Largely because of its proximity to Washington, DC., Virginia has traditionally been heavily dependent on federal spending in both military and private-sector areas. With a slowing rate of growth in federal government spending, the state's future prosperity will increasingly depend on diversifying its economy. That means cultivating private sector growth, developing new dynamic industries, tapping into expanding national and international markets, and attracting global capital.
Why is This Important?
Diverse economies are generally better able to absorb economic shocks and are more resilient than those concentrated in just a handful of industries. This resiliency in turn helps create conditions for economic growth, low unemployment, and steady household incomes.
One way of promoting economic diversity is by developing new industrial clusters. An industrial cluster is a group of interconnected businesses that become more profitable through geographical co-location. These clusters often sell similar products, buy resources from one another, and share production resources such as labor and R&D.
Economic competitiveness is the capacity to offer products and services for growing domestic and international markets at competitive prices that still provide adequate returns. Goods and services sold into these growing markets help propel state economic activity.
Increasingly, dynamic industrial clusters, exports, and foreign direct investment (FDI) help states and metropolitan areas gain a competitive edge. Industrial clusters enhance the productivity of firms located within them. Sectors whose goods are traded across geographical boundaries (i.e., "tradable sectors") also tend to pay higher wages and support economic activity in other local service industries. Foreign-owned firms help build bridges to international markets; introduce new products, technologies, and management practices; and provide a pool of finance capital for business modernization and growth. Economic competitiveness is vital to generating good-paying jobs and rising incomes for Virginia's growing workforce.
How is Virginia Doing?
Because of its reliance on federal government employment and contractual services, Virginia is less diversified than most other states. By one measure of industrial employment diversity, the Hachman Index, the Commonwealth ranked 38th in 2014 -- a ranking that has changed very little in the last seven years. Among peer states, Virginia ranked higher on the Hachman Index in 2014 than Maryland (40th) but lower than Tennessee (7th) and North Carolina (8th). The most diverse state economy in 2014 was Utah. These performance levels have also changed very little over the last seven years.
Industrial Clusters at the State Level
However, Virginia does have many private-sector industrial clusters that are important to its economy. Virginia's top five tradable clusters by employment in 2013 were:
- business services
- distribution and electronic commerce
- education and knowledge creation
- hospitality and tourism
- financial services
In terms of geographical concentration, tobacco, water transportation, coal mining, textile manufacturing, and forestry clusters are ranked at the top. Among the fastest growing were trailers, motor homes, and appliances (105.8%); environmental services (65.6%); leather and related products (47.2%); water transportation (42.9%); footwear (33.5%); and metalworking technology (30.2%). Some of these clusters are growing from a relatively small employment base.
Virginia has a relatively high proportion of employment in dynamic tradable industrial clusters. These are tradable clusters that show high -- and increasing -- levels of geographical concentration and are experiencing growth nationally. The state's percentage of employment in such dynamic clusters has increased from 3.2 in 2009 to 3.6 percent in 2014. Virginia has a higher percentage of employment in dynamic clusters than North Carolina (1.2%), but lower than Tennessee (9.8%) and Maryland (18.0%). Among all U.S. states, it ranks 41st. The leading state is Nevada, with 22.0 percent of employment in dynamic tradable industrial clusters.
Regional Industrial Clusters
The most dynamic clusters by total employment in 2014 vary among Virginia's regions, as illustrated by the table below.Dynamic Tradeable Clusters by Virginia Region
|Region||Cluster Name||Employment Level|
|Central||Distribution and Electronic Commerce||30,139|
|Marketing, Design, and Publishing||8,064|
|Construction Products and Services||4,323|
|Upstream Chemical Products||1,328|
|Eastern||Fishing and Fishing Products||459|
|Trailers, Motor Homes, and Appliances||438|
|Hampton Roads||Water Transportation||34,849|
|Hospitality and Tourism||19,715|
|Northern||Marketing, Design, and Publishing||15,798|
|Southside||Distribution and Electronic Commerce||5,338|
|Southwest||Trailers, Motor Homes, and Appliances||1,320|
|Food Processing and Manufacturing||987|
|Oil and Gas Production and Transportation||964|
|Valley||Hospitality and Tourism||5,886|
|Transportation and Logistics||3.116|
|West Central||Education and Knowledge Creation||14,099|
|Production Technology and Heavy Machinery||3,956|
|Construction Products and Services||3,811|
|Upstream Metal Manufacturing||1,052|
|Source: US Census Bureau, County Business Patterns|
Virginia's export sector has the advantage of a major deep-water seaport in Hampton Roads. However, at just 7.3 percent of gross domestic product in 2015, exports currently form a fairly small part of Virginia economic activity and rank the state 43rd nationally. Among peer states, Virginia's percentage is higher than Maryland (6.4%), but lower than North Carolina (13.4%) and Tennessee (11.6%). The national leader was Louisiana at 19.4 percent, thanks in large part to its extensive port system and position at the bottom of the trade-critical Mississippi River. The national average export rate was 10.9 percent.
Export propensities vary widely among Virginia regions. On a per capita basis, Virginia exported just $4,197 per person in 2015. Four Virginia regions were higher: the Valley ($6,648), Eastern ($5,264), Southwest ($5,008), and West Central ($4,988) regions. The lowest export values were in the Hampton Roads ($3,283), Central ($3,907), Northern ($4,126), and Southside ($4,126) regions.
Virginia does better in attracting foreign direct investment (FDI), with 3.6 percent of total employment attributable to foreign enterprises in 2014; this is up from 3.2 percent in 2007 and higher than the national average of 3.4 percent. Among peer states, North Carolina (4.4%) and Tennessee (3.7%) had higher FDI rates, while Maryland (2.9%) was lower. South Carolina ranked first in 2014 at 5.2 percent.
What Influences Industrial Diversity and Competitiveness?
States and regions tend to specialize in what they do best. Historically, industrial location was determined by access to natural resources, transportation linkages, and proximity to population centers.
In the postindustrial economy, skilled labor, industry clusters, and regional "innovation milieu" have grown in importance. Domestic and international firms seek locations that help them provide quality products at competitive prices using innovative processes. These firms will seek out locations with a good business climate, including skilled workers, quality infrastructure, agglomeration economies, world-class research institutions, and a low cost of doing business.
What is the State's Role?
The state can play a positive role in industrial diversification and competitiveness efforts by:
- identifying and marketing Virginia's competitive advantages
- investing in public infrastructure, human resources, and higher education R&D to further build on the state's advantages
- providing technical assistance and economic incentives to businesses
The state also aids competitiveness by maintaining a positive business climate.
State economic development assistance is available for industrial recruitment, retention and expansion of existing businesses, and the growth of new firms.
Since industrial clusters are often formed at the regional rather than state level, local and metropolitan cooperation and collaboration towards building and sustaining shared resources is critical. The state can play a facilitative role by helping to build the capacity of collaborative organizations and further incentivizing regional cooperation.
The state can also foster global trade and investment. Assistance can take the form of investing in critical export infrastructure like the states port and airports; building global relationships through international trade missions and overseas trade offices and representatives; raising awareness about opportunities for export and investment through market analyses; and offering technical, training, and financial assistance (grants and loans) for state businesses to build their export capabilities.
State rankings are ordered so that #1 is understood to be the best.
Data Definitions and Sources
- A "tradable cluster" is an industry cluster whose goods and services can be sold and consumed at locations distant from where they are produced.
- "Innovation milieu" is the combination of economic, social, and institutional characteristics of a region that generate favorable conditions for knowledge creation, new technology adoption, and technical progress.
State economic diversity is defined using the Hachman index (HI). This index is calculated as follows:
where N is the number of industries, SiState measures the state's share of employment in each industry and SiUS measures the nation's share of employment in those same industries.
The Hachman Index indicates how similar the state's industry employment distribution is to the national industry employment distribution. Because the national economy is more diversified than individual state economies, the national distribution is used as a benchmark. The index value varies from zero to one, with one meaning that the state distribution is the same as the nation (i.e., very diversified) and zero meaning that it is completely different (undiversified).
Industrial clusters are identified using the Harvard Business School's U.S. Cluster Mapping Project industry cluster framework. In total, 67 clusters are identified by 6-digit North American Industrial Classification System (NAICS) codes. Geographical concentration is measured by the location quotient (LQ), which shows how concentrated the individual cluster in Virginia is compared to the nation.
U.S. Cluster Mapping
Harvard Business School
Source: U.S. Census Bureau, County Business Patterns
Export Monitor, 2016
Nominal Gross Domestic Product by State
Bureau of Economic Analysis
Foreign Direct Investment (FDI)
Employment from FDI may come from opening a new establishment or purchasing an existing business (mergers and acquisitions).
Bureau of Economic Analysis
Activities of U.S. Affiliates of Foreign Multinational Enterprises
State Annual Personal Income and Employment
See the Data Sources and Updates Calendar for a detailed list of the data resources used for indicator measures on Virginia Performs.