Industry Cluster Analysis for the NewVA Region of Virginia

Industry Cluster Analysis for the NewVA Region of Virginia

An Industry Cluster Analysis
for the NewVa Region of Virginia
September 2004
Prepared For:
Fifth Planning District Regional Alliance
By:
Center for Regional
Economic Competitiveness
Arlington, Virginia
Roanoke Valley-Alleghany
Regional Commission
Roanoke, Virginia
Center for Regional Economic Competitiveness/Roanoke Valley-Alleghany Regional Commission
Executive Summary
The NewVa Region (including the counties and cities of the Roanoke Vall
ey,
Alleghany Highlands, and New River Valley) is the primary economic center for
western Virginia, serving as hub for retail trade, health care, business
services,
higher education, and travel/tourism. More than 228,000 people work in the
regionfs nine counties and four independent cities, according to 2002
Virginia
Employment Commission data.
The Fifth Planning District Regional Alliance commissioned a study to examine
existing industrial clusters and to explore possible economic linkages between
the New River Valley and the Roanoke Valley-Alleghany Highlands.1 The study
looks at clusters as groups of industries that have existing or potential
relationships. Firms within clusters are often interconnected h buyi
ng and selling
from one another, buying similar inputs as other firms in their cluster, selling to
similar clients, or sharing labor markets. Firms within a cluster may have no
direct transactional relationship between one another, but share a common set of
customers, labor needs, or suppliers. Furthermore, firms may appear in multiple
clusters if they offer different products or use unique processes that result in a
variety of relationships.
This study of the NewVA regionfs clusters and related economic characteristics
provides insights on existing relationships, potential relationships, and gaps in
the regionfs existing economic structure. The goal is to help policy
makers and
economic development professionals focus attention on the industries likely to
have the greatest impact on local economic growth.
To assess which clusters are most important, the analysts looked at three
dimensions of the regionfs clusters:
Their relative size in the region (how many people are actually
employed in that cluster?),
Their relative concentration in the regional economy (how
specialized is the region in that cluster?), and
Their wages relative to the local economy (are these good jobs?).
These three characteristics offer a snapshot of the importance of a variety of
possible clusters at a point in time. It is also important to examine changes over
time to determine the clusterfs current health and contributions to the local
economy. By analyzing how quickly cluster industries have grown or decl
ined,
the average wages paid by industry companies, and the cluster relative
concentration, economically important clusters can be more readily identified.
i
Center for Regional Economic Competitiveness/Roanoke Valley-Alleghany Regional Commission
The study found that the industries historically important to the NewVa region
may not be the basis for future economic growth. For instance, higher e
ducation
has suffered from major cutbacks in state spending. Growth in health care and
business services has been strong, but the growth of these clusters tend
s to
reflect national trends rather than a regional competitive advantage.
Where the region is gbucking national trends and growing faster than average
are in the opto-electronics, motor vehicles, and pharmaceutical manufacturing
clusters. During the past decade, significant numbers of new jobs were
added in
research, development & technical design and transportation, shipping, a
nd
logistics. Many of these clusters pay higher than average wages or offe
r
greplacement jobs for dislocated lower-wage workers.
Figure 1 provides an illustration of the size of many of the clusters paying the
highest wages, their growth rates, and their level of concentration in the region.
Each gbubble represents a national industry cluster in terms of its employment
size, relative concentration in the study region, and the growth of that
concentration. Larger bubbles represent larger clusters. Bubbles near the top of
the figure appear to be more highly concentrated in the region as define
d in
terms of the clusterfs glocation quotient, (an index that measures relative
concentration of employment in the region as compared with national
employment in that cluster). Clusters with location quotients above one (1.0) are
more greatly represented in the local economy than nationally-averaged data
might predict, and thus appear to have a local competitive advantage. Bubbles
near the right side of the graph have grown more rapidly than the national
average between 1992 and 2002 (the study time frame). Thus, a particularly
large bubble located in the upper right corner represents a fast-growing, highly
specialized concentration of high wage industries.
Center for Regional Economic Competitiveness/Roanoke Valley-Alleghany Regional Commission
By comparison, the health-related clusters represent a large proportion of local
jobs h more than 11 percent of the regionfs workforce. Figure 1 illustrates that
although the hospitals, labs, and specialized medical services cluster h
as a
relatively large level of employment (25,699 jobs), this clusterfs concentration (or
location quotient) is very close to 1.00. The cluster is about as larg
e as one
might expect to find, given relative size of this cluster in other regions and the
industryfs national growth trends.
The Chemicals and Plastics cluster, a traditionally competitive industry and large
regional employer, has a large concentration (location quotient of 1.67). But, this
cluster has declined in its competitive position during the past decade.
Information Technology and Instruments and the Computer Technology Sector
are high-wage industries that have grown during the past decade, but not as
rapidly as these clusters have in other parts of the country.
The study found that many of the more technology-oriented clusters tend to be
concentrating in Blacksburg. The regionfs service-related industries (finance,
health care, and tourism) tend to be concentrating in Roanoke. The rur
al areas
are providing access to available land for manufacturing activities, including
chemicals, plastics, and construction materials. This finding may suggest that
Roanoke, Blacksburg, and the Alleghany Highlands will depend upon one
another even more heavily in the future as Roanoke firms turn to Blacksb
urg
iii
Center for Regional Economic Competitiveness/Roanoke Valley-Alleghany Regional Commission
firms for new innovations and technologies while Roanoke provides financ
ial
support and cultural amenities for the entire NewVa regionfs firms an
d their
workers. The heavier manufacturing that remains in the region will most likely
focus in the rural areas where the administrative support services are nearby,
land is plentiful, and costs are lower.
After examining 45 US benchmark clusters, the study team identified 12 high
wage clusters that should be the focus of attention for the NewVa regionfs public
policy makers and economic developers in terms of retention, attraction,
and
entrepreneurial development activities. Some of these clusters are at-risk or
potential missed opportunity targets. These clusters are growing very slowly
or declining and may need to be the focus of business retention activiti
es. They
include:
Chemicals and plastics
Construction materials
Information technology and instruments
Computer technology
Several other clusters are important to the local economic base, and are growing
(some more rapidly than others). These constitute the basic or emerging
opportunity targets, including:
Mechatronics
Motor vehicle manufacturing
Research, development and technical design
Hospitals, labs, and specialized medical services
Opto-electronics
Pharmaceuticals
Securities and insurance
Primary Metals
To support these targeted clusters, the region should identify the key challenges
which limit their growth, and focus its resources on addressing the key
challenges facing them. Many of these challenges were addressed by the
2002
Regional Economic Strategy. This research should help regional leaders
focus
their attention on strategies that respond to the needs of these 12 clusters.
iv
An Industry Cluster Analysis
for the NewVa Region of Virginia
Background & Overview
In July 2002, the Fifth Planning District Regional Alliance h a publi
c-private
collaboration of leaders in the Fifth Planning District of western Virginia h
developed a Regional Economic Strategy. The strategy called for communi
ties
in Virginiafs NewVa Region (including the Alleghany Highlands, Roano
ke Valley,
and New River Valley h as shown in Map 1) to work together to build
on their
respective assets for future prosperity. This strategy identified potential ways for
the three sub-regions to work on a number of key strategies. The communities
included in the NewVa region are the counties of Alleghany, Botetourt, Craig,
Floyd, Franklin, Giles, Montgomery, Pulaski, and Roanoke, and the cities of
Covington, Radford, Roanoke, and Salem. The analysis aims to provide a better
understanding of how the economies of these localities complement one another,
providing the basis for working together as a single economic region.
One common challenge facing the region is the need to create high-paying jobs
that will seed a more diverse economy and ensure future prosperity. In 1999, the
ICF consulting firm conducted a study of industry clusters in the Roanok
e Valley-
Alleghany Highlands. The analysis was based on data from the mid-1990s,
and
local leaders felt it should be updated to reflect the impacts of the recent
recession and its subsequent impact on local technology sectors. In add
ition,
local leaders wanted to better understand the role of the Roanoke Valley

Alleghany Highlands economy within the context of a larger economic region
serving western Virginia.
In 2003, the Fifth Planning District Regional Alliance (the Alliance) commissioned
a study of the regional economy to identify emerging industries and potentially
important clusters of industries. The Alliance contracted with the Center for
Regional Economic Competitiveness (CREC), a non-profit organization affiliated
with George Mason University, and the Roanoke Valley-Alleghany Regional
Commission (RVARC) to design and conduct an industry cluster analysis
for the
communities in the service area of the New River Valley Planning and the
Fifth
Planning Districts h coinciding with the NewVA region. The ultimate goal of the
study is to help local leaders direct economic development resources and
facilitate economic development activities on behalf of critical elements of the
entire regional economy.
Center for Regional Economic Competitiveness/Roanoke Valley-Alleghany Regional Commission
2
Center for Regional Economic Competitiveness /Roanoke Valley-Alleghany Regional Commission
3 Methodology and Approach
This 2004 cluster analysis looks at employment to identify clusters of industries
that appear to have a comparative advantage in the NewVA communities relative
to other regions. Determining these industries can help public official
s and
economic development organizations focus economic development efforts on
industries that have the greatest likelihood of growing successfully.
Because the Alliance was interested in the relationships among a number of
industry sectors, the consultants opted to implement an analysis that examines
local industries as unique groups (or clusters), reflecting how they interact in the
local and national economy. Industry clusters represent groups of industries that
have existing or potential relationships. Firms within clusters are often
interconnected h buying and selling from one another, buying similar
inputs,
selling to similar clients, or sharing labor markets. It is important to note that
local firms that are considered part of the same cluster need not interact directly
with one another. Firms and industries are grouped or clustered based on their
behavior at a national level rather than local interactions. Thus, two
regional
firms may be categorized in the same cluster even though they have no di
rect
relationship because these firms may interact with other cluster-related firms
elsewhere in the US. Interaction may take the form of buying or selling
relationships, competition or collaboration in meeting common market demands,
or sharing of inputs or resources (including sources of labor, ideas, innovations,
or raw materials).
The study uses a different methodology than the 1999 ICF study, reflecti
ng
advances in our understanding of cluster analysis studies since the late
1990s.
Thus, although the overall economy of the Fifth Planning District (the subject of
the 1999 study) is not expected to have undergone dramatic changes, we do
expect a few important differences in the study outcomes. This analysis also
provides an important understanding of the existing and growing relationship
between the economies of the Roanoke and Blacksburg metropolitan statistical
areas (MSAs).
The study methodology uses existing employment data to identify concentrations
of industry in the region. The Center for Regional Economic Competitiveness
and the Roanoke Valley-Alleghany Regional Commission designed the
methodology based on similar studies completed in other regions and the unique
issues facing the local economy. The study includes some quantitative analysis
as well as follow-up interviews with leading industry leaders.
Policy makers and researchers have often asked how well the economies of the
sub-regions within NewVA have become integrated. As part of the quantitative
analysis, employment data was gathered and analyzed first for the communities
of both the New River Valley Planning District and Fifth Planning Districts, then
separately for the Roanoke MSA (Botetourt County, Craig County, Franklin
County, Roanoke County, City of Roanoke, and City of Salem), the Blacksburg
MSA (Giles County, Montgomery County, Pulaski County, and Radford city), and
Center for Regional Economic Competitiveness /Roanoke Valley-Alleghany Regional Commission
4
the rural areas of the planning districts (Alleghany County, Floyd County and the
City of Covington). The study then reviewed clusters for the entire NewVa region
as well as economic sub-areas of the region, including the Roanoke MSA,
Blacksburg MSA, and the combined rural areas of the planning districts. By
examining the sub-areas separately, it was possible to gain a clearer picture of
local competitive advantages and the economic interaction of industries among
the local sub-areas.
An industry cluster analysis seeks to examine groups of industries with high-
degrees of potential interconnectedness within a geographic area. Firms within
these industry groups may have either cooperative relationships (such as buyer-
supplier) or competitive relationships (competing within an industry)
. Economic
development professionals typically use cluster analysis studies to highlight
industries for which a geographic area has a competitive advantage. Having a
competitive advantage implies that an area can produce particular goods or
services more efficiently than other areas.
At times, it may be difficult to ascertain what the specific advantages are that a
region possesses. One might speculate, for example, that access to a certain
university research center or a natural geographic advantage helped the region
to develop an advantage. An analyst presumes that some advantage exists if a
region has a higher concentration of an industry or cluster than might b
e
expected. In contrast, the analyst presumes a disadvantage if the region has a
significantly smaller concentration of economic activity than one might expect.
Typically, researchers use employment data to represent that concentration, but
it is quite conceivable that a lower concentration of workers in an indu
stry may
reflect higher productivity and the need for fewer workers than in other
regions.
Thus, any quantitative analysis should be partnered with a process of
interviewing local business leaders to ensure that the data is revealing
an
accurate story.
CREC and RVARC approached the studyfs design by performing a
comprehensive literature review of previous cluster studies. Dr. Michael Porter of
Harvard University completed the groundbreaking academic work, and Dr.
Edward Feser of the University of Illinois (formerly University of North Carolina at
Chapel Hill) has completed extensive applied research on clusters in th
e
Appalachian region and in North Carolina. Both Porter and Feser are rec
ognized
experts in the cluster analysis field, and their previous work helped guide our
construction of gbenchmark cluster industries. These gbenchmark clusters
represent the industries that are commonly aggregated and identified as clusters
within the U.S. national economy.2
According to the academic literature, there is no standardized method for
gconstructing a cluster of service-based industries. Consequentl
y, the project
Center for Regional Economic Competitiveness /Roanoke Valley-Alleghany Regional Commission
5
team assembled an expert panel to provide technical advice on how best to
conduct an analysis in an applied research setting. The panel included
recognized cluster analysis experts Dr. Harrison Campbell from the University of
North Carolina h Charlotte, Dr. Roger Stough from George Mason University,
and Dr. Edward Feser from the University of Illinois.
Service industries have not typically been examined in cluster studies b
ecause
the focus of most past studies has been on linkages in the manufacturing sector.
Since this effort aimed to better understand the service sector linkages
and
growing clusters in the region, the team sought to identify appropriate cluster
linkages.
Input from the expert panel led to the use of IMPLAN| economic modeling
software to construct service industry clusters by analyzing the relationships
between individual industries. IMPLAN| includes estimates of industry-to-
industry transactions at the regional level based on a national survey of
industries conducted annually for the US Bureau of Economic Analysis. T
o
identify linkages in a simple and straightforward manner, the team examined the
prospective impact of a hypothetical event representing a large influx of capital
for each industry in the NewVA region. When this event was simulated us
ing the
economic modeling software, the analysts took note of other industries that
demonstrated an expectedly large impact. If a hypothetical increase in
employment or sales in one industry leveraged an increase in sales in another
industry of two percent or more, then the two industries were viewed as
interrelated.3
The research team also interviewed several individuals familiar with the
regional
economy and identified three gnon-traditional groups of industries or gsectors
(opto-electronics, mechatronics, and computer technology) as locally specialized
sectors requiring further examination. Mechatronics, the interdisciplinary field
combining mechanical engineering, electrical engineering, and software
engineering, was known to have substantial local representation in the electronic
controls industry. In addition, opto-electronics, the application of electronic
devices and lenses that interact with light, also has a large presence. Computer
technology represents much of the hardware driving productivity growth in almost
every sector of the regional and national economy.
3 Industries with linkage correlations of .02 or greater were flagged as interrelated. 2000 IMPLAN Data was used to
construct the impact models.

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