Northeast Ohio

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Northeast Ohios Economic Development Challenge

• Edward W. (Ned) Hill
• Vice President for Economic Development
• Cleveland State University
• Interim Dean, Levin College of Urban Affairs

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I dreamed that I was an economist and I had to
explain what happened!
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Real Tombstones
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What is the outlook?

• Liquidity trap, credit crunch
• Macroeconomic problems affects core domestic
  sectors in Ohio
• Automobile assembly
• Housing related
• Construction and building materials
• Furniture
• Chemicals
• Public policy and pricing favors
• Energy
• Food processingwell growing

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Market activity from Barrons
Corporate Debt Friday, October 24, 2008 None
expected this week.
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Commercial Paper Outstanding
Source Board of Governors of the Federal Reserve
System
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Discount rate spread in the commercial paper
market
Source Board of Governors of the Federal Reserve
System
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Source Cleveland Federal Reserve Bank
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Oil Peak 145, now 68.50
Source St Louis Federal Reserve Bank, download
October 29, 2008
Source Wall Street Journal Market Data Center,
October 29, 2008
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Northeast Ohios economic performance
Economic performance Ohio is Americas economic
battleground
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How big is the regional economy? Think of NEO as
the 17th largest metro economy in the US. Or, if
we were a nation, the 37nd largest national
economy
Economic performance NEO is a sizeable economy

• If Northeast Ohio were recognized as an economic
  region we would rank behind
• San Diego
• Ahead of
• Austin-San Antonio, Denver, St. Louis,
  Charlotte, Portland

Source US Bureau of Economic Analysis, October
2,2008
Notes GMP Gross Metropolitan Product GSP
Gross State Product
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Metropolitan per capita income in 2006There are
challenges
Economic performance NEO is a sizeable economy
Real 2001 out of 363 metropolitan areas Source
US Bureau of Economic Analysis, October 2,2008
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The economic challenge for the region and Ohio
was in late 1990s until the end of the 2001
recession
United States
Ohio
Economic performance GDP growth rates trail the
nation
Cleveland-Akron CSA
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Manufacturing's death in Ohio has been greatly
exaggerated and overly anticipated
Economic performance Statewide manufacturing is
a driver
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Productivity gain from manufacturing in Ohio led
the states weak recovery from the 2001 recession
Why manufacturing?
Source US Bureau of Economic Analysis, October
2, 2008
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Why is job growth so slow? The big 5 forces

• Tyranny of the product cycle
• Unbalanced product portfolio weighted toward
  older products
• Changing competitive advantage of firms
• Creative destruction fewer recalls, job growth
  comes from job creation not revitalization. In
  the US Ohio capital investment may be the job
  creation driver.
• Productivity Growth better, faster, smarter,
  fewer, cheaper a combination of technology,
  management and global supply chain integration
• Legacy work practices and cost uncertainty
• Work rules
• Cost uncertaintyhealth care, torts, mandates,
  energy
• Benefits wedge
• Failed business strategies of three key employers

Economic performance Legacy of place
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Growth Opportunity Base Drivers to build on in Ohio Strong Economic Base Drivers in good health
Important Supplier Base Drivers that need a transformation in Ohio Traditionally Competitive Base Drivers with challenged strategies
Ohio Growth
Ohio Competitiveness
Economic performance Portfolio of economic
drivers from 2000 - 2006
Chemistry combines five related industries
Soap, Cleaning Compound, and Toiletries (NAICS
3256), Rubber Product (NAICS 3262), Paint,
Coating, and Adhesive (NAICS 3255), Clay Product
Refractory (NAICS 3271), and Other Nonmetallic
Mineral Product (NAICS 3279)
1B in 2006 Output
IT intense
Source Economy.com
Compound Annual Growth Rate (CAGR) is the
year-over-year growth rate of an output over a
specified period of time
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Economic performance Portfolio of economic
drivers from 2000 - 2006
Compound Annual Growth Rate (CAGR) is the
year-over-year growth rate of an output over a
specified period of time
Chemistry combines five related industries
Soap, Cleaning Compound, and Toiletries (NAICS
3256), Rubber Product (NAICS 3262), Paint,
Coating, and Adhesive (NAICS 3255), Clay Product
Refractory (NAICS 3271), and Other Nonmetallic
Mineral Product (NAICS 3279))
Source Economy. com
IT Intense
1B in 2006 Output
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Four facts explain the performance of this market
area
Changing economic advantage
Low rates of innovation entrepreneurship
Economic performance Four observations
Failed corporate strategies and old products
Place-based legacy costs
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Strengths and opportunities in NEO

• Network of population centers, each with unique
  characteristics and operating environments
• Depth in professional services industries,
  including banking, insurance, and medical
  services
• Depth in traditional manufacturing and technical
  skill sets
• Diversity of manufacturing (food, chemicals,
  automotive, etc.)
• Educational resources
• Air access, particularly its status as a
  Continental hub
• History as a strong headquarters location (in
  particular, in banking and insurance)
• Strong cultural institutions
• Multimodal freight transportation
• Strong tradition in research and scientific
  initiatives

Economic perceptions Site location professionals
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Threats and challenges to NEO

• Low to declining population growth
• Does this make economic sense? Is cause and
  effect backwards?
• Role for targeted talent recruitmentremember the
  labor agents of the early 20th Century
• The threat of becoming an increasingly
  commodity-driven economy, dominated by global
  competitors (China and possibly India)
• Why the China model for industrial production is
  beginning to break down
• How this can fit into NE Ohios revival
• A legacy of organized labor work rules legacy
  costs
• The antidote is new firms new industries new
  business culture
• An overall perception of the region as dominated
  by industries under stress or in decline (rust
  belt image)
• The response has to be opportunity

Economic perceptions Site location professionals
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What local business leaders in the region say

• Ingrained mindset The culture of Northeast Ohio
  is resistant to change. Its very difficult to
  do business in Northeast Ohio. Workers see the
  company as the enemy.
• Unions Unions are seen as being averse to
  change, or slow to change, because of internal
  political pressures. This is a perception that
  the panelists consider detrimental to the area
  because it seems so out of sync with todays
  rapidly changing world.
• Finance As bankers, its tough to get our arms
  around and get behind how older industries are
  trying to innovate.

Economic perceptions Regional business leaders
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What local business leaders in the region say

• Workforce That aging workforce bodes problems
  for the future.
• Most praise their incumbent workers, and many say
  they are able to hold onto these prized workers
  by compensating and treating them well.
• The difficulty, they said, is in finding
  replacement workers with the right skills,
  attitude, and ethic.
• Moving to Northeast Ohio is viewed as too risky a
  prospect for managers experienced in leading
  entrepreneurial companies because they see few
  other opportunities in the area. If the venture
  fails, they have nowhere to go with their skill
  sets.
• Manufacturing companies with new operations in
  the Southwest state that the Economic Development
  service and training programs are superior in the
  Southeastern states but that work ethic is
  superior in Ohio.

Economic perceptions Regional business leaders
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Workforce challenges
STEM education
Focus on workforce
Fast growth management
Technical training
Innovation practices
Workplace literacy numeracy
Process improvement
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Lessons learned

• No silver bullet that will turn a slow-moving
  traditional-based economy into a vibrant, high
  performance one
• A skilled workforce and strong business dynamics
  are most highly correlated with regional economic
  growth
• The pursuit of societal goals, such as racial
  inclusion and income equality, can enhance growth
• While positively related to growth, locational
  amenities are not as important as other factors
• A region must overcome legacy of place costs

Conclusions From the academic literature
Source W.E. Upjohn Institute, NEO Dashboard
Indicators
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Observationsrequired changes in business behavior

• Business strategy needs to shift to top line
  revenue growth, while maintaining middle line
  cost discipline
• There is a difference between a lean
  organization and an anorexic organization.
• You cannot starve yourself to health.
• If you cannot export in this dollar environment
  you have a problem.
• In product innovation there should be no such
  thing as failure, only feedback. You need a
  system of constant and low cost feedback.
• Fail fast fail cheap.Doug Hall

Economic perceptions Regional business leaders
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What is Northeast Ohios competitive advantage?
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The competitive advantage of Northeast Ohio

• Portfolio economy mix of what Baumol, Litan,
  Schramm call large firm capitalism emerging
  entrepreneurial capitalism
• Required areas of product improvement
• Education workforce (incumbent workers)
• Entrepreneurial management
• Workplace flexibility
• Areas of demonstrated competitive competence
• Headquarters, insurance, banking health care
• Materials production/fabrication
• Chemistry
• Industrial design
• Secondarily logistics

Competitive advantage Managing portfolios, not
betting on silver bullets
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The regions economic health depends on corporate
strategies and the portfolio age of the regions
products. Five categories of companies

• Product innovators Grow the top line of their
  income statement without blowing up their cost
  structure. Can manage continuous product
  innovation and own intellectual property or have
  proprietary knowledge.
• Process innovators and global competitors
  Manage the middle of their cash statements and
  ride their product catalogs. Have deployed IT to
  tighten supply and customer chains. Developing
  global supply chain.
• Lifestyle firms Goal is not growth but owners
  control and earning target income. Are not
  profit maximizers. Frequently have no
  intellectual property or proprietary competitive
  advantage.
• One trick ponies Commodity business dependent
  on a single business or production relationship.
• Dead and dying companies Job shops in auction
  markets.

Conclusion Where is your firm?
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