The cost of doing business: depending on your experience, that could bring to mind obvious costs like labor, materials, equipment, and utilities. A primary driver for corporate site location is the cost of doing business. The cost of doing business also is important for business retention.
For the past two years, the Illinois State Chamber of Commerce and Bank of America have sponsored an ongoing analysis of the cost of doing business in Illinois. Completed by the Regional Development Institute at Northern Illinois University, the studies compare Illinois to other Great Lakes states and provide some interesting insights and challenges for Illinois.
Unlike many cost-of-doing-business studies, ours considers both costs and productivity. This comprehensive approach isn’t just different, it’s fundamental: high costs can be offset by high productivity, giving a state a comparative advantage. Low costs, coupled with low productivity, could result in a state with a comparative disadvantage.
When analyzing all value-added industries, the cost of doing business has been 3 to 6 percent higher in Illinois than other Great Lake states, exceeded only by Michigan. Some of our higher costs are offset by the higher productivity of Illinois’ workforce. In fact, productivity in Illinois has been consistently greater than other Great Lakes states, resulting in Illinois ranking first or second in overall productivity/cost attractiveness. Projections indicate productivity in Illinois is likely to continue to increase, and if cost of doing business is kept in check, Illinois could become an even more attractive location for business.
When one looks at the manufacturing segment alone, a very different picture appears. Historically, the cost of doing business for manufacturing firms in Illinois has been about 1 percent higher than other Great Lake states. This is significantly less than Michigan but higher than Indiana, Wisconsin, and Ohio. However, productivity in manufacturing in Illinois is lower than the other states. In fact, manufacturing productivity was 98 percent of the Great Lakes states’ average in 1996 and fell to 89 percent in 2003. Continued decline in manufacturing productivity is projected through 2006. While relative manufacturing productivity is falling in Illinois, it increased in Indiana and Ohio during 1996-2003.
This presents interesting challenges for Illinois. Manufacturing accounts for 11 percent of Illinois employment but 16 percent of earnings, so it’s an industry important to the future economic vitality of the state. We must pay attention to efforts to increase manufacturing productivity, so Illinois can turn around our losses.
One answer may be in a recent report published by the Council on Competitiveness, which detailed findings of the National Innovative Initiative taskforce. The report discusses the state of innovation in the United States and how we’re losing our position as world leader in innovation. Even more important are recommendations made by the taskforce. Three areas need to be addressed for America to improve and build on innovation.
First, we must improve the workforce talent. In Illinois, we need to increase our investments in K-12 through higher education to be sure an attractive talent pool is available to new industry. We must be more creative in how we educate and train the workforce. Tomorrow’s worker will need a broad set of knowledge and skills and be able to transfer knowledge and skills to a variety of situations. This may require us to reevaluate the education process.
Second, we must create a business climate that encourages investment in innovation and creativity. Increased availability of angel and venture capital in Illinois is a must. We have to implement public policy that will provide incentives for companies to risk longer-term investment in new and innovative products.
And lastly, we need to create an infrastructure that supports innovation. Of course that means states need to provide highways, water, sewer, and telecommunications infrastructure that are necessary for businesses to prosper.
We need training and education to create a healthy talent pool; a friendly business climate where taxes, labor laws, liability reforms, and economic development efforts are all fair enough to encourage new businesses to start and grow; and an infrastructure that literally paves the way for success by new and existing businesses in Illinois. In an environment with those conditions, the cost of doing business, balanced with our productivity, should place us not only ahead of other Great Lakes states, but most of the U.S.
If we can create that environment, we’ll certainly deserve to be back in the spotlight. IBI