GROWING CLUSTERS FOR AMERICAN PROSPERITY
OVERVIEW

While competition for innovative technologies and services is increasingly global, the context of innovation—and the benefits it brings in economic growth and high value employment—remains local.1 Innovation clusters are regional concentrations of large and small companies that develop creative products and services, along with specialized suppliers, service providers, universities, and associated institutions. Ideally, they bring together a critical mass of skills and talent and are characterized by a high level of interaction among these entrepreneurs, researchers, and innovators.2 The high levels of productivity and innovation found in many clusters are reflected in an intensifying “locational competition” among nations and regions around the world to attract the people, resources, and infrastructure believed necessary to develop clusters in leading-edge technologies.3

In the United States, innovation clusters have sometimes developed around a nucleus of government-funded laboratories and universities that interact repetitively with the private sector; one example is the high-technology industries that emerged and grew around the government

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1Michael Porter has observed that “the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, motivation—that distant rivals cannot match.” See Michael E. Porter, “Clusters and the new economics of competition,” Harvard Business Review, 76(6):77-90, 1998. For a review of current trends in the globalization of innovation and the nature of locational competition, see Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000, Strategy and Business, 53(Winter), 2008.

2For a review of the literature on the issue of innovation clusters, see J. Cortright, Making Sense of Clusters: Regional Competitiveness and Economic Development, Washington, DC: The Brookings Institution, 2006.

3See Anne O. Krueger, “Globalization and International Locational Competition; Symposium in Honor of Herbert Giersch.” Lecture delivered at the Kiel Institute, May 11, 2006.



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GROWING CLUSTERS FOR AMERICAN PROSPERITY OVERVIEW While competition for innovative technologies and services is increasingly global, the context of innovation—and the benefits it brings in economic growth and high value employment—remains local.1 Innovation clusters are regional concentrations of large and small companies that develop creative products and services, along with specialized suppliers, service providers, universities, and associated institutions. Ideally, they bring together a critical mass of skills and talent and are characterized by a high level of interaction among these entrepreneurs, researchers, and innovators.2 The high levels of productivity and innovation found in many clusters are reflected in an intensifying “locational competition” among nations and regions around the world to attract the people, resources, and infrastructure believed necessary to develop clusters in leading-edge technologies.3 In the United States, innovation clusters have sometimes developed around a nucleus of government-funded laboratories and universities that interact repetitively with the private sector; one example is the high- technology industries that emerged and grew around the government 1 Michael Porter has observed that “the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, motivation—that distant rivals cannot match.” See Michael E. Porter, “Clusters and the new economics of competition,” Harvard Business Review, 76(6):77-90, 1998. For a review of current trends in the globalization of innovation and the nature of locational competition, see Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000, Strategy and Business, 53(Winter), 2008. 2 For a review of the literature on the issue of innovation clusters, see J. Cortright, Making Sense of Clusters: Regional Competitiveness and Economic Development, Washington, DC: The Brookings Institution, 2006. 3 See Anne O. Krueger, “Globalization and International Locational Competition; Symposium in Honor of Herbert Giersch.” Lecture delivered at the Kiel Institute, May 11, 2006. 3

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4 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY laboratories and major universities in the Boston area.4 In other cases, for example, Silicon Valley in California, multiple private industries interacting with a major university, and irrigated with substantial and sustained federal funding, created powerful developmental synergies.5 In contrast to the relatively spontaneous emergence of these innovation clusters, a third approach to the development of innovation clusters is through the deliberate co-location of creative activity within the concentrated geographical area, such as through a research park development. The Research Triangle Park in North Carolina is a widely cited example of such a created cluster.6 The perceived success of these and other U.S. innovation clusters has led to widespread interest in creating and encouraging the development of new clusters as a means of creating jobs and spurring competitiveness. To this end, local, regional and national governments around the world are implementing programs and policies to create, develop, and strengthen locally focused networks among businesses, universities, research and development organizations, and philanthropic foundations.7 A recent study by the Brookings Institution documents national cluster 4 See National Research Council, Understanding Research, Science and Technology Research Parks: Global Best Practices, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2009. 5 See AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge, MA: Harvard University Press, 1994, p. 161. See also Martin Kenney, ed., Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region, Stanford: Stanford University Press, 2000. See also T. J. Sturgeon, “How Silicon Valley Came to Be” in M. Kenney (ed.), Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region, op. cit., pp. 15-47. See also Margaret Pugh O’Hara, Cities of Knowledge: Cold War Science and the Search for the Next Silicon Valley, Princeton: Princeton University Press, 2005. 6 For a comprehensive history of the Research Triangle Cluster, see Albert N. Link, A Generosity of Spirit: The Early History of the Research Triangle Park, Research Triangle Park: The Research Triangle Foundation of North Carolina, 1995. For a seminal study of the research parks phenomenon, see, M. I. Luger and H. A. Goldstein, Technology in the Garden, Chapel Hill: University of North Carolina Press, 1991, p. 5. For an update of this study, see M. I. Luger and H. A. Goldstein, Research Parks Redux: The Changing Landscape of the Garden, Washington, DC: U.S. Economic Development Administration, 2006. 7 Robert Lucas has long argued that the clustering and density of talented people is a key driver of innovation and economic growth. See Robert Lucas, “On the mechanics of economic development,” Journal of Monetary Economics 22:38- 39. Richard Florida has popularized the characteristics and economic advantages of innovative clusters. See, for example, Richard Florida, The Rise of the Creative Class, New York: Basic Books, 2002.

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5 OVERVIEW development programs in Japan, the Republic of Korea, and 26 nations in the European Union.8 National development programs are also underway in the world’s emerging economies. China, notably, has recently constructed 54 research parks, many of them on a very large scale, as a part of a coordinated strategy for developing innovation clusters.9 “Silicon Valley is probably the only place on earth not trying to copy Silicon Valley.” Robert Metcalfe, InfoWorld, March 2, 1998 The United States has no similar coordinated national effort underway to build new research parks or develop new innovation clusters.10 Traditionally, state and local governments and, in some cases, private foundations and other regional organizations have singularly or in combination sought to stimulate the development and growth of clusters. Some of these initiatives, including the development of a nano- technology cluster near Albany, New York, have reported significant 8 See Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” Washington, DC: Brookings Institution, April 2008. 9 China’s research parks vary in size and mission, but many are very large in scale. For example, the Zhongguancun Science Park in Beijing hosts over 20,000 enterprises, employs nearly a million people, and has earned about $ 124 billion in income in recent years. See National Research Council, Understanding Research, Science and Technology Parks: Summary of a Symposium, op. cit. The Chinese government is seeking to develop technology clusters through large investments in research parks. See Justin Tan, “Growth of industry clusters and innovation: Lessons from Beijing Zhongguancun Science Park,” Journal of Business Venturing 21(6):827-850, November 2006. See also Cheng-Hua Tzeng, “Managing innovation for economic development in greater China: The origins of Hsinchu and Zhongguancun,” Technology in Society 32(2):110-121, May 2010. 10 The United States currently has no legislatively authorized programs specifically dedicated to comprehensively supporting cluster initiatives. Many of the Department of Labor’s WIRED (Workforce Innovation in Regional Economic Development) projects are cluster-focused, but WIRED is not solely a cluster initiative program. See the Department of Labor WIRED website at .

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6 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY 11 achievements. In many cases, however, state and local efforts lack critical mass in terms of funding and facilities and may also lack the sustained policy support needed for success. To address this apparent gap and to adjust to the changing international competitive environment, some advocates have called for the federal government to play a more active role in supporting the development of local innovation clusters.12 Speaking at the National Academies symposium on “Growing Innovation Clusters for American Prosperity,” Susan Crawford, then of the White House Office of Science and Technology Policy, said that the Obama Administration is “committed to the idea of regional economic clusters and their role in economic growth and innovation.” She noted that innovation “cannot happen top-down alone, or bottom-up alone,” suggesting instead that the federal government’s role may be to provide a “kind of trellis” that supports the growth of entrepreneurial offshoots in the nation’s states and localities.13 This volume is based on the National Academies symposium on innovation clusters. The symposium included discussions on the nature of clusters, descriptions of the experiences of several states in cluster development, and views on the role of the federal government in supporting clusters. It also included perspectives on the role that public- private partnerships can play in supporting the growth of robust innovation clusters. This workshop summary has been prepared by the workshop rapporteur as a factual summary of what occurred at the workshop. The planning committee’s role was limited to planning and convening the workshop. The statements made are those of the rapporteur or individual workshop participants and do not necessarily represent the views of all workshop participants, the planning committee, or the National Academies. I. UNDERSTANDING THE CLUSTERING OF INNOVATION Although there are numerous ongoing efforts around the world to build new innovation clusters, the nature of these clusters and how they evolve remains in many ways an enigma. Clusters have been described 11 For an account of the role of the state of New York in the creation of this cluster, see the presentation of Pradeep Haldar, in the Summary of Presentations section of this volume. 12 See Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, op. cit. See also Jonathan Sallet, Ed Paisley, and Justin R. Masterman, “The Geography of Innovation, The Federal Government and the Growth of Regional Innovation Clusters.” Science Progress, September 1, 2009. 13 See the presentation by Susan Crawford in the Summary of Presentations section of this volume.

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7 OVERVIEW as a “combination of geographically co-located private sector producers of R&D, related manufacturing and services industries, linked or related suppliers and producer services providers, leading research universities and teaching institutions, and government sponsored labs and technology programs.”14 But there is more to the phenomenon of clusters than this static description. Reflecting the non-linear and interactive nature of innovation, successful clusters exhibit a culture of entrepreneurship emerging from dense networks of trust and cooperation that reaches across multiple organizations.15 Cooperation, Culture, and Clusters As Professor Maryann Feldman of the University of North Carolina at Chapel Hill noted at the National Academies symposium, this culture of innovation can emerge when face-to-face interactions enhance localized networks of trust, reciprocity and cooperation.16 Cooperation improves further when innovators develop a common vocabulary and a grammar to communicate with each other. Professor Feldman noted that this knowledge, and the language associated with it, grows as it is shared within a community. These network effects, in turn, lead to increasing returns and greater productivity from economic activity. 14 See Edward Feser, “Industry Cluster Concepts in Innovation Policy: A Comparison of U.S. and Latin American Experience,” in Interdisciplinary Studies in Economics and Management, Volume 4, Vienna: Springer, 2005. 15 As Tödtling and Trippl note, “innovation should be seen as an evolutionary, non-linear, and interactive process, requiring intensive communication and collaboration between different actors, both within companies as well as between firms and other organizations such as universities, innovation centers, educational institutions, financing institutions, standard setting bodies, industry associations, and government agencies.” See Franz Tödtling and Michaela Trippl, “One size fits all? Towards a differentiated regional innovation policy approach,” Research Policy 34, 2005. 16 Using controlled laboratory experiments, Elinor Ostrom and her colleagues find that face-to-face communication has a major effect on building trust, reciprocity and cooperation. For a recent review of the findings, see Marco A. Janssen, Robert Holahan, Allen Lee, and Elinor Ostrom, “Lab Experiments for the Study of Social-Ecological Systems,” Science 328(5978):613-617, April 2010.

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8 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY “Cluster formation is a process predicated on the actions of entrepreneurs and their symbiotic relationships with their local environments. The cluster and its characteristics therefore emerge over time from the individual activities of the entrepreneurs and the organizations and institutions that evolve to support them.” Maryann P. Feldman and Johanna L. Francis, “Homegrown Solutions: Fostering Cluster Formation,” Economic Development Quarterly, 18(2), May 2004 “When we look at firms in that context,” Professor Feldman noted, “we realize why they benefit from strategic location. This doesn’t mean firms that are attracted to a jurisdiction for a while and then move out. It means that firms have deep roots and deep social connections.”17 In this light, she said, it is logical that cluster formation reflects the local qualities of the place where it forms. Given that clusters are based on interactions rooted in the language and culture of a particular time and place, it also follows that replicating a successful cluster model elsewhere can be highly elusive. No Simple Formula While there is no ready formula for recreating an innovation cluster, analysis of the creation of clusters indicates some broader principles at work. Typically, some triggering event, coupled with an entrepreneurial spark, in the context of favorable framework conditions, seem necessary in order for industry clusters to emerge and enter a sustainable growth trajectory. In their review of the genesis of clusters, Feldman and Braunerhjelm note that “clusters are born and develop on the basis of specific combinations of capabilities, incentives, and opportunities.” 18 The presence of capabilities—including the presence of localized knowledge, a skilled workforce, and the availability of capital—creates opportunities for entrepreneurship and collaboration, where these opportunities can be realized in the presence of appropriate incentives. 17 See Pontus Braunerhjelm and Maryann Feldman, Cluster Genesis: Technology based Industrial Development, Oxford: Oxford University Press, 2006. 18 Ibid, p. 5.

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9 OVERVIEW A Role for Public Policy Public policies can play a role in developing the necessary capabilities, opportunities, and incentives for the development of clusters. In the United States, state and local governments have a leading role in supporting the development of clusters. Complementing state and local efforts, the federal government can play an important role in strengthening cooperative linkages within local innovation ecosystems. Public-private partnerships, along with other institutional intermediaries, help shape the incentives needed to foster cooperation among scientists, research administrators, entrepreneurs, financers, and other participants within an innovation cluster. As we see next, the National Academies symposium examined a variety of initiatives underway among U.S. states to stimulate the emergence and growth of innovation clusters. It also reviewed the role that the federal government and private foundations can play in supporting these efforts. II. SUPPORTING CLUSTERS: THE ROLE OF THE STATES In the United States, industry cluster strategies have chiefly been a concern of states, regions, and metropolitan areas. Participants at the National Academies symposium examined how a number of states— New York, Pennsylvania, Virginia, South Carolina, Kansas, Ohio, Washington, California and Arizona—are experimenting with policies to encourage the development of industry clusters.19 These initiatives can be seen as ongoing experiments that can yield valuable insights on the role and limits of public policy in encouraging cluster-based economic growth and employment. (See Box A.) Drawing on presentations at the June 2009 symposium on innovation clusters, this overview illustratively contrasts the circumstances associated with the formation of the regenerative medicine cluster in California and the nano-technology cluster New York—two large states with diversified economies—with steps taken by Kansas and South Carolina—two smaller and traditionally rural states—to encourage cluster development. 19 See the presentations my Michael Crow (Arizona), Pradeep Haldar (New York), Rebecca Bagley (Pennsylvania), Richard Bendis (Kansas and Pennsylvania), John Matheisson (Virginia), Egils Milbergs (Washington), David McNamara (South Carolina), Ed Penhoet (California) and Luis Proenza (Ohio).

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10 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY Box A Policy Experimentation in the U.S. Federal System “There must be power in the states and the nation to remold, through experimentation, our economic practices and institutions to meet changing social and economic needs…It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments....” Justice Louis Brandeis’ dissent in New State Ice Company v. Liebmann, 1932 Clustering in California Home to Silicon Valley and Hollywood as well as agricultural clusters, California’s innovation economy benefits from a strong system of state-supported universities, major research centers, and leading national laboratories. The state is also home to a large pool of talented people and a vibrant entrepreneurial culture. In his remarks Dr. Ed Penhoet observed that “talented people live everywhere, but for innovation, you need people with the courage to start a new business, and an environment that supports this. (See Box B) Box B A Key Role of States: Creating a Climate for Entrepreneurial Activity According to Ed Penhoet, state governments can play a central role in creating a climate for entrepreneurial activity, he said, by following some common-sense guidelines.a These may include: • Put all the pieces together. Make R&D investments part of a coordinated innovation strategy. • Make the right bets. Each region has its own strengths, and a regional strategy should build on them. “You do have to choose winners,” he affirmed. “But this is not the same as creating them. People often ask how to build a biotech industry, as though there is a secret formula. They fail to understand that what is required is the fertile ground to plant the seed.” There has to be a reason to think the business will thrive where you put it.”

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11 OVERVIEW • Innovate for the real world—globally and locally. Research must be relevant to industry and the community. The issue is not so much ownership as where you actually locate economic activity.” • Invest in collaboration. Innovation needs partners from universities, industry, and government. • Listen to the smart people. “There are hard decisions in this process, and you will need the best advice. Too many groups have tried to act in isolation.” • Be consistent while embracing change. Innovation needs both flexibility and sustained effort. • Make sure you get what you want, but be patient. It will take time to accomplish long-term goals, but measuring short-term gains is critical to getting there. a Excerpt from the remarks made by Ed Penhoet of the STEP Board and summarized in the Summary of Presentations section of this volume. Dr. Penhoet noted that in addition to what many see as a positive climate for innovation, the State of California also engages in direct efforts to transform its investments in knowledge into commercial products, new firms, and additional employment through large and sustained investments in the research and development of emerging technologies and public-private partnerships. In addition, California has created a number of large innovation funds including the University of California Discovery Grants, which offers seed grants to move projects out of the university laboratory and into early-stage development. The California Institutes for Science and Innovation provide another means to spur partnerships between university research interests and private industry that could expand the state economy into new industries and markets and “speed the movement of innovation from the laboratory into peoples' daily lives.”20 These institutes have received a total state investment of $1.2 billion, equally distributed among the four research centers. Dr. Penhoet, who also serves as a vice chair of the California Institute of Regenerative Medicine, described a state initiative to develop a new medical cluster in the state. This story began, he said, when California voters approved Proposition 71 in 2004 to establish the California Institute of Regenerative Medicine to regulate and fund stem cell research. This proposition was passed at a time when the federal government did not support stem cell research. The measure was paid for by issuing $3 billion in state general obligation bonds, which was the 20 State of California, Governor’s Budget summary 2001-2002.

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12 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY first time a state has raised that much money for a specific kind of research. Proposition 71 had two explicit goals. One was to find cures for disease using stem cells as a therapy or tool. The second was to enhance California’s competitive position as the world’s leading biotech region. Taking advantage of the hiatus in federal funding for stem cell research, funding for the state’s stem cell initiative has established in California the most robust regenerative medicine program in the world, he said, attracting numerous scientists from within and outside the United States. “So it has had a positive effect.” New York’s Nano Initiative Dr. Haldar, of the New York Energy and Environmental Technology Applications Center, described the rapid evolution of a high-technology cluster near Albany that is reversing the economic fortunes of the region. The effort began in the 1990s, when much of upstate New York was in an “economic shambles.” Manufacturing jobs were disappearing from every region: steel mills from Buffalo, high-tech Xerox and Kodak jobs from Rochester, the gas turbine division of General Electric from the capital. Traditional industries, such as textiles, shoes, and typewriters had long since moved offshore. The State Government Role. This situation began to change in the 1990s, said Dr. Haldar, as a result of energetic state leadership. Governor George Pataki assembled a diverse group of stakeholders to develop a strategy to revive the economic fortunes of the Upstate region. Subsequently, the state of New York provided grants, tax breaks, and other subsidies of more than $1 billion to encourage big-company investments and foster the birth of small start-ups. To sustain the momentum towards the development of a high-technology cluster, the state also sought to integrate research and development, education, and business strategy around Centers of Excellence, anchored by the State University of New York. Technology Focus. New York’s strategy identified nanotechnology as a main area of focus, launching in 1993 a Center for Advanced Technology. This was joined in 1997 by a NanoFab facility, and the following year the Semiconductor Industry Association (SIA) chose the site for a National Focus Center Consortium. Accelerating this trend, IBM in 2001 decided to build its new Nanoelectronics Center of Excellence in Albany, along with a consortium of partners. This news was followed in 2002 by the announcement that SEMATECH would establish a new research center there, called International SEMATECH North. In 2002 a TEL R&D Center was added, and in 2003 a NanoFab 300S, and in 2005 an ASML R&D Center.

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13 OVERVIEW University Research and Workforce Development. These new enterprises all needed a highly trained workforce. At the time, the Albany campus of the State University of New York had no engineering department. Starting from scratch, the state established a College for Nanoscale Science and Engineering (CNSE) in 2004, which has since seen remarkable growth. By 2007, Small Times Magazine ranked CNSE as the number one college in the world for nanotechnology. Today CNSE has 48 faculty members and 150 graduate students. An undergraduate program is scheduled to begin in 2010. The Kansas Experience States like Kansas have also adopted focused strategies, albeit drawing on more limited budgets but leveraging existing capacities and strengths to develop industries deemed to have the highest potential for growth. Richard Bendis, a former president and chief executive officer of the Kansas Technology Enterprise Corporation (KTEC), described efforts in Kansas to develop high-technology clusters. The State Government Role. The state of Kansas established KTEC as a public-private partnership to promote the state’s technology-based economic development. With funding determined yearly by the state legislature, KTEC manages a portfolio of programs, investments, subsidiaries, and affiliates that support the development and commercialization of new technologies developed by Kansas entrepreneurs and technology companies. Mr. Bendis noted that KTEC’s plan recognizes that Kansas is a “flyover state,” which means that Kansas cannot expect to benefit at the outset from top-tier research institutions or the presence of a large venture capital community. To overcome these limitations, Mr. Bendis underscored that “we had to link our strategic plan to local and national opportunities that matched the capacities in the region.” “We developed a Strategic Assessment Framework to see how Kansas ranked against national and global opportunities, based on the capacities it had at the local level.” The assessment found that Kansas had high capacity ratings in four areas: human biosciences, agriculture and agricultural biotechnology, information and communications technology, and aviation. Technology Focus. KTEC decided, in consultation with the state’s four major universities, that biotech and biosciences sectors were the strongest candidates for the development of innovation clusters, followed by information and communications technology sector. Interestingly, while the state has a significant agricultural sector, it was not seen to have the potential for strong future growth. Likewise, based on long-term

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18 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY stronger national economy.”25 Drawing from a paper coauthored with Karen Mills and Elisabeth Reynolds, he suggested three principles to guide federal participation: • Bottom-up. First, federal programs should be flexible, bottom-up, and collaboration-oriented, rather than top-down, prescriptive, and input-focused. • Incentive-based. Second, the government should use a kit of diverse tools to improve market information and incentivize entrepreneurship though the selective use of grants. • Appropriately funded. Third, a federal effort should be funded at a level appropriate to need. Dr. Reamer concluded by saying that the federal effort should build and rely on the capacity of state and regional organizations so they can serve as effective local catalysts. Federal policy should also link, leverage, and align existing federal programs that support regional economic development. Box E Making Cluster Support a Federal Priority “Who’s going to create the good-paying jobs here in America? They’re going to be innovation-driven companies that grow to be our new foundation for competitiveness. We have to think, “Where in the federal government is that initiative going to live?” The answer is that it is going to live in multiple places, so we need to create an umbrella structure that will make that a priority. That initiative is now in formation.” Karen Mills, SBA Administrator Putting $100 Million to Work for Clusters Jonathan Sallet of the Glover Park Group stated in his symposium presentation that clusters are part of national competitiveness strategies in most countries except for the United States. This, however, is changing. In the FY 2010 budget, President Obama has requested $100 million in appropriations to support regional clusters and associated business incubators. 25 See Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” op. cit.

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19 OVERVIEW To use this budget successfully, Mr. Sallet suggested that the federal government deploy its existing mechanisms more effectively. As a first step, he suggested a more explicit involvement of the Economic Development Administration (EDA) with cluster development. Because the EDA is in the Department of Commerce, he observed, it is well positioned to complement other relevant Commerce programs, including the Technology Innovation Program, Manufacturing Extension Partnership, export assistance from the International Trade Administration, and infrastructure funding from National Telecommunications and Information Administration and NOAA. He suggested that a federal program to support clusters should have three key features: competitive grants, a program of information exchange, and coordinated delivery of expert assistance. The grants program, he said, should be competition-based and flexible to maximize efficiency and should be matched by industry contributions. These grants could be used for business incubators, training programs at universities, and technology transfer for small and medium-sized firms. States have little or no money available for such programs now. The federal government can also provide data on cluster formation, performance, and composition from a national information center. Participants within the cluster can benefit by knowing what businesses are located there, or have filed patent applications, which suggests the level of expertise. Also, clusters have much to teach other clusters, which “is a fundamental aspect of what we ought to be trying to achieve here.” Finally, Mr. Sallet noted that the delivery of federal assistance could also be facilitated by a “one stop” delivery mechanism that draws together the expertise from existing Department of Commerce programs related to infrastructure, trade, and technology; programs of the Small Business Administration; the WIRED26 program of the Department of Labor; and other business-generating efforts with a regional focus. IV. PARTNERSHIPS AND THE INNOVATION ECOSYSTEM Public-private partnerships can play an instrumental role in fostering technology clusters. They encourage collaboration among industry, government, universities, and foundations in research and development 26 The Department of Labor’s Workforce Innovation in Regional Economic Development (WIRED), was initiated in 2005. According to its website, it “goes beyond traditional strategies for worker preparation by bringing together state, local and federal entities; academic institutions (including K-12, community colleges and universities); investment groups; foundations; and business and industry to address the challenges associated with building a globally competitive and prepared workforce.” .

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20 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY and provide the positive incentives necessary for entrepreneurship, thus helping to foster a robust innovation ecosystem. In a comprehensive study of federal innovation partnerships, the National Research Council found that appropriately structured partnerships contribute to national missions in health, energy, the environment, and national defense, as well as to the nation’s ability to capitalize on substantial R&D investments. 27 Successful partnerships tend to be industry initiated and led, with public commitments limited in time and defined in scope. At the same time, partnerships are not a panacea; the high-risk, high-payoff nature of innovation research and development assures that not all partnerships will be successful. Participants at the National Academies symposium discussed the role of federal innovation awards and S&T research parks—two important types of partnerships—in the development of innovation clusters and the role universities and foundations play in encouraging the development of clusters. The Role of Innovation Awards—The Technology Innovation Program “Imperfections in capital markets can sometimes pose major challenges to small firms seeking to bring their innovations to market.”28 Programs like the Technology Innovation Program (TIP) of the Department of Commerce provide competitively awarded grants that can help innovative firms secure early-stage funding. Marc Stanley, then the program’s director, described TIP’s three key features. First, it emphasizes societal challenges that are not being addressed and that have potential benefits that extend significantly beyond the proposed project. Second, because of its location at NIST, the program has exceptional scientific and technical ability to review and support high-risk, high-reward research. Third, the program has strong potential to advance research, contribute to the U.S. science and technology base, and help the nation deal with major societal challenges. “What I’m interested in,” he said, “is investing in disruptive technologies.” In particular, Mr. Stanley noted that the TIP program is focused on early-stage basic research and investment in areas of critical national needs. Only small and medium-size companies were eligible to 27 For a review of best practices among federal partnerships, see National Research Council, Government-Industry Partnerships for the Development of New Technologies, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2003. 28 National Research Council, Government-Industry Partnerships for the Development of New Technologies, op. cit., p. 11.

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21 OVERVIEW participate, and the majority of joint ventures are being led by universities.29 He said that the TIP looks for ways to support clusters and other state programs that share this spirit of adventure. TIP could do so, he said, by bringing federal R&D dollars and helping retain or develop high-tech industries located in different parts of the country. This has the effect of bringing and maintaining high-tech jobs to those regions, increasing local revenues. The Role of Research Parks “Research parks are a type of public-private partnership that fosters knowledge flows—often between park firms and universities and among park firms—and contributes to regional economic growth and development. These partnerships enhance both formally and informally, the efficiency of innovation within park firms, universities, and national laboratories.” 30 Speaking at the symposium, William Kittredge of the Economic Development Administration cited a recent example from Fargo, North Dakota. Recognizing that its competitive advantage lay in the high number of students graduating from its engineering school, North Dakota State University (NDSU) drew the University of North Dakota, along with the EDA, state and county governments, entrepreneurs, and people from the community, together to form a successful technology park adjacent to the NDSU campus. “This is not a traditional place, or a Silicon Valley,” Dr. Kittredge said. “It started with existing assets, brought everyone together, and came out of ideas on how a local competitive advantage might be exploited.” Science and technology research parks are seen increasingly as a “proven tool to create successful new companies, sustain them, attract new ones—especially in the high-technology sector—and make existing companies more successful using R&D. Today, countries as diverse as China, Singapore, Mexico, and France are among those undertaking substantial national efforts to develop research parks of significant scale and scientific and innovative potential. In many cases, these research parks are expected to generate benefits that go beyond regional development and job creation. Indeed, to the extent that research parks and the clusters they engender are effective, they have the potential to 29 Large companies may participate as joint venture members that fully fund their participation, as contractors, or as informal collaborators. 30 See National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices, op. cit., pp. 11-12.

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22 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY shift the terms of global competition, not least in leading technological sectors.” 31 The Changing Role of Universities The role of universities has evolved tremendously over the past two decades. In today’s knowledge economy, universities are recognized increasingly not only as centers of learning but also as focal points of regional growth and employment.32 Today’s science-driven industry increasingly draws upon university research for new ideas for improved products and processes, while university researchers frequently draw ideas from commercial trends to explore new veins of scientific inquiry.33 Support of university research by industry is also a common source of funds for equipment and research assistance for university laboratories.34 Such partnering between university and industry contributes to innovation and growth in the United States and is expected to remain an indispensable element for future economic growth.35 This recognition, in turn, is focusing new policy attention to strategies that grow new technology-based companies and growth clusters and the role that universities can play in this regard.36 31 For a review of selected national and local investments around the world to develop research parks, see National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices, op. cit. 32 See Roger L. Geiger and Creso M. Sá, Tapping the Riches of Science: Universities and the Promise of Economic Growth, Cambridge MA: Harvard University Press, 2009. See also Federal Reserve of Chicago, “Can Higher Education Foster Economic Growth?—A Conference Summary,” Chicago Fed Letter March 2007. 33 Rosenberg and Nelson have argued that university research enhances and stimulates R&D in industry, while Pavitt (1998) describes such research as “augmenting the capacity of business to solve complex problems.” See N. Rosenberg, and R. R. Nelson, “American universities and technical advance in industry,” Research Policy 23:323-348, 1994. See also K. Pavitt, “The Social Shaping of the National Science Base,” Research Policy 27:793-805, 1998. 34 Y. S. Lee, “The Sustainability of University-Industry Research Collaboration,” Journal of Technology Transfer 25(2), 2000. 35 Bronwyn Hall, “University-Industry Research Partnerships in the United States,” Kansai Symposium Paper, February 2004. 36 Some analysts point out, however, that not all universities are structured and funded in ways that encourage commercialization. They point to university technology transfer offices (TTOs) that are often faced with conflicting demands of generating revenues while managing the high volume of early-stage innovations resident and available for potential commercialization See Robert E. Litan, Lesa Mitchell and E. J. Reedy, “The University as Innovator: Bumps in

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23 OVERVIEW “It is hard to overstate the importance of a university in a cluster.” Ed Penhoet, STEP Board In their presentations, the presidents of Arizona State University (ASU) and the University of Akron described how their institutions have successfully taken on the challenge of research commercialization and regional development. Describing the experience of Arizona State University, Michael Crow said that his institution is taking steps to grow and adapt with the changing needs of the rapidly growing Phoenix region by becoming a center of knowledge creation, knowledge discovery, and commercialization. This task, he noted, began with a restructuring of the university seven years ago. The university’s goal, he said, was to become a “central node of an integrated knowledge discovery and commercialization network.” To this end, ASU has developed its own approach to innovation, rather than following models developed elsewhere. This approach includes engaging with the aerospace and other extant industries in Phoenix to reinforce existing technology clusters as well as developing new clusters by working with the Army on flexible display technologies and with the EPA on renewable energy technologies. Describing the experience of the University of Akron, Luis Proenza said that his institution has focused on opportunities, beginning with underutilized assets and the greater flexibility of the new economic environment. “We began,” said Dr. Proenza, “with the realization that the university was nearing its 130th birthday. The college opened the first rubber chemistry program in 1909, and, along with the major tire the Road,” Issues in Science and Technology Summer 2007, pp. 57-66. Others note that universities generally do not do not have the financial resources to provide early-stage capital, specialized support services to the inventors, entrepreneurs, and start ups, and a physical infrastructure and organization that allows their research faculty and students to network with corporate partners, investors, service providers and other entrepreneurs to help build and grow cluster capabilities. See Diane Palmintera, “Accelerating Economic Development through University Technology Transfer,” Innovation Associates, February 2005. This makes it harder for university based entrepreneurs to secure outside early-stage capital, even as angels and venture capital funds shift their focus to larger and later stage investments. See Bo Fishback, Christine A. Gulbranson, Robert E. Litan, Lesa Mitchell and Marisa Porzig, “Finding Business “Idols”: A New Model to Accelerate Start- Ups,” Kauffman Foundation Report, 4, 2007.

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24 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY companies located in Akron, developed what is today the “largest polymer program in the world.” Akron also formed its own research foundation in 2001 to build on its historical record of research. “This record is very complex and comprehensive,” he said. “A university’s impact on its region through its own technology and outreach is far broader than we’d recognized.” The university began by looking at local knowledge assets. Many companies were downsizing and could no longer manage their technical libraries. Some of them donated their libraries to the university where they could be managed at much lower cost. They took advantage of available space to work more actively on industry research projects. The Ohio Research Foundation was developed expressly to offer university services to other institutions. More broadly, the university began to transform itself and the region in fundamental ways. It found that 7,000 of its 23,000 students were not living on campus because housing had been neglected for so long. The neighborhood around the campus had little vitality. In response, the university launched an initiative that resulted in a virtual rebuilding of the campus and improvements to a 40-block area around it. “The goal is to make the whole area a nice place to live, learn, work, shop, and play,” said Dr. Proenza. Under President Proenza’s leadership, the University of Akron has also launched partnerships with other industries in northern Ohio. At the request of Proctor & Gamble, headquartered in Cincinnati, the university also started a series of Open Innovation Seminars. Their purpose was to promote outreach and networking among companies—to transform corporate culture from an inward-looking, isolated model to one of open innovation in which firms are receptive to the ideas of partners. Another initiative undertaken by the University of Akron is the Bioinnovation Institute, which grew out of existing local strength in polymers. “The human body, when you take away the water and the calcium, is basically polymeric stuff. So the concept of biomaterials becomes an exceptional opportunity to deepen the relationship between materials science and biomedicine. We asked the three major hospitals in Akron, as well as a regional public medical school, to join in forming this new entity. They agreed, and it was catalyzed by another grant from the Knight Foundation. This initiative is dedicated to making Akron the #1 biomaterials and orthopedic research program in the world.” The Catalytic Role of Foundations Private foundations can play a catalytic role in the development of local innovation clusters. In his presentation, Dr. Bo-Linn of the Gordon and Betty Moore Foundation described three unique roles played by foundations. First, he said, foundations can identify “possible pockets of

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25 OVERVIEW innovation and inflection points. We are not encumbered by an existing bureaucracy. In many cases the founders are businessmen and entrepreneurs who have long personal experience in finding and supporting those pockets of innovation and inflection points.” Second, he said, foundations are able to provide seed money outside the traditional funding process. This differs from the venture capital approach in that foundations can take longer to examine a project, pursue a deeper due diligence examination, and support more capacity building. With its flexibility and stature, a foundation can take risks, act quickly, and catalyze consensus. He noted that the tradition of philanthropy was being enriched by “a whole array of Silicon Valley entrepreneurs who have been enormously successful, and who are putting their money into foundations. The difference is that the living founders play a key role in their foundations. They want to know that something’s happening, that innovation is occurring.” Third, the stability, resources, and freedom from political pressures allow a foundation to stay with a project for the long run. Gordon Moore, he said, believed that success takes about 10 years measure. “He feels that if you want to see change, then you have to commit to it.” Once the Moore Foundation has done its due diligence, which takes about 18 to 24 months, it usually commits several hundred million dollars for 10 to 15 years. Foundations often focus their resources on particular localities and themes. For the Moore Foundation, 58 percent of the foundation’s grants from 2000 to 2009 were awarded to recipients in California ($810 million, in 938 grants) and 42 percent outside California ($981 million, in 677 grants). Similarly, the Heinz Endowments focuses its efforts on a geographical area—Southwestern Pennsylvania, including the city of Pittsburgh. Christina Gabriel described how Heinz and other foundations have joined with community development organizations and the state to integrate the city’s dilapidated Hill District with more prosperous adjacent zones into a new Pittsburgh Central Keystone Innovation Zone. Dr. Gabriel foresaw that this “KIZ” would feature “direct and deliberate bridges” to connect the Hill to the surrounding high-tech clusters. Philanthropic foundations also often reflect a founder’s personal history and interest. Reflecting Betty Moore’s interest in nursing, the Moore foundation provides funds for the Betty Irene Moore Nursing Initiative and the Betty Irene Moore School of Nursing, thereby addressing a major need for the health care system. The primary theme of these investments is workforce development, which is shaped by the foundation’s conviction that more and better nursing education and training are essential to keeping the quality of health care high and the costs low.

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26 GROWING INNOVATION CLUSTERS FOR AMERICAN PROSPERITY Clusters and Institutional Diversity These symposium presentations on public-private partnerships, research parks, universities, and foundations provide examples of how these entities can each contribute to the creation of dense localized networks of trust, reciprocity, and cooperation associated with robust innovation clusters. Federal partnership programs like the Technology Innovation Program provide competitively awarded grants that help innovative firms to secure early-stage funding, while bringing federal R&D dollars to help develop and retain high-technology companies located in different parts of the country. As Marc Stanley noted, this has the effect of creating and sustaining high-value employment in the nation’s regions while increasing local revenues. Research parks facilitate knowledge flows between firms and universities—where firms can draw from university research and students benefit from a local market for their knowledge and skills— while helping regions develop a well-recognized brand name. For their part, many universities are restructuring to become centers of knowledge creation, knowledge discovery, and commercialization. As Michael Crow of ASU and Luis Proenza of the University of Akron pointed out at the symposium, 21st century universities are actively seeking to develop complementarities between their own assets and expertise and the needs of regional companies. Lastly, as George Bo-Linn of the Moore Foundation and Christina Gabriel of the Heinz Endowments noted, private foundations can often leverage the strong personal interest and extensive business experience of their benefactors to provide the leadership, resources, flexibility, and stability needed to address missing gaps and connect firms and universities to neighborhoods. As Professor Feldman noted in her presentation, this institutional diversity—partnerships, research parks, universities, and foundations, together with state, regional, and national governments—helps create the localized networks of trust and collaboration we call innovation clusters. V. IN CLOSING As knowledge-based competition intensifies, countries around the world are making major investments in creating and encouraging the development of new clusters as a means of creating jobs and spurring competitiveness. Until recently, the United States had no similar national effort underway although, as described in this report, a number of states and regions have launched major programs to stimulate cluster development. However, as Jonathan Sallet noted in his presentation, recent federal and state initiatives provide significant resources to develop regional

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27 OVERVIEW centers of innovation, business incubators, and other strategies to encourage entrepreneurship and high-tech development. This has led to renewed interest in understanding the nature of innovation clusters and public policies associated with successful cluster development. This STEP symposium addressed this policy interest. The deliberations, summarized in the next chapter, brought together senior officials from the White House and other federal agencies, representatives of leading state and university programs, congressional staff and other policymakers to explore current knowledge on the role of clusters in promoting economic growth, the state and federal governments’ role in stimulating clusters, and the contributions of universities and foundations to their development.

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