Panel II

Clustering for Growth (Continued)

Moderator:
William Harris
Science Foundation Arizona

Mr. Harris, president of Science Foundation Arizona, welcomed the speakers and noted that one topic that is not discussed enough is new business. “We have a definition of small business that sometimes actually is big business,” he observed. “It is the energy that comes from businesses that grow into big businesses that we hope to inspire today.” Mr. Harris then introduced Karen Mills, administrator of the Small Business Administration.

BUILDING REGIONAL INNOVATION CLUSTERS

Karen Mills
Small Business Administration

SBA Administrator Mills noted she has been at the National Academy of Sciences (NAS) a half-dozen times over her career. “At the start of it, we were all new to clusters,” she said. “So to see everybody come together at this point is enormously exciting.”

Ms. Mills thanked the previous speakers for explaining the Energy Regional Innovation Cluster, which she described as “an incredibly exciting coming together of ideas we’ve all been working on for years. We are very proud to be a collaborator on that.” She also thanked Under Secretary Johnson for supporting the Small Business Innovation Research grant program, which is managed by the SBA. She noted that about 25 percent of R&D Magazine’s top 100 annual innovations can be traced to companies that had an SBIR



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Panel II Clustering for Growth (Continued) Moderator: William Harris Science Foundation Arizona Mr. Harris, president of Science Foundation Arizona, welcomed the speakers and noted that one topic that is not discussed enough is new business. "We have a definition of small business that sometimes actually is big business," he observed. "It is the energy that comes from businesses that grow into big businesses that we hope to inspire today." Mr. Harris then introduced Karen Mills, administrator of the Small Business Administration. BUILDING REGIONAL INNOVATION CLUSTERS Karen Mills Small Business Administration SBA Administrator Mills noted she has been at the National Academy of Sciences (NAS) a half-dozen times over her career. "At the start of it, we were all new to clusters," she said. "So to see everybody come together at this point is enormously exciting." Ms. Mills thanked the previous speakers for explaining the Energy Re- gional Innovation Cluster, which she described as "an incredibly exciting coming together of ideas we've all been working on for years. We are very proud to be a collaborator on that." She also thanked Under Secretary Johnson for supporting the Small Business Innovation Research grant program, which is managed by the SBA. She noted that about 25 percent of R&D Magazine's top 100 annual innovations can be traced to companies that had an SBIR 60

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PANEL II 61 grant.19 "That is a very powerful program, and we are investing very heavily in it," she said. Ms. Mills explained that she first became involved in cluster strategy in 2005, when the Brunswick Naval Air Station, close to where she lived in Maine, landed on the base closure list. "We knew we were going to lose some jobs," she said. Ms. Mills recalled that she received a call from Maine's governor, who said, "Karen, you know about small innovative businesses. You better get some here." At the time, the U.S. Department of Labor had just come out with WIRED grants20 for worker re-training, Ms. Mills said. A team looked around for indus- tries where Maine had unique strengths. It identified boat-building, an industry in which the state had a 400-year-old tradition. "We have all of these independent small-business people building boats in Maine. Who would think they would ever cluster together?" Ms. Mills said. Another asset is the University of Maine's cutting-edge research in wood composite materials. These composites were being used to build hulls for boats that were some of the lightest and fastest in the world. With the help of the $15 million workforce grant, the state created the North Star Alliance, a group that leverages the expertise of local craftsmen and the new technology being developed in the area. The state built a training center for composite technologies. Composites are applied in layers and infused with resins, so they require strong technical labor. "We have a lot of excellent folks going to community and vocational school in Maine who never thought of manufacturing careers in composite technologies," Ms. Mills said. Only one-third of Maine high school students go to college, she noted. Many go into fishing and construction industries. In mid-January 2010, she added, she spoke at three high schools to persuade students to go to the composite material training center. Five years later, the cluster is showing important progress. Maine-built boats "are selling as far away as Shanghai," she said. At the Brunswick industrial park, there now is a cluster of companies that is supporting not only builders of boats, but also other businesses using composites. Five to 10 of these clusters could replace the jobs lost in the textile, shoe, and pulp industries of Maine, Ms. Mills said. An initiative to establish a food cluster drew 120 people at its first meeting. "I was off and running clusters as the base for economic development," she said. Maine established a fund to promote cluster development. Ms. Mills asked 19See Fred Block and Mathew R. Keller, Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970-2006, Washington, DC: The Informational Technology & Innovation Foundation, July 2008, . 20 Workforce Innovation in Regional Economic Development (WIRED) grants are offered by the U.S. Department of Labor's Employment and Training Administration. A WIRED grant was awarded to train 1,800 workers in Maine to build boats using advanced technologies and materials.

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62 CLUSTERING FOR 21ST CENTURY PROSPERITY how many audience members came from states with cluster funds. Only a few hands went up, but Ms. Mills says she knows there are more because she had catalogued 32 such state funds. The next step was to figure out the federal role in regional economic clus- ters. She addressed these issues in a white paper on the topic for the Brookings Institution that was co-authored with Elizabeth Reynolds and Andrew Reamer.21 Later, Ms. Mills was appointed by President Obama to the transition team for the SBA. "Now I have the good fortune to have the best job in the world," she said. "Now we are in a good position to do something we have been talking about for years, which is to have the federal government play a meaningful role in regional economic development clusters." The SBA is involved in other cluster initiatives besides the Energy Regional Innovation Cluster program, Ms. Mills said. Soon after joining the SBA in 2009, the agency began to focus on Michigan's robotics industry, where a cluster had been forming among companies that had supplied the auto industry. Oakland University in Rochester, Michigan, also has a Center for Robotics and Ad- vanced A utomation. This expertise was in demand by the Department of Defense. Sensors that monitor car engines, for example, are very valuable in applications such as unmanned probes to detect roadside bombs. Recent studies, such one by the Computing Community Consortium titled "From Internet to Robotics"22 also piqued the SBA's interest. The study said that "robotics technology clearly represents one of the few technologies capable in the near term of building new companies and creating new jobs." The SBA helped organize a two-day summit that brought together DoD procurement officers and Detroit-area robotics manufactures and suppliers. "We got 200 small businesses in the room, with the university and the Department of Defense, and kicked off a cluster there which right now is flourishing," she said. In January, the Michigan Economic Development Corporation received the first clustering proposals from teams of private- and public-sector partners. The SBA recently replicated the Michigan approach in Hampton Roads, Virginia, where similar technologies exist. They include robotics, unmanned systems, port security, sensors, modeling, and simulation. Another program is in Hawai'i, where there is a lot of unexploded ordinance that can be detonated by unmanned probes. Ms. Mills said the SBA has funding in its 2010 budget for at least three more robotics clusters. There are five to seven more clusters, as well as pilot projects, that the agency may fund at some point. 21Karen G. Mills, Elizabeth B. Reynolds, and Andrew Reamer, Andrew, Clusters and Competitive- ness: A New Federal Role for Stimulating Regional Economies, op. cit. 22See "From Internet to Robotics: A Roadmap for U.S. Robotics," Computer Community Consor- tium final report to Congress, May 21, 2009, ().

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PANEL II 63 The Obama Administration has come forth with a number of models for supporting clusters, Ms. Mills said. The ones mentioned by Under Secretary Johnson and Ginger Lew are competitive models with very large scales. In Maine, she said, "I feel like we had a traditional, organic approach to clustering." The robotics clusters in Michigan, Virginia, and Hawaii are of a much smaller scale with smaller funding and tend to involve a single customer from the federal government to create demand. "We are going to look at these models and others and think about best practices," she said. The SBA has another $10 million in the proposed fiscal year 2011 budget for clustering activities. The funds will be used to help develop public-private partnerships, launch training initiatives, and incentivize cluster creation, she said. "It is pretty substantial when you know, as we do, that a little money can go a long way in clustering." Regardless of the clustering approach that is used, said Ms. Mills, "the SBA brings a lot to the table." The agency has a $90 million loan portfolio, and staff members know local lenders. That is important because many companies in clus- ters will need capital. The SBA is responsible for ensuring that 23 percent of all federal contracts go to small businesses. The SBA also has a "very strong bone structure in the field," she explained. It can tap 68 field offices, 900 Small Business Development Centers, more than 100 Women's Business Centers, and more than 350 chapters of SCORE, a small-business mentoring program affiliated with the SBA. That means 14,000 SBA-affiliated counselors are available, many of them on-line. "If your business has a problem, you very often can get a retired executive with similar issues who can counsel you," Ms. Mills said. With the Energy Regional Innovation Cluster, meanwhile, the SBA has special funding to add experts to its small-business development centers. The SBA also leverages its relationships with each federal agency, Ms. Mills added. Putting together the robotics clusters, which are driven by one large fed- eral buyer, "was a pretty natural place for us to drive a cluster," she said. SBA staff on the ground, meanwhile, often act as catalysts between state and federal programs. "This bone structure on the ground is a very important operational piece of clusters, whether we initiate them or whether they come from some other process." Ms. Mills concluded by saying the SBA is looking forward to pushing ahead with clusters. "It is a top priority for me, and it is a top priority for the President," she said. "We know that we need to drive jobs, and that jobs are going to come from high-growth, high-impact companies, some new, some old." Some of those will be "100-year-old companies repositioning themselves with innovation to compete in this next century."

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64 CLUSTERING FOR 21ST CENTURY PROSPERITY REGIONAL INNOVATION STRATEGIES INITIATIVE John Fernandez Economic Development Administration Referring to his background as former mayor of Bloomington, Indiana, ssistant Secretary of Commerce for Economic Development John Fernandez A said that his "bias very much is for boots on the ground and a bottom-up, grass roots perspective." Mr. Fernandez said that he would start by being the "Secretary of Obvious" and point out that "the last several years have been very brutal for all of us in- volved in economic development." But he added that the challenges also "in many ways have been an opportunity for a bit of a wake-up call across the board, not only for the federal government but also for the private sector and public agencies across the country." The National Innovation Policy is at the cornerstone of the Obama Adminis- tration's economic strategy. This policy is presented as the first White House-led "national economic development framework." Mr. Fernandez highlighted the Obama Administration's Energy Regional Innovation Cluster Initiative and the $129.7 million competition to establish an Energy Innovation Hub and commer- cialize new energy-efficient building technologies.23 The innovation policy was partly in response to the deep recession, Mr. Fernandez said. "The Administration has obviously been very focused on res- cuing the economy, restoring it, and rebuilding it," he said. But while addressing the immediate crisis, "the President has not lost sight of the vital importance of mak- ing smart investments that are going to be foundational for sustainable economic growth. A lot of the work we are talking about today fits into that foundation." Economic clusters aren't really new, Mr. Fernandez pointed out. "Many of us in the room have been engaged in the concept of clustering for a long time." EDA also has been conducting research and offering assistance to clusters for years, he added.24 23The task force is comprised of staff from the Department of Energy, that National Institute of Standards and Technology, the Economic Development Administration, the Small Business Adminis- tration, the Department of Labor, the Department of Education, and the National Science Foundation. Its Funding Opportunity Announcement for fiscal year 2010 can be found at . 24Examples of past Economic Development Administration research reports on clusters can be found on the EDA's Web site. They include "Crossing the Next Regional Frontier: Information and Analytics Linking Regional Competitiveness to Investment in a Knowledge-Based Economy," Octo ber 2009, , "Governor's Guide to Cluster-based Economic Development Universities and the Development of Industry Clusters," 2002, and "Measuring Regional Innovation: A Guidebook for Conducting Rural Innovation Assessments Unlocking Rural Competitiveness," .

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PANEL II 65 What is new, Mr. Fernandez said, "is that you are seeing the federal govern- ment shining a light on this as a policy." He agreed with Mary Good's comments earlier that Americans do not like to talk about industrial policy. The federal initiative on innovation clusters is "a framework that gets close to a policy," he said. "I can't remember any time when the White House has made this level of commitment to the development of regional innovation clusters." He said he also can't think of a time when the Secretary of Commerce has embraced regional innovation clusters as a deliberate strategy. "I think those are really encouraging signs that this Administration gets this and understands that clusters can be a critical part of how we amplify investment and how we accelerate the innovation and entrepreneurship our country needs," Mr. Fernandez said. Of the $150 million in Recovery Act funding EDA received, $50 million is being invested in regional innovation clusters around the country, Mr. Fernandez said. Previously, the agency lacked a central framework for investment priorities, he said. Under this Administration, they revolve around regionalism, collabora- tion, and clusters. "We are trying to get an alignment of our investments in a very smart way." Mr. Fernandez noted that the process is "incredibly difficult." He acknowl- edged the significant leadership of people, like Senior Advisor to the White House National Economic Council Ginger Lew, who are driving these initiatives. "It is heavy lifting," he said. "It is new and it is difficult, but we are learning as we go, and I think it will produce great results." The framework for EDA's development programs is called the Regional Inno vation Strategies Initiative.25 Among its priorities: Develop data-rich, geospatial representation of cluster activities across the United States to aid decisionmaking by businesses and policymakers. Develop a new tier of metrics and measurement standards to evaluate regional innovation clusters. Promote and facilitate trans-regional innovation clusters to spread best practices, cooperation, and problem-solving. EDA also has partnered with research organizations to develop and produce instructional tools for economic development practitioners. For example, the agency collaborated with the National Association of Development Organiza- tions to produce an online, self-paced curriculum called "Know Your Region" that explains the benefits of regional planning, tools to formulate regional strate- gies, and best practices. One tool enables planners to find data on employees and 25See Department of Commerce, Economic Development Administration, FY 2011 Congressional Bud- get Request, .

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66 CLUSTERING FOR 21ST CENTURY PROSPERITY businesses in their own regions26 to help them "get into the weeds of nascent cluster activities they can build upon," Mr. Fernandez said. EDA is working with federal partners and stakeholders to strengthen perfor- mance measurements. Mr. Fernandez said he appreciated the example cited by Karen Mills of the difficulties Pacific Northwest planners face procuring federal funds. There is "a wide swath of America" that does not see how innovation clusters will improve their lives, he observed. "If someone who lost a factory job hears officials talk about innovation clusters and high-tech, the person says, `That sounds cool, but where am I in that?' We need to work on our metrics in a way that gets down and makes this stuff relevant, so people can see it's not just about Ph.D.s. It's about everyone in the entire spectrum of a cluster." Metrics can show a cluster's impact on manufacturing, service sectors, and communities. "It is going to be essential to have relevant, real-world metrics to build the kind of sustainable political support needed to drive these kinds of policies," he added. Otherwise, the initiative could go away with a change in Administration. EDA is realigning its programming to better support regional innovation strategies, Mr. Fernandez said. It is expanding its Public Works and Infrastructure program to include critical infrastructure of the 21st century, expanding access to capital, and bolstering activities to support research parks and incubators. It also is supporting proof-of-concept and training centers. Not all support facili- ties need to be labs, he said. Some are places where workforce organizations and education groups can come together and offer training for industry. "There is a whole spectrum of places where our programs can be aligned to support these kinds of initiatives," he said. As the only government agency with economic development as its sole mis- sion, EDA plays an important role in the effort to enhance America's long-term competitiveness. Some investments may be only $1.5 million. But one advantage EDA enjoys is "an incredible amount of discretion and flexibility in terms of how we use funding," Mr. Fernandez said. EDA's flexible programs leverage private/ public investments, support "bottom-up" strategies and build 21st century innova- tion infrastructure. Its approach prevents a "race to the bottom" in which cities, counties, and states, undercut each other in order to attract short-term growth. By bringing together business leaders, government officials, universities, and nonprofits to work together-- EDA helps regions capitalize on shared strengths, multiplying their economic power and creating jobs. These activities do not mean the federal government is now assuming leader ship of regional innovation cluster initiatives, Mr. Fernandez said. "We can't legislate this stuff, but we can support it," he said. "What is very encouraging about the Obama Administration is that we are shining a light at the federal level on these regional innovation clusters in a very smart way to build sustainable 26Economic data down to the county level are available at .

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PANEL II 67 economic development for the 21st century. That is new, that is important, and I hope we can stay focused on that." Mr. Fernandez said federal agencies can play a powerful role in stimulat- ing regional development. The way to move forward, he said in summary, is for agencies to align their resources, shine a light on meaningful and impactful initiatives, find smart ways to do their work, and customize the way they invest federal resources "to support this bottom-up growth of strong, organic clusters." In terms of EDA itself, Mr. Fernandez said the aim is to modernize the agency. "We are not trying to blow it up or re-invent it," he said. "We are trying to fine-tune it." He urged people to pay attention to the agency's regional cluster initiatives to "make sure our programs are fine-tuned in a way to really support the 21st century infrastructure we need to grow our economy."