InRoads Research: Identifying Engines for Economic Growth
The process of identifying the comparative and competitive advantages of various industry sectors within a regional economy is an essential step in crafting effective economic development strategies.
To identify strategic industries which have strong implications for future economic growth, the Department of Business Intelligence utilizes a regional analysis methodology known as shift-share. Shift-share analysis is the process of examining a regional economy while considering both national growth trends across all industries and national growth trends related to a specific industry. The theory behind this methodology is similar to location quotients in that it highlights the unique industries within a regional economy. However, it explains the specialization of these industries in terms of job growth rather than total jobs.
In the analysis that follows, Business Intelligence examines the industry clusters defined by the Reinvent Hampton Roads: Industry Cluster Mapping Project. These industries play a fundamental role in the strength and resilience of our community and have the ability to enhance the business environment from which they operate. As such, with the appropriate resources and encouragement, these industries can provide accelerated opportunities of growth and innovation within Hampton Roads.
When attempting to define industry movements within a regional economy, it is important to consider the movements within the national economy and understand how those movements may be influencing local industry growth. For example, if the national economy is performing well collectively, one could theorize that industries within local communities are experiencing growth as well. Shift-share analysis incorporates national growth trends into the equation and adjusts employment accordingly. This is known as the National Growth Effect.
Similar to the national growth effect, the Industrial Mix Effect represents how much of the industry’s regional growth can be attributed to the growth of the industry on the national level. Both of these effects are an important step in the computation of shift-share analysis and represent macroeconomic forces that, unless drawn out, can overemphasize unique regional employment growth. By identifying the two national forces that may influence regional industry growth, we can draw a more realistic conclusion about how well an industry has performed or will perform over a specified timeline.
The summation of the national growth effect and the industrial mix effect is what we would anticipate the increase or decrease to be within a particular industry due to the national trends. This summation is known as the Expected Change. The expected change serves as the baseline from which we compare the actual or forecasted job change over the defined time period.
If a regions job change was greater than the expected job change, the region is experiencing a Competitive Effect or Local Effect. A positive competitive effect indicates that the regional industry is outperforming national trends. In other words, the competitive effect explains how much of the change in employment in a given industry is due to some unique regional characteristic.
Note: It is important to highlight that employment within an industry over a defined time period may be forecasted to decline both nationally and regionally; for example, industries within Advanced Manufacturing. While a decrease in employment is not generally viewed enthusiastically, it is important to understand that if an industry maintains a lower percent decrease in employment within the region compared to the nation, the industry’s relative concentration would increase and show a positive competitive effect.
Shift-share analysis, along with employment growth projections, can prove to be a powerful regional planning methodology. This process can identify investment targets so that local stakeholders can help high-performing regional industries continue to outperform national trends or “catch up” with national trends so that the regional economy is not left behind in those sectors.
Within the analysis to follow, individual industries have been extracted from within each industry cluster. The industries displayed have been analyzed at a 6-digit NAICS level and are forecasted to either maintain positive competitive positioning within the region or underperform national growth within the region over the next ten years (2016-2026). It is important to note that the shift-share projections are drawn from historical data. As with any forecasted data, the shift-share data is operating under the assumption that what has happened in the past will continue into the future.
Additionally, there exist limitations and shortcomings of the capabilities within shift-share analysis. Before drawing any conclusions, it is important to recognize that shift-share analysis is a descriptive model by which practitioners can use inductive reasoning to direct targeting efforts in a particular direction. By focusing attention on the strengths and weaknesses that exist within a region’s economic base; practitioners are able to draw more appropriate conclusions about the industrial needs and requirements that may exist within the region of Hampton Roads.
Before conducting granular community analysis, it is important to identify the projected growth rates and competitive effects from a regional macroeconomic perspective. By charting the various effects for each broad cluster on a regional level, we can understand how the cluster is forecasted to perform after extracting the forecasted national growth trends.
The chart below depicts the relative strength in each defined industry cluster on a regional level. Additionally, to break out sub-regional cluster strengths, the Southside and the Peninsula have been highlighted. “Strength” in this context is shaded in green and shows the industry clusters that are projected to experience both a positive percent growth rate from 2016 to 2026 & a positive competitive effect over the same time period. Clusters highlighted in yellow are projected to maintain positive growth from 2016 to 2026 but this growth is to a lesser degree than that of national trends; therefore, the cluster holds a negative competitive effect. Clusters shaded in red indicate that the industry cluster is projected to underperform national growth rates and hold a negative competitive effect.
As we can see in the first shaded column, 63% of the defined industry clusters are projected to experience positive growth over the next ten years as well as hold competitive advantages compared to the nation. The Cross Cutting Industries cluster, largely driven downward by regional managing offices, is projected to grow, but that growth is less than the nation and therefore holds negative competitive advantages. Industries tailored towards manufacturing are currently projected to underperform national trends.
It is important to note that within each cluster, even those shaded red, there are specialty operations that hold a significant regional presence. Some of these industries have thrived within the community and are projected to outpace national growth from 2016 to 2026. However, it is important to realize that one industry employing 1,000 people cannot pull the regional weight of the entire sector.
As an example, we will first highlight the Advanced Manufacturing cluster. The industries listed in the table below, have been identified as the top ranked Advanced Manufacturing industries within Hampton Roads. Many of these industries are projected to outpace national growth over the next ten years, hold a positive competitive effect, and pay an average salary higher than the regional average of $45,460.
Within the table there are some important distinctions to highlight. First, the industrial mix effect; if you’ll recall, the industrial mix effect represents how much of the industry’s regional growth can be attributed to the growth of the industry on the national level. These negative industrial mix values give testament to the overall weakness of these industries on a national level as we would in turn expect decreases in employment regionally. Second, there are two industries which have negative employment projections over the next ten years but still hold a competitive advantage. These industries include: power driven hand tool & glass container manufacturing. As mentioned in earlier text, while a decrease in employment is not generally viewed enthusiastically, these industries are buffered from a nationally declining industry due to some region competitive advantage.
Finally, note the bottom row. After filtration, this particular mix of advanced manufacturing industries turns green; with a projected growth percentage of 9% from 2016 to 2026 and a competitive effect of 214 jobs. This mix of industries proves to have been prosperous within the region and additional measures to enhance this cluster mix may be taken to increase its relative footprint within the manufacturing super sector.
To view the complete regional shift share analysis, please click here.