Manufacturing
3:03 pm
Fri May 11, 2012

Three Reasons Why It’s Boom Time For NH Manufacturers

Although tourism is something of a signature industry for New Hampshire, the largest sector of the state’s economy–by far–is advanced manufacturing.  So-called “SMHT” (Smart Manufacturing/High Technology).

Looking back on the exodus of shoe and textile factories, the slow death of the wood products industry, and the decline of high-tech in the 1990’s, you’d be forgiven for chalking-up the growth of SHMT to the miraculous.

But according to a new report released by the Brookings Institution on American manufacturing, there are three main reasons why New Hampshire’s seeing a renaissance in this sector.

  1. Geographic Clustering: According to Brookings researchers, the best-case scenario for a state’s manufacturing economy is to have a number of different factories, specializing in similar areas, close together.  These days, companies are less likely to make all, or even most, of the pieces in a single product.  Instead, they outsource to other companies, creating an intricate supply chain.  So if you have a bunch of factories making computer parts situated close together, other firms look at an area and say, “Hey, if we move there, we can save money on transportation and have access to a decent labor pool.”  Companies naturally like to do this.  And the notable thing about New Hampshire’s manufacturing sector is that there are some pretty clear specialties clustered in key parts of the state.  For example, the Seacoast and Upper Valley are particularly strong in high-tech manufacturing, while the Monadnock Region and Merrimack Valley are known for their advanced machining.  In other words, when it comes to clustering, success breeds success.
  2. The Boston Feeder: This is related to clustering.  The Brookings report notes that nearly 80 percent of manufacturing jobs are concentrated in metropolitan areas.  Why is this an advantage?  It’s all about proximity.  Recently, we posted a piece looking at urban vs. rural productivity in the US.  On average, highly-urbanized states are much more productive.  It doesn’t take as long to make deliveries, pick up supplies, or meet with potential customers.  Metros also tend to have a lot more in the way of high-tech infrastructure, like broadband access, which is helpful for companies.  From the manufacturers’ perspective, once you’ve clustered numerous, similar factories in the same city, that’s not just access to a specialized labor pool; it’s access to a large specialized labor pool.  And since urban economies tend to be highly diverse, they have easy access to other things they need: accountants, engineers, consultants, etc.  The Brookings researchers found that counties relatively close to urban areas also benefited from this clustering.  So thanks to Boston’s status as a high-tech mecca, the Merrimack Valley, Seacoast, Upper Valley and Monadnock Region disproportionately benefit.
  3. NH Took The “High Road”: According to Brookings, this is the most important thing states can do to help grow the manufacturing economy.  Making what researchers call “high road” decisions is when states encourage industry clusters by providing a skilled workforce and encouraging research and development and innovation. As the researchers explain, “Geographic benefits are not simply natural advantages but also advantages created by public policy…Geographic high-road policies build on the strengths that come when firms locate near each other.”  To understand what this means, it’s helpful to contrast the high road with what researchers term the “low road”

“All too often [states] pursue policies that encourage firms to compete on the basis of low wages, using low-skilled workers and leaving innovation to chance.  Those policies include tax abatements and other locational subsidies, efforts to compete for geographically mobile businesses…by lowering wages, and policies that favor the location of manufacturers in low-density nonmetropolitan areas and outlying metropolitan counties.  Such policies promote a low-road manufacturing sector in which state and local governments“race to the bottom” to attract manufacturers and manufacturers have artificial incentives to move away from the locations where the social benefits of clustering are greatest.”

New Hampshire’s typically been wary of this “smokestack-chasing” approach.  While the Granite State does work to bring in firms from outside, the state doesn’t offer special tax incentives.  Rather, it aggressively markets the fact that there’s no broad-based sales, income, inventory or capital gains taxes, among others.  Efforts to create workforce training programs through the Community College System and bi-partisan Senate push to double tax credits for research and development also fall under this “high-road” model.

And so far, it’s paid off.

One exception, however, could be the House’s push for a Right-To-Work law, which Brookings puts into the “low-road” column:

“These geographic low-road policies are based on the assumption that the main thing that makes a location desirable is low wages for production workers, even though such wages typically account for far less than 20 percent of a manufacturers total costs.  Indiana’s recent enactment of a right-to-work law shows that some policymakers continue to find the low-road approach attractive.”

 
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