BeNChMARks•••••••••••••••••••

The Quarterly Review of Economic News & Insight

• fall ’99 Volume two Issue 4

• Economic Currents

• Massachusetts Current and Leading Indices

• From the Field: The Pioneer Valley Region

• Measuring Internet Presence

A PUBLICATION OF THE UNIVERSITY OF MASSACHUSETTS

IN COOPERATION WITH THE FEDERAL RESERVE BANK OF Massachusetts Benchmarks Editorial Policy

Massachusetts Benchmarks is a quarterly journal published by the University of Massachusetts in cooperation with the Federal Reserve Bank of Boston. It presents timely information concerning the performance of the Massachusetts economy, including periodic economic analysis of major geographic regions within the Commonwealth and an array of key industries that make up the economic base of the state. The journal provides commentary and interpretation of economic data aimed at business leaders, public policymakers, educational organizations, and the general public.

The editors of Massachusetts Benchmarks invite articles on topics of current interest from researchers on various aspects of the state economy, regional economic development, and key growth industries. The editors also welcome queries from academic or professional economists for future issues of the journal. Please send queries to Carolyn Dash Mailler at [email protected] with a brief biography and topical outline. Authors considered for Massachusetts Benchmarks will be furnished with writers’ guidelines.

All submissions are subject to rigorous review by the Editorial Board or other referees. Manuscripts of accepted articles are expected to adhere to the guidelines. Final publication decision rests exclusively with the editors. MASSACHUSETTS fall 1999 BeNChMARks•••••••••••••••••••

EDITORS T ABLE OF CONTENTS L YNN BROWNE Federal Reserve Bank of Boston C RAIG MOORE 2 Letter from the President University of Massachusetts 3 Excerpts from the Board XECUTIVE DITOR The Massachusetts Benchmarks Editorial Board discusses current trends E E in the Massachusetts economy and finds that there are increasingly R OBERT NAKOSTEEN mixed signals, though the state’s near-term prospects are still positive. University of Massachusetts Amherst 4 Economic Currents: The State of the State Economy FEATURES EDITOR Alan Clayton-Matthews reviews the remarkable economic performance that continues in both the nation and the Commonwealth. While there R ALPH WHITEHEAD, JR . are signs of strain and a slowdown in growth ahead, the state economy University of Massachusetts continues to advance.

EDITORIAL BOARD 10 From the Field: The Pioneer Valley Region Robert Nakosteen explores the Pioneer Valley region, whose powerful M ICHAEL BEST economic legacy is rooted in the Industrial Revolution. In order to University of Massachusetts Lowell fulfill its potential, the region must break away from its proud past and reorient its economic base. K ATHARINE BRADBURY Federal Reserve Bank of Boston 16 The Measure of Massachusetts K ARL CASE The University of Massachusetts Economic Benchmarks; employment, Wellesley College unemployment, and income data; confidence indices; and more

A LAN CLAYTON-MATTHEWS University of Massachusetts Boston 18 Measuring Internet Presence: How Do Massachusetts Companies Compare R ICHARD DE K ASER BankBoston with the Nation’s Best? Leslie Ball, George Milne, and Susan Milne examine the extent to P ETER DOERINGER which the state’s top companies use the Internet as a marketing tool. Boston University Two new indices rate these companies’ Web sites and compare them

W ILLIAM HOGAN with their national counterparts. University of Massachusetts Dartmouth

Y OLANDA KODRZYCKI 23 Street Signs Federal Reserve Bank of Boston A UMass Poll that was administered for the Internet presence study reveals some interesting facts about Massachusetts citizens’ readiness S AMUEL KORTUM for the growing e-commerce economy, as well as their willingness to Boston University shop over the Internet.

F RANK LEVY Massachusetts Institute of Technology 24 Endnotes Stephen Coelen summarizes recent patterns of the J IM STOCK Massachusetts Export Index. Harvard University

A NDREW SUM Northeastern University

This and past issues of Massachusetts Benchmarks, along with information about the Benchmarks Project, can be found on the Web at www.massbenchmarks.org. LetterFROM THE PRESIDENT

Welcome to the final Massachusetts Benchmarks of the twentieth century. What better time to take stock of the economic opportunities and challenges that will face the Commonwealth in the near and distant future?

The Commonwealth is ending the century amid one of the longest periods of economic growth in history. The economy, both nationwide and statewide, continues to defy the experts by maintaining low unemployment without in- flation. This has been achieved through unprecedented technology-induced productivity gains.

There are, however, challenges ahead.

Two new measures of the Commonwealth’s preparedness for the twenty-first century are unveiled in this issue: the Internet Presence Index and the Rela- tive Internet Presence Index. These indices measure how well Massachusetts companies are performing in the rapidly advancing and increasingly competi- tive e-commerce environment. The message from University of Massachusetts Professors Leslie Ball and George Milne and research assistant Susan Milne is this: “Our in-state businesses appear to be average, if not somewhat behind, when it comes to holding their own in the Internet economy.”

Bob Nakosteen cites many of the advantages enjoyed by the Pioneer Valley but also sees that the uneven distribution of economic benefits across the state has disfavored the region. There is reason for optimism. Professor Nakosteen makes a compelling case for our having confidence in the Valley’s future.

Construction and technology skills are in high demand across the Commonwealth. Jobs in manu- facturing, however, are in decline. This has displaced many older workers who find themselves stranded in the information-age economy and forced to settle for lower-paying service jobs.

Our challenge is to assure that the growing demand for skilled, competent workers can be met by the local citizenry. Our supporters expect this of us. We must not disappoint them.

WILLIAM M. BULGER President University of Massachusetts

.... 2 .... EXCERPTS F R O M T H E B O A R D

or quite some time, there has been anticipation that the state’s economy would slow. Over the past few quarters, a number of signs have warned that the expansion may be limited by supply-side constraints, especially in the state’s labor market. The board F currently sees an economic picture that is still positive, but has a number of mixed elements. Massachusetts employment growth has remained positive over the past half year, but it has slowed to rates around 1.5 percent on an annual basis. U.S. job growth has remained above 2 percent. Other economic indicators are mixed, “but not that mixed,” to use one board member’s words. While the state may no longer be experiencing booming growth, neither is it expected to go into recession. What the board expects in the near-term future is an economy that grows at a moderate pace, constrained especially by the state’s tight labor market.

The longer the expansion continues side by side with growing evidence of supply-side con- straints, the more the issue of productivity moves to center stage. There is much current discus- sion about the possibility that productivity growth has kept the expansion going, at least at the national level. Technological advances, especially in the area of information technology and improved inventory management, may be leading to productivity gains that allow the economy to grow, even while supply-side sources of growth are limited.

In addition to technology, members of the Editorial Board discussed restructuring, cultural shifts, increased education and training, and soaring demand for consumer goods, four factors that may be eliciting more work effort and more output from the limited labor pool.

While it is virtually impossible to gauge productivity changes in the short term, especially at the state level, there is general agreement among members of the board that productivity improve- ments are increasingly contributing to the ongoing expansion.

Looking forward, an expected recovery abroad should increase demand for Massachusetts goods and services, but it will also reduce the positive fallout the American economy has enjoyed from relatively low-priced imports, especially oil. The board expects the Commonwealth’s economy to exhibit moderating rates of growth over the near term, with indicators moving more or less in parallel with, but at a slower pace than, those of the national economy.

.... 3 .... T HE STATE OF THE STATE ECONOMY

EconomicCurrents NAOMIILLUSTRATION: SHEA

A LAN CLAYTON-MATTHEWS ○○○○○○○○○○○○○○○○○○○○ hen Alan Greenspan presented his semiannual Humphrey- Hawkins testimony to Congress In the midst of continuing economic in July, he described the charac- growth, we are seeing signs of a possible teristics of the remarkable eco- future slowdown in the Commonwealth’s nomic expansion and the risks Wand challenges that now face monetary and fiscal pol- economy. June’s Leading Economic icymakers. He was speaking about the national economy, Index for Massachusetts was down nearly but what he said also applies to the Massachusetts economy. Both the state and the nation have enjoyed a long and ro- a percentage point from its May level, and bust expansion. Both have suffered from the fall in exports consumer confidence fell moderately in ○○○○○○○○○○○○○○○ associated with the Asian crisis but have benefited from the inflation- and interest rate–lowering effects of that same the same month. In the labor market, crisis. Both are at risk of overheating in the presence of there is evidence that inflationary pres- tight labor markets and insatiable consumer demand. The two basic indicators of the economy’s health, as sures may be building. specified in the Humphrey-Hawkins legislation, are employ- ment and inflation. The state and the nation are in excel- lent health, according to these overall indicators. Unem- ployment rates declined to very low levels during the past

.... 4 .... The Current and Leading Current Economic Index Economic Indices for and Massachusetts The trends rather than the levels of these indices Massachusetts should be compared, due to different base points.

125

123.8 125.0 124 he Current Economic Index U.S. 1992 = 100 122.9 for Massachusetts for July 123 121.9 122.8 was 122.8, up 1.3 percent 122 T 120.8 122.2 from June (at an annual rate), and up 121 2.9 percent from July of last year. The 121.4 MA July 1987 = 100 current index is normalized to 100 in 120 120.3 July 1987 and calibrated to grow at 119 119.3 the same rate as Massachusetts real gross state product over the 1978– 118 1997 period. The index was July Oct Jan Apr July ’98 ’98 ’99 ’99 ’99 recalibrated last month to reflect the Sources: The Conference Board; University of Massachusetts; Federal Reserve Bank of Boston recent release of gross state product through 1997.

The Leading Economic Index for Massachusetts for July was 1.9 percent, and the three-month average for May through July was 3.1 percent. The Massachusetts Leading Economic Index leading index is a forecast of the The leading index is the annualized, six-month projected growth in the current index over change in the Massachusetts Current Economic Index. the next six months, expressed at an 5 annual rate. Thus, it indicates that the 3.9 economy is expected to grow at an 4

annual rate of 1.9 percent over the 3.8 next six months. Because of monthly 3 fluctuations in the data on which the 2.3 index is based, the three-month aver- 2.0 2 age of 3.1 percent may be a more re- 1.9 liable indicator of near-term growth.

Projected Change (percent) 1 The index suggests that the economy is slowing from its rapid pace of the 0 last several years, as labor shortages July Oct Jan Apr July are effectively restricting the growth ’98 ’98 ’99 ’99 ’99

in employment, incomes, and con- Sources: The Conference Board; University of Massachusetts; Federal Reserve Bank of Boston sumer demand.

.... 5 .... year: 3.0 percent in Massachusetts and 4.3 percent in the ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ United States (as of June). Consumer price inflation has Employment Growth in remained uncharacteristically low in the face of such long Selected Massachusetts Industries and sustained growth: 1.9 percent in Massachusetts for the year ending in May, and 2.0 percent in the United States for the year ending in June. June 1998–June 1999 (percent change) Given the Commonwealth’s much lower rate of popu- lation growth, it is remarkable that Massachusetts has man- Total Nonagricultural ...... 1.5 aged to match the nation in its rate of expansion. Annual gross state product data through 1997, released by the Construction ...... 7.9 Bureau of Economic Analysis in June, indicate that during this expansion (1991–1997) real GSP growth in Massa- Manufacturing...... -3.4 chusetts matched the national annual average growth ofi Lumber & Furniture ...... 1.1 3.2 percent. Despite a small and shrinking pool of unem- Stone, Clay, & Glass ...... 1.1 ployed, job creation continues to exceed population growth. Machinery & Equipment ...... -8.1 For the year ending in June, the number of nonfarm pay- Electronics & Electronic Equipment ...... -1.8 roll jobs increased by 1.5 percent in Massachusetts. Over Communications Equipment ...... 2.7 the same period, the Massachusetts working-age popula- Transportation Equipment ...... -4.6 tion grew by only 0.5 percent. As a consequence of these Instruments ...... -4.6 trends, the signs of nascent inflation are more pronounced Textile Mill Products ...... -8.5 here than in the nation as a whole, as evidenced by wage- Apparel ...... -12.6 rate growth and housing price appreciation. Miscellaneous Plastics Products ...... 1.9

The Employment and Inflation Picture Is Mixed Transportation ...... 3.1 When one looks at the industrial composition of employ- ment changes, along with other indicators of inflation, the Communications ...... -0.3 bill of economic health is more mixed than is suggested by total employment and consumer prices. Electric, Gas, & Sanitary Services ...... -2.6 First, the good news. In the year ending in June, em- ployment growth in Massachusetts was particularly strong Wholesale Trade ...... 0.8 in construction (7.9 percent), transportation (3.1 percent), retail trade (2.7 percent), finance (4.8 percent), the broad ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Retail Trade...... 2.7 service sector (2.4 percent), and public primary and sec- ondary education (3.2 percent). Construction demand was Finance...... 4.8 supported by strong demand from the residential, commer- Nondepository Institutions ...... 6.4 cial, and public sectors and in retail trade by the building Banks ...... 2.7 materials, auto dealers, apparel, furniture, and dining sec- tors. In finance, employment expanded by 6.4 percent in Services ...... 2.4 nondepository institutions—essentially the money manage- Business ...... 4.1 ment/mutual fund industry. Health ...... 0.2 Banks expanded employment until the second quarter. Social...... 3.7 Consolidations, especially the proposed Fleet/BankBoston Engineering & Management ...... 3.9 merger, may result in employment declines after the merger is approved. The employment impact of the merger will Federal Government...... -0.7 depend on who buys the divested branches. If the buyer is from outside the region, the employment impact may be State Government ...... -0.9 quite small. Business service employment, which includes tempo- Local Government ...... 2.6 rary employment agencies and much of the software indus- Local Education ...... 3.2 try, grew by 4.1 percent. This is well below the sector’s average annual growth rate of 8.7 percent during the ex- pansion.1 The slowdown in this sector is largely the result Sources: Massachusetts DET; U.S. Bureau of Labor Statistics of a shortage of workers, rather than a decrease in demand by

.... 6 .... employers. The Fed’s June 16 Beige Book for the Boston district encompassing reports that demand is strong for Massachusetts Merchandise Exports information technology workers, and that employment firms by Country of Destination cannot find enough people to fill the IT vacancies. Other ser- Left-hand axis measures exports to individual countries. vice sectors that exhibited strong growth were engineering and Right-hand axis measures total exports. management (3.9 percent) and social services (3.7 percent). 4500 20,000 All Countries 18,000 Manufacturing Continues to Lag 4000 Manufacturing employment continues to decline, falling by 16,000 3.4 percent in the year ending in June. Measured in terms of 3500 14,000 production worker hours, the decline was even steeper, at Canada 12,000 4.1 percent. Particularly hard hit were the Commonwealth’s 3000 export sectors: machinery, electronics, instruments, transpor- 10,000 2500 tation equipment, apparel, and textiles. While some portion 8000 of the decline can be attributed to productivity, it is primarily 2000 6000 due to export declines engendered by weak economies in Japan 4000 Asia and the strong U.S. dollar. 1500 Before the impact of the Asian crisis was felt, the state’s 2000 $M at annual rates, not seasonally adjusted United Kingdom exports were growing at double-digit annual rates. By the 1000 0 second quarter of 1998, exports were declining.2 In the 1996 1997 1998 1999 third quarter, they were off by 8.8 percent over the same Q1 Q1 Q1 Q1 Source: MISER quarter in 1997. The reversal was most dramatic for trade with Japan, which, at the time, was our second-largest trad- Exports to Canada and Japan show a decline from last year.

While some portion of the decline in manufacturing employment can be attributed to productivity, it is primarily due to export declines engendered by weak economies in Asia and the strong U.S. dollar. ing partner (it is now the United Kingdom). The most re- cently available export data for the first quarter of 1999 still Massachusetts Exports indicate a declining trend for Japan and Canada (our largest by Industry trading partner in terms of exports). Exports to Canada have 5500 been hurt by a weak Canadian dollar, which makes them expensive for our northern neighbor. Industrial machinery, 5000 Industrial which was our largest export sector, was the hardest hit. Machinery Machinery exports declined from $5.3 billion in the fourth 4500 quarter of 1997 to $3.8 billion in the first quarter of 1999. 4000 There are signs that the bottom of the export crash is Electrical Equipment near. Stock markets in Japan and East Asia have outpaced 3500 even domestic markets so far this year (as of the end of July), an indication that international investors are expecting busi- 3000 ness conditions there to rebound. Presumably, economic Instruments growth and demand for our exports will follow. Data for 2500 New England as a whole indicate that exports to South $M at annual rates, not seasonally adjusted 2000 Korea and Singapore were up in the first quarter over a year 1996 1997 1998 1999 ago.3 The Canadian and European economies, including Q1 Q1 Q1 Q1 Germany, are also showing signs of renewed strength. Con- Source: MISER sequently, the declines in both exports and manufacturing employment have abated somewhat, even though they have Industrial machinery has lost its place as the state’s leading export industry. continued downward.

.... 7 .... Superimposed on the Asian crises was a glut in the com- ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ however. Without good state-level data on labor costs, puter chip market, which appears to be over. Some compa- we can only estimate the aggregate wage rate by dividing nies in Massachusetts that supply computer chip–making aggregate earnings by employment. This is not a true wage equipment have been expanding production and overtime rate, since it includes the effects of changes in the skill mix hours. Exports of electrical equipment have grown in the of the workforce and the intensity of work effort (weekly fourth quarter of 1998 and the first quarter of 1999 over hours worked per employee), but it gives the best indica- the prior year, according to the most recently available data. tion of recent trends in paid compensation. Not all manufacturing sectors have suffered. Those sup- We use two measures of aggregate earnings: state quar- plying primarily domestic demand—the real estate sector terly wage and salary disbursements from the U.S. Bureau in particular—have done well. These include furniture; of Economic Analysis, and monthly withholding taxes from stone, clay, and glass; and plastics. Rapid expansion in the the Massachusetts Department of Revenue.4 The former Internet, cellular phones, and related technologies has indicates that wage-rate growth accelerated in 1998. By this boosted employment in communications equipment. measure, first quarter 1999 wage rates were 6.8 percent above those of the prior year. In contrast, a similarly de- Signs of Nascent Inflation fined measure for the nation shows that wage-rate growth Monetary policy analysts and regional economists are con- decelerated moderately in 1998. At the national level, first cerned about inflation, though their motivations may be some- quarter 1999 wage rates were 3.9 percent above the prior what different. The year and rose slightly Federal Reserve to 4.1 percent in the Board of Gover- second quarter. The nors, toward its ob- second measure for jective of maintain- Growth in Wages per Worker Massachusetts, us- ing maximum sus- ing withholding ear 10 tainable economic taxes, shows an even 9 growth, seeks to more rapid growth restrain the emer- 8 in wage rates: 8.9 gence of inflation. 7 percent in the year Experience tells 6 ending in the first them that inflation ame Quarter Prior Y 5 quarter of 1999, is difficult to halt, 4 and also 8.9 percent and success in halt- 3 in the year ending in ing it can easily re- 2 the second quarter sult in initiating a 1 of this year. recession. These rates of 0

Regional ec- Growth from S Percent 1994 1995 1996 1997 1998 1999 growth, 6.8 percent onomists are aware Q1 Q1 Q1 Q1 Q1 Q1 to 8.9 percent, may that inflation is MA Wage & Salary Disbursements overstate actual rarely uniform MA Withholding Tax Base wage-rate growth in across regions; it the state, as part of U.S. Wage & Salary Disbursements often alters the the growth probably balance of inter- Source: Mass. DET; U.S. BEA; U.S. BLS; Mass. DOR; author’s calculations reflects increases in regional costs for hours of work. It is both businesses likely that hours of and households, work increased more with consequent disruptions in employment, unemployment, ○○○○○○○○○ in Massachusetts than they did nationally, due to the and migration. So though state governments do not possess Commonwealth’s lower unemployment rate. It is unlikely, monetary or fiscal levers to control inflation, regional ana- however, that hours alone account for the difference. Em- lysts are keenly interested in it. ployers often pay workers more per hour for additional work At the national level, policymakers are wary of several and also pay higher benefits (which are not counted in the precipitators of inflation. Chief among them is the cost of ○○○○○○ figures given here). These extra hours tend to be less pro- labor, the major component of value-added in production. ductive. The upshot is that per-unit labor costs in the state So far, at the national level, per-unit labor costs appear to are almost certainly rising faster than consumer prices plus be behaving well. This is not the case in Massachusetts, productivity growth, and they are rising faster here than

.... 8 .... nationally. They must, therefore, be putting upward pres- ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ regions of the state hurt by recent worldwide events, and sure on the Commonwealth’s business costs relative to soothe the social ills of job loss, which must be all the more other regions. painful in an economy that is otherwise booming. Housing prices, a major cost for newly formed house- Some recent news can be interpreted as supporting a holds and in-migrants, are also ramping up. According to “soft landing” scenario. Consumer confidence for New the Fannie Mae and Freddie Mac Repeat Sales Index, prices England fell in June. Although the drop was moderate over- for existing homes increased by 7.8 percent in Massachu- all, it was somewhat steep in the future expectations com- setts between the first quarter of 1998 and the first quarter ponent. Also, the surge in home sales and prices in the spring of 1999. This represents a gradual acceleration since early may largely reflect anxious homebuyers jumping into the 1997, when the appreciation rate was 3.1 percent. More market to avoid expected rises in mortgage rates, which recently, the Massachusetts Association of Realtors estimated have been moving upward. If this is so, speculative activity that the median price of detached single-family homes rose in the housing market may be restrained by rising mort- by 12.3 percent in June from the prior year. Unlike the gage rates. The Massachusetts Leading Economic Index for former measure, which controls for quality and size of house, June is down nearly a percentage point from May, a trend the MAR measure probably reflects both appreciation and that is welcome for now. a shift toward larger/higher-quality homes. Over the same Until and unless these signs materialize soon as a clear period, the MAR reported that the median price of condo- slowdown in growth, however, an inflation-induced end to miniums rose by 17.0 percent. the expansion becomes increasingly likely in the next year or two. For the future of the Commonwealth’s superb eco- Outlook: Slower Growth May Not Come in nomic expansion to be secured, wage growth and housing Time to Halt Inflation price appreciation must be restrained. Thus, like Alan June’s leading index for Massachusetts suggests real output Greenspan, regional economy-watchers will be keeping a growth of 3.3 percent over the next six months. Given the vigilant eye on inflationary pressures—albeit without very low unemployment rate and current rates of wage Greenspan’s monetary tool kit. growth and real estate appreciation, a continuation of growth of this magnitude presents a danger of overheating the economy. The action by the Fed in June to raise inter- ENDNOTES est rates is therefore welcome. 1. The expansion began in October 1991, as dated by the Massachu- setts Current Economic Index.

2. The export data are from the Massachusetts Institute for Social and Economic Research (MISER). ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Unless these signs 3. Data on exports from Massachusetts to East Asian countries are not materialize soon as a clear readily available to the author at this time. 4. Withholding taxes are converted to an estimate of wage and salary slowdown in growth, disbursements by adjusting for changes in rates and exemptions. The data are then seasonally adjusted and smoothed. an inflation-induced end to the expansion becomes increasingly likely in the next year or two.

Despite the overall danger of overheating, faster growth in the manufacturing sector would be welcome. A recovery in exports and manufacturing employment would help re- store balanced growth without adding to inflationary ten- dencies, as wage-rate growth in manufacturing is running at a safe 3.6 percent annual rate. Restoring the incomes of these workers will forestall destabilizing effects of personal credit card defaults and mortgage foreclosures, help restore

.... 9 .... From the Field

ILLUSTRATION: NAOMIILLUSTRATION: SHEA

The Pioneer Val ley

The map inside the back cover of this issue provides Region additional information about the Pioneer Valley region.

R OBERT NAKOSTEEN

The Pioneer Valley is a region with many attributes, one of which is great economic potential. Its mix of city, small-town, and rural flavor, combined with a significantly lower cost of living than in the eastern part of the state, makes it attractive from a quality-of-life perspective. In addition to these attributes, which can serve as a lure for a qualified labor force, new businesses, and job growth, the region has several other elements that can promote successful economic development. Among these are a well- developed transportation network and proximity to large East Coast markets, a unique capacity in telecommunications, and a strong presence in higher education.

Still, the promise of the region is not reflected in the economic data. Many of the indus- tries comprising its economic base do not have good growth prospects for the national and global markets of the twenty-first century. The task at hand is to reorient the Valley’s economic base from its roots in the industrial revolution toward one that can be expected to thrive in the next century.

.... 10 .... he Pioneer Valley region1 of Western ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ the region’s industries, the relatively small specialty- Massachusetts is very much a child of the paper sector remains a strong part of the Pioneer Valley’s Industrial Revolution. Holyoke was one economic base. of the world’s first planned industrial cit- Framing these developments is a pattern of overall ies, built to take advantage of Connecti- growth and decline in manufacturing across the region and cutT River water power and the boom in textile manufactur- the state. At the beginning of the 1900s, state and regional ing in the early 1800s. River traffic was mostly replaced by employment bases were comprised of approximately 20 railroads in the mid-1800s, connecting the mill towns with percent manufacturing jobs. This grew, throughout the Boston and New Haven. From this arose a formidable local Commonwealth, to more than 50 percent in the post–World economy that supplied the world with paper, cloth, and War II years. Hampden County, comprised of the region’s other manufactured goods, as well as manufacturing tech- largest cities (Springfield, Chicopee, and Holyoke), had nology. This industrial legacy, heavily committed to a manu- nearly 60 percent of its employment in manufacturing by facturing economic base, tells us much about where the the late 1940s. From this high-water mark, manufacturing Pioneer Valley is today—and about the challenges it faces as a percent of total employment has dropped continually. for the future. In its wake remains an infrastructure of mills and factories that have been and will continue to be very expensive to The Valley’s Industrial Past modernize. Equally important is a labor force in need of In the nineteenth century, the intro- training that will make individuals more qualified for the duced to the world the use of interchangeable parts in knowledge-based economy of the twenty-first century. manufacturing, resulting from a contract with the U.S. gov- ernment for the production of armaments. The armory’s Reorienting the Economic Base success spawned the growth of machine The Valley’s economic decline during tooling and precision metalworking the second half of the twentieth cen- from the Connecticut to the Machine tooling and tury was primarily a result of its heavy borders. These were the high-tech in- dependence on manufacturing. In the dustries of the nineteenth century, and precision metalworking late 1980s and into the ’90s, the re- the Pioneer Valley was a leader around were the high-tech gion shared in the severe statewide the world. recession. The unemployment rate Holyoke’s mills, completed after industries of the was near double digits, firms were the decline in the New England textile nineteenth century, and closing, and the Pioneer Valley lost industry had commenced, were able to population to out-migration. The ap- diversify into machine tooling, preci- the Pioneer Valley was a parent improvement of the economic sion metalworking, and—most impor- leader around the world. landscape in recent years masks an tant—paper manufacturing, while economy that has been unable to re- keeping some of their textile manufac- place the many lost manufacturing turing capacity. By the 1880s, Holyoke was known as the ○○○○○○○○○○○○○○○○○○○○○ jobs. Worse still, the region has no strong engines of eco- Paper City. The relatively rapid transition from a planned nomic growth on the horizon. textile mill city to this was due in large part to the quality At the same time, the Pioneer Valley has many attributes of the ’s water, uniquely suited to the and great economic promise, if in a more general sense. As manufacture of paper. This resource gave the Holyoke mills noted recently in The Boston Globe Magazine,3 “With its an advantage, even over those with greater proximity to breathing room and lower cost of living, as well as its choice wood, the most basic raw material in paper production. of small cities and college, farm, and hill towns, the region By the mid-twentieth century, however, the fortunes offers an appealing mix of the rural and the urbane that of the Valley’s industrial giants began to wane. The 1970s doesn’t exist in many places.” In addition to these quality- saw both machine tooling and precision metalworking stag- of-life attributes, which can serve as a lure for new businesses nating in the region, and the industries virtually collapsed and a qualified labor force, the region has many other ele- over the following decade. Dozens of companies with thou- ments that can promote successful economic growth. Among sands of employees closed or were seriously downsized.2 ○○○○○○○○○○ these are a well-developed—and relatively uncongested— Numerous factors contributed to the decline, not the least transportation network with proximity to large East Coast of which was an extremely strong dollar in international markets, a unique capacity in telecommunications, and a exchange markets. This made domestic firms fatally less strong presence in higher education. price competitive than their international counterparts. Still, the region’s promise is not reflected in the eco- Though the twentieth century took a toll on virtually all of nomic data. Many of the industries comprising its economic

.... 11 .... base do not have good growth prospects for the national ○○○○○○○○○○○○○○○○○○○○ Pioneer Valley Employment 1997 and global markets of the twenty-first century. The task at State numbers in parentheses hand is to reorient the regional economic base from its roots in the industrial revolution toward those industries that are more likely to thrive in the decades ahead. Services 40.1% (41.2%) Regional Profile Retail Trade 19.9% (17.7%) Employment. Peak regional employment during the pre- vious expansion was reached in 1989, at 319,739.4 Not Manufacturing surprisingly, the regional unemployment rate was at its low- 16.0% (14.5%) est (3.9 percent), one-tenth of a point below the state rate.

From there, the state and the regional economies deterio- ○○○○○○○○○○○○○○○ rated rapidly, with unemployment reaching 9.5 percent in 1991. There was a parallel decline in regional employment from its highest level down to 303,823, a drop of nearly Government 4.7% (4.3%) 5 percent of the employment base. The state lost nearly a quarter of a million jobs between 1989 and 1992. FIRE 4.9% (6.8%) From its high point, the regional unemployment rate Construction fell monotonically for six years, to 3.8 percent in 1998. The 3.7% (3.8%) Commonwealth’s rate reached 3.3 percent. What has Agriculture .8% (.7%)

SOURCE: Wholesale Trade MA Division of 4.0% (5.5%) Employment and Training Pioneer Valley Employment 1989–1998 Transportation & Public Utilities 350,000 5.7% (5.5%)

340,000 Labor Force At the division level, regional employment 330,000 percentages are similar to those of the state.

320,000 Employment 310,000 distinguished the regional pattern of unemployment is 300,000 the extent to which it has masked a degree of economic weakness. In fact, the regional employment number has 290,000 not yet returned to its 1990 peak level on an annual-aver- 280,000 age basis, standing at 317,036 in 1998. And while the state 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 has experienced a 12.6 percent increase in employment since a low point in 1992, regional growth has been only 4.3 percent. The drop in regional unemployment has virtually Pioneer Valley Unemployment 1989–1998 matched that of the state, not because of employment 10 growth, but rather because of labor-force stagnation. The 9 labor force has not returned to its 1990 high. In 1998, it 8 stood at 329,485, a loss of 3.2 percent. This is due to net 7 out-migration of the population, a phenomenon the Pio- 6 neer Valley has faced during most of this decade. The pat- 5 tern suggests a lack of economic opportunity in the region that is not obvious when considering only the low rates of Percent 4 3 unemployment. 2 Industry mix. At the major-industry level of detail, 1 the region’s economy closely resembles that of the state: 0 the services sector is the largest, at 40.1 percent of total 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 employment. Manufacturing, which represents 16 percent of regional employment, accounts for 14.5 percent at the SOURCE: MA Division of Employment and Training

.... 12 .... ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ state level. In other sectors as well, the region and the state Fine Arts in the Valley are well aligned in percentage representation. The wage differential. There is considerable disparity between the region and the state when it comes to wages. In every major industry sector, the average regional wage5 An Underrated Economy is lower than the state average. In some cases, the differ- ences are dramatic. For example, the state average wage in n 1998, travel writer John Villani ranked finance, insurance, and real estate is nearly $60,000, while Northampton, Massachusetts, “Number the regional average is less than $40,000. I One” in his book The 100 Best Small Art The Boston metropolitan area, where the cost of living Towns in America. The Boston Globe proclaimed, is significantly higher than it is in , “This small city offers more restaurants and shops, dominates the state averages in nearly every sector. The re- certainly more galleries, theaters, and performance ported wages do not take into account cost-of-living differ- venues than most urban centers dozens of times ences and therefore must be interpreted with caution. Still, its size.” In this thriving mini-metropolis, galler- wage data suggest that the Pioneer Valley lags considerably ies gleam, potters prosper, and musicians from behind the state as a whole when it comes to wage and 6 every genre enjoy packed houses night after night. income levels. Employment in key industries. This analysis again One wouldn’t expect this from a town of 30,000, ○○○○○○○○○○○ but that’s part of Northampton’s appeal. makes it clear that the Pioneer Valley has not fully ben- efited from the economic recovery and expansion of the A burgeoning cultural industry has been grow- 1990s. While the regional unemployment rate is consider- ing impressively in the Pioneer Valley for more ably lower now than it was early in the decade, job growth than 25 years. The reputation brings successful and wage levels have lagged behind the rest of the state. artists from around the country, encouraging lo- In a recent study of the state economy, the Massachusetts cal artists outward from Northampton to the sur- rounding towns, where lower rents and more available space have energized the growth of arts communities throughout the region. Wage Comparison: Pioneer Valley vs. Massachusetts 1997 But while we generally look to numbers to spell out economic impact of any industry—and oftentimes, they do—there are things the num- bers don’t catch. Why don’t the arts register on Pioneer Valley Massachusetts the Dun & Bradstreet or Division of Employ- Government ment and Training data screens? Because many Services artists aren’t employed in the traditional sense. They don’t work for firms that pay wages, taxes, FIRE and unemployment insurance—but they are Retail Trade working artists nonetheless. The numbers that Wholesale Trade do show up, measuring the direct impact of the Transportation & Public Utilities cultural industry, may not seem impressive by Manufacturing comparison to leading industries. As a result, the Construction significance of the arts to local economies is of- ten underrated. Agriculture, Forestry & Fishing

Ask any resident or regular visitor about the im- $10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000$50,000$55,000$60,000 portance of the arts to the Pioneer Valley, and Average Annual Wages they will tell you: There is allure in the region’s cultural community, even if the numbers can’t State wages exceed those of the region in every sector. prove it. SOURCE: MA Division of Employment and Training

.... 13 .... ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Technology Collaborative observed, “The Massachusetts Pioneer Valley Share of State Employment economy is fundamentally different than it was a decade in Key Clusters 1998 ago. Not only has the economy grown in jobs and output, but its character has changed. A ‘boom-and-bust’ economy Industries below the line are once dependent on a few cyclical industries, especially de- underrepresented in the Pioneer Valley. fense and computer hardware, is now more diverse with a 18 much broader range of industries.… This diversity means 16 that as Massachusetts enters a period of global economic 14 uncertainty, our economy is better positioned to promote 12 long-term growth and respond to the coming challenges.”7 10 8 The MTC study identified nine key industry clusters Percent 6 that are critical to the state’s economy and its future. These 4 include innovation services, postsecondary education, tex- 2 tiles and apparel, diversified industrial support, computers 0 Postsecondary Financial Textiles & Software & Computers & and communications hardware, financial services, healthcare Education Services Apparel Communications Communications technology, software and communications services, and Services Hardware defense.8 These clusters account for more than one-third Diversified Innovation Healthcare Defense of the state’s private-sector payroll and pay wages nearly 50 Industrial Services Technology percent higher than the rest of the industries comprising Support SOURCE: Dun & Bradstreet

Valley-Wide Initiatives Aim to Secure Economic Future

n attempts to reverse the economic meltdown of the late 1980s and early 1990s, the Pioneer Valley’s economic development planners and practitioners have launched multiple initiatives in recent years. These are helping the Valley harness its public- and private-sector resources to develop and administer industrial parks, clean up brownfields, press forward with infrastructure for new technology-based industries, leverage public schools and higher education resources to full advan- I tage, and inspire other benefits for the region. At the core of economic development efforts is the Pioneer Valley Plan for Progress, which is anchored by the Pioneer Valley Planning Commission (PVPC). The plan brings together mayors, state and town officials, nonprofit organiza- tions, regional entities and the private sector in a collaboration that reaches beyond the traditional mandate of a regional planning agency. Though the PVPC service area does not extend to the Franklin County region, the Plan for Progress embraces this northern neighbor as an important player in the Pioneer Valley’s economic arena.

The Economic Development Council (EDC) of Western Massachusetts serves in many ways as an implementation arm of the Plan for Progress. Through its own strategic plan, it addresses many of the business-related issues raised by the Plan for Progress and offers support for others. Created in 1996 by prominent private-sector companies in the three counties, the council is governed by seven mayors, three selectman, and 70 private-sector chief executives. Its main purpose is to turn the plan’s initiatives into private-sector-driven progress throughout the Valley and increase private- sector payroll and direct investment in the three counties.

The Franklin Regional Council of Governments (FRCOG) maintains its own economic development planning capacity to complement its participation in the Plan for Progress and to ensure that local needs do not get subsumed by the much larger Hampden and Hampshire counties. FRCOG’s overall economic development program focuses on brownfields reclamation, tourism expansion, equitable investment in telecommunications infrastructure and agriculture as an economic sector. FRCOG has included the Hampshire County town of Amherst in its economic development planning, because UMass Amherst is the largest employer of Franklin County’s citizens.

In spite of the ongoing efforts of these and innumerable other organizations, economic development activities centered on the Plan for Progress have not yet solved the region’s structural economic problems. Formidable obstacles remain, including workforce readiness concerns, reinvigorating the region’s older urban core cities, fostering quality public schools, and how best to develop and boost export industries. The efforts to date, however, are generating confidence that a better economy is at hand for the Pioneer Valley region as a new century unfolds.

.... 14 .... the Commonwealth’s economy. For the most part, these clus- ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ efficiently, largely by providing information to key players ters are also export industries rather than local support and by seeking out and securing government subsidies for industries; most of their production is destined for areas out- specific efforts, market forces are going to prevail. At the side of Massachusetts. One of the key elements of a moment, those forces have resulted in a flat or slightly grow- dynamic regional economy is a strong set of export industries. ing regional economy. The difficult task of spawning genu- To what extent is the Pioneer Valley linked to this im- ine economic development lies ahead. portant set of industries? As a benchmark, the region ac- counts for 9 percent of the state’s employment. Regional shares of state employment in an industrial cluster that fall ROBERT NAKOSTEEN is a member of the faculty at UMass Amherst’s Isenberg School of Management. He is also the executive editor of this journal. above 9 percent can be thought of as overrepresented in the region; those below are underrepresented. The author wishes to thank Rebecca Loveland for her invaluable advice and Postsecondary education is a key sector in the Pioneer Val- insights, and Professor Peter Doeringer for his usual incisive review. ley, with a 16 percent share, and diversified industrial sup- port9 also has 14.4 percent of its state share located in the ENDNOTES

Pioneer Valley. Financial services falls just short of its “share,” 1. The Pioneer Valley Planning Commission excludes Franklin County with 8.7 percent of its state employment in the region. All from its definition. For the sake of convenience, this article will use the other key sectors are underrepresented in the region. larger regional definition, which encompasses Hampden, Hampshire, and Franklin counties. One way to think of the relative stagnation of the Pio- neer Valley economy during this decade is that the “wrong” 2. Forrant, Robert and Erin Flynn, “Seizing Agglomeration’s Poten- tial: The Greater Springfield Massachusetts Metalworking Sector in Tran- industries make up the region’s economic base. That is, the sition, 1986–1996,” Regional Studies, Volume 32, number 3, 1998, pp. region has a high proportion of industries that have been 209–222. growing only slowly, if at all, in recent years. And, as the 3. Roche, B.J., “Paradise at a Price,” The Boston Globe Magazine, small regional shares in most of the key industrial clusters November 22, 1998, pp. 12–38. illustrate, the area does not yet have an economic base popu- 4. The employment, labor force, and unemployment data reported in lated with the companies and industries that have provided this section are all household-based data. job and income growth for the eastern part of the state. ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ While the Pioneer Valley cannot be expected to have an 5. These data are for the fourth quarter 1997, the most recently avail- able regional and state wage data by industry. industry mix on par with the region, the key to healthy economic growth is its ability to attract an 6. For a further analysis of regional income differences within the Com- monwealth, see Andrew Sum, et al., The Road Ahead, www.massinc.org/ economic base that has dynamic employment and earnings pages/Reports/RoadAhead/The_Road_Ahead.htm, 1998. prospects for the future. 7. Massachusetts Technology Collaborative, Index of the Massachusetts Innovation Economy, 1998. Whither the Valley: What’s Next? There is a considerable effort under way to revive and re- 8. For definitions of these clusters, see ibid., appendix B. make the economy of the Pioneer Valley. Local officials are 9. This cluster consists mostly of durable manufacturing inputs to other pushing a number of projects related to the tourism indus- industrial processes. Most important to the regional economy are the try. These include a renovation of the Springfield Civic metalworking and machine tooling industries.xxxxxxxxxxxxxxxx Center, as well as a new convention center, a $103 million expansion of the Hall of Fame along the Con- necticut River, and a new tourism center in Greenfield. Springfield Technical Community College is developing a capacity to train telecommunications workers, with the hope that this effort will strengthen the industry for which well- trained labor is the most pressing need. The University of Massachusetts is becoming increas- ingly involved in supporting economic development through outreach efforts and commercial spin-offs of fac- ulty research, and other collaborations are initiating ways to strengthen the regional economy. Still, the effectiveness of these efforts remains to be seen, at least in terms of the aggregate economic data. Regions grow and decline for a variety of reasons, many of which are market-driven. While economic development efforts can make markets work more

.... 15 .... The Measure of Massachusetts

5.0 4.5U.S. 4.5 4.5 4.3 4.3 4.3

4.0

3.5 MA 3.2 3.2 3.2 3.2 Unemployment Rates 2.9 3.0

2.5

2.0 July Oct Jan Apr July ’98 ’98 ’99 ’99 ’99

Change from Period Value Year Earlier (%) Employment 7/99 3,226,200 1.3 Manufacturing 435,400 -3.3 Services 1,162,100 2.4

State Employment Monthly Initial Unemployment Claims 7/99 26,356 -5.2 & Income Income ’99 Q1 Personal Income ($M) 209,776 6.4 Real Personal Income ($M 1982–84) 127,446 4.6

Help Wanted Advertising Index, Boston 7/99 58 11.5 (1987 = 100)

Employment Unemployment Rate Change from 7/99 7/99 7/98 Central Year Earlier (%) Fitchburg-Leominster PMSA 66,383 0.6 4.3 4.2

Worcester, MA-CT PMSA (MA only) 240,186 -1.0 3.3 3.3

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Cape and Islands

Barnstable-Yarmouth MSA 84,531 3.7 2.3 2.7

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Boston Metro

Boston, MA-NH PMSA (MA only) 1,791,967 0.2 2.7 2.7

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Regional Employment Northeast Lowell, MA-NH PMSA (MA only) 156,859 2.0 3.4 3.4

Lawrence, MA-NH PMSA (MA only) 120,095 -0.2 4.8 4.7

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Southeast Brockton PMSA 128,828 1.5 3.8 3.9 New Bedford PMSA 79,222 1.7 5.7 6.1 Providence-Fall River-Warwick, 113,514 0.4 4.4 4.4

RI-MA MSA (MA only)

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Pioneer Valley Greenfield LMA 31,584 0.5 2.8 3.0

Springfield MSA 270,123 -0.5 3.6 3.7

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Berkshire North Adams LMA 12,873 -0.2 3.1 3.3 Pittsfield MSA 39,976 1.4 3.7 3.8

.... 16 .... July ’99 July ’98 The University of Massachusetts Current Economic Index 122.8 119.3 Economic Benchmarks Leading Economic Index 1.9% 2.0% The Leading Economic Index for Massachusetts for July was 1.9 percent, and the three-month average for May through July was 3.1 The Current Economic Index for Massachusetts for July was 122.8, percent. The leading index is a forecast of the growth in the current up 1.3 percent from June (at an annual rate), and up 2.9 percent index over the next six months, expressed at an annual rate. from July of last year. The current index is normalized to 100 in July 1987 and calibrated to grow at the same rate as the Commonwealth’s Both indices suggest a decided slowing of the state’s rate of growth real gross state product over the 1978–1997 period. in the coming months.

Consumer Confidence Business Confidence U.S. and Massachusetts in Massachusetts The Massachusetts index is measured quarterly; Employers have generally positive views on current and the U.S. index is measured monthly. prospective business conditions when the index is above 50. 140 80 137 135 68 135 70 62 63 U.S. 136 62 129 60 130 MA 129 130 50 125 53 122 119 126 40 120 MA 30 115 116 20 110 10 105 0 July Oct Jan Apr July July Oct Jan Apr July ’98 ’98 ’99 ’99 ’99 ’98 ’98 ’99 ’99 ’99

MA New Boston Consumer Price Index MA Home Price Index Housing Permits (1982–84=100) (’87 Q1=100) (monthly average, 8/98–7/99)

Change from Change from Change from 7/99 ’99 Q2 Through 7/99 Year Earlier (%) Year Earlier (%) Year Earlier (%) 175.3 2.7 129.2 9.3 1,639.0 8.4

Key Industry Clusters

Industry Cluster Number of Businesses Number of Employees

12-Month 12-Month ’99 Q3 Change (%) ’99 Q3 Change (%) These “Key Industry Textiles & Apparel 836 -19.5 25,434 -12.1 Clusters” were identified Software & Communications Services 6,216 0.1 95,976 4.5 Innovation Services 8,945 -2.3 133,697 2.1 by the Massachusetts Higher Education 1,332 -0.5 65,194 7. 2 Technology Collaborative Healthcare Technology 808 -1.8 33,224 7. 4 as significantly affecting Financial Services 6,194 -4.5 110,515 7. 5 the state and being Diversified Industrial Support 2,150 -6.1 52,608 -8.4 uniquely linked to what Defense 295 1.0 33,504 -21.9 Computer & Communications Hardware 1,199 -2.8 79,544 11.6 they term the “Innovation Economy.” Change in Number of Businesses -3.1% Change in Number of Employees 1.9%

SOURCES: Associated Industries of Massachusetts; The Conference Board; Dun & Bradstreet; Mass Insight/New England Economic Project; Fannie Mae and Freddie Mac; Massachusetts Division of Employment and Training; U.S. Department of Commerce; U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; University of Massachusetts

.... 17 .... Measuring How Do Massachusetts Internet Companies Compare with the

Presence Nation’s Best?

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

LESLIE BALL, GEORGE MILNE, AND SUSAN MILNE

There is great potential among Massachusetts com- panies to become important players in the Internet economy. Two new indices, the Internet Presence Index (IP) and the Relative Internet Presence Index (RIP), help us better understand how well the Commonwealth’s companies are competing in this venue. The indices facilitate comparisons of Massa- chusetts companies with leading U.S. companies across these industry sectors: banking, biotechnology, com- puters, consumer goods, electronics, finance, indus- try, retail, services, telecommunications, and utili- ties. When compared to a sampling of companies across the country, our “in-state” businesses appear to be average—if not somewhat behind—when it comes to holding their own in the Internet economy.

he Massachusetts economy can be viewed through several different lenses. The study presented here compares The Boston Globe’s top 100 Massachusetts businesses (based on net revenue) to the For- tune 100 companies. This provides us with the ability to evaluate the relative Internet presence of companies that have the larg- Test economic impact on the state. Economic sectors such as education, tourism, and soft- development are generally not represented in this study, as the companies or organizations are too small to make the Boston Globe list. Each of these sectors is dramatically impacted by the Internet, however. Though this is beyond the scope of this study, they represent a portion of the economy that needs to be addressed. This study focuses on how to best measure the Internet presence of those compa- nies that represent the largest portion of the Massachusetts economy. ILLUSTRATION: NAOMI SHEA

.... 18 .... Indices Analyze Six Important Web Site Qualities result in negative consequences where staying ahead of Electronic commerce, use of the World Wide Web for retail the competition is concerned. sales, is only one component of the new Internet economy. The model described above is helpful in understanding It is, however, the one that gets most of the popular press. the impact of the Internet on the Massachusetts economy Estimates of the significance of electronic commerce in 1998 from a number of viewpoints. Looking at all 200 compa- vary, but a common estimate is that $7 billion in goods and nies reveals that the national sample had a 76 percent IP, services was sold to consumers over the Internet in while the entire Massachusetts sample totals just 58 1998, with a majority of sales occurring in Decem- percent. The RIP for the entire set of Massachu- ber. Analysts estimate that by 2002, electronic setts companies is 0.77. Consequently, our own commerce will account for $160 billion. companies must devote more resources to their The Internet Presence Index (IP) and the Web-based business or they will likely fall fur- Relative Internet Presence Index (RIP) capture ther behind. the extent to which companies exploit the Another way to view the data is to focus Internet and compare Massachusetts companies on which industries have the largest presence. with their counterparts nationwide. 1 The indi- Nationally, banking ranks highest, with a rat- ces provide an analysis of Web-site qualities for ing of 86 percent. Massachusetts banks are also companies and corporations in banking, biotech, doing quite well with a 76 percent rating and an computers, consumer goods, electronics, financial ser- RIP of 0.88. (See table on pages 20 and 21.) vices, industry, retail, services, and utilities.2 Consumer goods is the only industry sector that is doing The methodology involves analyzing the Web sites of better in the state than its national competitors (RIP equals the top 100 Massachusetts companies and the top 100 U.S. 1.06). However, this is the industry segment that is doing the companies, ranked by revenue, across six dimensions (see poorest overall and has the greatest need for improvement. “How the Web Sites Were Scored”). Preliminary research Sectors whose RIPs are closest to 1.0 (banking, com- found these dimensions to be prevalent across organizations’ puters, and consumer goods) apparently best understand the Web sites. More importantly, they reflect the ability of each challenges of getting the most out of the Internet and are organization to communicate with key constituencies that using it as an integral part of their business planning. determine competitive effectiveness. Biotech, retail, services, and utilities are very weak rela- Each Web site was scored on the six dimensions. The tive to their national competition. All scored between 0.61 scoring system reflects the number of features that were found and 0.63. To catch up with their national counterparts, these on the site. Depending on that number, a site received a industries must better understand the impact of the Internet score ranging from zero to five for each dimension. on their businesses. A company’s Web site then received an Internet Pres- ence score.3 This was a sum of the six dimension scores— with “product/service” information and “captures prospec- How the Web Sites Were Scored

tive consumer” information receiving double weight— ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ divided by the maximum potential scores. A sector IP score Provides Product/Service Information A score of 0 indicates that there is no information about products on the Web site. A score of 5 was the average of companies’ IP scores in the sector. (IP means that the site shows many individual products with detailed scores range from zero to 100 percent.) These scores mea- information (part number, diagrams, schematics, etc.) and allows the sure the business use of Web sites, compared to a maxi- customer to buy on-line. mum potential. Captures Prospective Consumer Information A score of 0 Relative Internet Presence (RIP) is the ratio of the indicates that the Web site has no method of capturing consumer Massachusetts-sector Internet Presence to the U.S.-sector information. A score of 5 means that the site uses at least two forms to capture consumer name/address and e-mail address. Internet Presence. The Relative Internet Presence provides a comparison ratio. Massachusetts companies with a ratio “Sticky” Web Site (Keeps Consumer Coming Back) A score less than 1.0 fall short of national companies. Those whose of 0 indicates that there is no reason for the consumer to return to the Web site regularly. A score of 5 means there are five or more reasons. ratio is 1.0 are on par, and those with a ratio greater than 1.0 exceed their national counterparts. In evaluating Mas- Recruits Employees On-line A score of 0 indicates that the Web sachusetts companies’ Internet capabilities, both IP and RIP site has no mention of potential employment opportunities. A score of 5 means that the site includes lengthy job opportunity descriptions by should be considered. duty and location, along with the ability to apply on-line.

Internet Presence: U.S. Companies = 76, Provides Investor Information One point is awarded for each of the following: current stock price; 1998 annual report and current Massachusetts Companies = 58 SEC filings; historical financial report (annual report and SEC filings); The analysis is based on one important assumption: All current news releases, including press releases; highlights or companies want to be competitive in the Internet economy. summations of current financial data. Certainly, a business strategy might reject that assump- Communicates Corporate Social Responsibility A score of 0 tion. The Internet economy is becoming so pervasive, indicates that there are no examples of corporate social responsibility. however, that rejection of this assumption is likely to A score of 5 means that there are five or more examples.

.... 19 .... ○○○○○○○○○○○○○○○○ Internet Presence ○○○○○○○○○○○○○○○○○○○○○○○○○○

SCORES (based on a scale of 0 to 5) Relative Provides Captures Internet Internet Product/ Prospective Recruits Presence Presence Service Consumer “Sticky” Employees Sector (N) (percent) (MA ÷ US) Information Information Web Site On-line

Banking (MA) 4 76 0.88 3.75 4.25 2.75 3.25 Banking (US) 6 86 4.17 4.50 4.50 4.67

Biotechnology (MA) 4 54 0.63 3.25 2.75 2.25 4.25 Biotechnology (US) 2 85 4.00 4.00 5.00 3.50

Computers (MA) 13 73 0.89 4.00 4.62 3.08 4.15 Computers (US) 8 82 4.50 3.00 3.88 4.75

Consumer Goods (MA) 15 60 1.06 3.47 3.60 3.00 2.53 Consumer Goods (US) 10 56 2.20 2.70 3.60 2.10

Electronics (MA) 4 65 0.81 3.25 4.50 3.00 3.25 Electronics (US) 3 80 4.33 5.00 3.67 4.00

Financial Services (MA) 7 51 0.73 3.14 2.71 3.14 2.43 Financial Services (US) 11 70 3.91 3.36 4.55 2.73

Industry (MA) 22 61 0.82 3.77 4.18 2.59 1.64 Industry (US) 16 74 4.06 3.69 3.19 3.13

Retail (MA) 10 44 0.62 1.50 3.20 2.70 2.10 Retail (US) 15 71 4.13 3.00 3.80 3.33

Services (MA) 16 49 0.61 3.25 2.69 1.63 2.56 Services (US) 18 80 4.17 3.78 4.83 4.33

Telecommunications (MA) N/A N/A N/A N/A N/A N/A N/A Telecommunications (US) 8 92 5.00 4.13 5.00 4.25

Utilities (MA) 5 53 0.63 2.80 2.20 2.20 1.60 Utilities (US) 3 83 4.00 4.67 5.00 3.67

All sectors (MA) 100 58 0.77 3.31 3.57 2.60 2.58 All sectors (US) 100 76 4.01 3.57 4.15 3.59

.... 20 .... ○○○How Do Massachusetts Companies Measure Up?

Communicates Provides Corporate Marketing Implications for Massachusetts Firms Investor Social Information Responsibility

4.50 3.75 Far exceed national counterparts in providing investor information via the Web. Fairly successful at providing product and service information and capturing consumer information. Poor at providing a sticky Web site, a critical 3.67 4.33 criterion for keeping consumers on the site and selling more services.

3.00 0.00 Best use of the Web for recruiting employees, likely a result of the tight labor market and a willingness to use all available channels for recruiting. Falls short in ability to create sticky Web sites. Best of Massachusetts companies 4.50 5.00 sampled, Boston Scientific, had an IP of just 68 percent.

3.92 0.77 Very good at capturing consumer information. Web does not appear critical in efforts to communicate corporate 4.50 4.63 social responsibility. Highly likely that smaller companies not on this list would rate better, as they often create products and services for the Internet economy.

3.40 1.00 Most successful of the Massachusetts sectors in establishing Internet presence. Far better than the national average at providing product and service information and capturing consumer information. Less successful 4.00 3.00 communicating corporate social responsibility. Given the size of consumer goods in the state, this is very positive for this industry.

4.25 1.25 Have not used the Web as well as national sample. Score relatively high in capturing consumer information, an indication that they are collecting information to influence product and service delivery. Provide a reasonable amount 4.67 1.00 of information about corporate social responsibility.

2.86 0.14 A large presence in the state. National competitors score better in all categories. In recruiting employees, Allmerica 3.75 2.36 scored best with a low 73 percent rating, suggesting that this sector has much work ahead if it intends to remain competitive in the Internet economy.

3.77 0.41 Great job of capturing consumer information and a respectable job of providing information on products and services. Show an interest in using consumer feedback to enhance products. Score low in recruiting employees, an 4.31 3.38 area that could be substantially improved with little cost.

2.40 0.90 Some surprises here. Not strong at providing product and service information. As the industry most threatened by e-commerce, some of the best success stories are found here (e.g., LLBean, e-Toy, Amazon.com). The industry as a 4.13 2.73 whole must move quickly to improve communications with their constituencies.

Strong relative performance in ability to provide product and service information. Poor in ability to create sticky Web 2.81 0.88 sites. As “stickiness” is a proxy for getting and keeping customers, this is an area that needs attention. The best in 4.27 2.89 this sector, Renaissance Worldwide, a provider of information technology services, came through with a weak Web presence of 73 percent.

N/A N/A 4.75 4.38

4.20 3.00 Poor performance, except in two important areas: providing investor information and communicating corporate 4.67 2.67 social responsibility. All other areas are in need of substantial improvement.

3.42 0.88 4.23 3.22

.... 21 .... Top Companies in the State and in the

Nation: The Exemplars of Success Exemplar Companies Highest Rated Web Pages ○○○○○○

The analysis of Massachusetts business IPs sug- ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ gests several exemplary companies with regard to maximizing the capabilities of the Internet. Industry Company Name (U.S.) IP (%) URL Banking Bank of America 98 www.bankamerica.com These companies provide important benchmarks Biotech Merck 88 www.merck.com Computers Compaq Computers 89 www.compaq.com as a basis upon which others can plan their own Consumer Goods Proctor & Gamble 88 www.pg.com Internet strategies. Rather than being Internet- Consumer Goods Johnson & Johnson 88 www.johnsonandjohnson.com Electronics General Electric 88 www.ge.com based businesses (Amazon.com, eBay, eToys, Financial Merrill Lynch 88 www.merrilllynch.com etc.), these companies represent traditional in- Financial Cigna 98 www.cigna.com Financial Aetna 98 www.aetna.com dustries and have had to adjust to the impact of Industrial General Motors 98 www.gm.com the Internet. Services Cigna 98 www.cigna.com Retail Dayton Hudson 98 www.daytonhudson.com Merck has been an exemplar for the phar- Telecom Bell Atlantic 100 www.bellatlantic.com maceutical and biotech industries for more TelecomU.S. BellSouth 100 www.bellsouth.com than 20 years in the areas of research, drug Utilities PG&E 88 www.pge.com development, and marketing. It is not sur- Industry Company Name (MA) IP (%) URL prising, then, that it scores 88 percent in Banking Bank Boston 98 www.bankboston.com Internet presence, making it a leader, also, Biotech Boston Scientific 68 www.bsci.com Computers Aspen 83 www.aspentech.com in the Internet economy. Computers Progress 83 www.progress.com Banks nationwide have regarded Bank of Computers The Learning Company 83 www.learningco.com Consumer Goods Stride-Rite 85 www.striderite.com America for its innovative services. With a 98 Consumer Goods New England Business Service Inc. 85 www.nebs.com percent IP rating, this corporation clearly holds ConsumerM GoodsASSACHUSETTS Staples 85 www.staples.com Electronics Teradyne 80 www.teradyne.com a prominent position in Internet leadership. Electronics GenRad 80 www.genrad.com In retail, industrial, and service sectors, Financial Allmerica Financial Corp 73 www.allmerica.com Industrial Waters Corp 85 www.waters.com General Motors (98 percent), Dayton Hudson Industrial Cabot Corp. 85 www.cabot-corp.com (98 percent), PG&E (88 percent) and GE (88 Retail BJ’s Wholesale Club 70 www.bjswholesale.com Services Renaissance Worldwide Inc. 73 www.technologyfair.com percent) are all top performers that should Utilities BEC Energy 78 www.bedison.com serve as role models for their counterparts in the state and across the nation. Consumer products scored poorly in both the national LESLIE BALL is associate dean of information technology at the Isenberg School sample and the Massachusetts sample. Yet, there are two of Management and is codirector of the Interdisciplinary Center for Elec- strong exemplars in Proctor & Gamble and Johnson & tronic Enterprise at UMass Amherst. Johnson. Both have been industry leaders for years, and both GEORGE MILNE is associate professor of marketing at the Isenberg School of are ahead of the competition on the Internet. Management at UMass Amherst. His teaching and research are focused on Financial services is heavily involved in Internet business. Internet marketing.

Both Cigna and Aetna scored very high (98 percent) as they SUSAN MILNE recently received her MBA with a concentration in electronic depend on the Web to sell their business products. Merrill commerce at the Isenberg School of Management at UMass Amherst. Lynch, who recently announced on-line brokerage and other ENDNOTES financial management services, currently does well (88 percent) 1. These indices are preliminary and will undergo further validation and revision by the authors in the future. but will be an even more formidable presence in the future. 2. No data were collected for telecom companies in Massachusetts, Using the Indices to Improve Success because none were represented in the Top 100 Massachusetts companies. The Internet is affecting the manner in which nearly all 3. Internet Presence (IP) and Relative Internet Presence (RIP) scores businesses operate and communicate. One of their greatest are calculated as follows: challenges is the fact that the measure of excellence in Internet Presence (Company): Internet strategies changes as the Internet economy evolves. ∑ (2 x [Product or Service Information] + 2 x [Captures Self-assessment and comparison to the competition are es- Customer Information] + Sticky Web Site + sential tools for improvement. The RIP index provides an Recruits Employees + Provides Investor Information objective measure of a company’s IP standing by compari- + Communicates Social Responsibility) (Maximum Potential Score) son to the national exemplars in its industry. Massachusetts businesses, while doing fairly well in the Internet Presence (Sector): Internet economy, must continually assess their progress and ∑ Company Web Presence Scores make the changes that are necessary to keep the state economy N

strong. The RIP index suggests that Massachusetts businesses Relative Internet Presence (MA companies): have plenty of room for improvement in their communica- tions to the constituencies that will ensure their survival. Massachusetts Sector Web Presence U.S. Sector Web Presence

.... 22 .... STREETSTREET Signs

Is E-Commerce Catching On in the Commonwealth?

he UMass Poll recently administered random surveys to 400 adults in the Commonwealth to find out how many use the Internet and how many go a step further and tap into electronic commerce. The surveys suggested that slightly more than half of all adults in the state make use of the Internet. Of those with college educations (bachelor’s degree and higher), 74 percent are Internet users, as are 78 percent of those with family incomes above $75,000. In April, 38 percent of all Internet users reported researching product information on-line, and 24 percent said they use the Internet to make purchases. AT June survey asked Internet users about their comfort regarding the use of electronic commerce (see table). The responses help us gauge whether or not the public has sufficient confidence to buy various products and services via computer. Nearly 20 percent, our survey found, have used the Internet for banking, and 37 percent more would consider doing so, but 44 percent would not. More than half of Internet users would trade stocks and purchase clothing, home electronics, and toys over the Internet. Forty-six percent have used or would consider using the Internet to purchase appliances and household goods. Travel arrangements and job searches are the most popular uses of electronic services; more than three-fourths of the respon- dents have at least considered using these. Some categories seem far from catching on in the electronic market. Seventy-two percent of those surveyed would not shop electronically for prescription drugs, and 71 percent would not purchase food or beverages over the Internet. Seventy-five percent of respondents would not use the Internet to buy insurance. The use of e-commerce, seemingly unlimited in its prospects, is relatively new. Only time will tell which goods and services lend themselves to Internet shopping—and which, perhaps, never will.

Activities Have Used Consider Using Would Not Use

Banking 19% 37% 44%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

Trading stocks 15% 39% 46%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

Buying insurance 2% 23% 75%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ How do Finding airline tickets,

car rentals, hotel reservations 38% 45% 17%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

Massachusetts Looking for a job 27% 47% 26%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Internet users Buying clothes, shoes,

and accessories 20% 32% 48%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

feel about doing Buying home electronics 14% 44% 42%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Buying prescriptions or

business on-line? over-the-counter drugs 4% 24% 72%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

Buying toys 12% 43% 45%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Buying food, beverages

and packaged goods 4% 25% 71%

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

The polls have a margin of error Buying appliances and of plus? or minus 6 percent. household goods 8% 38% 54%

.... 23 .... Endnotes

Massachusetts Manufacturing Export Performance

espite Massachusetts exports falling for the third time in the last four quarters, there was still good news in the Commonwealth’s export picture. In the first quarter of this year, the Massachusetts export benchmark rose sharply, D returning nearly to zero. This implies that Massachusetts companies have come closer to holding their market share against those in other parts of the United States than they have since the third quarter of 1997, the last time Massachusetts exports produced a positive benchmark. During this period, electronics and electrical equipment (excluding computers) has taken over as the state’s export leader, a position held previously by industrial machinery (including computers).

The benchmark compares the amount of exports actually produced in Massachusetts, summed over industries, and the amount we might have produced had each industry grown over the preceding year at national rates rather than at the Commonwealth’s own rate. The index reflects several factors that differentiate Massachusetts from the rest of the nation, including different market orientations, different prices and marketing strategies, and different commodities within similar two-digit industries.

300

200

100

0

Gain (Loss) (100) Relative to United States (200) (300)

(400)

(500)

(600) 19881989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Q1

Sources: MISER; University of Massachusetts; Associated Industries of Massachusetts; The Alliance for the Commonwealth

The Massachusetts Manufacturing Export Index is a quarterly indicator of the strength of the Commonwealth’s manufacturing exports relative to the exports of a comparable mix of industries nationwide. In any quarter, the index equals zero whenever Massachusetts industries have exported at rates equal to the national rates for the same industries; it is greater or less than zero whenever the state average growth rate exceeds or falls short of the national rates. The index is calculated as a four-quarter moving average.

Contributed by Stephen Coelen, professor of political science and director of the Massachusetts Institute for Social and Economic Research (MISER)

.... 24 .... Pioneer Valley Region

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2

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YORK 2 7

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9 90 20

7 90 20 290 Interstate Highway State Highway 84

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