Location Quotients in the MAFC

by Ben Zietlow on February 4, 2013

A hot topic at this year’s TRB Annual Meeting was the role of our transportation system in achieving the economic goals set forth by President Obama (doubling exports) and MAP-21 (economic competitiveness). While we live and breathe transportation on a daily basis, it is important to remember that transportation is only one part of the puzzle—it plays an ancillary, yet incredibly important supportive role in accomplishing both goals. With this in mind, I ask you to remove your transportation hats and put on your entrepreneur hats (or at least place one on top of the other) as we take a brief look at the MAFC’s industrial make-up thru the lens of reshoring.

Let’s start with a basic concept that is fairly common and widely used within economic development circles: a location quotient (LQ). LQs are relative measures (expressed as ratios) used to compare an industry’s presence, or percentage share of the economy, between a smaller and larger geographical area. For example: an MPO versus its state, a state versus the nation as a whole, or an MPO versus the nation. To illustrate, an LQ equal to 1.5 represents a 50 percent higher concentration in the smaller area versus the larger area. Employment figures are most often used when computing LQs.

The reshoring of American jobs (particularly in manufacturing sectors) was highlighted in a Boston Consulting Group (BCG) report last March (1), and since has been the subject of a number of recent media stories (2). Lower costs of labor, the low cost of transportation, and decreasing costs of capital—all of which once prompted companies to seek offshoring opportunities—are now receding. These factors, combined with the risks associated with foreign markets (political and foreign exchange) and logistical considerations (reducing the length of supply chains, domestically matching production to demand, or locating within an industrial cluster to obtain agglomeration benefits) have caused companies to rethink their location decisions.

Why is this important? The U.S. Department of Commerce recently released a report ranking the states by their manufacturing sectors’ share of total earnings and employment (3). Mid-America Freight Coalition states fill out the top six spots, and seven of the top ten, respectively. The report also notes manufacturing’s share of the nation’s GDP growth between 2009 and 2011 (about 25 percent) and employment growth between 2010 and 2012 (approximately half a million). While it is difficult to say for certain how much of the growth can be attributed to reshoring, anecdotal evidence is available to make the case reshoring played some sort of a role (4). More specifically, the BCG highlights what they call the ‘Tipping-Point Industries’ (the seven manufacturing subsectors most likely to experience reshoring) and conservatively estimates future impacts of 2-3 million jobs and ≈$100 billion in annual output. The MAFC region hosts strong concentrations of these activities (see table below). Increased reshoring in the future will create both opportunities and challenges for the region and the transportation system supporting it as the amount of freight increases and the flow of those goods are redirected.

Manufacturing SubSector Value of Goods Consumed (billions) Imports via China (billions) MAFC LQ LQ   Rank Top Ranked State LQ
Transportation Goods 582 6 1.97 1 4.66
Computers & Electronics 467 122 0.65 18 1.05
Fabricated Metals 262 10 1.56 5 1.99
Machinery 251 16 1.66 4 2.45
Plastics & Rubber 170 9 1.74 3 2.39
Appliances & Electrical Equipment 134 25 1.47 6 2.09
Furniture 75 13 1.14 14 2.30

While federal agencies prepare the national framework and policies to guide public investment, the responsibility for creating solutions to increase exports and economic competitiveness initially rests with the private sector and those at the local level in the public sector. Relationships and collaborations connecting the various levels will be vital to aligning national vision with local execution. For example, MnDOT’s Corridor Investment Management Strategy (CIMS) has put the building blocks in place to do so (5).  Based on earlier work which identified and categorized the Upper Midwest’s trade centers, as well as the interregional corridors connecting those centers, the CIMS program (facilitated via annual meetings and an interactive website) is designed to foster collaboration between the various stakeholders. CIMS has laid the foundation and provides MnDOT an opportunity to encourage a bottom-up analysis with stakeholder participation at the corridor level. In doing so, CIMS can capitalize on indispensable local knowledge to develop constructive dialogue addressing industry/cluster specific supply chain issues and constraints.

I want to close with an observation from TRB that ties this all together, and a look ahead to the Regional Freight Study. The functionality of freight plans (state or national) can only be accomplished when they are integrated into the overall planning processes at the state, regional, and local levels (6). No two states are alike, and neither will the freight plans or implementations of those freight plans. One of the things I learned to appreciate early on about the MAFC was the fact that it was ten states acting independently while sharing experiences collectively, and it is this spirit of collaboration that will serve us well as we work to implement MAP-21. The Regional Freight Study will expand upon the LQ analysis discussed here and include LQ analysis and industrial cluster maps for all manufacturing subsectors (3-digit NAICS code level). I look forward to learning more about the cooperative efforts within each of your states, and am happy to assist in any way possible. See you all in Louisville.

References

  1. Made in America, Again- U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much?” Boston Consulting Group. (March, 2012).
  2. The Insourcing Boom.” The Atlantic. (December, 2012).
  3. The Geographic Concentration of Manufacturing Across the United States.” U.S. Department of Commerce. (January 2013).
  4. I invite you to check out the Reshoring Initiative’s website at www.reshorenow.org for a library of reshoring case studies.
  5. More information regarding MnDOT’s CIMS program can be found at the following website: http://www.dot.state.mn.us/cims/index.html
  6. A special thanks to Leo Penne for his perspective and presentation during TRB’s Freight Day: “Every Day is Freight Day.”
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