Palmetto Institute urges South Carolina to develop industry clusters

South Carolina should stake its economic future on developing clusters of industries that can become hubs of innovation, says The Palmetto Institute, the nonprofit group dedicated to raising the state’s per capita income.

C Grant Jackson
The State
Coumbia, SC
http://www.thestate.com

But developing successful clusters will require that South Carolina revamp its approach to economic development and strengthen its underlying economic foundation, the group says.

The recommendation comes from a research study commissioned by the Columbia-based institute and released Monday.

In it, the institute sought to say where South Carolina is economically and recommend what it can do to improve.

The study, conducted by international economic analysis consultant DRI-WEFA, concluded what many already know. South Carolina’s economy is largely dependent on mature or declining industries, such as textiles, and the advantages of low wages and low taxes.

"We will not improve the standard of living with old strategies that do not respond to the new knowledge-based economy," said Darla Moore, financier and institute chairman.

The institute will use the report to enlist the help of leaders across a broad spectrum to make long-term changes, Moore said. "We hope these findings will instill in every citizen an urgency to act."

While the Institute plans to make specific policy recommendations, that is not the first order of business, said Ed Sellers, chairman of Blue Cross Blue Shield of South Carolina and vice chairman of the institute.

The first thing, he said, is to get the state’s leadership to buy into the need for a change in the direction of the state’s economic growth.

Moore promised the institute will move forward from report to action.

"We will not let this sit in a corner and nothing be done, which is what happens historically to research. We have to move this forward, and we will continue to do so," she said.

Approach to industry has potential in state

Industry clusters must become the centerpiece of South Carolina’s economic growth, the Palmetto Institute study concludes.

"States that are growing are using the cluster concept because this synergy or common purpose tends to exponentially grow the economy," said Darla Moore, institute chairman.

Clusters are groups of companies, typically within close proximity, that produce similar goods and share common needs. Often, a research university is associated with an industry cluster.

Clustering can work here, the report said, if the state takes steps to establish working groups, develop strategies and capitalize on intellectual research.

Clustering is not a new approach to looking at economic development opportunities, said Jim Morris, chief of staff of the S.C. Department of Commerce. Morris said the state considered the approach some years ago, but didn’t seize upon it as the best way to do business.

"Industrial clusters in growth sectors have a lot of potential," Morris said. It’s one reason the state decided to join BMW in funding a graduate engineering center at Clemson for an automotive cluster in South Carolina.

The cluster is strong, growing and has a bright future, he said.

The state needs to pick clusters where there is growth potential, Morris said.

The report recommended the state push the development of clusters in these areas:

• Tourism. This is the state’s largest cluster. Despite recent setbacks, tourism can expect strong growth over the next five years, the report said. Major tourism companies cited include: Burroughs & Chapin; Wild Dunes Resort; Charleston Place Hotel; Kiawah Island Golf & Tennis Resort;

• Transportation services. Centered on the Port of Charleston, this cluster is expanding to serve as a warehousing and distribution center. Major companies: Wal-Mart Stores Inc.; Standard Corp.; Southeastern Freight Lines Inc.; Overnite Transportation Co.;

• Components and sub-assemblies. One of the smallest clusters, it is highly productive. While employment levels might remain flat over the next five years, sales growth will be among the fastest in the clusters, the report said. Major companies: Kemet Corp.; AVX Corp.; Square D; Cutler Hammer; Hitachi; Rockwell Automation; Bose Corp.;

• Professional services. The cluster consists of firms specializing in providing such services as engineering, research, accounting or management functions. Growth in this area can spur growth in other clusters around the state, the report said. Major companies: Blue Cross Blue Shield; Computer Sciences Corp.; Jacobs Engineering Group; Rockwell International Corp.; Blackbaud Inc.

While the automotive industry, textiles, agriculture and other clusters are important, they do not offer the greatest opportunity for growth, the report said.

Moore said economic development needs to be more than recruiting businesses from other places to locate in South Carolina.

Industry recruitment is but one component, she said. It will become harder as other parts of the world become more competitive with South Carolina.

"What we have to do is build our own. That is the key to long-term economic success."

As it stands now, the report said, South Carolina cannot compete vigorously in the new, knowledge-based economy with its current mix of industries.

Long-term, the state should look at what the report calls "seed clusters," emerging industries that rely on new technology.

Board member Larry Wilson said a proposed USC research campus, for example, could be coupled with the endowed chairs program to attract researchers in such emerging technology as fuel cell research.

That might enable the state to go to General Motors, which in turn could lead to a production facility.

Morris pointed to life sciences and biotechnology as other areas for potential clustering.

Education must mirror economic development

South Carolina needs an economic development policy and an education policy that go hand-in-hand, said Darla Moore, Palmetto Institute chairman.

Education and economic development are inextricably connected, Moore said. In the past, the state has talked about the two separately, but that cannot continue, she said.

The institute’s report on South Carolina’s economy concludes the state’s education system lags behind in quality and in students’ ability to get financial aid.

The report notes the state is taking steps to improve its educational system.

But the growth of knowledge-based industries and their role in the economy has made the availability of skilled, professional labor critical to the state’s economic foundation.

Compared with its neighbors, South Carolina is on par in terms of semi-skilled labor preparedness, but lags in skilled and professional labor-force preparedness.

The report recommended a series of long- and short-term goals for the state to pursue excellence in education.

Long-Term Goals:

• Implement mandatory course work at the primary/elementary level to improve verbal, math and science skills;

• Set up remedial sessions with top-scoring students as tutors. Tutors would receive extracurricular credits;

• Consolidate institutions of higher learning and improve quality and standards of colleges and universities;

• Transform some colleges and universities to focus on vocational or technical training that relates specifically to industry clusters;

• Coordinate higher education priorities at the state level. Establish industry partnerships between colleges and universities. Target key research and development areas that link to industry clusters in the state.

Short-Term Goals:

• Encourage labor-force training;

• Develop a more comprehensive endowed chair program to attract top academics.

Palmetto Institute says S.C. economy trailing
The Palmetto Institute report found that South Carolina’s economy is weak and trailing its neighboring states, as well as the nation.

A real cause for concern: The state’s labor participation rate is at a 10-year low of 63.5 percent, according to research conducted by DRI-WEFA, an international economics analysis consultant.

That means only about 63 percent of people age 16 and older are working or seeking jobs, which threatens to limit productivity.

That figure directly impacts the institute’s goal of increasing the per capita wealth of all South Carolinians.

"If you increase employment out of the unemployment ranks, you increase per capita income," said Ed Sellers, chairman of Blue Cross Blue Shield of South Carolina and vice chairman of the institute.

"We will be hard-pressed to close the economic gap with a shrinking percentage of workers" added Darla Moore, institute chairman.

Some of the increase in the rate of those not working can be attributed to a higher number of retirees in the state. The state had 485,300 people age 65 or older in 2000, about 12 percent of the population. The state added 88,000 people age 65 and up during the 1990s, a 22 percent increase and nearly double the national average.

Doug Woodward, director of research at USC’s Moore School of Business, said he is not particular concerned about the falling rate. "I would emphasize that it is at least as much if not more a demographic phenomenon than an economic phenomenon."

But Sellers said he is equally concerned about a declining youthful population. DRI-WEFA predicts the number of 25- to 44-year-olds will grow at a slower rate than the total population, both in South Carolina and across the nation.

Study IDs pros, cons of state’s economy

The study identified six key foundations for South Carolina’s economy. Two of those are an advantage for the state, but four require urgent attention before clustering can succeed.

TROUBLE SPOTS
Labor Force Skills South Carolina’s educational system lags behind competing states in quality, availability of high-quality research centers and access to financial support. On the plus side, the state is taking steps to improve education.

Access to capital. Investment capital is caught in a negative cycle in South Carolina. A lack of good investment opportunities has stunted the growth of venture capital businesses. As a result, businesses have difficulty accessing capital.

Technology. Research and development funding and activity is low, in terms of both government-sponsored and corporate initiatives.

Infrastructure. South Carolina has good roads and adequate water and sewerage. However, the telecommunications network is lacking.
STRONG POINTS
General business climate. The cost of doing business in South Carolina is favorable — operating costs continue to be low.

Quality of life. On average, South Carolina rates well. The low cost of living relative to average earnings is a key contributor.

Key Finding: South Carolina’s economy cannot compete given its current mix of industries

Key Finding: South Carolina’s economy cannot compete given its current mix of industries. It needs to diversify its industries and improve the foundations of its economy, especially education.

Key Recommendation: Create industry clusters that can become hubs of innovation.

Palmetto Institute: Who’s Who

Darla Moore, chairwoman
Partner in Rainwater Inc., one of the largest private investment firms in America. A Lake City resident, Moore is a USC graduate with an MBA from George Washington University. Moore gave a $25 million endowment to the USC business school, which was renamed in her honor.

M. Edward Sellers
Chairman, president and CEO of Blue Cross Blue Shield of South Carolina. A Columbia resident, Sellers is a graduate of Vanderbilt University with an MBA from Harvard Business School. Sellers has served as president of the Palmetto Business Forum, a private organization representing the state’s largest corporations, and the South Carolina Chamber of Commerce.

Lucy J. Reuben
Dean of the business school at S.C. State University, recently named provost at North Carolina Central University. A Columbia resident, Reuben is a graduate of Oberlin College with an MBA and doctorate from the University of Michigan.

William Barnet III
CEO of the Barnet Co. and Barnet Development Co. Barnet is mayor of Spartanburg and received his undergraduate degree and MBA from Dartmouth College. Barnet has served as chairman of both the state’s Education Oversight Committee and the Palmetto Business Forum.

Paula Harper Bethea
Director of client relations and development for Bethea, Jordan and Griffin, P.A. A Hilton Head Island resident, Bethea is a graduate of the University of South Carolina. She is a past two-term president of the state Chamber of Commerce.

Ernest A. Finney Jr.
Retired chief justice of the S.C. Supreme Court. A Sumter resident, Finney graduated from Claflin College and received his doctor of law degree from S.C. State University.

Don Herriott
President and general manager of Roche Carolina Inc. A Florence resident, Herriott is a graduate of Sonoma State University. Herriott is chairman of the Governor’s Workforce Education Task Force and president of the South Carolina Chamber of Commerce.

George Dean Johnson
CEO and director of Extended Stay America Inc. Johnson is a former S.C. legislator and chairman of the State Development Board. Extended Stay is in the process of moving from Fort Lauderdale, Fla., to Spartanburg, where Johnson was born and raised. Johnson is a graduate of Wofford College and the USC Law School.

Minor Mickel Shaw
President of Micco Corp. and Mickel Investment Group. A Greenville resident, Shaw is a graduate of the University of North Carolina. She has been on The Greenville News’ list of that community’s Top 25 Leaders.

Joel A. Smith III
Dean of the Moore School of Business at USC. A Columbia resident, Smith is a graduate of the University of the South, the University of Oklahoma’s national lending school and the School of Banking of the South at Louisiana State University. He is a former executive for Bank of America.

G. Larry Wilson
President of Trelys, a technology investment firm. A Columbia resident, Wilson earned his undergraduate degree and MBA at USC. He founded Blythewood software company Policy Management Systems Corp., which was later renamed Mynd and then sold to Computers Systems Corp. Wilson serves on the Governor’s Technology Transition Team.

Walter G. Seinsheimer Jr.
Founder of Dolphin Architects and Builders. Seinsheimer has lived in Charleston since 1990. His company has built more than $100 million worth of homes in the Charleston area.

The Palmetto Institute was founded in February with the mission of raising per capita income in South Carolina. On average, South Carolinians earn 81 cents for every dollar that other Americans make. The institute said it would research the state’s economy before making recommendations on how to improve personal income. Monday’s report is the group’s first action. This special report highlights the key findings.

With its benchmark research in hand, the Palmetto Institute will begin developing a long-term strategic plan to increase the wealth of all South Carolinians. Darla Moore, chairman of the Institute, said the nonprofit group wants to work with policy-makers and opinion leaders to develop recommendations. While the institute will advocate for particular policy changes at some point, the first step is to "get everybody on the same song sheet to do something about this," Moore said.

http://www.palmettoinstitute.org/