Committed regional leadership can overcome institutional fragmentation, build community capacity, improve public-sector service delivery and attract private investment through the regional deployment of low cost technology infrastructure. With advanced market intelligence, regions can leverage economic incentives to make smarter investments in smarter growth, retaining and attracting businesses that are growing in high-wage jobs.

Acknowledge Your Regional Strengths and Weaknesses

Practical and prudent economic development strategies start with an objective assessment of regional strengths and weaknesses. This regional assessment must be put into a broader context to support regional planning relevant to other competing regions and macro market forces to establish a basis to compete for the region's industry clusters.

To this end, regional leadership must understand and acknowledge their economic playing field if they hope to win the race to economic prosperity. Some of these ideas were published by the Financial Times in an article on current market trends called "Plot Your Course For The New World." (See link) Financial Times

Author Ian Davis (Worldwide Managing Director of McKinsey & Company) outlined major trends that every region would be well advised to understand and acknowledge. Your region’s standard of living depends upon your community’s ability to:

1) Navigate and respond to macro market trends and conditions,

2) Incorporate and synthesize knowledge into the regional planning activity, and

3) Secure category leading positions for existing and emerging industry clusters.

The Macro Trends That Demand A Regional Response Are:

• "Centers of economic activity will shift profoundly, not just globally but regionally. As a consequence of economic liberalization, technological advances, capital market developments and demographic changes, the world has embarked on a massive realignment of economic activity."
• "The consumer landscape will change and expand significantly. Almost a billion new consumers will enter the global marketplace..."
• "Technological connectivity will transform how we live. The technology revolution is at an early stage. We are learning how to make the best use of IT in the design of processes and in developing and accessing knowledge...”
• "The battlefield for talent will shift. Changes in the nature of labor and talent will be far more profound than the widely observed movement of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well trained talent…”
• "The role and behavior of business will come under increasing scrutiny.”

These trends, combined with regional issues like the mushrooming cost of public sector support services and flat or decreasing public sector revenues, mandate a public sector response. Regional leadership must make dramatic productivity gains or watch as the regional standard of living declines. An aging population with an increased demand for services combined with decreasing revenues will require new levels of efficiency, creativity and innovation from the public sector. A strategic response must be found - and soon - if we are to live up to social obligations. Without significant productivity gains, the pension and health care burden and the cost of service delivery will create an unmanageable budget problem for most states and regions.

The Good News – Opportunity In New Global Industry Structures

The good news is that the current transition to a post-industrial economy has created new global industry structures and regional opportunities for high wage job growth and prosperity. These new structures are a market response to the updated regulations, new technologies, and innovative non-traditional business models that are flourishing. Within virtually all sectors, industry structure extremes have emerged with a few major players on one end, a narrow middle market, and a thundering herd of smaller, innovative fast-moving players on the other end.

Regional industry clusters, and the winning companies that take advantage of these new structures and new-found productivity gains, are capitalizing on these transformations to the benefit of all regional citizens.

Knowledge production, access, distribution, and ownership are the new powers in our post-industrial economy. We are seeing the rise of community approaches to knowledge development and retention as communities, not individuals, become responsible for innovations. Open source cooperation has exploded software development, manufacturing and design. All three have been leveraged by communities with the will, capacity and knowledge to be competitive. Regions face the extreme choice of either proactively learning how to leverage these structural advantages to the benefit of its citizens, or being paralyzed by indecision in the face of information overload.

Ubiquitous Access To Information Has Changed The Economics Of Knowledge

An almost infinite amount of information is now available instantaneously. The vast amount of information exceeds an individual's ability to absorb and utilize it all. Knowledge is increasingly available and specialized. Units of production have shifted from a resource based industrial economy to an information based knowledge economy. Knowledge and innovation are the driving forces of economic growth, social development, and job creation. In this context the promotion of knowledge transfer has become a priority for public and economic development policies.

Today's most valuable workers engage in business activities that economists call “interactions". The broadest definition of an interaction is the searching, coordinating, and monitoring that is required to exchange goods or services.

Complex interactions typically require workers to make informed decisions or educated guesses with ambiguous information. These people (such as administrators, doctors, engineers, judges, lawyers, managers, mediators, nurses, salespeople, etc.) often need to draw upon personal experience, which economists call "tacit knowledge". Given the current transition to a post-industrial economy, we have adopted (for all occupations) three general categories of "knowledge workers" based on intellectual activity. These are:

1. Tacit Knowledge Worker: People who deal with complex interactions. Tacit knowledge is knowledge that people carry in their minds and is difficult to access. Tacit knowledge workers are people who may not necessarily be aware of the knowledge they possess or understand how valuable it is to others. Tacit knowledge is considered more valuable because it provides context for people, places, ideas, and experiences. Effective transfer of tacit knowledge generally requires extensive personal contact, trust and a structured organizational framework.
2. Transformational Knowledge Worker: People who extract raw materials or convert them into finished goods. These people typically deal with nonagricultural labor such as assembly, construction, manufacturing, mining, operating production lines, running heavy equipment, etc. Effective transfer of transformational knowledge generally requires documentation, training, and standardized operating procedures.
3. Transactional Knowledge Worker: People who deal with routine interactions or transactions. These workers perform tasks that are primarily repetitive and routine in nature but occasionally use complex information to make independent decisions. Routine interactions include accounting work, auditors, chemists, clerical, IT specialists, technicians, etc. Companies have and will continue to automate or eliminate these routine interactions because most of what these people do can be standardized and automated: the proven and established tools of productivity improvement. The balance of these interactions will continue to relocate to low labor cost regions, globally.

Tacit knowledge workers are the primary force in determining which regional economies are successful and which are not. They are the key source of growth in most organizations. Innovative marketing approaches, new products and services, and new business models all come from tacit knowledge workers. So if you want your economy to grow, your region better be proactively managing your tacit knowledge workers!

Industry cluster development has become the de facto standard for economic development policy. It is now universally accepted that successful regional economies are specialized to some degree. Even the most diversified regions are home to industries that are found in higher concentrations than in other places.

No region can be outstanding at producing everything - especially less favored regions. Successful regions develop strengths and focus innovative capacities on specific types of industry sectors, or clusters. Clustering provides firms with access to more suppliers and specialized support services, skilled labor pools and the inevitable knowledge diffusion that occurs when people interact. Tacit knowledge labor pools and specialized industry clusters must be proactively managed if regions are to sustain a growing standard of living for its citizens.

This imperative is especially true in less-favored regions impacted by:

• A vague understanding of industry and occupational cluster development
• Historic under-investment in physical and technology infrastructure
• A lackluster public and economic development policy and
• Ignoring the major macro economic trends and market forces

The growth of cluster development begins with recognizing that industry and occupational clusters are based on systemic relationships among firms and individuals. Clusters are geographically bound, defined by distance and the time that people are willing to commute for employment. This obviously depends on transportation systems and traffic, but also involves cultural influences, family and social demands.

Industry clusters have life cycles, which progress from:

1) Emerging, which can be generated by innovations, or inventions, to

2) Growth, where markets have developed to attract imitators and competitors that stimulate entrepreneurship, to

3) Mature, which is when the processes or services have become routine, and costs become the primary basis to compete, to

4) Decay, when the products or services become fully replaceable by lower cost or more effective market alternatives.

The life cycle of industry clusters is best illustrated by a bell curve measuring Gross Metropolitan Product (GMP) Growth (The one year percentage change in the per capita dollar value of all final goods and services produced in the metropolitan area) and time. See Figure 1 below:

Figure 1: Industry Cluster Life Cycle

Innovation, imitation, and the thundering herd of entrepreneurship are what propel virtually all competitive industry clusters. While the success of an individual firm may depend on its ability to protect its own technological advances, new products or designs, the success of a cluster depends on the opposite -- knowledge diffusion (access to new innovations and information, and spin-offs of new enterprises). Clusters force competing members within the cluster to continually improve and innovate in order to maintain their advantages over imitators. Organizations live or die by their corporate strategy and their ability to innovate. Organizations, like clusters, are either growing or decaying. The only debate is the length in time of the life cycle.

Clusters are not defined by organizational membership. Clusters are defined by relationships that are self-selecting based on how individuals, employers, and institutions define their missions, establish trust, and produce access to tacit knowledge of technologies, markets, and opportunities to network, and to aggregate interests and needs.

The most successful clusters build structured mechanisms that can speed the movement of ideas, innovations, and information for commercialization from firm to firm throughout the regional economy. The responsible parties for collecting and disseminating knowledge are the gatekeepers, brokers, and intermediaries that provide the value embodied in social capital that is vital to cluster growth and competitiveness.

As stated earlier, the most important competitive advantage a cluster has is its skilled labor pool of tacit knowledge workers and the competencies they embody. Learning and knowledge transfer is the lifeblood of tacit knowledge workers and industry clusters. The skills and knowledge of the work force is at the top of the list of businesses’ requirements. Today virtually all business is dependent upon technology. Business needs highly skilled, educated, and talented employees. While other cluster inputs such as raw materials, parts, suppliers, and services can be easily sourced globally; the work force remains a local resource constrained by reasonable commuting patterns. Changing demographics and preferences only reinforce the critical nature of a skilled labor supply and tacit knowledge workers.

A history of regional under investment can limit clusters in less favored regions from gaining new, or holding onto existing, cluster competitive advantages -- including its skilled labor. Most under investment can be traced to:

• Weak physical and technology infrastructure
• Lack of access to capital
• Diminished innovation mechanisms
• Regional insularity and isolation
• Low skilled/educated work force and
• Overly mature or hierarchical industry structure

The effects of historic under investment in infrastructure are social, technological, and economic exclusions. Social exclusion exists in regions with large, isolated, underprivileged and undereducated populations; technological exclusion exists in regions with poor access to sources of technology and benchmark companies; and economic exclusion is a result of weak links to benchmark regions and markets.

Infrastructure deficits create an uneven economic playing field for regions and inhibit capital investment. Clusters live or die with the entrepreneurial and innovative abilities of its tacit knowledge workers and companies. The development and commercialization of new ideas requires technical resources and capital. But capital markets often prefer innovative companies to mature and low technology companies and regional innovation centers over more remote places that are difficult to monitor and assist.

Fragmented institutional structures must be overcome to support successful cluster development. Clusters depend on regional institutions for information and help with technology assistance, economic analysis, brokering, workforce development, and education and training within their industries. Most regions have an institutional framework for some services, but few have an explicit economic development focus. Even fewer have meaning performance measurements in place to ensure accountability.

Less favored regions must acquire the resources and expertise to target clusters; to become the centers of excellence that attract talent, resources, and other companies. Technology infrastructure is the foundation for building industry cluster-based economies, and its absence is a death knell for growing clusters. Technology infrastructure is a fundamental utility to support the operation and lower the cost structure of industry clusters.

While social capital is the medium that transports information within a cluster, competitiveness is highly dependent on an ability to import new information and ideas from greater distances. The most successful clusters have lead firms that are part of global networks and are exposed to global market opportunities, and employ people who are active in international professional associations. These firms regularly benchmark themselves against the best practices anywhere. Because knowledge in general comes from a very diverse set of sources, the wider the net, the more likely a greater knowledge base will be accessed. Poorer and peripheral regions have limited access to these benchmark practices, innovations, and markets. Without wider access, companies are limited to learning only within their regional borders and have a difficult time achieving any sort of competitive position.

Companies do not consider locating or expanding in communities where skill levels are low and work force development programs do not match employers' needs. Even in tight labor markets, firms will try to import workers before they are willing to take a chance on hiring inexperienced local workers, except to fill low-skill positions. This disconnect becomes mutually reinforcing. With no opportunities to gain experience and skills, the work force remains a liability, not an asset.

Regional prosperity depends upon cluster development, tacit knowledge workers and infrastructure investment. Understanding that clusters are of value to regions only matters if that knowledge leads to measurable actions that grow economies and raise standards of living. Successful efforts to leverage industry clusters and the complex tacit knowledge interactions which support them can generate sustainable regional competitive advantages. Regions that pursue this strategy with appropriate public and economic development policy can expect an increasing standard of living for its citizens.