Overview:
The New Federal Role in
Innovation Clusters

Ever since Silicon Valley and Boston’s Route 128 gained global attention as fountains of dynamic new high-technology companies, state and local governments across America have tried to create innovation clusters of their own.1 To this end, several states and universities have invested in science parks, business incubators to nurture start-ups, and an array of real and virtual research collaborations with private industry.2

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1 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. For an insightful review of interface of the entrepreneur in regional growth dynamics, see Sameeksha Desai, Peter Nijkamp, and Roger R. Stough, eds., New Directions in Regional Economic Development: The Role of Entrepreneurship Theory and Methods, Practice and Policy, Northampton, MA: Edward Elgar, 2011.

2 For a review of policy initiatives around the world to develop research parks, see National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices—Summary of a Symposium, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2009. For a review of selected state strategies to develop innovation clusters, see National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, Charles W. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011.



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Overview: The New Federal Role in Innovation Clusters Ever since Silicon Valley and Boston's Route 128 gained global attention as fountains of dynamic new high-technology companies, state and local govern- ments across America have tried to create innovation clusters of their own.1 To this end, several states and universities have invested in science parks, business incubators to nurture start-ups, and an array of real and virtual research collabora- tions with private industry.2 1Robert 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 Cre- ative Class, New York: Basic Books, 2002. For an insightful review of interface of the entrepreneur in regional growth dynamics, see Sameeksha Desai, Peter Nijkamp, and Roger R. Stough, eds., New Directions in Regional Economic Development: The Role of Entrepreneurship Theory and Methods, Practice and Policy, Northampton, MA: Edward Elgar, 2011. 2 For a review of policy initiatives around the world to develop research parks, see National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices--Summary of a Symposium, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2009. For a review of selected state strategies to develop innovation clusters, see National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium , Charles W. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011. 3

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4 CLUSTERING FOR 21ST CENTURY PROSPERITY Box A The Relevance of Innovation Clusters 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.a Prior to the second half of the 20th century, the limitations of communication and transportation technologies meant that industries most always developed in clusters. Consistent with this, U.S. manufacturing industries organically developed in clusters--for example, textiles in New England, cars in Detroit, and steel in Pittsburgh. Indeed, economists have studied industrial concentrations for over a century.b Open global markets, rapid transportation, and high-speed communications of the 21st century should allow any company to "source anything from any place at any time." Nonetheless, economic growth and employment continue to be strongly associated with successful clusters.c Recognizing this, regional and national govern ments have sought to pursue policies that actively create and nurture technology clusters within their borders.d Muro and Katz distinguish the phenomenon of innovation or industry clusters in general from specific Regional Innovation Cluster (RIC) initiatives, which they call "formally organized efforts to promote cluster growth and competitiveness through collaborative activities among cluster participants." Led in many cases by regional or national governments in partnership with universities and industry, these cluster initiatives often "sponsor education and training activities, encourage relationship building, or facilitate market development through joint market assessment and marketing, among many others."e Muro and Katz note that since RIC initiatives are a relatively new phenomenon, they do not yet have a sufficient empirical record, leaving the effectiveness of these cluster building strategies to be established. aNational Research Council, Growing Innovation Clusters for American Prosperity: Sum- mary of a Symposium, Charles W. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011. bSee Alfred Marshall, Principles of Economics, London: Macmillan, 1920. The first edition of Marshall's classic textbook appeared in 1890. Marshall characterized clusters as a "con- centration of specialised industries in particular localities" that he termed industrial districts. cMichael Porter, "Clusters and the New Economics of Competition," Harvard Business Review, November-December 1998. dJoseph Cortright, Making Sense of Clusters: Regional Competitiveness and Economic Development, Washington, DC: The Brookings Institution, 2006. Cortright notes that "the foundation of a regional economy is a group of clusters, not a collection of unrelated firms. Firms cluster together within a region because each firm benefits from being located near other similar or related firms." This means that economic development policy and practice can be effectively oriented toward groups of firms in a specialized region. eSee Mark Muro and Bruce Katz, The New `Cluster Moment': How Regional Innovation Clusters can Foster the Next Economy, Washington, DC: The Brookings Institution Metropoli- tan Policy Program, September 2010.

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OVERVIEW 5 The federal government has traditionally played an important supportive role in the development of innovative clusters around the country. Federally funded research and military procurement have been instrumental in the emergence of clusters that have formed around major research universities.3 And through legislation, such as the Bayh-Dole Act of 1980, Congress has encouraged universities and national laboratories to commercialize federally funded research.4 Unlike many Asian and European nations, however, the United States has traditionally not adopted explicit national policies to promote development of particular industries in specific regions. The federal role is now evolving. In recent years, support has grown in Washington to a more direct federal role in assisting and accelerating innovation clusters around the country. In part, the impetus for change has come from a National Academy of Sciences Report, Rising Above the Gathering Strom, which warned that the United States is in danger of ceding global leadership in technol- ogy and innovation to nations with more ambitious and comprehensive policies to enhance their competitiveness.5 Citing this report, Congress in 2007 passed with bipartisan support the America COMPETES Act, which included authorization-- but not funding--to boost the development of innovation clusters.6 The impetus for change has also come in response to the recent economic downturn--the most severe in decades. Recognizing clusters as important catalysts for creating good paying jobs, growing new small businesses, and forming new globally competi- tive industries, the government has actively sought to develop federal-regional partnerships to foster their development.7 3For an analysis of the military role in the origins of Silicon Valley and the high-tech industry in Boston, see Stuart W. Leslie, The Cold War and American Science: The Military-Industrial-Academic Complex at MIT and Stanford, New York: Columbia University Press, 1993. 4The Bayh Dole Act of 1980 (P.L. 96-517, Patent and Trademark Act Amendments of 1980) permits the transfer of exclusive control over many government-funded inventions to universities and businesses operating with federal contracts for the purpose of further development and commercialization. 5National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, Washington, DC: The National Academies Press, 2007. 6The America COMPETES Act (P.L. 110-69), signed by President George W. Bush on August 9, 2007, directed national laboratories owned by the Department of Energy to establish Discovery Science and Engineering Innovation Institutes to co-develop applications for technology with uni- versities and industry. On January 4, 2011, President Barak Obama signed P.L. 111-358, the America COMPETES Reauthorization Act of 2010. Section 603 of this act authorizes $100 million annually for the Commerce Department to implement a "Regional Innovation Program." 7National Economic Council, Council of Economic Advisers, and the Office of Science and Technology Policy, A Strategy for American Innovation: Securing Our Economic Growth and Prosperity, Washington, DC: Executive Office of the President, February 2011. Access at . Consistent with this strategy, recent interagency clusters efforts, led by the Economic Development Administration, include the Jobs & Innovation Accelerator Challenge (implementing COMPETES Sec. 603) (); the i6 Challenge () and the i6 Green Challenge ().

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6 CLUSTERING FOR 21ST CENTURY PROSPERITY "Regional innovation clusters have a proven track record of getting good ideas more quickly into the marketplace. The burning question becomes, `How do we create more of them?'" Keynote Address by Commerce Secretary Gary Locke, National Academies Symposium on "Clustering for 21st Century Prosperity," February 25, 2010 To better understand ways in which the public sector can most effectively advance innovation clusters, the National Academies' Board on Science, Technol- ogy, and Economic Policy (STEP) partnered with the Association of University Research Parks (AURP) to convene a symposium on `Clustering for 21st Century Prosperity.' This symposium brought together senior Administration officials and economic development professionals, academics, and venture capital investors from the United States and around the world. This report summarizes the proceedings of this symposium, and this over- view highlights the key issues presented and discussed at this forum. It 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. A. NEW INITIATIVES FOR GROWING CLUSTERS Federal support of regional clusters has grown in recent years. The 2009 budget allocated $50 million in new funds, administered by the Commerce Department's Economic Development Agency (EDA), to assist regional cluster initiatives.8 Also relevant is the American Recovery and Reinvestment Act of 2009, which directed the Department of Energy (DoE) to distribute $2 billion to manufacturers and component makers of lithium-ion batteries--many of them based in the Detroit area--to be used in next-generation electric vehicles. 9 And 8The fiscal 2009 budget provided $50 million in regional planning and matching grants within the Economic Development Administration to "support the creation of regional innovation clusters that leverage regions' existing competitive strengths to boost job creation and economic growth." See National Economic Council and Office of Science and Technology Policy, "A Strategy for American Innovation: Driving Towards Sustainable Growth and Quality Jobs," Executive Office of the President, September 2009. 9See symposium presentation by David Parks of the Michigan Economic Development Corporation Further, the STEP Board convened a symposium on "Building the Battery Industry for Electric Vehicles," in July 2010 to examine the key challenges and opportunities for the Department of Energy,

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OVERVIEW 7 the Small Business Administration, working with state agencies and the Depart- ment of Defense, has helped launch robotics clusters in Michigan, Virginia, and Hawaii.10 In addition, the Department of Energy's Energy Regional Innovation Cluster initiative, or E-RIC, is devoted to developing technologies, designs, and systems for energy-efficient buildings.11 E-RIC attempts to align the resources of several federal agencies around regional initiatives and to collaborate more closely with state and local governments, universities, and industry.12 State and Regional Support for Cluster Initiatives Many state and regional governments have taken a pragmatic approach to fostering innovation clusters, targeting industries such as semiconductors, bat- teries, flexible electronics, and robotics. New York, Ohio, Michigan, and New Mexico are among states that have invested alongside corporations and universi- ties in R&D centers, awarded cash grants to companies building manufacturing plants, and amassed sizeable funds to provide early-stage capital to start-ups. 13 Symposium participants cited numerous other examples of innovation clusters that are sprouting in regions of the United States with varying degrees of state and local government intervention as well as industry participation. These initiatives are found in places like Kansas, the Pacific Northwest, and West Virginia. "All of this is occurring on an ad hoc basis without a formal U.S. policy," noted Ginger Lew, then of the White House National Economic Council, in her symposium remarks.14 Congress, Michigan and other states, and other federal agencies in developing a U.S. advanced battery industry. 10See symposium presentation by Small Business Administration Administrator Karen Mills in the proceedings section of this volume. 11For a critique of the Obama Administration's Regional Innovation Cluster policy, see Junbo Yu and Randall Jackson, "Regional Innovation Clusters: A Critical Review," Growth and Change, 42(2), June 2011. 12The Department of Energy plans to pool resources with six other agencies in the $129.7 million project. Agencies participating in E-RIC are the Department of Energy, the National Institute of Standards and Technology, the Economic Development Administration, the Small Business Adminis- tration, the National Science Foundation, the Department of Education, and the Department of Labor. See . 13See presentations by Doug Parks (Michigan) and Rebecca Bagley (Ohio) in the proceedings section of this volume. For presentations on strategies deployed by New York, Pennsylvania, and South Carolina, see National Research Council, Growing Clusters for American Prosperity, op. cit. Also see Pete Engardio, "State Capitalism," BusinessWeek, February 6, 2009. 14See presentation by Ginger Lew, formerly of the White House National Economic Council, in the proceedings section of this volume.

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8 CLUSTERING FOR 21ST CENTURY PROSPERITY B. AN ENHANCED FEDERAL ROLE? Concerns over America's global competitiveness and high unemployment are prompting federal policymakers to take a harder look at whether Washington can do more to bolster these regional initiatives. Improving U.S. Competitiveness One reason is the realization that other nations are catching up with and even surpassing the United States in key benchmarks of competitiveness in science and technology. In his symposium presentation, Marc Stanley of the National Institute of Standards and Technology (NIST) described a number of "disturbing signs" of eroding American leadership. He pointed out that after years in which spending on R&D has remained flat, at around 2.5 percent of gross domestic product, the United States now ranks behind nations such as Israel, Sweden, Finland, Japan, and South Korea in R&D intensity.15 His remarks echoed the warnings that were raised in the National Academies' 2007 report Rising Above the Gathering Storm of an "abrupt" loss of U.S. global leadership in science, technology, and innova- tion and its impact on the future prosperity of the United States. 16 Perhaps more importantly, other nations appear to be mastering the so-called soft infrastructure associated with successful innovation zones in the United States. In fact, Dr. Good asserted that many countries around the world "are replicating our successes better than we are." China, Singapore, Hong Kong, Taiwan, and France are among those building modern science parks that promote synergies among businesses, governments, and university research programs in their regions.17 The growing movement among governments around the world to move away from outright subsidies to companies and poor regions and instead invest in public goods that enable industry and universities to cooperate and enable com- munities to compete represents "a new paradigm in regional policy," said Mario Pezzini of the Organisation for Economic Co-operation and Development. 18 15See OECD Science, Technology and Industry Scoreboard 2011 at < http://www.oecd.org/document/ 10/0,3746,en_2649_33703_39493962_1_1_1_1,00.html>. 16See National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, op. cit., p. 3. 17See presentations by Alberto Duque (Portugal), Francelino Grando (Brazil), and Nicholas Brooke (Hong Kong) in the proceedings section of this volume. For a review of the growth of science parks in China, Singapore, India, Mexico, and Hungary, see National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices--Summary of a Symposium , op. cit. 18See presentation by Mario Pezzini of the Organisation for Economic Co-operation and Development in the proceedings section of this volume. See also Organisation for Economic Co-operation and Development, National Innovation Systems, Paris: Organisation for Economic Co- operation and Development, 1997, . Influential earlier works on global policies to promote innovation include Charles Freeman, Theory of Innovation and Interactive Learning, London: Pinter, 1987; Bengt-ke Lundvall, ed., National

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OVERVIEW 9 Strengthening the Structure of the U.S. Economy The economic crisis that began in 2007 has added further impetus for the development of innovation clusters. As noted below, several senior Administra- tion officials stated at the symposium that the collapse of financial markets and soaring unemployment in services and manufacturing has led to a focus not only on creating jobs and stimulating growth now, but also on resolving broader struc- tural weaknesses in the U.S. economy. Kristina Johnson, then Under Secretary of Energy, said that the enormity of the nation's economic needs, which include energy security, building 21st century infrastructure, and creating new growth industries, require that government must find new ways to accelerate the commercialization of technologies, mobilize funds, and attain large scale. "It's going to take trillions of dollars in investment, and it can't be something the federal government does on its own. It has to be a collaborative, cooperative partnership," Dr. Johnson said. "We don't get there by technology alone and by policy alone."19 Assistant Secretary of Commerce for Economic Development John Fernandez observed that the deep recession "in many ways may have been . . . a bit of a wakeup call across the board, not only for the federal government but also for the private sector and in public agencies across the country."20 Improving Credit Markets Some symposium participants noted that the collapse in the market for credit has made it difficult for manufacturers to build or expand capacity in order to bring new products to market. Venture and angel funding, which already had been concentrated in a few regions such as Silicon Valley, the Boston area, and metropolitan New York, dried up further in much of the rest of the country. 21 In his remarks, Michael Borrus noted that traditional venture capitalists have grown more averse to supporting early-stage start-ups.22 As a result, innovative small businesses are finding it more difficult to raise the capital they need to bring promising new technologies to market. In this credit-scarce environment, he noted, small companies are finding it difficult to survive the so-called Valley Innovation Systems: Towards a Theory of Innovation and Interactive Learning, London: Pinter, 1992; and Michael Porter, The Competitive Advantage of Nations, New York: The Free Press, 1990. 19See the summary of the presentation by Under Secretary Kristina Johnson in the Proceedings section of this volume. 20See the summary of the presentation by Assistant Secretary of Commerce for Economic Develop- ment John Fernandez in the Proceedings section of this volume. 21PriceWaterhouseCoopers and the National Venture Capital Association provide a region-by-region breakdown of venture capital investment on a quarterly basis. See . 22See the summary of the presentation by Michael Borrus of X/Seed Capital in the Proceedings section of this volume.

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10 CLUSTERING FOR 21ST CENTURY PROSPERITY of Death, the 5 to 12 years it typically takes to turn an invention in the laboratory into a commercial product. C. THE FEDERAL STRATEGY Until recently, the United States has had no coordinated national effort under way to build new research parks or develop new innovation clusters. 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.23 In many cases, however, state and local efforts lack critical mass in terms of funding and facilities and, in some cases, the sustained policy support needed for success. To address this apparent gap and to adjust to the changing international competitive environment, a number of policy institutes and nongovernment or- ganizations have in recent years released studies urging the federal government to make regional innovation clusters a core element in economic development.24 Andrew Reamer of the Brookings Institution and Jonathan Sallet of the Center for American Progress are among those who have urged federal agencies to make more effective and efficient use of resources they already deploy. 25 While federal agencies, including the Small Business Administration (SBA), the Energy Department, the Department of Labor (DoL), NIST, the Department of Defense, and the National Institutes of Health have numerous programs intended 23A number of states have promoted clusters development, taking advantage of universities to do so, since the 1980s. An example of an early document guiding state clusters development policies is "Choosing to Compete: A Statewide Strategy for Job Creation and Economic Growth," published by the Commonwealth of Massachusetts in 1993. This report was prepared for Massachusetts Governor Weld in 1993 by a council led by Michael Porter. Reflecting support by both Democratic and Republican governors, the National Governors Association has been active in promoting and assessing state efforts over the past decade to develop innovation clusters. See Council on Competitiveness and the National Governor's Association, Cluster-Based Strategies for Growing State Economies, Washington, DC: Council on Competitiveness, 2007. For a review of selected state initiatives, see National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit. Clusters have not been system- atically identified and mapped across all U.S. regions. To address this, the Economic Development Administration is supporting a Cluster Mapping Project, led by Michael Porter of the Harvard Busi- ness School. 24See for example, Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies, Washington, DC: The Brookings Institution Metropolitan Policy Program, April 2008. See also Ed Paisley and Jonathan Sallet, The Geography of Innovation: The Federal Government and the Growth of Regional Innova- tion Clusters, Washington, DC: Center for American Progress, 2009. 25Andrew Reamer, "Stimulating Regional Economies," in National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op cit. See also Jonathan Sallet, "The Geography of Innovation: The Federal Government and the Growth of Regional Innova- tion Clusters" in National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op cit.

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OVERVIEW 11 to contribute to regional economic development, Reamer and Sallet argued in their presentations that these programs are often not coordinated with those of local devel opment agencies, educational institutions, or nongovernment organizations that are pursuing similar aims.26 To better leverage these federal investments, a 2009 Brookings Institution report called on the federal agencies to "link, leverage, and align" their resources with regional innovation cluster initiatives.27 According to Ginger Lew, the Brookings study not only drew attention to efforts by regional governments to grow innovation clusters, but also encouraged the Obama Administration "to link, leverage, and align federal, state, and regional resources" to accelerate development of innovation clusters. Federal Collaboration with E-RIC Ms. Lew suggested that the new Energy Regional Innovation Cluster effort, led by the DoE, therefore represents an important initial effort to coordinate these policy tools. In her presentation, she presented a diagram depicting how federal agencies are working together on the E-RIC. (See Figure 1.) The lead agency in the middle, labeled "Agency X," in this case is DoE. Six other agencies (SBA, NIST, EDA, DoL, National Science Foundation [NSF], and Department of Education [ED]) pool resources to play a supporting role. The federal agencies, meanwhile, fund and convene an array of "regional part- ners" also working to advance the cluster, such as colleges, workforce training programs, private companies, nongovernment organizations, and local and state development agencies. For example, she said, the Labor Department can team with community col- leges to make sure a region has enough engineers and skilled workers to meet project demand for a cluster; NIST can work with university-industry research centers to accelerate development of core technologies; the SBA can provide seed capital for start-ups; and the U.S. Department of Agriculture (USDA) supports a variety of rural cluster activities. Getting so many federal bureaucracies to think and work together is a big challenge, Ms. Lew admitted. Practical efforts required for greater coordination are daunting and can often drain managerial energy at the federal, state, and local levels. Nonetheless, she said that she hoped to learn from the experience of the E-RICs in order to fine tune the collaboration model that can eventually be used as a template to accelerate other clusters.28 26Ibid. 27Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies, op. cit. 28 The Taskforce for the Advancement of Regional Innovation Clusters (TARIC), under the auspices of the National Economic Council, is overseeing the development and implementation of interagency clusters efforts described in the symposium and those that occurred afterwards. The TARIC was chaired by Ginger Lew before her retirement in June 2011.

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12 CLUSTERING FOR 21ST CENTURY PROSPERITY FIGURE 1 RIC operations. SOURCE: Ginger Lew,INTRO_Figure01and Proc-01.eps Presentation at February 25, 2010, National Academies Sympo- sium on "Clustering for 21st Century Prosperity." bitmap DoE Energy Hubs In her symposium presentation, DoE Under Secretary Kristina Johnson ob- served that given its broad mission of meeting the nation's energy needs, reducing carbon emissions, and now spurring economic development, the DoE must learn to leverage the efforts of other agencies and regional partners. Describing DoE's fiscal year 2011 budget of $28.4 billion, she noted that $10.4 billion will go for energy and environmental programs, with sharp fund- ing increases for solar, wind, geothermal, and nuclear energy. The DoE is also dispersing $3.4 billion under the American Recovery and Reinvestment Act (ARRA) for projects in carbon-capture sequestration, $4.5 billion for smart grid technologies, $12 billion for energy efficiency, and $2.4 billion for production of electric-vehicle batteries and components. To accelerate basic scientific breakthroughs, the DoE is supporting 46 "engi- neering frontier research centers" with $140 million allocated under the Recovery Act. In its Fiscal Year 2011 budget request, the department seeks funding to make these centers permanent.

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OVERVIEW 13 Build a competitive, low-carbon economy to secure America's energy future through R&D, Demonstration and Deployment (FY2011): Solar energy: 22% increase Nuclear Energy Wind energy: 53% increase $0.9B Geothermal energy: 25% increase Nuclear Energy: Loan Guarantees Energy tripled to $54bn Efficiency and Fossil Energy Renewable $0.8B Energy ARRA Funding: $2.4B Carbon Capture & Storage: $3.4bn Smart Grid: $4.5bn Energy Efficiency: $12.5bn (includes Grid $5bn for weatherization) $0.2B EV Batteries/Components: $2.4bn FIGURE 2 President's budget invests in clean energy. INTRO_Figure02_Johnson.eps SOURCE: Kristina M. Johnson, Presentation at February 25, 2010, National Academies Symposium on "Clustering for 21st Century Prosperity." To speed up the commercialization of clean-energy technologies, the DoE also established the Advanced Research Projects Agency for energy, known as ARPA-E, funded with $400 million from the Recovery Act. The program strives to achieve "game-changing" technology advances that could result in large-scale, commercially viable production of fuels from cellulose, sugar, and algae, for example, Dr. Johnson said. One major DoE initiative is to establish "energy-innovation hubs," or re- gional innovation clusters in solar power, energy-efficient buildings, nuclear energy, and batteries for storing energy. The first hub will focus on energy ef- ficiency, because buildings account for 40 percent of U.S. energy consumption, 70 percent of electricity, and 55 percent of natural gas. The field also involves big industries from appliances and software to construction, which accounts for 9.5 percent of U.S. Gross Domestic Product (GDP) and employs nearly 10 mil- lion. Such agencies as the Labor Department, SBA, NIST, and NSF also have building-efficiency programs.29 29On August 4, 2010, the Department of Energy announced the selection for a grant of the Greater Philadelphia Innovation Cluster (GPIC), led by Pennsylvania State University, to run the Energy-

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26 CLUSTERING FOR 21ST CENTURY PROSPERITY Sandia As a Regional Growth Catalyst Sandia National Laboratories in Albuquerque, New Mexico, was among the first national laboratories to expand its mission beyond national security and assume "a significant leadership role" in commercializing government-sponsored research, Sandia Chief Technology Officer J. Stephen Rottler explained in his presentation. The focal point of this effort is Sandia's 12-year-old science park.46 The park now is home to 30 high-tech companies employing 2,000 people in industries as diverse as solar energy and software to nano-materials and semiconductor manu- facturing equipment. The jobs in Sandia Park pay twice as much as the average for Albuquerque. The park's biggest success is solar-equipment manufacturer Emcore, which moved its headquarters to Albuquerque after buying a Sandia spin off. The park is still expanding and hopes to account for 6,000 jobs in a decade. Spin-offs, prompted by the Sandia's Separation to Transfer Technology pro- gram, have been an important element in Sandia's success, Dr. Rottler explained. The program allows scientists who work at Sandia National Laboratory to take leaves of absence for up to two years to join or help start up companies. If a busi- ness venture doesn't work out, the scientists can return to their jobs. Since 1994, 138 Sandia scientists and engineers have left the laboratory in New Mexico and its California affiliate, Lawrence Livermore National Laboratory, to enter busi- ness. At least 91 companies have been started or expanded as a result. Box C Conflict of Interest and Technology Transfer from Federal Laboratories The success of Sandia Science and Technology Park notwithstanding, efforts to transfer technology from national laboratories have often stalled over concerns about conflict of interest and bureaucratic red tape. In his presentation Jonathan Epstein, an aide to Sen. Jeff Bingaman (D-NM), said that conflict of interest is a genuine issue when a federal employee "is working under the taxpayer's dollar and [is] making decisions on how taxpayer dollars are spent." The potential for conflict of interest is reduced when a federal laboratory has an explicit mission to work with the private sector, noted Ken Zweibel of the George Washington University Solar Institute at the symposium. Citing the case of the National Renewable Energy Laboratory (NREL) in Boulder, Colorado, whose mis- sion is to support research by private industry, Mr. Zweibel noted that NREL sci- entists and laboratory facilities have helped launch most of America's successful solar-power companies. 46National Research Council, Industry-Laboratory Partnerships: A Review of the Sandia Science and Technology Park Initiative, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. The review provided an early validation of the park's concept, rationale and current plans, as well as identified potential operational and policy issues that helped to guide the growth of Sandia S&T Park.

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OVERVIEW 27 Sandia is leveraging its core strengths in high-performance computing and simulation, nanotechnologies, micro systems, and "extreme environments" in projects aimed at developing the New Mexico economy. It is a partner in a state supercomputing project and in a small-business assistance program that is cred- ited with creating and retaining 1,020 jobs. In California, meanwhile, Sandia is converting a portion of its Lawrence campus into i-Gate, a public-private partner- ship that will serve as an innovation hub for green-transportation technologies. Kennedy Space Center's Exploration Park NASA is developing Exploration Park, situated adjacent to NASA's Space Life Sciences Laboratory (SLSL) at Kennedy Space Center as an innovation cluster. According to Robert Cabana, director of NASA's Kennedy Space Center, Explora tion Park has the potential to draw on the significant specialized talent found at the Kennedy Space Center to commercialize research out of the Center as well as to maintain and attract the knowledge base that is essential to advance NASA space missions. He noted that the Center's 25 fully equipped labora- tories are helping a broad range of new companies that are tapping the space center's R&D. Dr. Cabana noted that most Kennedy Space Center commercial R&D projects are funded through NASA's Innovation Partners Program and are collaborations with companies, universities, and other national labs. Partnerships with Carnegie Mellon University, a space exploration center in Hawaii, Caterpillar, ASRC Aero- space, and the Colorado School of Mines, for example, are developing technolo- gies and equipment to mine and develop natural resources on the moon. Other R&D partnerships are developing technologies that will enable plants to grow in space, wires made of polymers that detect and repair flaws by themselves, sensors that monitor the human body for radiation damage to DNA, and solar arrays that cleanse themselves of dust. These technologies can have significant commercial applications as well. Exploration Park will have 5,000 researchers, technicians, and support staff. The campus will border both Kennedy Space Center's secured campus and the University of Central Florida, which has a major engineering school. The Center's commercial R&D efforts could get a boost from President Obama's proposed 2011 budget, Mr. Cabana said,47 which calls for a $6 billion increase over five years. G. UNIVERSITY-BASED CLUSTERS Ever since Stanford University created a business park next to its campus in 1953, American universities have been regarded as global pioneers in leveraging 47Details of the NASA budget can be found at "Fiscal Year 2011 Budget Forecast," National Aeronautics and Space Administration, .

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28 CLUSTERING FOR 21ST CENTURY PROSPERITY science and technology research as a catalyst for new industry.48 University-linked re- search parks such as Research Triangle Research Park in North Carolina, C ummings Research Park in Alabama, Purdue Research Park in Indiana, and others quickly followed. The trend spread globally to nations such as England, Taiwan, France, Canada, and Singapore.49 By 2007, according to a study by the Battelle Technology Partnership Practice and the Association of University Research Parks, companies housed in 134 research parks in the United States and Canada employed more than 300,000 workers and created another 350,000 jobs outside their borders.50 As several participants at the symposium noted, the role of university re- search parks also has evolved. Most early parks were regarded as real estate developments for corporate research labs. In subsequent decades, they became strategically planned campuses designed to foster collaboration, innovation, and commercialization of technology.51 They also integrated a variety of industries, research partners, and small-business services. These changes come as many state governors are calling on universities to assume even bigger roles as engines of innovation and regional economic development. "That is going to take a little getting used to on the part of our university people," Dr. Good observed. "But I don't think we will be able to get out from under that necessity." 52 America's Fading Advantage According to Brian Darmody, president of the Association of University Re- search Parks (AURP), there is growing concern that the United States is ceding its 48AnnaLee Sexanian has argued that Stanford's heavy involvement in fostering local technology companies was a major reason Silicon Valley surpassed the Boston area in high-tech electronics, where the Massachusetts Institute of Technology had a hands-off attitude toward start-ups. See AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 , Cambridge: Harvard University Press, 1994. 49 National Research Council, Understanding Research Science and Technology Parks: Global Best Practices--Summary of a Symposium, op. cit. 50 Battelle Technology Partnership Practice and the Association of University Research Parks, October 2007, . 51 Ibid. 52 Nevertheless, university technology-transfer programs still come under considerable criticism for generating too little licensing revenue and launching too few new enterprises. A report by the Marion Ewing Kauffman Foundation, for example, finds that university bureaucracies often slow the transfer of technology to private industry. These challenges come on top of other obstacles facing university researchers, including the difficulty of securing research grants for applied research and tenure and promotion policies that favor publication of scientific papers, rather than work on applied technologies or commercialization. To improve university technology transfer, the Kauffman report recommends major reforms, such as allowing university researchers to sell intellectual property directly to industry. See Robert E. Litan, Lesa Mitchell, and E. J. Reedy, Commercializing University Innovations: Alternative Approaches, Boston: National Bureau of Economic Research, Working paper JEL No. O18, M13,033, 034, 038. Last accessed on October 8, 2010 at .

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OVERVIEW 29 leadership in research parks to China, which now has the world's largest research parks. Further, he noted that nations such as the United Kingdom now claim to have developed more efficient systems for transferring technology from universities. Citing a new AURP report, he offered a set of suggestions for improving technology commercialization in the United States.53 These include a call for the Office of Management and Budget to change accounting rules to make it easier for principal investigators to commercialize federally funded research. He also recommended that the federal government expand the corporate R&D tax credit, increase funding for researchers to develop prototypes, ease U.S. export-control rules, and include entrepreneurship. "We need to embed entrepreneurship in all of our projects and policies," Dr. Darmody said. Challenges in University Commercialization A recent study by the Association of University Technology Managers (AUTM) reveals a mixed record of university technology-transfer programs.54 In his presentation, AUTM President-elect Ashley Stevens analyzed survey data col- lected from member institutions since 1991. He noted that AUTM data reveal dra- matic increases over the past two decades in the number of university inventions, licensing revenue, and expenditure on full-time technology-transfer specialists and patent application. The number of start-ups launched by AUTM members also has climbed steadily, from 200 in 1994 to nearly 600 in 2008. Dr. Stevens noted that when one looks at the productivity of university technology-transfer programs, however, the picture is unimpressive. Successful patent applications and the number of licenses have remained flat for the past decade. Only 59 percent of 19,554 invention disclosures by universities in 2009 resulted in U.S. patent applications, meaning that the rest never made it out of the lab, Dr. Stevens observed. Just 26 percent led to signed licenses, and only 16 percent resulted in U.S. patents issued. Just 3 percent of those inventions led to the formation of start-up companies. This weak performance is remarkably consistent across U.S. institutions, even well-endowed research universities such as Stanford and MIT, Dr. Stevens reported. 53Brian Darmody, "The Power of Place 2.0: The Power of innovation--10 Steps for Creating Jobs, Improving Technology Commercialization and Building Communities of Innovation," Association of University Research Parks, March 5, 2010, . 54See Paul M. Swamidass and Venubabu Vulasa, "Why University Inventions Rarely Produce Income? Bottlenecks in University Technology Transfer," The Journal of Technology Transfer, 34(4), 2009. This analysis of the Association of University Technology Managers periodic Licensing Activity Surveys of 1995-2004 indicates that "the annual income generated by licensing university inventions was 1.7 percent of total research expenditure in 1995 and 2.9 percent in 2004. Some consider this and the rate of commercialization of university inventions to be too low." The authors point out that some analysts believe that this "slow rate of commercialization of university inventions may be due to the lack of adequate trained staff and inventions processing capacity in University Offices of Technology Transfer (UOTT)."

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30 CLUSTERING FOR 21ST CENTURY PROSPERITY Invention Disclosures 19,554 (Percent) New U.S. Patent Applications filed 11,626 59 Licenses Signed 5,002 26 U.S. Patents Issued 3,156 16 Start-Ups formed 584 3 Active Licenses 30,920 FIGURE 5 2008 Licensing activity survey. SOURCE: Ashley J. Stevens, Presentation at February 25, 2010, National Academies Symposium on "Clustering for 21st Century Prosperity." Intro now Figure 05 (Percent) Academic invenons are embryonic Average success rate 25.6 Median success rate All instuons 21.7 More than $200 million research 22.9 Over 100 disclosures 19.7 MIT 18.8 Stanford 24.3 WARF 19.7 FIGURE 6 Why is this so hard? SOURCE: Ashley J. Stevens, Presentation at February 25, 2010, National Academies Symposium on "Clustering for Intro Figure 21st Century 06 Prosperity."

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OVERVIEW 31 Even more troubling, Dr. Stevens said, are data showing that 52 percent of the 130 technology-transfer programs studied lose money for their universities. Only 16.2 percent reported that their programs are financially self-sustaining, meaning they do not depend on the university operating budget to remain in operation. A big reason for their struggling finances, Dr. Stevens suggested, is that uni- versities are rarely able to reap big returns by selling stakes in successful public companies. Universities also lack sufficient staff and funds to shepherd fledgling companies through the Valley of Death until they have marketable products. One way Washington can help, he said, is by funding post-doctoral fellowships last- ing several years for Ph.D. students who want to commercialize their research. Improving the Johns Hopkins Model Cultural attitudes at major universities have been another obstacle to com- mercialization, noted Johns Hopkins University technology-transfer director Aris Melissaratos in his presentation. While Johns Hopkins is among the biggest re- cipients of federal research dollars, 93 percent of that coming in health sciences, it has lagged in technology transfer. "In fact, it was an anathema among our faculty," said Mr. Melissaratos, a former Westinghouse Electric executive. "At Hopkins, you were not even thought of being capable for tenure if you had even thought about starting a company." To change that culture, the university set up programs to link scientists with entrepreneurs. A new business school, an idea Johns Hopkins trustees had rejected in the past, will offer entrepreneurial training for researchers. And a new building on campus that serves as a research park is nearly filled with start-up companies and is facilitating R&D collaborations between the university and private firms. "We want every professor, every researcher, every department head, and the deans of every school to be interested in and applaud the current change in attitude," Mr. Melissaratos said. As a result, Johns Hopkins has spun off 22 new companies in the past two years that have attracted $89.5 million in venture investment. That compares to an average of four per year for the previous decade. Licensing revenue is rising steadily. So is investment in new R&D facilities. The National Cancer Institute recently announced it will build a headquarters at Johns Hopkins' campus in Montgomery County, Maryland. Ultimately, Mr. Melissaratos contended, invest- ment in university research remains the most powerful catalyst for creating new businesses and industries and achieving economic growth. West Virginia's Mix of Models West Virginia University (WVU) is developing three complementary ap- proaches to growing innovation clusters, President James Clements explained in his presentation. The first is the traditional "linear" model where research faculty

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32 CLUSTERING FOR 21ST CENTURY PROSPERITY help convert research ideas into local businesses that then spawn other businesses. A second is to build a cluster around the needs of locally based U.S. laboratories and agencies. A third is to leverage location, building industries in which regional assets such as natural resources or proximity to R&D institutions offer an edge. A good local example of the linear model at work, he said, is Protea Bio sciences, a developer of technologies to discover new proteins in human blood and tissue samples. The fast-growing company began as a research project at WVU, moved to a campus incubator, and then opened its own facility in Morgantown, West Virginia, where it continues to collaborate with university researchers on new products. Protea, in turn, is stimulating the development of other new companies. According to Dr. Clements, West Virginia's energy innovation cluster lever- ages the state's traditional endowments of coal, gas, and timber. Morgantown also is home to the National Energy Technology Laboratory. The state recently organized the Advanced Energy Initiative, which is building public-private R&D research partnerships in areas such as liquefied coal for transportation fuel, envi- ronmentally safe access to natural gas reserves, bio-fuels, and carbon sequestra- tion. WVU is part of an alliance that includes nearby Carnegie Mellon and the University of Pittsburgh and that recently won a $435 million research contract. Morgantown's rapidly growing biometrics cluster, by contrast, is an example of how WVU is tapping local research expertise to target a promising technology niche. West Virginia has a history of more than 40 years in technologies used to identify individuals through distinguishing biological traits,55 Dr. Clements noted, and WVU has had a research partnership with the Federal Bureau of Investigation for more than a decade. Interest by law enforcement surged after the 2001 terror- ist attacks. WVU established one of the nation's first degree-granting programs in biometrics. Morgantown then became home to CITeR,56 a National Science Foundation center that serves as a hub for identification technology research con- ducted around the country. Booz Allen Hamilton, Northrup Grumman, Lockheed Martin, and other affiliates have Morgantown operations, and corporate invest- ment is surging, Dr. Clements said. H. SUSTAINING FEDERAL-STATE SYNERGIES U.S. regional economies face mounting global competitive challenges. No longer do U.S. states and cities compete only among themselves for talent, 55For a concise history of the development of West Virginia's biometrics cluster, see Kim Harbour, "WV Biometrics: Fertile Ground for Innovation," on the West Virginia Department of Commerce Web site, . 56CITeR stands for the Center for Identification Technology Research. It is an Industry/University Cooperative Research Center (I/UCRC) funded by the National Science Foundation. The center was founded by West Virginia University and is the I/UCRC's lead site for biometrics research and related identification technologies.

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OVERVIEW 33 investment, and entrepreneurs in technology-intensive industries. As seen in the case of Brazil and Hong Kong (reviewed in this report), they also compete against committed national and regional governments that are executing comprehensive strategies that seek to create regional innovation clusters in many of the same high-potential, emerging industries being pursued in the United States. Indeed, governments around the world are backing up these strategies with heavy invest- ment in state enterprises, new and renewed universities, public-private research collaborations, workforce training, early-stage capital funds, and modern science parks, all reinforced by strong policy attention from top leaders. As described by various participants, this new competitive landscape is prompting federal, state, and regional authorities in the United States to take cre- ative and comprehensive approaches to developing innovation clusters. Federally funded research programs at universities and national laboratories are in some cases being oriented toward the activities of local industrial clusters. Backed by strong White House leadership, government agencies such as the departments of Energy and Commerce are aligning a wide range of programs to accelerate the development of strategic technologies within regional clusters. In many instances, federal agencies are sharing best practices with regional agencies and are facilitat- ing networking among researchers, investors, and support organizations across the United States. There is much greater awareness of the potential benefits of clusters and a concerted effort to create synergies across multiple federal and state programs. Sustaining Funding for Clusters The federal and state initiatives described in this symposium, while prom- ising, face a number of challenges. Perhaps foremost is a sharp decline in the availability of federal funds for these types of initiatives. Current budget limita- tions already run the risk of providing resources that are inadequate to meet the often expansive objectives of the federal and state agencies. Addressing the issue of whether such funding can be sustained over a period of time, Mr. Darmody pointed out that many regional innovation cluster initiatives are premised on the assumption of continual flows of federal R&D dollars. With the prospect of loom- ing federal budget deficits, he asked what the implications for the program would be should federal R&D investments substantially decline. State governments also are under financial duress. Mr. Parks of the Michigan Economic Development Corporation noted that his state is facing a budget deficit exceeding $1 billion. In Arizona, which also faces a budget crisis, the legislature has slashed millions of dollars from public-private research programs. 57 57Arizona Daily Star, "Budget Cuts Hit Science Research Partnerships at Arizona Universities," February 8, 2009.

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34 CLUSTERING FOR 21ST CENTURY PROSPERITY Measuring the Cluster Payoff Several symposium participants noted that a key strategy for sustaining support is to provide data showing such investments benefit taxpayers, private investors, and universities. "Once a state and a region see the payback to the economy, there is positive reinforcement and things start to move forward," said Kristina Johnson. However, producing compelling data proving direct links between public spending on science parks, industrial investment incentives, and research consor- tia and positive economic outcomes, remains a challenge.58 In part, this is because Regional Innovation Cluster initiatives are relatively new and do not yet have a record that can be empirically validated. Another problem is that "a wide swath of America" does not see how in- novation clusters will improve their lives, Mr. Fernandez observed. "We need to work on our metrics in a way that gets down and makes this stuff relevant, so that it's not just about Ph.D.s." Mr. Fernandez said the EDA is looking for partners to develop "relevant, real-world metrics." Otherwise, political support could dis- appear with a change in Administration and changing economic circumstances. Some state development agencies are working on developing methods to better demonstrate the economic payoff of investments in innovation clusters. NorTech, for example, is building a database to measure the performance of each of its cluster initiatives in northern Ohio. Ms. Bagley said she would like to identify how many companies were introduced to potential customers, how many negotiated deals, how many jobs were created, and how much investment was generated. "If you could start to put paths like that together with your clusters, you can start to show how some of this very difficult to measure activity actually ends in some result," she said. Impacts on Jobs and Growth At the end of the day, job growth is what matters most to Americans, Sec- retary Locke said. And the best way to create jobs, Mr. Locke said, is to create new businesses. That means there is an "urgent need to move great ideas more quickly from university labs into the market place." Developing more regional innovation zones, "where entrepreneurs, scientists, product developers, and ven- ture capitalists are clustered together and can work together," can accomplish that. Mr. Locke said regional innovation clusters, therefore, should be a key part of the nation's long-term strategy for growth. "It is to lay a new foundation for sustainable long-term economic growth," he said. 58For an overview of the rationale and methods of evaluating research parks, see presentation by Albert N. Link of the University of North Carolina at Greensboro in National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices--Summary of a Symposium, op. cit.

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OVERVIEW 35 Sustaining a Policy Consensus? Despite the many initiatives taken in recent years, the fundamental chal- lenge faced by U.S. regional innovation cluster initiatives is the lack of policy consensus regarding their benefits at the state and especially the federal levels with the attendant risk that the necessary continuity of policy and funding will not be maintained. This comes at a time when America's competitors are mounting sustained efforts and great policy continuity to enhance their innovation capabili- ties and national competitiveness.

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