SD26 - An Industrial Cluster Analysis of the Virginia Economy


Executive Summary:
The vision behind this report is that of a Commonwealth research and development strategy that levers the state's scientific and technology resources for economic growth. Such a strategy is important because it is directed at the "new economy" or rapidly growing and changing parts of the state's economy, which are being forced to restructure because of the rapid rise of the technology that underpins the knowledge economy. The research plan developed to accomplish this vision is in three stages:

1. Identify Virginia's major industrial clusters and potential growth sectors in those clusters;

2. Develop a set of recommendations for each cluster through focus group meetings and interviews; and

3. Review and prioritize these recommendations with the R&D Commission that the Secretary of Technology is forming.

The research reported in this study describes the results of the identification and examination of the Virginia industrial clusters, i.e., stage one of the research plan. Work on the 2nd and 3rd stages is reserved for future research initiatives.

Industrial clusters are groups of industries that are highly inter-dependent in that they buy and sell from each other, their products tend to be functionally interrelated and there are supporting institutions, e.g., associations and research institutions related to the cluster functions. Components of such clusters are usually proximate to one another thus they tend to exhibit spatial concentration in specific regions or sub-parts of states. There are different types of industrial clusters ranging from traditional to propulsive to service, etc. Here clusters have been identified in three areas: natural resource, manufacturing and service sector with an emphasis on propulsive clusters.

Propulsive (emergent) clusters and/or their industry components are ones that exhibit recent growth or growth potential and have, or promise to have, relatively high wages. Clusters that have significant growth in employment earnings, wage levels, productivity and large size relative to a national or global base tend to be propulsive. Further, the larger and more interdependent a cluster and its industry components, the greater the policy significance.

Major Findings

1. Agricultural services and product cluster: the most promising part of this cluster is in the area of food products and more specifically meat, poultry and dairy products.

2. Three sectors in the wood products cluster show potential for future development: furniture products; paper products; and printing and publishing.

3. The chemicals cluster is composed of several strong sub-sectors: inorganic chemicals; plastics materials and polymers; and medicinal products.

4. The machinery and equipment cluster has several major sub-sectors that are very promising: electronic equipment (especially industrial and communication equipment); scientific equipment and instruments (search and navigation equipment, measuring and controlling devices such as sensors and optical instruments and lenses.

5. The transportation equipment cluster, despite many attributes of the "old economy" has several emergent and fast growing sub-sectors. These include: motor vehicle equipment and space related industries.

6. The transport services cluster has promising sub-sectors in water transport (marine cargo handling, towing and tugboat services, and sea transport) and air transport. Activities in this cluster drive the demand for transportation services, and trucking and warehousing services.

7. The financial services cluster has exhibited considerable growth in non-depository banking. Opportunities lie in this sub-sector as well as in the depository banking services and securitization (e.g., Freddie Mac).

8. The business services cluster is the largest in the state and contains one of the states strongest complexes of continued growth in computer services (programming, integrated systems design, data processing, prepackaged software, maintenance and repair and computer facilities management). Developments in these related sectors creates a continuing demand for professional services and therefore a strong demand for engineers, management consultants and personal services.

9. The communications cluster is one of the more propulsive ones. The strength in this cluster is in telephone communications (wire and wireless), cable, and Internet applications.

10. The tourism cluster is a potentially promising one. While today it is composed primarily of constituent industries such as hotels and motels, entertainment and recreation, by linking it to the states strong computer services industry, "smart tourist" products could become the foundation of a higher paying and emergent cluster.

11. The health services cluster is one of the largest in the Commonwealth yet relative to the national presence it is quite small. The opportunities in this cluster lie in the area of bio-science and in particular, bio-informatics. By continuing to link bio-science to the Virginia computer services industry, a potentially new and powerful industry may be developed.

12. Legal services also offer some potential in the area of technology law which has surged in the last year in Northern Virginia and Richmond.

The 12 areas discussed above are the potential target clusters and industries for the analysis.

The next stage (stage 2) of the analysis would be to investigate and identify potential improvements in the way the target industries do business through focus groups and interviews. In most cases these potential improvements will be in the areas of better services, technologies and infrastructure. The final stage of the research would be to review and prioritize the proposed improvements with the R&D Commission the Secretary of Technology is forming.

An example of a potential improvement stems from a pattern identified in several industries examined in part through the initial focus group meetings and a few interviews. The pattern is that logistical and transport outsourcing and integration is occurring at a very rapid pace in many industries. It is important to note that this is impacting and will impact many industries in the state. At the same time Virginia probably has the kind of skilled labor force and knowledge base required to produce advanced logistical technologies that could he developed to support Virginia demand and eventually to become an exporter of this technology and related services. A case study of the food products industry, as part of the agricultural services and products cluster, is reported in the concluding chapter of the report to illustrate how this industry is outsourcing most, if not all, of its transportation and logistics functions.

Recommendations

This report has been successful in identifying the major industrial clusters and their high potential industrial components. Future work as described above is needed to move these initial results to the policy and action stage. Thus the overriding recommendation is that research to identify potential improvement or growth strategies for the target industries is needed to complete the development of a "new economy" oriented research and development plan for the Commonwealth. The research needed is that required to complete the 2nd and 3rd stages of the research plan.