Session II

Leveraging Federal Programs and
Investments for Hawaii

Moderator:
The Honorable Brian Schatz
Lieutenant Governor of the State of Hawaii

THE MANUFACTURING EXTENSION PARTNERSHIP:
THE NETWORK EFFECT

Roger Kilmer
Manufacturing Extension Partnership Program
National Institute of Standards and Technology

Mr. Kilmer, director of the Hollings Manufacturing Extension Partnership (MEP) at the National Institute of Standards and Technology, began by building on Dr. Wessner’s term “real innovation,” which “means you’re going to make something that somebody’s actually going to pay money for. If they don’t pay money for it,” he said, “it’s an invention. I worked at a research laboratory in my previous life at NIST, and I saw that if you don’t develop an invention into a product or service somebody will pay for, you’re not getting a return on the investment.” Helping inventors and small firms capture this return, he said, is the primary focus of the MEP.

The other piece of the MEP name he emphasized was “partnership.” Partnership, he said, “really means working together, and if you don’t have that, it’s more of a coordination role than helping generate real pay-back.” He also said that the “next-generation MEP” was focused increasingly on technology and innovation.

The explicit mission of the MEP, Mr. Kilmer said, was to help manufacturers, especially small and medium-sized firms, improve their productivity and competitiveness, and to do this in a strategic way. The program was created in 1988 and has centers in all 50 states, including roughly 370 field offices. The MEP funds



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Session II Leveraging Federal Programs and Investments for Hawaii Moderator: The Honorable Brian Schatz Lieutenant Governor of the State of Hawaii THE MANUFACTURING EXTENSION PARTNERSHIP: THE NETWORK EFFECT Roger Kilmer Manufacturing Extension Partnership Program National Institute of Standards and Technology Mr. Kilmer, director of the Hollings Manufacturing Extension Partnership (MEP) at the National Institute of Standards and Technology, began by building on Dr. Wessner’s term “real innovation,” which “means you’re going to make something that somebody’s actually going to pay money for. If they don’t pay money for it,” he said, “it’s an invention. I worked at a research laboratory in my previous life at NIST, and I saw that if you don’t develop an invention into a product or service somebody will pay for, you’re not getting a return on the investment.” Helping inventors and small firms capture this return, he said, is the primary focus of the MEP. The other piece of the MEP name he emphasized was “partnership.” Partner- ship, he said, “really means working together, and if you don’t have that, it’s more of a coordination role than helping generate real pay-back.” He also said that the “next-generation MEP” was focused increasingly on technology and innovation. The explicit mission of the MEP, Mr. Kilmer said, was to help manufacturers, especially small and medium-sized firms, improve their productivity and compet- itiveness, and to do this in a strategic way. The program was created in 1988 and has centers in all 50 states, including roughly 370 field offices. The MEP funds 53

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54 BUILDING HAWAII’S INNOVATION ECONOMY about one-third of the operating expenses of the centers, so the centers must be fully integrated with the states and partners in order to function. Revenue for the centers comes in the form of fees for services from manufacturing clients. The MEP interacts with about 34,000 manufacturing firms a year, reaching a “detailed and intensive level” with about 10,000 of them. The 1,400 or so MEP personnel are not federal employees, but are paid through cooperative agreements or grants. Helping to Think Strategically The MEP provides practical assistance to help manufacturers to address short-term needs, but it also emphasizes the strategic context of these needs. “Part of the problem we’re facing in this country is that we’re very short-term focused and reactionary. The MEP tries to promote strategic thinking among manufacturers, help them identify opportunities, and then help find the financial and expert resources needed.” Mr. Kilmer said that the MEP focuses on its impact on clients in evaluating its performance. It evaluates the kinds of services offered to the centers, how well the centers perform, and whether the program gives the centers the right tools and services to help manufacturers. The program regards its work as an invest - ment, so it tries to measure the bottom-line impact, both at the national and local levels. For FY2009, for example, clients reported some $3.5 billion in new sales as a result of MEP assistance, $4.9 billion in retained sales, $1.9 billion in capital investment, $1.3 billion in cost savings, and 72,000 jobs created and retained. These figures were derived from a third-party survey that contacts clients online or by telephone six to nine months after a project is completed. The primary approach of the MEP is the use of partnerships and network- ing, at both a national level and the state and local levels. At the national level, Mr. Kilmer said, his job is to link the centers and share resources and solutions for the manufacturers. At the center level, the task is to find the right partners for a manufacturer. This might be a community college to meet training needs, a university to provide research, or the Small Business Association (SBA) to help arrange financing. National partners include federal agencies and trade associa - tions, which are an essential conduit to the manufacturers. Connections with Local Organizations The organization as a whole, Mr. Kilmer said, is structured to reach far be- yond its federal roots. The MEP has only about 45 federal government employ- ees, most of them stationed in regional centers around the country. However, most of the work is done by third-party suppliers. “We really rely on local people,” he said, “because they are our connection with the manufacturing base. We work through a lot of organizations that existed before MEP and are the ones the local clients recognize. It’s a unique national asset among federal programs, because

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55 SESSION II we have people who can get to manufacturers anywhere in the country within some reasonable time and effort.” For example, he said, Hawaii’s MEP center, directed by Janice Kato, is actually located within the state’s High Technology Development Corporation (HTDC), near the University of Hawaii’s main campus in Mānoa. The HTDC works with a team of partners including the Department of Business, Economic Development and Tourism; the State of Hawaii Foreign Trade Zone #9; the Hawaii Center for Advanced Transportation Technologies; the Hawaii Strategic Development Corporation; and others. Moving Beyond Cost Reduction to Product Development This MEP-HTDC partnership emphasizes product development in the higher-tech areas. “I’ll be honest with you,” he said, “Hawaii is steps ahead in this emphasis. It’s good to see other centers around the country still focused on cost reduction and the lean manufacturing elements, which are necessary. But if a state isn’t thinking about growth, as you are, it’s probably going the opposite direction. You have to be thinking about the next product, the next service, and how do I get that into the hands of my customers.” From a general manufacturing perspective, he said, trends have been chang - ing, partly due to globalization. He described the MEP’s response to three of them: 1. Most manufacturers today are not selling directly to consumers; they sell to another company that integrates the product into something else. Hence manufacturers have to focus on the relevant supply chain and position themselves appropriately. A company does not have to do this alone, he noted; partnerships and business organizations can help a firm develop a new product with high sales potential. 2. The MEP now focuses more sharply on technology adoption by manufac- turers, because rates of technology adoption in small firms still lag those of larger firms. 3. A rapidly growing trend is that of sustainability—not only from an environmental or energy conservation perspective, but from the need to build a business model that both satisfies those requirements while helping the bottom line. In its survey of businesses, the MEP asks about challenges. From a national perspective, he said, companies were focused on controlling costs. In the case of Hawaii, he said approvingly, the top priority was product innovation and develop- ment, followed by identifying growth opportunities. “A lot of our effort in dealing with the manufacturing client is getting them to go beyond just cutting costs. We

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56 BUILDING HAWAII’S INNOVATION ECONOMY want them to think about how to come up with new ideas and how to get those ideas into products they can take to the marketplace.” Mr. Kilmer said that this emphasis had changed for MEP as well. A decade ago, the program emphasis was on cost reduction; this had given way in the mid- 2000s to a focus on strategic management and growth—making companies more competitive, managing growth, and spurring product development. This strategy, in turn, had evolved into efforts to exploit technology to foster innovation. “We really spend the time now trying to get companies to understand that they need (1) to be strategic, and (2) to bring technology into the equation to improve over- all competitiveness. It can’t be just cut costs, cut costs, cut costs, because that doesn’t generate new growth.” Connecting Inventors with Manufacturers Mr. Kilmer showed a chart he called a “contrast to Valley of Death chart,” which he called “the bridge to success.” It was meant to show a continuum from research to the marketplace. The MEP’s activities were concentrated on the right-hand side, including efforts to improve processes, improve business, and understand markets. On the left-hand side were the people and organizations that generate new research and technology. “For a lot of small manufacturers,” he said, “they don’t even know what they don’t know. That includes the possible markets for a technology, and how they can integrate it into their products or processes. We try to help them reduce the risk of those steps, of bridging that knowledge gap.” This does involve financing, he said, which may include private capital, SBIR, or state programs, and it acknowledges that many players and approaches can be involved in the process of commercialization and that all of them need to collaborate to create marketable products. “From an MEP perspective,” he said, “we’re really that cog that connects the technology folks with the manu facturers. Our focus is on translating the potential of these technologies into business opportunities.”12345678910 He described a web link called the National Innovation Marketplace, de - veloped in partnership with Eureka Ranch, in Cincinnati, Ohio. Its purpose is to connect those who produce technology with those who manufacture products. He said that it differed from an on-line database in two ways. First, it translates a technology from the language of a scientific paper or patent abstract into the language of business. Second, MEP had done an analysis of market opportunities so that its staff could explain them to manufacturers, including estimates of how a commercial product might be used and how big the market might be. “This helps understand the opportunity and reduce the risk,” he said. Mr. Kilmer said that while the link was intended to connect manufacturers with technology, its effectiveness would rise with its ability to help other mem - bers of the value chain. The system now allows manufacturers to post their manu- facturing capabilities, which could benefit an original equipment manufacturer 1 2 3 4 5 6

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57 SESSION II (OEM); it also allows OEMs to post their own needs. By allowing more partners to work together, he said, it could minimize transaction costs while increasing scale. “And we can get this into a structure that my 1,400 field staff can explain,” he said, “without knowing the deep engineering or science. They just need to convey in business terms why the manufacturer should make the investment or take the risk.” Helping Manufacturers Diversify the Customer Set The MEP also works with supply chains so that manufacturers have a better understanding of their core capabilities and how those might be applied more widely. He described a company in Michigan, which had produced gears for a General Motors vehicle that no longer existed. An MEP center there helped the company discover that it could apply the same capability to produce components for a medical prosthetic device. “Now they are diversifying their customer set,” he said, “so they’re not as reliant on the automotive industry.” Mr. Kilmer said that MEP has worked with other federal agencies and com - panies in the same way. At the Defense Logistics Agency (DLA) in Columbus, Ohio, the MEP’s national network helps companies find manufacturers capable of producing hard-to-find National Stock Number parts. The network also helps BAE Systems, Inc. to communicate electronically with its suppliers for real- time design and production and to help train suppliers. Finally, MEP helped the Veterans’ Administration find suppliers that were veteran-owned companies. A project that grew out of stimulus funding was helping with a statutory requirement to “buy American” in building retrofit programs of the Department of Energy (DoE). The MEP was able to use its network to help the DoE to iden- tify U.S.-based suppliers. As of December 2010, the MEP had made 39 exact or partial matches out of 75 opportunities, and 22 of them were deemed by DoE to be viable U.S. suppliers.1112131415 The Complex Demands of Export Mr. Kilmer described another program, called ExporTech, that helps com - panies enter and expand into global markets. “Many companies have been used to supplying a customer down the street, or maybe in the next county,” he said, “but not in the next country. We try to help them understand what’s involved in that and get positioned for the complex demands of export.” In the case of Wilco Machine and Fabrication, of Marlow, Oklahoma, which manufactures equipment for the energy industry, MEP had accompanied Wilco officials to visit potential clients in the Middle East and Brazil. After these visits, exports jumped from 8 percent of total revenue in 2008 to 51 percent by mid-2009. ExporTech is a collaborative effort with the U.S. Export Assistance Centers, the SBA, and state and local programs that support export. 11 12 13 14 15

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58 BUILDING HAWAII’S INNOVATION ECONOMY Finally, Mr. Kilmer noted that MEP has worked with the Environmental Protection Agency (EPA) for more than eight years to promote manufacturing through sustainability through opportunities that reduce environmental impacts. The strategy is to do this in ways that make good business sense for compa- nies. The MEP supports the Green Suppliers Network and the E3 program on Economy, Energy, and Environment, along with federal partners. The strategy had recently expanded to include energy impacts, financing requirements, and potential training dimensions. This partnership includes the DoE, the Department of Labor, and the SBA. “What’s different about the sustainability program,” he said, “is that its community based. The partners work directly with local utilities, government, and manufacturers.” He closed by saying that the MEP had worked with many partners over the past half-dozen years in order to maximize its impact and that this strategy had been successful. One program in particular, Mr. Kilmer said, the Interagency Network of Enterprise Assistance Providers, convened with the SBA, had man - aged to bring together all 82 federal programs that focus on outreach and business assistance and also attracted 36 non-government programs as partners. “We’ve had such an impact,” he concluded, “that we now have organizations outside the federal government that participate in that effort.” DOD STRATEGIC TECHNOLOGY CAPABILITY THRUSTS: OPPORTUNITIES TO FUEL HAWAII’S INNOVATION ECONOMY Starnes Walker University of Hawaii Dr. Walker, chief engineer and technical director at the University of Hawaii, reviewed the technological activities of the Department of Defense (DoD), based on long experience as a science and technology (S&T) director for the Depart - ment of Homeland Security, Office of Naval Research, and other positions. He said he would describe “the programs and thrust areas” for science, technology, research, and development that provide “the capabilities we need to defend the nation, and where we need to go to meet a constantly changing threat.” He began with a set of priorities laid out by Defense Secretary Gates about a year ago: take care of our people, rebalance the military, reform what and how we buy, and support our troops in the field. He said that the activities of science, technology, research, and development “were the seed corn we plant to make those things real. They provide the creativity and capabilities we need across the military.” Dr. Walker began by thanking his colleagues Zachary Lemnios, director of Department of Defense Research and Engineering (DDR&E), and Alan Shaffer, principal deputy, for “providing the focus for the defense agencies in terms of

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59 SESSION II investments and for ensuring collaboration among between organizations.” The DoD invests about a $13 billion a year in basic research, applied research, and advanced technology development, all of which “are important to fuel the capa - bilities we need.” A number of studies, he said, had distilled the areas most impor- tant in maintaining the DoD’s technology capability, beginning with “accelerate delivery of technology capabilities to win the current fight.” This “imperative” included electronic warfare, computer science, cyber operations, energy and water, and a rapid capability tool kit. He mentioned especially the importance of electronic warfare. “We are in a cyber connected world,” he said. “It’s important for us to be able to communicate and to share information. That means we need to have the cyber domain well protected.” He said also that “energy security is national security” and emphasized its importance in the view of Secretary Gates. In addition, alternative energy sources are increasingly important to the DoD as well, because the cost of delivering fuel to troops abroad is “approaching $200 to $300 a gallon.” Another central area, Dr. Walker said, was materials science—the electronic, optical, and physical properties of materials. “These all depend on discoveries that occur across the seams of disciplines,” he said. “Physics crossing mathe- matics, mathematics crossing chemistry, then biology, and now the fertile linkage with human behavioral sciences. We are a network-enabled society and world. So we have to understand how this all fits together.” The Challenge of Moving Science into Practice A second imperative, preparing for an uncertain future, requires platforms that serve core purposes in battle, such as helicopters, attack vessels, and all-terrain vehicles. Each of them could be further strengthened by new technical capabilities, such as breakthroughs in acoustics, sensors, and materials that provide offensive and defensive capabilities. The challenge, he said, is to both identify important discoveries in science and technology, and then move them into practice. “That’s an important area for the DoD,” he said, “and something we have to do in a better way.” He mentioned some positive programs in this regard, including the Small Business Innovation Research (SBIR) program, such as that managed by the Navy. “I think there are many examples of what has gone well with that, and certainly for the state of Hawaii, we’ve had some of our greater successes in terms of collec- tive capability in Phase I and Phase II grants.” The challenge remains, he said, to “move things from the fundamental discovery stage, planting the thousand flowers, and then harvesting those flowers as something useful.” In addressing the uncertain future, Dr. Walker said, the biggest issue is to decide which challenges to act upon, and to what degree. The DoD has sought advice from outside sources, including the National Academies, the Jasons,16 and 16 Jason is an independent scientific group, coordinated by the MITRE Group in McLean, Virginia, which advises the U.S. government.

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60 BUILDING HAWAII’S INNOVATION ECONOMY the Defense Science Board to help define the best approaches. The Quadrennial Defense Review Report, compiled every four years, is a core strategic planning document. Many such studies, aimed at “making things real,” he said, are public documents accessible on line, where it is possible to see how well the DoD makes use of basic knowledge. Industry, he said, faces the same challenge in “making things real,” moving from basic discoveries to useful products. “We have to have a partnership between government, industry, and academia to make this work,” he said. “And to make this work we have to build the next generation of outstanding scientists, engineers, and mathematicians.” He said that the potential for “tech - nology surprise” is growing because so many more scientists and engineers are now being educated in other countries, so that new research results now appear anywhere around the world. “We need to pay attention to this,” he said. “We need to be able to work collectively as researchers.” In response to such changes, Dr. Walker said, DoD strategy had also changed over the past decade. In 1993, he said, the focus was on how the military could conduct two wars simultaneously; there was relatively little concern about non- state actors. “Today we’re looking at terrorism and counter insurgency, and also winning the hearts and minds of the people. To me, understanding the human terrain will be an important part of the DoD’s investment from now on.” Finding the Capability Gaps The approach by the military, he said, is to “drill down” to find the capability gaps. “Don’t tell me what you want to discover,” he said. “Tell me the things that are important to you. Then I will take a look at the investments in basic science that I should be making. And, what are the areas where discoveries might have interesting applications. That’s where I will make investments.” To show the real utility, he said, the discovery had to be moved into a testing and experimenta- tion environment. “When you make a discovery in the laboratory,” he said, it is important to understand it and get user feedback before moving it too quickly into the field. Dr. Walker returned to the need to operate effectively in cyberspace. The military must defend its systems in a cyber environment contested by nation- states and various sophisticated adversaries. “We need to own that domain,” he said. “It’s an area that’s moving very rapidly. How can we assure ourselves we can connect across the domain and maintain connections?” It is essential to receive secure data from sensor platforms and be able to process it. “How we do that is very important,” he said, “because we easily go into sensory overload. We have lots of data, but what does it mean?” This requires extensive fundamental research in the areas of complex adaptive systems and discreet agent models, he said. And we must be able to do sophisticated network analysis of social and behavioral relationships. Dr. Walker drew a distinction between the physical defeat of capability and

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61 SESSION II the functional defeat of capability. The second kind of defeat shuts down supplies of power, water, fuel, or energy, all of which are connected by cyber and cyber- physical systems. The military’s power systems, including pipelines, refining, and other petrochemical operations, are controlled by Supervisory Control and Data Acquisition (SCADA). He recalled the cyber-event that occurred in Estonia over a year previously when the power grid was shut down. “That was done intention- ally,” he said, “to get someone’s attention. We are vulnerable in these areas. We need safe, secure communication, and we have to have it in nanoseconds.” For example, the Navy has electric drives, weapons, and launch capabilities, all of which are connected across all four Navy enterprises: air, surface ships, submarines, and the Navy seals. Each enterprise needs uninterrupted situational awareness of conditions, all cyber-enabled. “I’m here to tell you that the DoD is going to make significant investments across all of these domains,” he said, “to ensure that we own that landscape.” He noted that one partner in that effort is the new U.S. Cyber Command, established in 2009 in Ft. Meade, Maryland, under General Keith Alexander, who was promoted to four-star rank in 2010. He said that the academic research environment at the University of Hawaii and elsewhere will be critical partners, as will the electronics industry. In order to maintain state-of-the-art research, he continued, one of the most urgent needs is to provide the next generation of highly skilled scientists and en - gineers. Dr. Walker said that one of the most urgent concerns of major electronics corporations, including Raytheon, L3, Lockheed Martin, and General Dynamics, is where they will find these trained experts across cyber-related fields. Invest - ment in training is a leading topic of discussion among members of the Business Higher Education Forum, which includes the CEOs of Fortune 500 corporations as members. “They are asking, ‘How should industry make its investment in recruiting, retaining, and training the next-generation work force.’” Systems Must be Able to Absorb Innovation Taking a broader view of the cyber realm, Dr. Walker said, it is important to be able to “plug and play in an open architecture environment.” Systems must be structured so as to absorb discovery and innovation. “You can’t have a fixed domain where you make one investment and then you’re stuck in one area as technology moves past you,” he said. To help achieve this breadth of capabili- ties, he said the Naval Research Laboratory had invested $160 million a year in funding this area, and was able to leverage this through partner investments from industry and government organizations to produce a capital working fund of some $1.1 billion. “That’s an engine of discovery,” he said. He returned to the importance of data in making decisions. “So much of our data now is unstructured, and the meaning is hard to process,” he said. “What are the systems we need to process that knowledge?” He listed the research areas of data structure, anomaly detection, embedded algorithms, context, and

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62 BUILDING HAWAII’S INNOVATION ECONOMY prediction. “This all comes down to fundamental mathematics. I think everyone in that community has an important contribution to make.” In developing new intelligent tools and approaches, he said, he looks at the places where research areas intersect. It is along these “seams,” he said, “where we usually find the greatest discoveries.” Partnerships among government, industry, and academia, Dr. Walker said in conclusion, were essential in developing the cross-cutting technologies needed for defense and for civilian uses as well. A key to developing these, he said, was to leverage the R&D work at the DoD, the National Science Foundation, and the national laboratories of the DoE. “And then industry is going to play an important role in making these things real: the processes of information technology, the enabling technologies, and the sensing and data collection.” “I think this conference has been exactly on target,” he concluded. “It fits the synergism we expect between industry, government and academia to drive this capability for national security and the capabilities we need.” THE MILITARY AND HIGHER EDUCATION Vice Admiral Daniel Oliver, USN (Ret.) Naval Postgraduate School Monterrey, California Vice Admiral Oliver, president of the Naval Postgraduate School (NPS), thanked President Greenwood and the National Academies for hosting a sympo - sium on topics “not only important to the health and prosperity of Hawaii, but to the future of the nation.” He introduced his talk by saying he would address three issues: the global challenges faced by the nation, a description of the Naval Postgraduate School, and several themes of education and research at the school that may be of common interest. He said that he would bring a view of the military and higher education that is somewhat different than it might have been during his active duty days. “I was a cold warrior,” he said, “and our national security challenges were very different.” During the Cold War, he said, the focus was on building capability to win wars. Today, preventing a war is considered as important as winning one. Both 9/11 and the forces of globalization have expanded the national security mission, he said. “It’s a reflection of the understanding that we are all in this together,” he said, “and it gives rise to many levels of endeavor and investment of resources. While historically we thought in terms of prevailing in combat, today the span of mili - tary missions is much broader.” Vice Admiral Oliver referred to a statement by the Chairman of the Joint Chiefs of Staff, Admiral Mike Mullin, who has said that the biggest threat to long-term national security is the economy—not the concern that the United States won’t have enough money to buy ships, airplanes, tanks,

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63 SESSION II and helicopters, but the global competition for resources and the struggle between the haves and the have-nots. “All of these things mean that the military interest in research, education, and innovation is broader than I would have visualized even 10 years ago and broader than most people imagine even today.” Vice Admiral Oliver said that in his opinion, current events have been largely defined by the effects of globalization. “Democracy, open markets, and social progress are just a few of the benefits of a global system comprised of mutually interdependent networks of commerce, communications, and governance,” he said. “The commons serve as essential conduits through which the global system prospers.” Yet recent disruptions at vulnerable transit points, he continued, have highlighted dangers that accompany globalization, which include trans-national terrorism, proliferation of sophisticated weapons, economic instability, and inter- national competition for increasingly vital resources. Dependence on Vulnerable Systems “It is no secret that the United States and our partners are facing profound and unsettling shifts in the global balance of power. Ironically, the greatest po - tential beneficiaries of the global system have in some cases become its most problematic users.” For example, he said, anti-satellite missiles may challenge not only military forces but also commercial services and scientific research in space. Recent cyber intrusions have threatened economic and information exchanges, signaling a growing propensity to attack defense and security networks. Increas - ingly, the U.S. military’s freedom of action is threatened by competitors who seek to exploit its dependence upon these vulnerable systems. More specifically, the strategies of potential adversaries seek to deny the U.S. military freedom of action and threaten its ability to project military power. These disturbing trends, Vice Admiral Oliver said, are especially apparent in the proliferation of advanced air defense systems, solid-fuel ballistic missiles, accurate anti-ship cruise missiles, and sophisticated under-water combat systems. “The challenges before us are complex and daunting,” said Vice Admiral Oliver. “In the future we might not know that we are being attacked or by whom, or how to respond. There are many pieces to this global puzzle, and we must as a nation be able to work them all. Hawaii is a piece, and although it is isolated geographi - cally, it is strategically critical to the whole.” Central to addressing such challenges, he said, is higher education for mem - bers of the military. At the undergraduate level, the military has its five service academies, but the majority of officers come from civilian institutions where they may join Reserve Officer Training Corps (ROTC) units and prepare for officer candidate schools. At the graduate level, the services have one joint medical school, and each has its own war college, which are highly focused professional schools. For the broader graduate education of officers and military, many are sent to civilian institutions around the world, and others use GI benefits to pursue degrees on their own.

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64 BUILDING HAWAII’S INNOVATION ECONOMY Broad Graduate Education for the Military Vice Admiral Oliver noted that the only two military research universities that provide a broad graduate education are the Air Force Institute of Technology, in Dayton, Ohio, and the Naval Postgraduate School in Monterey, California. The Naval Postgraduate School, he said, provides graduate-level education for military officers of all services, as well as for government civilians of all federal agencies. It also conducts related research on technology needs for the future security of the United States and its allies. A highly international endeavor, the university normally has faculty working in dozens of countries and currently has 240 interna- tional students on campus from 49 countries pursuing masters and Ph.D. degrees. When the university was founded more than a century ago, it was designed around a core of military-specific engineering programs. Today it has four col - leges, 4 major institutes, 14 departments, and some 50 different master’s- and Ph.D.-level degrees across science and technology, business, public policy, inter- national studies, and operational sciences. It also offers a range of short courses, certificate programs, and a robust distance-learning program, which accounts for one-third of the student population. The university has a dozen distance learning students in Hawaii, he said, along with multiple research projects. Of a faculty of more than 700, about 50 are military officers, and about half of the full-time civilian faculty are on tenure tracks. With some 3,000 degree students, the school is fairly small, even though designated as a “global federal service provider.” It maintains nearly 900 separate research activities with a reimbursable operating budget that “dwarfs the Navy mission funding for educa - tion.” It also maintains Collaborative Research and Development Agreements (CRADAs) and other partnering arrangements with well over 100 universities, corporations, federal agencies, and others. “One thing that makes us unique,” Vice Admiral Oliver said, “besides being a federal government organization, is that most of our research assistants are active- duty military men and women with recent combat experience—in many cases motivated by their own experience to find solutions to problems they faced in the field and in the fleet. We also believe that the future of science and technology lies increasingly in collaboration among military operators, industries, civilian academia, and federal agencies. The Naval Postgraduate School and the military look at the upcoming challenges as not just opportunities for expanded partner- ship in education and research, but as imperatives for securing our homeland in the long term.” In research, he said, his own university partnered with many institutions with similar interests, such as the U.S. Pacific Command and the University of Hawaii. Some areas of common interest that benefit from partnerships, Vice Admiral Oliver said, included the following: • The future Navy anticipates heavy reliance on autonomous vehicles, par- ticularly in anti-submarine warfare. The Naval Post-Graduate School had been

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65 SESSION II tasked by the Secretary of the Navy to create a dedicated center for this research, which would include field experimentation and student theses. • The NPS is experimenting with information collection, analysis, and shar- ing by using commercial devices, like the iPhone, and testing them throughout the Pacific theatre. Many of these capabilities have high potential for dual-use technology spin-offs, such as emergency medicine. • A critical area for future research is meteorology, oceanography, and ocean acoustics. The U.S. Navy is keenly interested in near-term operational consequences of regional climate change, especially in the western Pacific and the polar regions. NPS researchers are modeling the thinning and recession of the polar ice cap and, through joint monitoring exercises with Pacific Rim partners, deepening the understanding of the dynamics of typhoons and ocean-system modeling. • A strong research focus for naval strategy is directed energy, such as laser systems. “Lasers may be the ultimate defense against modern anti-ship missiles,” he said. “And while some applied research must be closely held, the underlying physics is widely publishable.” He said that the school already works closely on directed energy weapon systems and counter measures with Peter Crouch, the University of Hawaii dean of engineering. • Small “nano-satellites” such as the CubeSat, typically 4 inches on a side, are receiving attention for their potential intelligence value. The goal is to rapidly and cheaply deploy a fleet of CubeSats from a single launcher to provide 3-meter- resolution surveillance. The NPS is a leader in CubeSat research and developed the orbital dispenser in widespread use today. Energy Goals for the Military Vice Admiral Oliver noted that energy research requires partnerships and multiple disciplines. “The economic, political, and environmental cost of energy, particularly fossil fuel, is a looming problem for military forces, just as it is for our nation.” Middle East oil is a focus of regional instability, he said, so that greening the U.S. Navy is a high priority. The Navy has set “breathtaking” goals for fleets and shore installations, and the NPS has embarked on studies of bio-fuel performance, energy-efficient materials, and fuel cell and battery technologies. The goal of energy independence is common to both the Navy and the state of Hawaii, he noted. Another area of focus for the NPS is emergency management and prepared - ness. The Center for Infrastructure Defense has unique analytical capabilities to allow regional and national systems to respond to major disruptions, whether caused by deliberate attacks or accidental events, such as those caused by weather or system failures. The Center is currently working in Hawaii to analyze a com- mercial fuel-oil distribution system and the inter-island maritime transportation system.

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66 BUILDING HAWAII’S INNOVATION ECONOMY Vice Admiral Oliver summarized by saying that graduate education had become a strategic investment for the military, bringing both short- and long- term benefits to not just military operations but to society as a whole. “I have mentioned some areas in which we at NPS are engaged,” he said, “but maybe even more important than what we are exploring today is what we will discover together tomorrow.” INFRASTRUCTURE FOR THE 21ST CENTURY ECONOMY: THE ROLE OF THE ECONOMIC DEVELOPMENT ADMINISTRATOIN Barry Johnson Economic Development Administration U.S. Department of Commerce Mr. Johnson said he would frame his talk around regional innovation clusters and their role in advancing economic development. His “real theme,” however, would be transformation—“because it’s transformation that we’re all seeking.” Obviously, he said, the nation faces daunting current challenges, includ - ing natural disasters, man-made disasters, a housing crisis, the decline of the auto and other manufacturing industries, budget restraints at all levels of gov - ernment, and persistently high unemployment. And yet, he said, such chal - lenges often bring new opportunities—in this case, to advance the 21st century economy through collaboration, innovation, research and development, higher production with lower consumption, exports into the global market, and the advancements of rising new sectors, such as green technology and low-carbon industries. A New Model of Economic Development “The opportunities that await us hold promise for the realization of an economy that works for everyone,” he said. “Yet realizing these opportunities requires the adoption of a new approach to economic development policy and practice. We know that the traditional approach to economic development isn’t working. Silos don’t work. Trying to cultivate jobs without leveraging regional assets doesn’t work. And zero or negative sum competition with the next city or county or state does not work. That old model was designed for another time, and a new model is required for a new century.” Mr. Johnson illustrated some of the contrasts between 20th-century economic development and 21st-century economic development in the following terms:

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67 SESSION II 20th Century Economic Development 21st Century Economic Development Domestic competition Global competition, collaboration Zero sum game Positive sum game Growth of jobs Increasing productivity and per capita income Incentives to attract or retain cost-driven firms Investments in talent & infrastructure to support & industries innovation-driven clusters Lead industry attraction and market efforts to Broker innovation networks, connect inventors, firms & industries financers & transformers Quantity of jobs, number of firms attracted/ Quality of jobs, wage & income growth, retained innovation He noted that while the term cluster had become part of the economic development lexicon, it is used in many different contexts. He offered the EDA’s definition: A regional cluster is a geographically bounded, active network of similar, syn- ergistic, or complementary organizations in a sector or industry that leverages the region’s unique competitive strengths to create jobs and broaden prosperity. Mr. Johnson said that clusters are not defined by their size, or composition, or geography. “They can fit within a political boundary or they can straddle political boundaries, whether those boundaries are counties or states.” More broadly, he said, clusters are based on the presence of regional assets, including companies, educational institutions, suppliers and customers, federal, local, and state governments, foundations and other non-profit entities, venture capital firms, and financial institutions. Each of the various entities has a critical role in supporting the overall cluster, or ecosystem. A cluster must be inclusive, he said, “and this is where the transformation has to occur. It’s not just about sitting around a table; that’s just getting together. Collaboration is the shift that occurs when you see yourself as part of the same community as everybody else. You may be the big business with all the money, but you’re sitting across the table from a small social entrepreneurship entity or a small non-profit. In this new model, the one with the money doesn’t rule. Everyone has a unique role that no one else at that table can play. Each of them needs to be there, and be engaged.” Regional Clusters Across Geographic Boundaries Mr. Johnson added that a crucial feature of regional clusters is that when they are functioning well, they reflect the function of economies at larger scale. That is, they help clarify economic realities and highlight opportunities where existing geo-political boundaries may present obstacles. For example, while the adjacent

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68 BUILDING HAWAII’S INNOVATION ECONOMY areas of Northern Virginia, the District of Columbia, and Maryland are separate political areas, current cluster analysis shows how closely bound the parts of this area are to one another. The activities of industries in the three zones transcend the boundaries between them. He turned to some of the best practices of clusters, beginning with strong leadership. “The leader may be a business or a university or local government, but leadership has a quality of charisma that demands respect and generates excitement among the partners,” he said. Successful clusters are also custom - ized, or focused on unique strengths. He saw this attribute in Hawaii, he said, in its strong partnerships, horizontal and vertical, that included industries, non- profits, foundations, and local communities, both small and large. “Everyone’s at the table, ready to make a commitment to collaboration.” Another feature of successful clusters is that they understand the markets they need—not just the local markets, but national and global markets. Finally, they have a roadmap for sustainability. “You tap into the broader universe of resources,” Mr. Johnson said, “but at some point the federal grant or other support ends. How do you sustain your development?” Many states, communities, and nations are moving to clusters as a framework for economic development, he said, at least partly because they have proven to yield high returns on investment. The returns have been noted in job creation, business formation, increased competitiveness, increased innovation, and faster commercialization. At least some of these results, he suggested, occur when cluster members attract other members to the cluster. The Popularity of Clusters Abroad Mr. Johnson then issued a “red flag wakeup call” in saying that the effec - tiveness of clusters was no longer a secret among U.S. competitors. “Make no mistake,” he said, “our international competitors are fast accelerating their utili - zation of clusters as a framework for driving economic development. Certainly all the BRIC countries and the EU countries are doing it. They are focused on it, they are funding it, and they are beginning to reap the benefits.” He said that the Economic Development Administration (EDA) makes a point of meeting twice a year with about 40 other countries to exchange information about economic practices. “And I could spend an hour just telling you how other countries, both large and small, are embracing clusters.” He noted that the President’s economic development policy was rooted in place-based and regional strategies, and that the America Competes Act 17 had described a key role for the EDA in supporting and funding regional clusters. 17 The America COMPETES Act of 2007, which provided a surge of funding for science- and technology-intensive federal agencies, also mandated that each agency cooperate with its partner agencies and offices. The Act was reauthorized in December 2010.

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69 SESSION II He said that the federal government had four key roles in fostering successful regional economic development economies: • Advance a common framework: A common regional framework is in- tended to ensure better alignment of programs and resources. • Support initiatives: The federal government invests in locally generated ideas and programs deemed capable of spurring regional job growth. • Convene stakeholders: An important role is to help groups overcome barriers to partnerships. “Many regional players won’t think of collaborating for strange reasons,” he said, “such as, ‘Well, they won the basketball game 42 years ago and they cheated.’ We don’t have a stake in that argument, so we can come to town and help them overcome those barriers.” • Invest smarter: The federal government has many information resources that are unavailable at the local level, especially about opportunities abroad. In carrying out its mission, Mr. Johnson said, the EDA does not invest in business directly but in the infrastructure in which business can thrive. “As we make strategic investments to support regional clusters,” he said, “we build on a long tradition of best practices to spur regional prosperity. To be sure that the agency is supporting projects that are strategic for the 21st century, EDA supports new investment priorities: projects should be collaborative, demonstrate innova- tion, support public-private partnerships, push toward a clean-tech, sustainable economy, and promote global competitiveness. Addressing the Economically Distressed Populations Mr. Johnson emphasized a final characteristic for today’s regional investments: they should address economically distressed and underserved communities. In the past, he said, government has supported some development projects that are meant to help distressed areas, but they fail to do some. Many projects of monumental scale, such as urban renewal projects that replace dilapidated housing with huge buildings, succeeded in displacing rather than empowering underserved areas.18 “Too often,” he said, “workers would come to their jobs by day and then go home at night to other places. All the people who live in the shadow of this great monument are left unchanged, and still disadvantaged. We believe that’s an issue of national security. If we figure out a way to build direct and deliberate bridges into those populations, they can become the talent pool from which our future leaders will emerge. 18 Mr.Johnson referred in particular to the case of Pittsburgh and detailed studies of urban renewal carried out by researchers at Carnegie Mellon University and elsewhere. See, for example, Mindy Thompson Fullilove, MD, Root Shock: How Tearing Up City Neighborhoods Hurts America, and What We Can Do About It, New York: Ballantine Books/One World, 2005.

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70 BUILDING HAWAII’S INNOVATION ECONOMY Mr. Johnson noted that the EDA supports a suite of programs that are “es - sentially investments in the innovation economy.” Some of those inputs are data, tools, and technical assistance; some are direct support for projects, including physical improvements of buildings, sewer, roadways, or other infrastructure; or “invisible” networking, such as funds for planning, collaborating, and studying an infrastructure and its strengths and weaknesses. The EDA cluster initiatives include the following: • Task Force on Advancing Regional Innovation Clusters (TARIC); • Regional Innovation Acceleration Network (RIAN); • National geospatial cluster mapping initiative; • Registry of organized cluster partnerships; • Urban RICE pilot project; • Regional Entrepreneurship Action Plans. Cluster Mapping “These are the lenses,” Mr. Johnson said, “through which we are viewing the investments, and some of them are brand-new.” For example, the cluster mapping initiative represents the first such survey. It will be undertaken with Professor Michael Porter and colleagues at Harvard, seeking to understand how the cluster model can best be used and how it can form linkages with other clusters domesti - cally and abroad. He pointed out that clusters in urban areas have different needs from those in rural areas, so that separate studies have been designed for each. For example, a regional innovation urban project will examine the unique challenges and op- portunities of developing clusters in inner cities. “In doing this,” he said, “we’ve discovered a really important principle. That is, the federal government has to transform the way it does business. As it relates to cluster initiatives, that means we need to engage horizontally in a way that we have not done historically, when all the departments worked in their own silos. That’s not good enough. Now there’s a real effort for the federal agencies to collaborate and reach across those silos.” Mr. Johnson ended his presentation by describing some EDA activities in Hawaii. Over the past four years the EDA has invested $19.5 million as “catalytic money,” he said, to leverage more private dollars into projects, including: • $3 million to renovate a downtown Honolulu warehouse into an import/ export small business incubator; • $3 million in the Maui Economic Development Board to construct a Re- newable Energy Resources Center in Kihei; and • $300,000 to the High-Tech Development Corporation for business start-up assistance.

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71 SESSION II “We are active and we expect to continue to be active,” he concluded. “You’re doing the things that align with our investment priorities, so we want to encourage you to keep doing what you’re doing and to view us as a worthy partner that can provide guidance and support.” DISCUSSION Moderator Schatz added several points. First, he said that the established industries in the state of Hawaii were showing signs of recovery since the reces - sion. “We have some good news on the tourism front,” he said, “and construction is starting to improve.” Second, the Asian Pacific Economic Cooperation meeting was scheduled for Waikiki in November 2011 with 21 member economies. “We think that’s a tremendous opportunity for both our public and private sectors to reposition Hawaii vis-à-vis Asia, strengthen existing connections, and rebrand ourselves as a serious place to conduct business travel as well as to conduct busi - ness.” Finally, he said, Hawaii had now developed an “unprecedented partnership between the University, the federal government, and state government. That’s something we used to have 20 or 30 years ago, and it had sort of frayed. But now, with a governor from the University and a university president from the federal government, we have a great opportunity to strengthen these partnerships with the private sector.” Dr. Wessner said he would like to hear more discussion about the issues of industrial policy, which “we on the mainland are dancing around. Every other country in the world has an industrial policy, which really means to make your country or state an attractive place for doing business, and picking strategic areas to emphasize. We’ve allowed that debate to degenerate into an argument over pick- ing winners or losers, which to me is the wrong debate. And each time we have elections we change policies. The question is, ‘How we can make strategic deci - sions that might last 5 or 10 years? Otherwise it’s hard to form a serious public- private partnership, which puts us at a disadvantage relative to Asia and Europe.’” Mr. Johnson responded that he did not have the answer, but said that all parties needed to move beyond “historic thinking and being. It’s about a transformative approach. I find that whenever we advance a policy, even our constituents in eco- nomic development tend to ask, ‘Why?’ We need to articulate the case and demon- strate the upside to show how partnerships are preferred to staying where we are.” Virginia Hinshaw, the UH chancellor, said she noticed that the Manufactur- ing Extension Partnership in Hawaii did not include the University of Hawaii, and asked Mr. Kilmer how many universities actively participated. Mr. Kilmer replied that he did not know the details for Hawaii, but that universities were the lead partner for operations at about 17 centers. “But partnerships go much beyond that,” he said. “It depends on the local region. In the southern part of the U.S. mainland, the universities are the primary economic base from Texas to Florida. In other regions, other organizations may lead, but the universities will still be involved.”