Manufacturing 2.0: A More Prosperous California

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A robust manufacturing industry is an indicator of a nation's ability to foster innovation and drive broad, sustained economic growth, and no state has been more important to U.S. manufacturing competitiveness than California.

In 2002, the Milken Institute's report Manufacturing Matters: California's Performance and Prospects sounded the alarm bells on the decline of the state's manufacturing competitiveness and the impending economic implications. Seven years later, a new report - Manufacturing 2.0: A More Prosperous California - compares the industry's performance to other states and quantifies the damage resulting from a failure to address previous concerns.

Download the full report and executive summary.

Manufacturing 2.0 reveals that:
  1. California is losing a larger share of manufacturing employment overall, in high-tech in particular, and at a faster rate compared to these other states;


  2. California has a wide gap between its capacity for ingenuity and entrepreneurship and its ability to efficiently commercialize innovation in manufacturing;


  3. This gap continues to widen in part due to the burden of an onerous regulatory climate and some of the highest taxes in the United States;


  4. California has a reputation for being a state that is unfriendly to business, which harms its overall competitiveness; and


  5. Peer states are using targeted incentives to keep and lure manufacturers away from California.

Manufacturing employment index (2000-2007)
This index tracks manufacturing employment data using 2000 as a base year, setting the index at 100 and measuring the change over time. This data is pictured in the graph above.
State 2000 2001 2002 2003 2004 2005 2006 2007
California 100.00 96.01 88.08 83.25 82.11 81.10 80.31 78.98
7 Peer States 100.00 95.27 88.71 84.87 84.70 85.73 87.11 86.88
United States 100.00 95.22 88.37 84.03 82.91 82.40 82.00 80.41

Sources: U.S. Bureau of Labor Statistics, Moody's Economy.com, Milken Institute.

Top five indicators
The data below show the percent change in the indicator for each state and the U.S. as a whole for the time period 2000 to 2007. There is also an indicator ranking, showing how each of the peer states measures up when compared to others for that indicator, 1 being the best and 8 being the worst. Values for each indicator can be found on the individual state pages by clicking on the state name.
 
  United States California Arizona Indiana Kansas Minnesota Oregon Texas  Washington 
Indicator %
Change
%
Change
Rank %
Change
Rank %
Change
Rank %
Change
Rank %
Change
Rank %
Change
Rank %
Change
Rank %
Change
Rank
Real gross state product 17.4% 20.3% 4 34.6% 1 6.8% 8 16.6% 6 16.1% 7 27.8% 2 24.2% 3 17.6% 5
Per capita personal income 29.4% 28.8% 3 28.0% 5 22.4% 8 22.9% 7 28.4% 4 25.1% 6 31.0% 1 29.7% 2
Total exports of goods 48.7% 12.3% 8 34.1% 7 68.7% 4 99.7% 2 75.3% 3 44.5% 6 62.0% 5 106.0% 1
Manufacturing's share of real GDP -6.1% -9.8% 8 -3.1% 4 -5.4% 6 -4.4% 5 1.7% 3 65.8% 1 23.8% 2 -7.8% 7
Real manufacturing output per worker 37.9% 39.1% 4 50.1% 3 22.0% 7 20.2% 8 37.1% 5 135.1% 1 75.7% 2 23.2% 6

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, U.S. Census Bureau, Milken Institute.
Note: Data are 2007 figures, unless stated otherwise. The rankings are among the eight peer states, 1 = best and 8 = worst, based on the growth rate between 2000 and 2007.


Notes about Manufacturing 2.0: A More Prosperous California

Selection of peer states: The study analyzed the drivers behind the decline of California's manufacturing industry, and compares it to the national average and to seven other states that met specific criteria. These states were chosen because 1) the state's share of U.S. manufacturing employment increased from 2000 to 2007, 2) the state's share of U.S. high-tech manufacturing employment also increased during the same time period, and 3) the state's share of U.S. high-tech manufacturing employment in 2007 either matched or exceeded the national average of 2 percent. Although Texas did not meet all three criteria, it was included in the analysis because of its large share of U.S. manufacturing and its similarity and proximity to California.

High-tech manufacturing is singled-out because of its importance in determining a region's future prosperity through sustainable growth due to the creation of high-skilled, well-paying jobs, and the sector's high employment multiplier effect.

Economic climate: To place a state's manufacturing industry in the proper context, the Milken Institute analyzed a set of broad economic indicators to determine the overall state of the economy and what implications it may have had on manufacturing. For example, was the state's economy growing or contracting? How linked is overall economic activity in the state to manufacturing output? Are the state's economy and manufacturing industry dependent on exports and more susceptible to global trends? These are all indirect factors that influence manufacturing's competitiveness.

Business climate: The climate for business activity and the efficient conduct of commerce varies from one state to the next for a number of reasons, including the state's tax policies, regulatory regime, and level of government spending. These factors can significantly influence the overall competitiveness of the state's economy and the businesses operating within it. They also come into play when businesses are determining where to locate. Such costs are an important consideration because businesses in high-tax, high-regulation states will be at a comparative disadvantage.

Leading business and economic indices: A number of organizations periodically produce well-regarded studies that quantify business and economic conditions and then rank states according to performance. The indices referenced in the case studies are completed using different methods, but much of the data used is the same. This means a state may rank higher in one index and lower in another. Nevertheless, these indices are useful for setting benchmarks and comparing the conditions between states.

Manufacturing indicators: Many of the key indicators used to identify the peer states are used again to analyze their manufacturing industries in more depth and in relation to the other peer states. In addition to looking at manufacturing overall, the case studies also examine high-tech manufacturing in particular because of its importance as a driver of broader economic growth.

Public incentives: The final section of the case studies provides examples of the more effective publicly sponsored incentives employed in each state. Incentives are explicit efforts made by state governments to retain and attract manufacturers. The incentives can be in the form of tax credits for specific business-related expenses such as purchasing equipment, training employees, or buying land. They can also include access to low-cost capital or grants to retrofit aging facilities or targeted public infrastructure improvements.

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