only where they are earned
5. Aggressively address distortions and abuses
in the international trading system
6. Simplify and streamline regulation
7. Improve logistics, communications and energy infrastructure
8. Responsibly develop American shale-gas and oil reserves
Source: Porter, Michael, and Jan Rivkin. "An eight-point plan to restore American competitiveness." The Economist: The World in
2013. (Nov 2012).
23
MACRO
MICRO
STRATEGIC PRIORITIES FOR FEDERAL POLICY: APPROVAL PERCENTAGES
U.S. COMPETITIVENESS PROJECT 24
All Liberal Conservative All Liberal Conservative
Sustainable federal budget 90% 92% 85% 60% 62% 63%
Corporate tax reform 91% 91% 92% 72% 75% 73%
Infrastructure investments 85% 92% 75% 68% 74% 70%
International trading system 80% 81% 79% 60% 67% 58%
Responsible energy extraction 79% 75% 80% 64% 65% 64%
Streamlined regulations 86% 71% 95% 52% 43% 62%
High-skill immigration 89% 90% 88% 42% 55% 38%
Territorial tax code 58% 34% 75% 25% 19% 30%
U.S. business leaders General public
THE ROLE OF BUSINESS RESTORING U.S. COMPETITIVENESS
1. Vigorously pursue productivity and profitability within the business
a. Position the company to draw on U.S. strengths
b. Perform in the U.S. those activities that can thrive here
2. Tap opportunities to build the commons and benefit the business
a. Improve skills
b. Upgrade supporting industries and the U.S. supply chain
c. Support innovation and entrepreneurship
d. Bolster cluster and regional strength
3. Stop narrowly self-interested actions that undermine the commons,
especially in government relations
U.S. COMPETITIVENESS PROJECT 25