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King of the hill?
Virginia has been named the best state in the country for doing business. But how competitive is the Old Dominion overall? And where do we go from here?
by Garry Kranz
for Virginia Business
March 2007
The national press is learning what state business leaders have known for years: When it comes to nurturing economic growth, Virginia is on a roll. The commonwealth regularly woos businesses with its low corporate taxes, stable regulatory climate, strategic location to U.S. markets and a pipeline of educated workers.
It is a winning recipe. Since 2003, Virginia consistently has outperformed the national average in employment growth.
But the state scaled the summit — and furiously began waving the victory flag — last August when Forbes.com, the Web site for Forbes magazine, proclaimed Virginia the No. 1 state in the country for doing business. Forbes looked at a total of 30 measurements within six categories — regulatory environment, labor, quality of life, economic climate, business costs and growth prospects — and Virginia scored in the top half of all but three of them.
“We were a runaway at No. 1,” crowed Patrick O. Gottschalk, Virginia’s secretary of commerce and trade. During a recent statewide conference on competitiveness, he noted that Virginia was the only state to rank in the top 10 of all of Forbes’ six categories. “The next best state was Texas.”
Virginia gained its highest marks for regulatory environment (boosted by a triple A bond rating), labor (34 percent of the state’s residents have college degrees) and quality of life. It also scored well for low business costs. Overall, Virginia’s costs are 9 percent below the national average, said Forbes.com. Tax and energy costs were the seventh and ninth lowest in the country.
After being named the best state for business, other kudos followed. Entrepreneur magazine ranked Virginia as the second-best state for launching new companies. AeA, the nation’s largest high-tech trade industry association, recognized Virginia as the top state in technology job growth, with 9,100 new tech jobs produced since 1999.
The momentum continued in 2007. In January Virginia Tech announced plans for a new medical school. It will team with Roanoke-based Carilion Health System to open a five-year school, a venture viewed as an economic boost for Southwest Virginia and a big plus in Virginia Tech’s quest to become one of the top 30 four-year research institutions in the nation (see related story on page 17).
With so much laudatory news, business
leaders are trying to shun a false sense of security.
As recent events show, fortunes can shift quickly and
wreck the best-laid plans for sustained economic growth.
Ford Motor Co. plans to shutter its truck-manufacturing
facility in Norfolk by 2008, meaning the loss of 2,400
jobs in Hampton Roads. And in January drug-maker Eli
Lilly & Co. of Indianapolis abruptly halted construction
of a $325 million insulin manufacturing plant in Prince
William County that would have created about 700 jobs.
Meanwhile, the state continues to struggle with a long-term
funding strategy for transportation — hands down the most important issue to businesspeople. Estimates say Virginia needs sustainable annual revenue of about $1 billion a year to simply maintain its roads and bridges. That doesn’t include money for improved rail and public transit. A special legislative session last fall failed to break a longstanding stalemate between the House and Senate on how to come up with funding. By press time, it wasn’t
clear whether efforts to reach a compromise during
the 2007 General Assembly would bear fruit.
Well-trained workers
Transportation aside, other pressures threaten long-term economic prosperity. Greater coordination of, and funding for, work-force training tops the list. “It is the No. 1 economic development incentive, as important as K-12 or post-secondary education,” says Jay Langston, president of the Virginia Economic Developers Association. Gov. Timothy M. Kaine wants to overhaul the state’s existing, fragmented work-force programs, now spread across four state secretariats. He proposed a major new initiative in January aimed at streamlining the program.
Kaine also wants to restore $4 million in funding over the next two years, the amount pared during the last biennial budget. This would increase the pot for work-force development, now set to receive $14 million in 2007 and $12.6 million in 2008. It’s a welcome gesture, but hardly enough to narrow the gap with other Southern states. According to Expansion Management magazine, the five states with the best work-force training programs are Alabama, Georgia, Texas, North Carolina and South Carolina. The magazine rated states on a number of factors, including how much money is furnished for training programs. Virginia failed to crack the top 10.
“An area’s economy is only as bright as its work force enables it to be,” says Deborah DiCroce, the president of Tidewater Community College (TCC), one of the state’s largest, with four campuses in Hampton Roads. Virginia’s community colleges excel at delivering customized training for specific niches. For instance, welding is integral to operations at Virginia’s growing port in Hampton Roads, the third busiest general cargo port on the East Coast. Yet finding workers who possess the special skill of marine welding — which can involve welding while submerged in water — is challenging.
“We were trying to bring people into the industry [as welders] to fill needs and weren’t getting a good product,” says Roger Geisinger, president of the Hampton Roads Shipping Association. Geisinger approached TCC for help. While the college has offered welding courses for years, now it’s developing programs to specifically respond to the maritime community’s needs.
Virginia needs to devote more resources to applied training, especially in the hardest-hit areas of the state, says Hugh Keogh, president of the Virginia Chamber of Commerce. Although Virginia sports the highest per-capita income of all Southeastern states at $38,390 — and the seventh highest in the U.S. — Keogh said the macro numbers disguise wide economic disparity between different regions.
Many communities, particularly in Southside and Southwest Virginia, are still suffering from the loss of old-line jobs in manufacturing, textiles and tobacco. “We’ve got to tilt the playing field,” says Keogh, to create job opportunities that match those regional labor pools.
Still, 2006 brought glimmers of hope to some of those regions. Swedwood North America, a subsidiary of Swedish home furnishings giant IKEA Group, chose Danville as the site for its North American furniture manufacturing plant, a move that should bring 740 new jobs.
Money talks
When it comes to financial incentives for economic development, Virginia could be characterized as prudently conservative. Some would even say stingy. Years ago state officials altered the way Virginia doles out incentives, placing greater emphasis on performance-based grants and loans and less emphasis on huge cash payouts.
In 2006, Virginia provided $46.3 million in economic incentives from a variety of funding programs, according to the Virginia Economic Development Partnership, the state’s business-recruitment arm. Nearly half that amount, or $22 million, went to one recipient: SRI International, a global research leader building a Center for Advanced Drug Research in Rockingham County. By comparison, officials in St. Petersburg, Fla., announced in January that SRI would receive about $30 million in state and local money to construct an R&D facility there.
Meanwhile down in Georgia, economic development officials ponied up $400 million in state and local incentives to persuade South Korean Kia Motors Corp. to build a $1.2 billion auto assembly plant that’s expected to create 2,800 plant jobs and 2,600 supplier jobs. Additionally, Georgia is paying nearly $26 million to build a 70,000-square-foot training center to prepare would-be Kia workers for jobs on the assembly line.
Such massive sums are unheard of in Virginia, at least for individual projects. Even so, it is a mistake to regard raw dollars as the only effective measure of incentives, says Dr. Ronald Pollina of Chicago-based Pollina Real Estate Inc., which produced the data for Forbes.com.
Pollina ranked Virginia’s incentive programs second in the country. He credits Virginia with having something many states lack: an organized system of funding programs that businesses can identify and access. “Just having a big pot of money doesn’t mean anything. You have to have specific programs that are [well-known to businesses], and Virginia obviously is doing pretty well,” says Pollina, in a nod to the state’s extensive network of publicly funded programs for startup businesses.
Revving up R&D
Incentives play another role by helping Virginia boost its research-and-development profile. For years, state officials have yearned to see Virginia become synonymous with groundbreaking research. The most recent statistics available from the National Science Foundation rank Virginia No. 12 in terms of total money spent on R&D. The state ranks higher, No. 3, in the amount of federal R&D spending ($6.2 million in 2003) largely because of increased spending on defense and homeland security.
A new effort with vast R&D potential is the Virginia Modeling Analysis and Simulation Center started by Old Dominion University. Its pioneering breakthrough technologies use computer-generated models for transportation planning, military applications and medical training. The growing modeling and simulation industry already has produced about 4,000 jobs in Hampton Roads, with average salaries twice that of the regional average of about $34,000. Overall, the industry generates $400 million in annual revenue, according to an ODU study.
That is the type of spin-off activity desired across the rest of Virginia, particularly in regions where there are large pools of unemployed or “under-employed” people. While Virginia has nothing on the magnitude of Raleigh, N.C.’s Research Triangle Park, leaders hope that SRI will begin to change that. The research company’s choice of Rockingham County for a new drug research center is expected to generate about 100 highly technical jobs paying average salaries of $85,000.
If history is an indication, SRI’s presence in the Shenandoah Valley may trigger a rash of startups and hundreds of new jobs — not to mention stepped-up investment activity in Virginia. “The SRI project is almost transformational in nature,” says Gottschalk.
Virginia enters the next decade with a finely honed competitive edge. The commonwealth enjoys one of the lowest unemployment rates in the nation (2.9 percent), and above-average job growth appears assured, at least for the foreseeable future. Stepped-up R&D promises to provide new sources of jobs and economic prosperity, and a move back to some state regulation of electricity should keep energy costs low. In the future, the challenge for Virginia isn’t getting to the mountain; it’s more about staying on top amidst storms of competition.
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