Understanding your Industry

A few years ago the SLPP conducted a survey of state Economic Development Research Directors. Of the fifty state offices contacted, 35 participated in the survey. The purpose of the survey was to determine:

• how many states employ an industry-based strategy as part of their economic development efforts,
• how these states identify and analyze their industries,
• the data and techniques they use in their analysis,
• how they translate this research into economic development programs, and
• the need for greater access to data and assistance with industry analysis at the state and local level.

The survey was conducted as part of the Humphrey School's Database for Economic Adjustment project. The project, which is funded in part by a Department of Defense grant to examine ways in which communities can adapt to economic changes, seeks to provide a framework communities can use to understand and analyze their industries. Research and experience have shown that communities that possess a clear understanding of their key industries and are able to capitalize on their strengths enjoy the greatest success in their economic transitions.

The information from the survey will be used in the development of a World Wide Web site that provides communities with the tools and data sources they need to analyze their industries and offers examples of how other states and communities are both performing industry analysis and turning this analysis into successful economic development strategies.

States with industry-based strategies

Of the 35 states that participated in the survey, 28 have an industry-based focus as part of their economic development strategy and three states are in the process of shifting to one. In eight of the states, the industry focus is the strategy's key component. In one case, a research director commented that their industry strategy "serves as the foundation of the economic development office's work." Four states do no include an industry-based component in their economic development strategies.

Table 1. States with industry-based economic development strategies

How industry strategies and analysis are used
Of the states that have some form of industry-based strategy, seven focus their efforts on mostly business attraction or marketing. Industry analysis is used in national advertising campaigns, prospecting trips, trade shows, and marketing publications. One state researcher said that his state uses the information to attract firms that fit with the industries it believes are the "driving force" in the economy.

Ten states use industry analysis for primarily business retention and expansion efforts. In one state, for example, industry research led to the revision of state laws local insurance firms felt hindered their expansion in the state. Other states assign representatives to work with clusters of industries. These representatives help organize the clusters, match industries with state programs, and identify state and local policies that harm business expansion and retention. Eleven states use the industry analysis for business attraction, retention, expansion, and creation purposes. For example, one state, which views itself as the "technology state", focuses its efforts on recruiting and starting firms that complement existing technology firms as well as building workforce skills related to these particular technologies.

Table 2. How states use industry analysis

Industry clusters

Most of the states' industry strategies are centered around industry clusters, which include groups of industries related by any number of criteria. "state pays attention to and tries to help other industries, but cluster industries have more clout." Another research director said his state is moving to an industry cluster approach because several cross-cutting issues can be addressed more efficiently and effectively by working with groups of related firms rather than on a firm by firm basis.

The role of the state with respect to industry clusters varies only slightly. Most states see their role as initial facilitator or organizer. For example, one researcher said his department believes its job is to "incubate an industry cluster." In doing this, the department organizes firms in a cluster until they reach a "critical mass" at which time the state leaves it to the firms to organize themselves. Meanwhile, the department will work on making regulatory and tax reforms to help the clusters grow.

Several researchers said their departments have assigned staff members to specific industry clusters. These representatives keep the clusters informed about state policies, collect industry information the state uses for analysis, and promote state and local policies that help strengthen the clusters. One director said his department's industry cluster representatives serve as "broker agents" who help match manufacturers' needs with suppliers. Another director said that after the research office identified plastics as an increasingly important sector in the state, the economic development department organized a state plastics association and held a "plastics summit". Plastics firms were surprised by how large the industry was in the state. Since the summit, the firms formed an active organization and held another well attended summit with state legislators.

In determining industry clusters, many researchers and states look beyond Standard Industrial Classification codes to supplier links. For example, one state includes firms in certain plastics and wood industries in its jewelry cluster since they were identified as important suppliers to the jewelry making industry. A researcher director reported that his state groups industries by "function not product". Another said that her state has a health/biomedical cluster that includes health care, pharmaceutical, and medical devices industries. Other states group industries based on labor, energy, and transportation requirements as well as common technologies and workforce skills. One state has identified 45 specific industries, which are divided into three tiers based on likelihood of success. The 15 industries with the greatest likelihood of success are the targets of the economic development department's business attraction efforts.

Researchers in some states try to identify and promote or attract industries whose needs match the states' comparative advantage in areas such as energy availability and price, transportation and communication networks, and labor skills and costs. A couple of research directors said their states try to take stock of their specific labor skills and technologies and then focus attraction efforts on industries that require or complement these skills and technologies. Other states, however, simply want high-tech industries.

One state with a large share of both high-tech, high-performance and low-tech, declining industries tries to promote the former while offering support to the latter, which continue to play an important role in the state economy. Two states with undiversified economies try to develop clusters around their traditional industries. For example one state would like to use the warm water generated in energy plants to promote and support greenhouse businesses. Another state, which is largely agricultural, is exploring a variety of new industries that will provide value-added opportunities for its farm products.

Table 3. Criteria used to identify key industries and clusters

In the survey, research directors were asked about specific evaluative measures or techniques they use to identify key industries. The examples given in the question included location quotients, shift-share analysis, and input-output analysis. Research directors in five states reported that their offices use all of the techniques listed in the question. Sixteen directors said that their offices use some of the techniques, and fourteen said they do not use any of the techniques. Some of the research directors commented that their offices rely on other state departments and universities for analysis and that those organizations sometimes use the techniques, particularly input-output analysis. Several research directors commented that their offices are moving toward more qualitative analysis, and one director said that his office does not use "academic approaches". Focus groups and interviews with firms and associations are being used more frequently to analyze industries. One state, for example, identifies clusters through interviews with firms about their suppliers.

Data sources used in industry analysis

The research directors were also asked about sources of data and information their offices use to understand and identify key industries. All of the directors were familiar with federal data sources and have used Bureaus of Labor, Census, and Economic Analysis data. The reliance on federal data varied significantly across states. Some researchers performed almost all of their analysis with federal data. Many researchers, however, used federal data as a first level of analysis and to make comparisons with other states. These states derived whatever they could from the federal sources and then performed more detailed analysis with state, private, and other data sources.

Although the researchers found the federal data sources to be reliable and valuable, many wished that the data could be released on a more timely basis. Several directors complained about the lag time for the release of data and the infrequency with which some data are produced. Specific concerns include the need for more sub-state level data and data on self-employment and productivity.

Most of the researchers also use state ES-202 employment data. However, the availability and quality of that data appear to vary from state to state. Some states find that disclosure limitations hamper the data's use and effectiveness. One research director said that ES-202 data in his state are available at only the one-digit level. Another said that the high level of aggregation masks many dynamic and growing industries since they are lumped with other less productive or relevant industries. Another researcher finds ES-202 data to be unreliable since administrative files are used as statistical files even though the two types of data are not necessarily interchangeable.

Researchers access federal and state data from a variety of sources, including printed documents, computer disks, CD-ROMs, the Internet, and the World Wide Web (WWW). Most of the researchers said they are accessing more and more of their data from the WWW. A couple of researchers said that it is sometimes difficult to find the data they need on the WWW and commented that a Dewey Decimal-type system is needed. One research director said that "since there are many sources all over the place, it is difficult to find what you need."

Several research directors said that their offices collect a lot of important data through surveys and from industry associations and companies. Other important sources for some states include investment house and university research reports; Federal Reserve data, analysis, and reports; and manufacturers directories. A list of data sources identified in the survey is included in the following table.

Table 4. Data sources used by state economic development researchers

Need for assistance and access to data at the local level
In the survey, research directors were asked about the need for greater access to data and assistance with industry analysis at the local level. All but one of the research directors said that local governments and economic development organizations could use assistance in both areas. The one who said that assistance was not needed believed that even if local practitioners were able to access data and perform analysis, "they might not have the time or inclination to use it." This sentiment was echoed in some of the other researchers' comments. Specifically, these researchers believed that some people at the local level might not know how to use the data if they had it or would use it to tout their strengths in marketing efforts, not for analytical purposes. Most of the research directors, however, said that greater access to data as well as guidance on how to use the data would be welcome at the local level. They also said that techniques for analyzing data and assistance in interpreting the results of that analysis are needed. A few directors said that some local areas do an excellent job analyzing their industries and implementing programs related to that analysis.

Table 5. Types of data and analytical assistance required at the local level

Appendix

Table 6. States whose research directors participated in the survey