Is Indiana exporting enough?

• Author: Slaper, Timothy F.
• Position: Interview

If there is one thing that politicians on both sides of the aisle can agree on, it is that exports are good. Economic developers routinely look for new ways to spur export activity, as it is commonly thought to promote economic growth with very little downside. In general, Indiana has a fairly strong export profile. In 2011, Indiana's exports totaled 11.6 percent of its GDP--higher than the national ratio of 9.9 percent. (1) In addition, Indiana exports have been growing at a faster rate than the nation as a whole. This should not be too surprising given Indiana's strength in manufacturing--particularly in transportation equipment manufacturing, which accounts for 14.7 percent of all U.S. exports.

It remains undear, however, to what degree Indiana is exporting to its full potential given the prominence of high-export industries in the state. To address this question, the Indiana Business Research Center investigated which industries may be under-exporting and identified at least 10 industries that may benefit from policies and programs to encourage companies to export.

What Is an Export Gap?

Industries are not evenly distributed across the U.S. economy. They tend to be concentrated in certain geographic areas and, more often than not, in specific states. For instance, Michigan is known for motor vehicle manufacturers, California is known for tech firms, and New York is known for its concentration of financial services firms. Indiana is no different in this respect. Certain industries represent a larger share of Indiana's employment relative to total U.S. employment, whereas other industries represent a smaller share. While particular industries might dominate a state's workforce, it is far from certain that those industries will also dominate the state's exports. Concentration of employment is only one factor that affects how much a particular industry exports from a particular state.

In order to assess whether an industry (or a set of industries) were under-exporting, we needed a rough measure of an export gap. Theoretically, if an industry represents a large share of Indiana's employment, but does not represent as much of the state's total exports, then Indiana may be missing potential foreign markets for its products. We define an export gap as the discrepancy between a state's concentration of employment in a given industry relative to the national average and the state's concentration of exports in that industry relative to the national average. (2) In other words, we measure the export gap as the difference between the state's location quotient (LQ) and its export quotient (EQ).

The LQ is a commonly used measure of local employment concentration. It is the ratio of an industry's share of a region's (Indiana) employment to the industry's share of U.S. employment. An industry LQ above 1 indicates a higher-than-average concentration of employment for that industry in a particular state.

The EQ is a ratio that we developed to assess export concentration. It is the ratio of an industry's share of a region's exports (Indiana is the region in this case) to the industry's share of total U.S. exports.

To assess the export gap of any particular industry, we subtract the industry's Indiana EQ from its Indiana LQ and if this difference is positive, we identify the...