Reseeding the

Garden State’s
economic growth:
A vision for New Jersey
McKinsey New Jersey Office July 2017

Tyler Duvall
Mike Kerlin
Paula Ramos
Zachary Surak
Steve Van Kuiken
2 Reseeding the Garden State’s economic growth: A vision for New Jersey
Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

In brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

New Jersey’s economy today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Unleashing growth enablers in New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . 9

Growing young companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Improving infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Addressing workforce imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Tailoring incentives for growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Building on New Jersey’s sector strengths in a changing economy . . . . . . . 21

What can be done? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Reseeding the Garden State’s economic growth: A vision for New Jersey 3
 Preface
The Great Recession of 2008-2009 left many states, including New Jersey, reeling. And, like
many other states—and the US economy overall— New Jersey has not yet got back to the rate
of growth seen before the global financial crisis. Unlike many other states, however, we in New
Jersey do have an outstanding opportunity to reignite our growth. If New Jersey makes the right
choices now, it can create a future-oriented, high-growth economy.

This report is intended to assist New Jersey’s leaders in understanding the dimensions of the
state’s economic potential. With it, we hope to provide an objective, non-partisan analysis of the
Garden State’s economic strengths, informed by extensive economic and business data, by
insights from 70 prominent business leaders, and by a survey of the state’s business community.

This report reflects a collaboration between McKinsey & Company’s New Jersey and
Philadelphia offices, its Public and Social Sector Practice, and the McKinsey Global Institute.
McKinsey Partner Mike Kerlin and Senior Partner Steve Van Kuiken led this research, together
with Tyler Duvall, Paula Ramos, and Zachary Surak – all McKinsey Partners. Lesley Pandey,
a consultant in McKinsey’s New Jersey Office, led the project team, which consisted of
Reinier van der Lely and Gillian Almeida.

We are grateful for the advice and input of many McKinsey colleagues and experts. Michael Della
Rocca and Sree Ramaswamy provided invaluable guidance throughout the effort. We thank
Geoffrey Lewis, who provided editorial support; Jesse Salazar for his help with external relations;
Anna Gressel-Bacharan and Melissa Milstead for their guidance on public sector considerations.
The final report relied heavily on McKinsey Publishing for its production, content, and graphics
expertise. Many leaders in New Jersey have offered invaluable guidance, suggestions, and
advice. We thank them for their willingness to help us shape this research.

With this report, McKinsey hopes to start productive, non-partisan conversations that will lead
to distinctive, lasting, and substantial improvements in the New Jersey economy. No single
institution or sector can make the changes the state needs. It will take dedicated efforts by the
private, social, and public sectors—and the involvement of us all —to make the Garden State a
growth leader again.

This work is independent, non-partisan, and objective; it has not been commissioned or
sponsored in any way by any business, government, or other institution.

Tyler Duvall Paula Ramos Steve Van Kuiken

Partner Partner Senior Partner
Washington, DC Summit, NJ Summit, NJ

Mike Kerlin Zachary Surak

Partner Partner
Philadelphia, PA Summit, NJ

4 Reseeding the Garden State’s economic growth: A vision for New Jersey
In brief
New Jersey has significant economic strengths, including strong positions in knowledge-
intensive industries such as pharmaceuticals, finance, and technology. It has a highly educated
labor force and a uniquely advantageous location for participating in international trade and
providing logistics services on the Northeast Corridor. Yet, in recent years, the state has not
translated these advantages into rapid growth. If its private, social, and public sectors address
these barriers to growth and focus on ways to nurture new businesses, New Jersey can build on
its strengths and become a future-oriented, high-growth economy in the coming decade. The
2008-09 recession hit the state hard—GDP declined by 4.6 per cent and employment fell by 4.3
per cent between December 2006 and December 2009. Recovery has been weaker in New
Jersey than across the nation: US GDP advanced by 1.4 per cent per year from 2005 to 2015, but
growth in New Jersey averaged just 0.3 percent. Growth in both employment and median income
in New Jersey was flat between 2006 and 2016.

This performance can be attributed to four major factors that reduce dynamism in the New Jersey
economy and depress growth.
1. New Jersey has relatively few young companies that have grown into major employers.
2. Aging transportation infrastructure exacts a toll on productivity and high maintenance
costs divert public funds from other uses.
3. There is a growing mismatch between the type of middle-skill workers New Jersey has and
middle-skill jobs that employers need to fill.
4. New Jersey has focused business incentives on retaining major employers and therefore
has created fewer new jobs than states that aim more incentives at new businesses.

New Jersey could address these four drags on growth by learning from the best practices of
other states. Some states, for example, have created a more supportive environment for growing
startups into large-scale businesses. New Jersey could invest in improving the quality of its
transportation infrastructure and better manage traffic flows to avoid congestion. To improve
labor-market matching, New Jersey could emulate other states and work with employers
to create training programs and post-secondary curricula to qualify middle-skill workers for
positions in growing fields such as health care. And the state could seek to get better returns
on economic development programs by focusing on fast-growing young firms and targeting
foreign investors.

New Jersey is well positioned to ride growth trends in several industries where it could build on
established strengths. Examples include biotech, logistics for e-commerce, and cybersecurity.

We estimate that by addressing the four factors described above, New Jersey has the opportunity
to make up for the growth it has missed out on in the past decade. If the state can keep pace
with the U.S. economy, it can vastly increase economic opportunity in the state. By reaching
the national average for growth, the state will expand its economy by more than $150 billion and
create more than 250,000 jobs over the next decade.

Reseeding the Garden State’s economic growth: A vision for New Jersey 5
 New Jersey’s economy today
The State of New Jersey has a proud place in the history of the United States. It played a leading
role in the founding of the nation and was an engine of growth for the economy through much
of the 19th and 20th centuries. It gave the nation Campbell’s soup, Victor phonographs, RCA
televisions, and the TV dinner. It is where Thomas Edison did most of his work and Albert Einstein
pushed the boundaries of science.

In the 21st century, the state retains many of its core advantages. Its 9 million people make it the
11th largest state in terms of population and employment. With $508 billion in annual GDP (in
2015), New Jersey is the eighth-largest state economy.1 New Jersey is No. 3 among the states
in median household income ($68,357 vs. $56,516 nationally in 2015).2 And it remains a favored
location for major corporations, with 19 Fortune 500 companies headquartered within its borders.3
New Jersey is home to high value-added industries, ranging from pharmaceuticals to information
and communication technology, and financial services. According to our survey of business
leaders, New Jersey’s highly educated labor force—37 percent of workers have four-year college
degrees compared with 30 percent across the United States—is one of the main reasons to locate
in the state.

New Jersey’s highly advantageous location is perhaps its most enduring economic strength, and
has helped make it a global leader in trade and a critical hub for logistics. The Port of New Jersey /
New York is the third-largest in volume in the country and the largest in the value of goods that flow
in and out. Equally important, New Jersey sits at the heart of the Northeast Corridor, the densely
populated region that extends from Boston to Washington DC and generates 22 percent of US
GDP. This gives New Jersey proximity to large markets, innovation clusters, and robust supply
chains.

However, in the 21st century, these advantages have not generated strong growth (Exhibit 1).
A decade after the onset of the global financial crisis, New Jersey’s economy is still struggling
to grow. State GDP grew by just 0.3 percent on average, from 2005 to 2015, compared with 1.4
percent for the United States overall. Out of 19 leading industries in New Jersey, 16 grew at rates
below their industry’s national average from 2010 to 2015. And, although the median household
income in New Jersey remains high, it is barely growing, and total employment was nearly flat from
2005 to 2015. Critically, New Jersey continues to lag the rest of the United States in productivity
growth, a trend that began in the mid-1990s and acts as a drag on the state’s GDP.4 At the same
time, the cost of doing business has risen faster than the national average, and in surveys, the state
consistently ranks in the bottom quartile. In 2016, CNBC ranked New Jersey 42nd out of 50 states
in business friendliness because of its complex regulations.5

The overall picture is one of great potential that is currently tempered by weak economic
dynamism. Other states have been able to tap new sources of growth and have made their
economies more attractive to investors in the past decade through investments in infrastructure
and training, for example. But little has changed in the New Jersey economy in the past decade.

We identify four major factors that limit dynamism in the New Jersey economy and depress
growth. First, New Jersey has relatively few young companies that have grown into major
employers (with more than 500 employees). New Jersey has about as many startups as other
states, but fewer of them scale up into large businesses. Dynamism is also inhibited by New
Jersey’s aging infrastructure, which exacts a toll on productivity, raises the cost of doing business,
and diverts public funds from uses that might generate more growth.

1 Bureau of Economic Analysis.

2 American Community Survey, US Census.
3 Eric Strauss, “19 New Jersey companies make 2015 Fortune 500 list,” NJ Biz, June 4, 2015.
4 The US Economy: An agenda for inclusive growth, McKinsey Global Institute, November 2016.
5 America’s Top States for Business 2016: A scorecard on state economic climate, CNBC.com.

6 Reseeding the Garden State’s economic growth: A vision for New Jersey
New Jersey has been trailing the US economy since the 1990s
Exhibit 1 New Jersey has been trailing the US economy since the 1990s
New Jersey

USA
NJ GDP growth has trailed the US in GDP growth … … as well as in employment growth
GDP in $US bln, Chained to 2009 $ Private non-farm employment, millions of employed workers

USA NJ USA NJ
+1.4% p.a. +0.6% p.a.
17,500 700 150 6.0
140 5.5
15,000 600 130
-0.1% p.a. 5.0
120
12,500 500 110 4.5
+ 0.3% p.a. 100 4.0
10,000 400 90 3.5
80
3.0
7,500 300 70
60 2.5
5,000 200 50 2.0
1975 80 85 90 95 2000 05 10 2015 1975 80 85 90 95 2000 05 10 2015

Further exacerbated by below-average productivity growth… … and an increasing cost of doing business
Productivity, $000s Cost of Doing Business Index, 100 = USA
130 118
1990s: NJ cost
-11 116 of doing
120
1990s: NJ starts 114 business rises
110 losing its 112 faster than US
productivity 110
100 edge vs the US -21
108
90 106
104
80
102
70 100
1975 80 85 90 95 2000 05 10 2015 1975 80 85 90 95 2000 05 10 2015
1 Productivity is measured as Real GDP (at chained 2009 US$) / employment
SOURCE: BEA, BLS, Moody’s analytics
McKinsey & Company 1

Third, New Jersey has a significant labor-market mismatch between demand for middle-skill
workers and the supply of workers with appropriate skills. Finally, New Jersey’s efforts to spur
growth through tax breaks and other incentives for employers to locate or remain in the state have
not been as effective as similar programs in other states; New Jersey has been good at retaining
existing employers, but other states do more to attract fast-growth companies.

ƒƒ Growing young businesses: Young, fast-growing firms create most of the jobs in the
United States. In New Jersey, only 5 per cent of companies with 500 employees or more
are less than 10 years old, compared with 11 per cent across the United States. New Jersey
attracts less venture capital per capita than peer states with similar types of economies. And
some other states have created better environments for fast-growing young companies by
improving access to capital through angel investing credits, setting up business incubators,
and helping firms navigate state and local regulations.

ƒƒ Improving transportation infrastructure: Aging transportation infrastructure and

congestion are a drag on productivity, raise the cost of doing business, and restrict worker
mobility across the region. Congestion and poor road conditions cost New Jersey motorists
an estimated $5.2 billion a year in time, wasted fuel, and repairs.6 To help address the
infrastructure problem, New Jersey could consider shifting more funding to long-term
improvements, adopting methods for optimizing infrastructure spending, encouraging transit-
oriented development, and taking additional steps to rebalance traffic flows.

6 Report Card for New Jersey’s Infrastructure 2016, American Society of Civil Engineers, 2016.

Reseeding the Garden State’s economic growth: A vision for New Jersey 7
 ƒƒ Addressing workforce imbalances: The skills of the labor force in New Jersey are not
well aligned with demand. There are more high- and low-skill workers in New Jersey than
employers need, and more middle-skill jobs than qualified middle-skill applicants. The
economy has shifted successfully from a heavy reliance on traditional manufacturing to
services and advanced manufacturing (pharmaceuticals, for example), but relatively few
of New Jersey’s middle-skill workers (with less than a four-year post-secondary degree)
are qualified for the middle-skill jobs that are available today, such as health technicians,
construction service workers, heavy vehicle maintenance, and retail managers. This shortage
is exacerbated by the outmigration of young millennials from New Jersey, including many
middle-skill workers. New Jersey could increase the supply of “job-ready” middle- skill
workers by expanding access to vocational training, partnering with companies to tailor
college curricula, and putting in place other measures to train workers in skills demanded by
the private sector.

ƒƒ Tailoring incentives for growth: New Jersey’s capital outlays (for building construction,
land alterations, and infrastructure expansion, etc.) and business development efforts have
had relatively modest impact on growth. In an average deal, New Jersey pays ~5x more for
each job affected and ~6x more per dollar of investment attracted than peer states. Over 80
percent of incentive deals are geared to older domestic companies, even though younger
firms and foreign companies, on average, invest more capital in operations and create more
jobs. Other states have gotten higher returns by continuously monitoring the economic gains
from their investment, enforcing claw-back provisions for incentives that do not produce
returns, and focusing investment in industry clusters where young companies can blossom.

8 Reseeding the Garden State’s economic growth: A vision for New Jersey
 Unleashing growth enablers in
New Jersey
If addressed forcefully, each obstacle New Jersey faces could be turned into an enabler of
economic growth. For example, by better nurturing fast-growing companies, New Jersey could
benefit from similar levels of job creation that other states get from start-ups. Modernizing
infrastructure could speed up commerce and raise productivity. Efforts by companies and the
education system to train middle-skill workers for jobs that are in demand could help to raise
employment and accelerate growth. New Jersey could improve the impact of its investments in
growth. All these things can happen in New Jersey.

Here we look at how the four major factors inhibiting growth can be turned into growth enablers if
New Jersey follows the lead of other states and applies its own best practices more broadly.

We believe that by building up these growth enablers, New Jersey has the potential to make
up for a decade of growth that trailed the national average. If the state can keep pace with the
U.S. economy, it can vastly increase economic opportunity in the state. By reaching the national
average for growth, the state will expand its economy by more than $150 billion and create more
than 250,000 jobs over the next decade. Below we lay out the factors that have held our growth
and employment back in the past and the ingredients that can push us ahead in the future.7

Growing young companies

Young, fast-growing companies are an important enabler of growth. Across the country, startups
and other small firms are the largest net job creators, according to US Census data. And wherever
New Jersey
they thrive, has fewer
young companies fast-growing
also generate youngservices
demand for business companies
and contribute to a
more dynamic business environment. The rate of business starts in New Jersey is comparable to
the US average, but New Jersey attracts less venture capital per capita than peer states.8 And
fewer fast-growth companies grow into major employers in New Jersey; only 5 percent of New
2014companies
Jersey share of that
totalare
companies
10 years oldby age and
or younger size 500 or more workers, compared with
employ
11Percent,
percent across the United
000s of firms States (Exhibit 2).
New
New Jersey
Jersey has
has fewer
fewer fast-growing
fast-growing young
young companies
companies
0-10 years old >10 years
Exhibit 2 New Jersey has fewer fast-growing, young companies
Small
2014
2014 share
share of
of total
US
total companies
companies by
by age
age and
and size
size
52 48
(0-99000s of firms
Percent,
Percent, 000s of firms
employees) NJ 0-10 50 50
0-10 years
years old
old >10
>10 years
years 100%
100% ==
Small US
US 52
52 48
48 4,955
4,955
Small
(0-99
(0-99
employees)
Medium NJ
employees) NJ
US 2050
50 50
50
80 162
162
(100-499
employees) NJ 18 82
Medium US
US 20
20 80
80 85
85
Medium
(100-499
(100-499
employees)
employees) NJ 18 82 4
NJ 18 82 4
Large US 11 89
(500+
Large US
US 1111 89
89 21
21
employees)
Large NJ 5 95
(500+
(500+
employees)
employees) NJ 5 95 3
NJ 5 95 3
New Jersey has approximately half the share of young
New firms
Jersey
New Jersey has (0-10
has years) that
approximately
approximately half grew
half the
the rapidly
share
share of compared to the US
of young
young
firms
firms (0-10
(0-10 years)
years) that
that grew
grew rapidly
rapidly compared
compared to
to the
the US
US
SOURCE: US Census Business Dynamics Statistics
SOURCE: US Census Business Dynamics Statistics
SOURCE: US Census Business Dynamics Statistics
McKinsey & Company 2 McK
7 Forecasted growth rate of New Jersey GDP is based on Bureau of Economic Analysis estimate; Pitchbook.com.
McKinsey & Company 2

8 Best States for Doing Business, Forbes.com, 2016.

Reseeding the Garden State’s economic growth: A vision for New Jersey 9
 New Jersey has fewer fast-growing young companies

The lack of fast-growing young firms—and the higher proportion of older corporations—has been
2014 share of total companies by age and size
a factor in the slow growth of New Jersey’s economy. Few mature businesses grow faster than
Percent, 000s of firms the overall economy and large companies generally create relatively few new jobs, but young
companies 0-10
can double
years inold
size in a year or two and may be>10
adding jobs for many years to keep up
years
with growth. In New Jersey, employment in companies less than 10 years old grew by 100% =
15 percent
US from 2004 to 2014, 52somewhat below the US average, while employment
48 in companies
4,955 10
aged
Smallcompanies
Young have
years been
or older the
fell by net job creators,
12 percent—far more than theacross
US averagethe US3).and in New
(Exhibit
(0-99
Jersey
employees)
Exhibit 3 Young
NJcompanies have50
been the net job creators, across
50 the US and in 162
New Jersey
Net job creation by age of firm
% growth in total employment, 2004-2014
Medium US 20 80 85
New Jersey USA
(100-499
employees) NJ 18 82 4
Young companies
15% 17%
(0-10 years)
Large US 11 89 21
(500+
employees) NJ 5 95 3
Old companies
-12% -5%
(>10 years) New Jersey has approximately half the share of young
firms (0-10 years) that grew rapidly compared to the US

SOURCE: US Census Business Dynamics Statistics

McKinsey & Company 2

States that have many large-scale young businesses have done more to support startups,
including by providing a more attractive overall business environment. In national surveys, New
Jersey ranks relatively poorly on metrics such as regulatory environment and cost of doing
business. For example, it was ranked 48th in cost of doing business by Forbes because of labor
rates, energy costs, and taxes. New Jersey also has been less successful than other states
SOURCE: US Census Business Dynamics Statistics

in landing federal small business funding; for example, it only received $32 per capita in Small
Business Innovation Research awards from 2010 to 2015, compared with $214 per capita in
McKinsey & Company 4
Massachusetts.9

“The entrepreneurial To turn this around, New Jersey could look to the experience of other states that have created
an environment in which young companies thrive and grow large. This might involve action on a
ecosystem is weak number of fronts, which could range from creating access to financing to helping in regulatory
in New Jersey. compliance.
Although there are ƒƒ Incubators and other support services. Some states encourage home-grown startups
some incubators, and attract entrepreneurs by supporting incubators. New Jersey has only 15 incubators and
business accelerators, compared with 375 in California and 179 in New York.10 Maryland
accelerators, and works with the University of Maryland to create incubators with state-of-the-art facilities and
co-working spaces, on-site business services. Through Maryland’s overseas economic development arm, the
incubators are connected with joint ventures in China, India, Russia, and other countries.
they are not on par
with other places.” ƒƒ Finance. Today, New Jersey is attracting a moderate amount of venture capital—$1,493
per capita from 2010 to 2014.11 That is far below the $9,347 of Massachusetts, and 20
–Technology executive
percent below New York’s $1,863. Access to early-stage capital is also critically important for
encouraging startups. Tennessee, for example, recently launched an angel investor tax credit
(see Box 1: How Tennessee supports fast-growing companies).

9 SBIR/STTR Program, US Small Business Administration (SBA), www.sbir.gov.

10 Pitchbook.
11 Pitchbook.

10 Reseeding the Garden State’s economic growth: A vision for New Jersey
Box 1 How Tennessee supports
fast-growing companies
Tennessee has made itself a favored location for
small fast-growing companies through a series of
state initiatives, collaboration with the private sector,
and public/private partnerships. It has launched six
entrepreneurship centers around the state, which
connect startups with mentors, researchers, and
investors. More than 500 companies have gone through
these accelerators and the INCITE Co-Investment fund,
which uses federal funding to match private funding, has
invested $116 million in Tennessee startups. The state’s
angel investing tax credit and Launch Tennessee have
helped raise more than $1 billion in venture investing in
Tennessee, including $138 million for companies that
went through the accelerator program. Finally, Tennessee
has partnered with the Oak Ridge National Laboratory to
provide R&D services and improve innovative capabilities
of Tennessee firms. An R&D voucher program helped
attract Local Motors, a maker of self-driving vehicles that
uses small, local factories.

Reseeding the Garden State’s economic growth: A vision for New Jersey 11
 ƒƒ Regulation. As noted, in national surveys, companies rate New Jersey poorly for its
regulatory system, which is regarded as highly complex. There are more than 500
municipalities, each with its own rules for zoning and business regulation as well as county
and state regulations. The process of getting approvals can be daunting for a young company.
New Jersey could consider specific initiatives to ease the way for growing companies, such
as providing assistance to help young businesses navigate the regulatory system. In New
York, Indiana, and other states, public-private partnerships (PPPs) have been established to
assist small businesses in the regulatory process and expedite approvals for new buildings or
licenses. Some states offer such assistance from state agencies. Other states have launched
efforts to streamline regulatory processes specifically to help young businesses.

Improving infrastructure
New Jersey has extensive transportation infrastructure, but it is also the most densely populated
state and its roads are highly congested, impeding commerce, limiting productivity, and exacting
a high cost on the state and its residents. High density is the result of New Jersey’s unusual
geographic situation: it is part of two large metropolitan areas (New York and Philadelphia)
that are only about 80 miles apart. In 2014, the New York-Newark-Jersey City metro area had
the highest congestion costs in the nation, at nearly $15 billion, and the Philadelphia-Camden-
Wilmington metro area ranked eighth nation-wide, at $3.7 billion.12 The congestion problem could
grow worse if, as predicted, traffic volume in New Jersey increases by 15 percent by 2030.13 As
in comparable states, such as Massachusetts and Maryland, traffic growth is occurring almost
entirely in already-congested areas. In New Jersey, this could mean even longer traffic jams
around New York and Philadelphia.

New Jersey drivers already lose an estimated $5.2 billion per year to congestion in wasted
fuel and lost time.14 Businesses lose an incalculable amount of productivity to delays in moving
supplies, goods, and personnel. And congestion ranks second only to the high cost of doing
business as the reason companies cite for not locating to or expanding in New Jersey; business
leaders rank New Jersey 44th among states for infrastructure quality.

“There is no easy way The cost of congestion is only one way that aging infrastructure holds New Jersey back. Two-
thirds of New Jersey’s roads are in poor or mediocre condition and 36 percent of its bridges are
to get to our offices
structurally deficient or functionally obsolete. The average New Jersey motorist spends $601 a
from New York City year on vehicle repairs and additional operating costs caused by poorly maintained roads, more
and it is very difficult than any of its peer states (Exhibit 4). The average bridge in New Jersey is 51 years old compared
with 43 years old across the country (most bridges have a useful life of 50 years).15
for me to do site visits
Aging bridges and highways require continuous repairs, adding to congestion and consuming a
given the congestion
large share of New Jersey’s transportation funding. New Jersey disbursed $306,000 per state
in Northern NJ” controlled lane mile in capital and bridge spending, maintenance and administrative expenses in
2013, compared with $113,000 in New York and $50,000 on average per state nationwide.16
–Retail executive
With budget constraints, New Jersey has concentrated on repairing old roads, leaving limited
funds for the new construction that could help address the long-term challenge. Spending for
road operations and maintenance rose by 68 percent from 2010 to 2014, while spending on
capital construction dropped by 37 percent from 2010 to 2013, before turning up in 2014.17

Tackling infrastructure takes a sustained effort and considerable investment. New Jersey is
already working on the challenge. In 2016, the State legislature did pass a 23 cents per gallon hike
in gasoline tax—the first increase in 28 years—which is expected to generate $32 billion for the
State’s highway trust fund.18

12 American Community Survey, US Census.

13 Report Card for New Jersey’s Infrastructure 2016, American Society of Civil Engineers, 2016.
14 Ibid.
15 Ibid.
16 22nd Annual Highway Report, Reason Foundation, 2015.
17 The Cost of Roadway Construction, Operations and Maintenance in New Jersey, Rutgers University, 2016.
18 Patrick McGeehan, “New Jersey Will Increase Gas Tax 23¢, Ending Long Political Stalemate,”
The New York Times, September 30, 2016.

12 Reseeding the Garden State’s economic growth: A vision for New Jersey
Poor road
Exhibit conditions
4 Poor cost the
road conditions average
cost NJ driver
the average more
NJ driver than
more $600
than $600a ayear
year
Road and bridge infrastructure of peer states, 2013
Vehicle repairs/operating costs
due to driving on roads in need Roads in poor/mediocre Structurally deficient /
of fixing, $US per driver condition, % functionally obsolete bridges, %

New Jersey 601 66% 36%

Maryland 422 55% 27%

New York 403 60% 39%

Pennsylvania 341 57% 42%

Massachusetts 313 42% 53%

Connecticut 294 73% 35%

Delaware 257 36% 21%

NJ’s bridges are ~51 years on average, compared to the a national

average of 43 years and an expected life of 50 years
SOURCE: Federal Highway Administration (Transportation.gov), ASCE infrastructure report card (2013)
McKinsey & Company 4

As it increases efforts to upgrade transportation infrastructure to reduce congestion, New Jersey

can look to successful efforts in other parts of the country. These efforts generally fall into two
categories: optimizing infrastructure spending to get the most value out of investments in new
capacity and rebalancing traffic flows to reduce congestion. If New Jersey decides to attack
congestion on multiple fronts, it can look to models such as Chicago’s GO TO 2040 plan for
creating modern, efficient infrastructure (see Box 2: Chicago’s road to the future is paved with
data).

ƒƒ Optimize capital spending. Infrastructure is costly to build and maintain, but there are
proven ways to raise the productivity of infrastructure investment by up to 60 percent. The
McKinsey Global Institute has identified a series of steps that states can implement to stretch
infrastructure dollars, including optimizing project portfolios to prioritize investments that have
the greatest benefits, streamlining delivery to save time and money, and make the most of
existing infrastructure rather than investing in new infrastructure.19

ƒƒ Rebalance traffic flows. Around the world, cities and nations have worked to reduce
highway congestion by finding ways to reduce demand on highways. These efforts include
investments in new rail lines (passenger and freight) as well as incentives to choose non-
automotive transportation such as congestion pricing. In Europe, for example, the Gotthard
Base Tunnel in Switzerland reduced road congestion by completing a rail link that extends
from the port of Rotterdam to Genoa. The tunnel, which opened in 2016, is expected to shift
goods being transported by more than a million trucks annually to rail transport. In the United
States, Amtrak is planning a new high-speed rail service along the Northeast Corridor, which
would take some of the burden off New Jersey highways. Having said that, those trains are not
expected to run before 2040.

19 Infrastructure productivity: How to save $1 trillion a year, McKinsey Global Institute, January 2013.

Reseeding the Garden State’s economic growth: A vision for New Jersey 13
Box 2 Chicago’s road to the future is
paved with data
The Chicago Metropolitan Agency for Planning (CMAP)
has led a regional effort to relieve congestion and improve
transportation infrastructure across the Chicago area.
Under the banner of “Chicago GO TO 2040,” 284
municipalities have approved a comprehensive plan
that relies heavily on data-based decision making to set
priorities and determine what projects to fund and which
approaches to use. Performance-based funding, using
federal highway performance data, provides a transparent
method for funding decisions. The same data-driven
approach has been used to create the Transportation
Financial Plan for the region, which identifies several
“fiscally constrained” major capital projects. Using
a variety of data tools, including aerial photography,
Chicago is tackling traffic flow and improving maintenance
programs. CMAP is exploring opportunities to introduce
congestion and parking pricing programs to move traffic
away from bottleneck areas. It is also exploring a public/
private partnership that would work with the city, Amtrak,
and freight operators to eliminate bottlenecks in the
rail system. Some of the opportunities that have been
identified include dedicated trucking routes and a regional
freight authority, which would fund capital improvements
and address public policy issues.

14 Reseeding the Garden State’s economic growth: A vision for New Jersey
Congestion pricing can offer a lower cost and faster way to fight congestion. Motorists pay a
premium to enter certain high-congestion zones or to travel during rush hours. London is one of
the major cities that has successfully used congestion pricing, albeit not without criticism. After
congestion pricing was introduced in central London in 2003, travel delays were reduced by
25 percent and traffic speed increased by 30 percent. But congestion pricing is a controversial
policy to implement and has not been widely embraced in the United States.

Introduce transit-oriented development. Developing new housing, shops and offices around
existing commuter rail lines is a way to cut congestion and improve neighborhoods. Typically,
transit-oriented development raises real estate value in the surrounding areas. In places such as
Hong Kong, the government has helped fund development through “betterment” assessments,
which are levied on nearby property owners to capture some of the windfall.20 Still other value-
capture schemes can also be used to get private capital to fund new transit stops that will be the
center of development. Transit-oriented development can also help address high housing costs
through “inclusionary” zoning, which requires residential projects to include some percentage of
affordable units.21

Addressing workforce imbalances

The executives we surveyed cite the highly educated labor force as the second most important
reason for locating to New Jersey. However, there is a growing mismatch between labor supply
and demand. As employment in New Jersey has shifted from manufacturing to services, the state
has developed a shortage of middle-skill workers with the skills needed in today’s economy and
a surplus of workers at the high and low ends of the skills spectrum. There is a growing need for
middle-skill workers (with high school and some college education) in jobs such as healthcare
(health technicians), construction services, heavy vehicle maintenance, and retail management,
which the New Jersey labor market has trouble filling.22

This imbalance affects growth. As in other states, New Jersey’s surplus of low-skill workers leads
to relatively high levels of unemployment for people with no more than a high school education.
The oversupply of high-skill workers with college or graduate degrees leads to unemployment
as well as underemployment—high-skill workers accepting jobs below their skill levels. Between
these two groups are middle-skill workers, who are in short supply. According to the National
Skills Coalition, an estimated 53 percent of all jobs in New Jersey in 2015 were appropriate for
middle-skill workers. Furthermore, 50 percent of all job openings between 2014 and 2024 are
expected to be middle-skill jobs. However, middle skill workers represent only 37 percent of the
labor force in New Jersey.

In almost every industry, the shortage of middle-skill workers is an issue. This is likely the result
of the shift in the types of industries in the state and changes in the types of skills needed within
industries. While manufacturing, which traditionally employed middle-skill workers, went from
employing 23 percent of the New Jersey labor force in 1990 to just 6 percent in 2014, healthcare
employment has gone from 6 percent of all jobs to 14 percent (Exhibit 5). Also, jobs that once
could be filled by anyone with a high school education now require higher skills, including
proficiency in analytics, communication, presentation, and computer programs. In health
information management, for example, employers seek workers who have both IT backgrounds
and are trained in customer service.

The shortage of middle-skill workers can be traced to several factors, including the rising share of
New Jersey students who complete college degrees and the outmigration of millennials. In 2015,
more than 85 percent of the people leaving New Jersey were in the millennial age bracket (aged
18 to 35 in 2015). The outmigration rate for millennials is six times that of any other age cohort
and it is particularly high among the youngest members of the group (18- to 24-year-olds), which
includes college students who leave and do not return after graduation. Overall, middle-skill and
high-skill millennials are the most likely to leave, contributing to the mismatching for middle-skill
positions.

20 A blueprint for addressing the global affordable housing challenge, McKinsey Global Institute, October 2014.
21 Ibid.
22 For more on middle-skill employment trends, see Digital America: A tale of the haves and have-mores, McKinsey
Global Institute, December 2015.

Reseeding the Garden State’s economic growth: A vision for New Jersey 15
 ECONOMIC SECTORS AND CLUSTERS

Employment has shifted from manufacturing to services such as healthcare

ECONOMIC SECTORS AND CLUSTERS
ECONOMIC SECTORS AND CLUSTERS

Employment
Exhibit 5 Employment
Employment hashas
has shifted
shifted
shifted from
fromfrom manufacturing
manufacturing
manufacturing to services
tosectors
to services
declining services such
such
such as healthcare
growing asashealthcare
sectors
Relatively
healthcare
unchanged
Relatively Relatively

Breakdown of New Jersey employment by industry, 1990-2014 Relatively

Relativelysectors
Relatively
Relatively
Relatively
Relatively
declining growing sectors unchanged
% of total employment, 000s of employees declining sectors growing sectors unchanged
Breakdown of New Jersey employment by industry, 1990-2014
Breakdown of New Jersey
% of total employment, employment
000s by industry, 1990-2014
= ofofemployees
100%000s
% of total employment,
employees
3,061 3,995 3,848 3,963

Other 100% =9% 3,061 3,995

10% 3,848
9% 3,963
10%
100% = 3,061 3,995 3,848 3,963
Construction
Other 9% 10% 9%
3% 10%4%
Other 4% 9% 4%10% 9% 10%
Tranportation and warehousing
Construction 4% 4% 4%4% 4%
3% 4%4%
Construction
Tranportation and warehousing 3% 4%
Other services 4% 4%4% 4%
3%
4% 4%
4% 4%
Tranportation and warehousing 4% 4% 4%
4% 4%
Finance andOther services
insurance
3%
5%4% 5% 4% 5%
Other services 4%
3% 4%
5% 4%
5% 4%
5%
Finance and insurance 6% 4% 5% 5%
Wholesale trade and insurance
Finance 6% 6%5% 5%
5% 5%
5%
Wholesale trade 6%
6% 7%
5% 6%
5%
Wholesale trade 6% 7% 6%
11%11% 7%
6% 6%
Manufacturing
Manufacturing 23% 23% 11% 6% 7%7%
Manufacturing 23% 6%6% 6% 7%
7%
7% 7%7%
6% 7% 7%
Admin;waste
Admin; support; support; waste 7%7%
3% 3% 7%
7% 8%8%
Admin; support;Services
Professional waste 4%
4% 3% 7%
Professional Services 7%7% 7% 8%
Professional Services
Accomodation and food 4%
5% 11%
Accomodation and food 5% 7%
11% 11%
5% 11%
Accomodation and food 12% 11% 11%
Retail 12% 12%
Retail 12% 12%
Retail 12% 13% 14%
Healthcare 6% 10% 13% 14%
13% 14%
Healthcare 6% 6% 10%
10%
Healthcare
Government 16% 15% 17% 16%
Government
Government 16% 16% 15%
15% 17%
17% 16%
16%
1990 2000 10 2014
SOURCE: Moody’s Analytics, US Bureau of Labor Statistics 1990 2000 10 2014
1990 2000 10 2014
SOURCE: Moody’s Analytics, US Bureau of Labor Statistics
SOURCE: Moody’s Analytics, US Bureau of Labor Statistics
McKinsey & Company 5

The only bright spot is an inflow of college-educated 31- to 35-year-olds, who come to New McKinsey & Company 5
Jersey for high-level jobs (Exhibit 6). McKinsey & Company

Another factor contributing to the skills mismatch is the shortage of training opportunities to
prepare middle-skill workers for today’s economy, which is a nationwide challenge. The United
States spends considerably less per capita on vocational training and apprenticeships than other
advanced economies. “Earn while you learn” apprenticeships, which are widely used in countries
such as Germany, help workers build credentials that make them far more employable, without
accumulating excessive student debt.
The share of students in apprenticeship programs in the United States is much lower than in
Germany, although it is growing through state-level programs and federal initiatives such as
the Virginia Registered Apprenticeship Program.23 Germany’s dual system of education—with
students working part-time and attending school part-time—combines high-quality vocational
training with apprenticeships in nearly 350 nationally recognized occupations. These programs
are closely aligned with the secondary and post-secondary education system. The German
approach requires private-sector investment, but participating companies are rewarded with a
well-trained talent pool. Most of the dual-system training in countries such as Germany, Austria,
and Switzerland is provided by companies.
The United States trails other advanced economies in apprenticeship enrollment rates and New
Jersey trails the rest of the country. In New Jersey, only 0.15 percent of the employed population
was in an apprenticeship program in 2016, compared with 0.26 percent across the United
States.24 New Jersey also lags other states in other types of support for middle-skill workers,
such as integrated education and training programs, financial aid for occupational training,
and “stackable” credentials that employees can build up over time. New Jersey also lacks a
comprehensive program to coordinate efforts to train and employ middle-skill workers.
23 Game changers: Five opportunities for US growth and renewal, McKinsey Global Institute, July 2013.
24 ApprenticeshipUSA. US Department of Labor Registered Apprenticeship National Results Fiscal Year 2016
(10/01/2015 to 9/30/2016).

16 Reseeding the Garden State’s economic growth: A vision for New Jersey
 The majority of millennials leaving NJ are middle- or high-skill
The majority
Exhibit of millennials
6 The majority leaving
of millennials NJ are
leaving middle-
NJ are ororhigh-skill
middle- high-skilled
Net migration of people in New Jersey that changed states/countries in 2015, 000s by age and education attainment
Net migration
Negative of people
values in New
represents Jersey
a net that changed
out-migration (morestates/countries in 2015,
people leave than enter000s by age and education attainment
the state)
Negative values represents a net out-migration (more people leave than enter the state)
Age Low-skilled: High Medium-skilled: Some college High-skilled: Bachelor,
Age
group Low-skilled:
school degreeHigh
or less Medium-skilled: Some college
education or credentials High-skilled:
Master, DoctorBachelor,
degree
group school degree or less education or credentials Master, Doctor degree

18 - 30
-3 -22 -7
Millennials

18 - 30
-3 -22 -7
Millennials

31 - 35 -1 -1 3
31 - 35 -1 -1 3
Millennials

36 - 59 5 -2 -4
Non-Millennials

36 - 59 5 -2 -4

Other (under 17 1 -2 -3
Other (under
and over 60) 17 1 -2 -3
Non-

and over 60)

Total 1 -26 -10

Total 1 -26 -10

1 Includes middle-skilled workers with Associate’s credentials, GED or alternative credentials or 1 year or more of college education
1 Includes middle-skilled
SOURCE: workers
Census, American with Associate’s
Community Survey credentials, GED or alternative credentials or 1 year or more of college education
SOURCE: Census, American Community Survey
Other states have addressed the skills issue in the middle of the labor market with a variety of initiatives. Typically, these
efforts involve partnering with the private sector to identify high-growth areas that will generate middle-skill jobs, defining
skill requirements for high school and post-secondary curricula, and collaborating on skills training. Some states
McKinsey also have6
& Company
McKinsey & Company 6
established incentives for employers that invest in training that elevates low-skill workers to middle-skill status. Pennsylvania,
for example, identified 12 industry clusters and partnered with companies, local workforce development agencies, educators,
and nonprofit groups to educate, train, and employ residents in middle-skill jobs. North Carolina has created consortia with
community colleges that allow students to earn an associate’s degree and a “journeyman” certificate in a middle-skill specialty.
Maryland created a state-funded grant program for workforce development that focuses on training outside of traditional
educational and training institutions (see Box 3: Moving training beyond the class room in Maryland).

Tailoring incentives for growth

All states make investments to support economic growth. These range from investments in physical infrastructure—building
new highways, schools, sewers, and storm drains—to providing tax cuts to attract firms to the state, to sending development
officials to trade fairs halfway around the globe to find foreign investors. The State of New Jersey puts a great deal of effort into
economic development programs to attract new businesses and help existing businesses thrive. However, these programs
are typically less productive than they have been in many peer states.

In terms of capital investment, New Jersey is not putting as much into physical assets as other states. It lags the US average in
terms of capital outlays for construction and for the purchase of buildings, equipment, and land, as well as in spending for major
alterations. Its investments in new capital projects have trailed the national average since 2000, when the state spent about 1.4
percent of GDP on capital investments compared with more than 2.1 percent across the country. Overall, New Jersey allocates
only 7.7 percent of state and local spending to capital outlays, compared with 9.9 percent, on average, across the 50 states.25

Second, New Jersey gets less return on the incentives it provides to attract and retain companies. Like other states, New
Jersey offers tax discounts, grants, loans, subsidies and other incentives to convince companies to create jobs and invest
capital. In an average deal, states spend 40 cents for every dollar of corporate investment they induce through incentives such
as tax abatements. Between 2010 and 2016, New Jersey, in an average deal, offered $1.80 in incentives for every dollar of
capital spending by the targeted company.26

25 2015 Annual Capital Expenditures Survey, US Census Bureau, February 8, 2017; IncentivesMonitor - WAVTEQ (www.IncentivesMonitor.com);
It’s Time for States to Invest in Infrastructure, Center on Budget and Policy Priorities, February 2016.
26 Based on data collected from IncentivesMonitor (www.IncentivesMonitor.com). Values in average deals refer to arithmetic, non-weighted means.

Reseeding the Garden State’s economic growth: A vision for New Jersey 17
Box 3 Moving training beyond the
classroom in Maryland
Employment Advancement Right Now (EARN) is a
state-funded workforce development grant program
established by Maryland in 2014. The program
provides $4.5 million annually in funding and technical
assistance to regional workforce training partnerships
around the state. Each partnership is made up
of employers, nonprofits, local secondary school
educators, and business/trade associations. Using
grants, the partnerships determine the workforce
pipeline needs for employers in the area (the relevant
skills needed by entry-level workers), then apply for
implementation grants to fund training programs. So
far, 40 implementation grants have been awarded and
more than 650 businesses have contributed to program
design and implementation. According to Maryland
data, for every dollar invested in EARN, $14.88 in
economic value is created. This compares with $3.41
for workforce training programs across the United
States. More than 1,400 students have completed
entry-level training and 3,000 workers have received
skilled training.

18 Reseeding the Garden State’s economic growth: A vision for New Jersey
In total, New Jersey’s incentives represent 0.33 percent of state GDP, compared with 0.03 percent in New York, which paid
25 cents for every dollar of new private investment. A similar pattern is seen in incentives to bring new jobs to the state or to
keep existing jobs in New Jersey. Between 2010 and 2016, US states paid about $69,000 on average per job attracted through
sweeteners such as tax breaks, grants, loans, and subsidies. New Jersey, meanwhile, pays as much as $162,000 per job. For
jobs retained, the US average was $48,000 (Exhibit 7).

In an average
Exhibit deal, NJ
7 In an average pays
deal, more
NJ pays than
more 5 times
than 5 timesas
asmuch aspeer
much as peerstates
states
for for
every
dollar
everyofdollar
investment it attracts and
of investment for everyand
it attracts job created
for everyor retained
job created or retained
Incentive deals1, 2010-2016
Incentive spend Incentive paid
Incentive paid as a % of GDP to capex Incentive paid Incentive paid
Destination per deal 2015 spend as attracted ratio2,3 to job created2,4 to job retained2,4
State Average US$ mln % of 2015 GDP Average $ Average $000s Average $000s

New Jersey 17 0.33 1.8 162 184

Connecticut 3 0.06 0.6 51 49

Pennsylvania 3 0.01 0.3 35 39

New York 3 0.03 0.2 28 43

Massachusetts 1 0.02 0.1 22 28

Virginia 1 0.01 0.1 8 14

USA 6 0.4 69 48

1 Examples of incentive deals include tax discounts, loans, grant, subsidies

2 Values in average deals refer to arithmetic, non-weighted means.
3 Calculated on all deals with investments over $0
4 To calculate averages, a deal is classified as “job created” when more jobs were created than retained, a deal is classified as “job retained” when more jobs were retained than created
SOURCE: IncentivesMonitor, BEA, *An earlier version of this report transposed figures for PA, MA, and NY

New Jersey’s returns on incentive deals are likely skewed by the large proportion that are done with older firms, which generate
lower returns than investments in fast-growing young companies. Between 2010 and 2015, less than 20 percent of incentive
deals to create or retain jobs in New Jersey went to young companies (less than ten years old). It cost New Jersey $174,000
for each job created or retained by an old firm, compared with $110,000 per job in companies younger than 10 years. Some
owners of young companies who responded to our survey cited complex processes as a barrier to seeking incentives.
Another area where New Jersey might want to place additional emphasis is in attracting foreign direct investment (FDI). New
Jersey’s location makes it a good choice for global players and, in an average deal, it already gets $0.99 of investment for a
dollar of incentive offered to foreign companies, compared with $1.97 in incentive spending for every dollar of capital spending
by a domestic company in an average deal.27 It pays $119,000 for each job created in an FDI deal, compared with $197,000 for
each job created by a domestic company.
How could New Jersey improve its investment returns? It does not have a rigorous program to regularly evaluate the effectiveness
of tax breaks and other incentives. In 2013, the legislature passed a law commissioning Rutgers to conduct a one-time study of
the efficacy of tax incentives, which is due out in 2018. However, the same bill led to an increase in incentive spending.28
Meanwhile, other states are increasing scrutiny of incentive programs. Virginia, for example, tracks all its investments and
calculates an ROI on incentive deals over the years (see Box 4: How Virginia boosts ROI on investments in growth). Working
with the Pew Charitable Trust, 22 states and the District of Columbia have enacted laws requiring regular and rigorous review
of tax incentives and economic development programs. Ohio uses an impact-driven evaluation system and targets investors in
specific industries that are important to the state, such as aerospace and chemicals. In Toronto, the focus is on companies that
can strengthen industry clusters in growth areas such as digital media.
27 Values in average deals refer to arithmetic, non-weighted means.
28 How states are improving tax incentives for jobs and growth: A national assessment of evaluation practices, The Pew Charitable Trusts, May 3, 2017.

Reseeding the Garden State’s economic growth: A vision for New Jersey 19
Box 4 How Virginia boosts ROI on
investments in growth
Virginia stands out among states for getting the greatest
bang for its economic development buck. It does so by
carefully monitoring and measuring its investments and
holding recipients to their commitments. The Virginia
Economic Development Partnership calculates ROI
for each project and estimates a present value of $23
for every dollar invested over ten years and $48 over
20 years. Recipients sign performance agreements,
which include provisions for claw-backs if performance
does not fall within specified parameters. Virginia also
strategically targets certain industries and sectors where
it is well positioned for growth and assigns business
attraction managers to work with companies in those
areas. Virginia is one of five states that are working with
the Pew Charitable Trusts and the Center for Economic
Competitiveness to codify best practices in state
business development incentives.

20 Reseeding the Garden State’s economic growth: A vision for New Jersey
 Building on New Jersey’s sector
strengths in a changing economy
In addition to putting in place enablers such as infrastructure improvements and skills training,
New Jersey could encourage growth by building on current strengths and riding important trends
in the national economy. As an exercise, we looked for examples of sectors that might hold
particular promise. First, we looked at the five major industry clusters in the state: information
and communication technology (ICT), pharmaceuticals and medical equipment, logistics and
wholesale trade, chemicals, and professional services. Then, by mapping these clusters against
a list of industries that are undergoing rapid change because of technological disruption, three
growth opportunities were identified that could be particularly promising for New Jersey.29

By highlighting these three examples–logistics and wholesale trade, pharmaceuticals and

biotech, and cybersecurity–we are not attempting to pick “winners and losers.” The New Jersey
growth agenda should be broad-based and statewide to succeed. However, these industries
represent some of the clearest opportunities for immediate results (Exhibit 8).

Examples
Exhibit of industries
8 Examples that are
of industries that poised forfor
are poised growth
growthand
andwhere NewJersey
where New Jersey
has advantages
has advantages
Logistics/wholesale trade Biotech Cybersecurity
Shift in customer preferences Top 15 PharmaCos by pharma sales Cyber breaches have increased dramatically
towards shorter delivery times, % 2015 in USD billions Number of breaches1
70% would Presence in NJ
prefer +13% p.a.
cheapest form 47.4
of delivery 5% would pay more for 1,405 1,384 1,647
45.0
reliable, timed delivery 1,194
38.8
704 740 754
38.8 510
23% of consumers
are willing to pay 36.6
extra for same-day 33.9
delivery 32.6 2008 09 10 11 12 13 14 2015
31.9 … and the # of records lost is increasing
Number of records lost, in hundred thousands2
24.9
2% would pay more for
instant delivery 22.8 +12% p.a.
Central location within NE corridor
219
Area that can < 2 hrs Biotech products within Top 100
be reached within product sales, % of total 160
same day (11 hrs) 130
Conventional/ unclassified

Biotechnology 53 49 50
66 58 71
13 28

53 50 200506 07200809 10 11 12 13 142015

70
Universities with Cyber degrees

47 50 10 NJ universities have cyber related

30 programs and 5 NJ universities have
cyber degree programs, providing talent
2008 15 2020P pool for growing cyber companies
1 Average of breaches reported by: Identity Theft Resource Center, Privacy Rights Clearing House, and Risk Based Security. US focused
2 As reported by Privacy Rights Clearing House. US focused
SOURCE: NJ Department of Labor & Workforce Development, Quarterly Census of Employment and Wages, 2010 - 2015 Annual Averages; Evaluate Pharma McKinsey & Company 8

29 For more on the “pillars” of growth in the US economy, see The US Economy: An agenda for inclusive growth, McKinsey Global Institute,
November 2016.

Reseeding the Garden State’s economic growth: A vision for New Jersey 21
 Logistics and wholesale trade
As noted, New Jersey’s location has already made it a strong player in logistics. It has the
second-largest port on the east coast, which handles imported goods from all over the world.
Newark Liberty International Airport is the 14th busiest air freight facility in the United States and
has FedEx’s third-largest hub. New Jersey is centrally located on the Northeast Corridor, which
enables it to be a distribution point for reaching large population centers and it has extensive rail
and highway networks. Now, New Jersey has the opportunity to capitalize on changes in logistics
that are driven by new technologies and consumer preferences.

The most far-reaching change in logistics is the increasing focus on “last-mile” delivery, which is
the result of the shift to e-commerce. Consumers are making more purchases online and expect
next-day delivery. In the case of groceries – a growing ecommerce category – same-day delivery
is required. Business customers also expect rapid deliveries and the emergence of additive
manufacturing technology will mean shorter lead times and more dispersed manufacturing, both
of which put pressure on logistics suppliers to provide rapid last-mile service.

Logistics technology is also evolving to meet new challenges and improve the overall
performance of distribution systems. These range from autonomous vehicles – including self-
guided container ships and airborne drones – to artificial intelligence software that can optimize
schedules. Innovations such as self-driving delivery vans with lockable bins could be used for
grocery delivery and flying drones are being introduced by Amazon and DHL for use in package
delivery. New Jersey could be an ideal market for such approaches, which need high population
In logistics, New Jersey can benefit from customer demand for rapid
density to succeed economically (Exhibit 9).

delivery
Exhibit 9 In logistics, New Jersey can benefit from customer demand for rapid delivery
Delivery model customer preferences, % Available delivery options, by density of locale
70% would B2C
prefer cheapest
Regular High
form of delivery 5% would pay more for parcel1 reliability Same day Instant B2B
reliable , timed delivery
Drones (same day, if
Rural areas fulfillment times
23% of consumers Density of feasible)
are willing to pay extra <50,000 Fulfillment
for same-day delivery inhabitants likely not
possible
at
2% would pay more for Autonomous ground vehicles with economi-
instant delivery Urban areas
Density of lockers (e-grocery with today’s cal cost Today’s
50,000- delivery model) levels delivery
▪ The rapid growth of e-commerce and 1 million model
consumer demands for faster parcel inhabitants
delivery and new technologies such as
autonomous vehicles make proximity to Droids or
large population centers even more Urban areas bike
important. Density of couriers
>1 million
▪ New Jersey’s prime location positions it to
inhabitants
benefit from these shifts
1 Parcel delivery between one day after drop-off and four days after drop-off
SOURCE : Mckinsey & Co, Future of Last Mile Delivery, How consumer demands are reshaping last mile delivery

Additional innovations in logistics include Internet of Things sensors to manage the flow of goods
McKinsey & Company 9
through warehouses, shipping, and delivery, as well as new kinds of packaging that improve
packing efficiency. Robotics will also play a role in next-generation logistics, as will new software
systems that can orchestrate all the elements that move items through global, regional, and local
networks.

22 Reseeding the Garden State’s economic growth: A vision for New Jersey
 New Jersey could support the development of advanced logistics in a number of ways. Other
states have offered targeted and temporary tax incentives to strengthen certain sectors of their
economies. If it chose to follow those examples, New Jersey could for instance consider special
incentives for investment in new logistics technology and university-industry consortia to help
develop and implement new technologies such as robots and autonomous vehicles.

Pharmaceuticals and biotech

New Jersey has a high concentration of US and global pharmaceutical and life sciences
companies and has benefitted from the success of the industry over many decades. Today,
however, the industry is moving in ways that will only fully benefit New Jersey if the state can
position itself to participate more fully in high-growth subsectors, such as biotechnology.

The life sciences sector is undergoing structural and technological change. Globally, growth is
shifting to emerging markets and, while subsectors such as biotech and generics are outpacing
the overall industry, “big pharma” companies that develop and market branded pharmaceuticals
have shrunk as a share of the industry. In New Jersey, this pattern is reflected in sector
employment: overall employment in life sciences declined by 10 percent from 2010 to 2015, while
employment grew in biotech.30

Because of its large pharmaceutical cluster and its wealth of scientific and life sciences talent,
New Jersey is well-positioned to benefit from the growth in biotech, which is driving innovation
in life sciences. New Jersey has five research universities, 13 teaching hospitals, and four
medical schools. In 2014, New Jersey companies had more than 1,000 new medicines under
development and, in 2015, 16 of 27 drugs approved by the US Food and Drug Administration
came from companies with significant New Jersey footprints (Exhibit 10).
ecosystem for biotech
SELECT EXAMPLES

Exhibit 10 New Jersey has a strong innovation ecosystem for biotech NJ position vs. peer states
Strong
Medium
Weak

▪ Five research universities, Princeton University, New Jersey Institute

of Technology, Rowan University, Rutgers University and Stevens ▪ In 2015, 16 of 27 new drugs approved by the FDA came
Institute of Technology from companies with a significant footprint in New Jersey
▪ Princeton starting a wet lab space for biotech incubator through
Keller Center ▪ 12 of 22 top R&D companies are located in New Jersey
▪ Rutgers’ $677 million/yr in research spending ▪ In 2014 New Jersey had a total of 1,067
puts it in top 30 US universities medicines making their way through
companies’ pipelines
▪ Rutgers’ RUCDR Infinite Biologics is world’s
largest university-based cell and DNA 1.Anchor 2. Innovative
Institutions corporations ▪ In December 2016, ~6,500 clinical
repository
trials, over 12% of all US trials were
▪ 13 teaching hospitals and 4 medical
being conducted by NJ companies
schools

Innovation
▪ Grow New Jersey Assistance Program ▪ NJ biotech firms received ~$409M in
(Grow NJ): 10-year tax credit for up to VC funding from 2010-2015, ~7% of
$15,000 per job, per year Mass VC funding for biotech
▪ Technology Business Tax Certificate ▪ The Commercialization Center for
Transfer Program: NJ-based biotech firms 4. Government 3.Incubators Innovative Technologies is NJ’s leading
can sell NJ net operating tax losses and support & VC life sciences incubator
R&D tax credits ▪ Institute for Life Science: Nonprofit provides
▪ Angel Investor Tax Credit Program: 10% tax credit incubator space, consulting and access to a
for investment in emerging technology businesses network of R&D service organizations
that have 75% of employees in NJ
▪ BioNJ: Mission is to enhance the climate for ▪ Juice Tank: Co-working space and incubator focused on investments
biotechnology in the state within technology, digital health, and consumer products
▪ New Jersey Biotechnology Task Force, established in 2016, helps find
ways to retain and attract new biotech companies to the state

1 Lead scientist or engineer for research projects (e.g., laboratory study or clincal trial)
SOURCE: Press search, Rutgers University, National Institutes of Health, ChooseNJ McKinsey & Company 10
30 New Jersey’s Life Sciences Industry Cluster, NJ Department of Labor and Workforce Development, Spring 2017.

Reseeding the Garden State’s economic growth: A vision for New Jersey 23
To date, however, New Jersey has not assumed a role in the global biotech industry commensurate with its role in big pharma.
For example, New Jersey biotech companies attracted only $409 million in venture capital from 2010 to 2015, only about 7
percent of what Massachusetts firms received.31 New Jersey could turn this around and become a leading center of biotech
innovation by learning from strategies from Massachusetts and other states. For instance, in 2008, Massachusetts legislators
approved the Massachusetts Life Sciences Act, which committed the state to spending $1 billion over ten years to fund R&D,
capital investments and economic incentives to spur growth in biotech, pharmaceuticals, medical devices, diagnostics,
and bioinformatics. Programs ranged from investments in buildings and roads to support the sector to internships and
apprenticeship programs.

Cybersecurity
New Jersey has the potential to play a leading role in the burgeoning cybersecurity sector, where the state’s strength in ICT
and its expertise in financial services – a prime target of cybercriminals – could provide distinct advantages. New Jersey is
also located within easy reach of many of the most likely customers for cybersecurity products and services – in New York and
Washington. Attacks on critical national infrastructure – such as transportation and power systems – and financial institutions
have been on the rise. Global revenues from cybersecurity products and services have been estimated at $77 billion in 2015
and are projected to grow by 17 percent or more per year from 2015 to 2020.32

In New Jersey, a group of new businesses has cropped up in cybersecurity and IT security and major ICT companies such as
AT&T and Verizon added managed security services to their business offerings by 2015. New Jersey is home to 14 of the top
500 cybersecurity firms. In addition, it has the building blocks to be a major cybersecurity hub, including 80,000 programmers
and 110,000 software developers, and Princeton, which has a top ten computer science graduate program (Exhibit 11). Virginia
has recognized the opportunity and has launched programs to fill the talent pipeline for a growing cybersecurity industry. The
for a strong cybersecurity ecosystem
effort includes a veterans training program, apprenticeships, and a program to increase the number of community colleges
and universities that are certified in cybersecurity education. In 2015 more than 65,000 Virginians worked in cybersecurity.

NJ position vs. peer states

Exhibit 11 New Jersey has the ingredients Strong
for a strong cybersecurity ecosystem Medium
Weak

▪ Two of New Jersey’s universities offer higher education in ▪ New Jersey’s technology firms (EMC, CommVault, Verisk)
technology including programs at Rutgers University’s School of provide technology talent
Communication and Information (SC&I) and the New Jersey Institute of ▪ New Jersey is home 14 of the top 500
Technology (NJIT) Cybersecurity firms1
▪ 5 of New Jersey’s top universities offer the use of ▪ New Jersey is close to the two largest
their incubator and accelerator facilities to young cybersecurity customer segments, financial
technology and start-up companies institutions and CNI in NYC and DC, respectively
▪ New Jersey has more than 80,000 computer
programmers and 110,000 software
developers 1.Anchor 2. Innovative
▪ Princeton has a top 10 computer science Institutions corporations
graduate program

Innovation hub
▪ Grow New Jersey Assistance Program ▪ TechLaunch LLC, the technology
(Grow NJ): 10-year tax credits for up accelerator links entrepreneurs with
to $15,000 per job, per year mentors, seed funding, investors and
training
▪ Angel Investor Tax Credit Program: 10% ▪ Juice Tank: Co-working space and startup
4. Government 3.Incubators
tax credits for investment in an incubator focused on investments within
support & VC
emerging technology business with 75% technology, digital health, and consumer
of their employees in New Jersey products
▪ NJ Tech Council provides business ▪ Newark Venture Partners: VC fund and
development, education, networking and accelerator that invests in technology companies
recognition opportunities as well as advocacy for while also catalyzing development in the
the state and region‘s technology businesses technology ecosystem in Newark
▪ New Jersey Cybersecurity and Communications Integration Cell
(NJCCIC) is the State's one-stop shop for cybersecurity information
sharing, threat analysis, and incident reporting

1 Ranked by Cyber Security Ventures

SOURCE: ChooseNJ, NJBiz
McKinsey & Company 11

31 Pitchbook.
32 Steve Morgan, “The Business of Cybersecurity: 2015 Market Size, Cyber Crime, Employment, and Industry Statistics,” Forbes.com, Oct. 16, 2015.

24 Reseeding the Garden State’s economic growth: A vision for New Jersey
What can be done?
In this paper, we have focused on describing the root causes of New Jersey’s relatively slow
growth in recent years. We have sought to clarify why, despite all the enviable advantages that
come with its location, wealth, labor force, and intellectual capital, New Jersey has lagged
the nation in GDP and job growth. From this research, a complex and multi-faceted challenge
emerges. If the state can keep pace with the U.S. economy, it can vastly increase economic
opportunity in the state. By reaching the national average for growth, the state will expand
its economy by more than $150 billion and create more than 250,000 jobs over the next
decade.

Our hope is that this paper will be used to start productive conversations about New Jersey’s
future and will be a resource for those who are looking for practical, proven solutions. They can
look to Tennessee for ideas about how to support the young fast-growing companies that create
more jobs than older companies. They can think about how Chicago has developed data-driven
approaches to tackle its infrastructure challenge and they can look at how states like Maryland
have used grants and regional training partnerships to prepare more workers for today’s middle-
skill jobs. They can also consider the new approaches to incentives for job creators that Virginia
has been using.

It will take dedicated efforts by the private, social, and public sectors—and the involvement
of us all—to make the Garden State a growth leader again. All stakeholders can take
encouragement from the experience of other states that have faced all the same challenges and
hurdles—and remember the unique strengths that can make New Jersey a growth leader.

Reseeding the Garden State’s economic growth: A vision for New Jersey 25
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26 Reseeding the Garden State’s economic growth: A vision for New Jersey
Reseeding the Garden State’s economic growth: A vision for New Jersey 27
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July 2017
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