Northeast Ohio’s Economic Development Challenge

1. Northeast Ohio’s Economic Development Challenge Edward W. (Ned) Hill Vice President for Economic Development Cleveland State University Interim Dean, Levin College of Urban Affairs

2. I dreamed that I was an economist and I had to explain what happened! Northeast Ohio Regional Day VI

3. Real Tombstones Northeast Ohio Regional Day VI

4. 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 processing—well growing Northeast Ohio Regional Day VI

5. Market activity from Barrons Corporate Debt Friday, October 24, 2008 None expected this week. Northeast Ohio Regional Day VI

6. Commercial Paper Outstanding Northeast Ohio Regional Day VI Source: Board of Governors of the Federal Reserve System

7. Discount rate spread in the commercial paper market Northeast Ohio Regional Day VI Source: Board of Governors of the Federal Reserve System

8. Source: Cleveland Federal Reserve Bank Northeast Ohio Regional Day VI

9. Oil: Peak $145, now $68.50 Northeast Ohio Regional Day VI Source: St Louis Federal Reserve Bank, download October 29, 2008 Source: Wall Street Journal Market Data Center, October 29, 2008

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11. Northeast Ohio’s economic performance Economic performance: Ohio is America’s economic battleground Northeast Ohio Regional Day VI

12. 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 Northeast Ohio Regional Day VI

13. 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 Northeast Ohio Regional Day VI

14. 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 Northeast Ohio Regional Day VI

15. Manufacturing's death in Ohio has been greatly exaggerated and overly anticipated Economic performance: Statewide manufacturing is a driver Northeast Ohio Regional Day VI

16. Productivity gain from manufacturing in Ohio led the state’s weak recovery from the 2001 recession Why manufacturing? Source: US Bureau of Economic Analysis, October 2, 2008 Northeast Ohio Regional Day VI

17. 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 uncertainty—health care, torts, mandates, & energy • Benefits wedge • Failed business strategies of three key employers Economic performance: Legacy of place Northeast Ohio Regional Day VI

18. Miscellaneous Chemistry Auto Metal 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 Northeast Ohio Regional Day VI *Compound Annual Growth Rate (CAGR) is the year-over-year growth rate of an output over a specified period of time

19. Miscellaneous Chemistry Auto Metal 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 Northeast Ohio Regional Day VI

20. 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 Northeast Ohio Regional Day VI

21. 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 Northeast Ohio Regional Day VI

22. Threats and challenges to NEO • Low to declining population growth • Does this make economic sense? Is cause and effect backwards? • Role for targeted talent recruitment—remember 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 Ohio’s 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 Northeast Ohio Regional Day VI

23. What local business leaders in the region say • Ingrained mindset: “The culture of Northeast Ohio is resistant to change.” “It’s 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 today’s rapidly changing world. • Finance: “As bankers, it’s tough to get our arms around and get behind how older industries are trying to innovate.” Economic perceptions: Regional business leaders Northeast Ohio Regional Day VI

24. 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 Northeast Ohio Regional Day VI

25. Workforce challenges Focus on workforce STEM education Fast growth management Technical training Innovation practices Workplace literacy & numeracy Process improvement Northeast Ohio Regional Day VI

26. 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 Northeast Ohio Regional Day VI

27. Observations—required 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 Northeast Ohio Regional Day VI

28. What is Northeast Ohio’s competitive advantage?

29. 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 Northeast Ohio Regional Day VI

30. The region’s economic health depends on corporate strategies and the portfolio age of the region’s 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 owner’s control and earning target income. Are not profit maximizers. Frequently have no intellectual property or proprietary competitive advantage. • One trickponies—Commodity businessdependent ona singlebusiness or production relationship. • Dead anddying companies — Job shops in auction markets. Conclusion: Where is your firm? Northeast Ohio Regional Day VI

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