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32 BUILDING THE ILLINOIS INNOVATION ECONOMY Panel I The Overall Innovation Challenge Moderator: Alicia Loffler Northwestern University Dr. Loffler introduced herself as director of the innovation and new ventures office at Northwestern, where her job is to “move all this research to the public.” She said that her job is very easy because the university faculty and students are “both inspirational and entrepreneurial.” She said the members of the first panel would introduce innovation challenges and opportunities at the global, national, local, and institutional levels. THE GLOBAL INNOVATION IMPERATIVE Charles Wessner The National Academies Dr. Wessner began by thanking Dr. Mirkin for his leadership in designing a conference that promised to bring sharp focus to Illinois’ innovation strategy. He also extended his thanks to those who had worked together to organize and implement the conference in a “very brief time indeed.” Referring to the location of the conference in Evanston, Illinois, he said that too often people who work in Washington know little about the people or practices of other regions and countries. “People talk about local and regional needs all the time,” he said, “but they do so from within the Beltway. Our program at the National Academies is different in that it meets people where they live and work, and searches for best practices and new ideas that might be useful elsewhere.” Describing the innovation challenge in an international context, Dr. Wessner observed that “governments throughout the world aggressively support their innovation systems in many ways, from building new research parks to

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PROCEEDINGS 33 creating trade, taxation, and manufacturing requirements that favor their own domestic economic development. The clear objective of these policies is to create an economic playing field that is tilted in ways that favor their own companies and products over those of competitors.” In the United States, by contrast, we promote the notion of a “level playing field,” he said, reflecting our belief in the rhetoric of “fair trade” that is grounded in a rules-based trading system, and ignoring the lessons of our own successes. This commitment to the ideal of fair trade, he noted, is shared by very few of our international competitors. “The global trading system is like a soccer game in which the referees do play favorites. The only way to win is not to complain about the refs, but to play harder and tougher.” Playing harder in the innovation arena, he said, requires a strategy to coordinate the strengths of government, academic, and industrial sectors far more effectively than is now the case. The generation of new ideas and products is an acknowledged strength of the United States, he continued. “The U.S. innovation system remains the best in the world, and there is every reason to be proud of it. I spend a fair amount of my time going around the world, and I find that people in every country admire and respect our educational system and its ability to produce the best people and innovations.” Among the positive features of the U.S. innovation system are its robust research universities, generous federal funding of research and development, a vibrant culture of entrepreneurship, significant manufacturing capabilities, openness to new opportunities, and adaptability. However, Dr. Wessner said, recent conditions and policies have threatened to reduce the relative strength of the U.S. innovation system. For example:  State governments, weakened by the financial pressures of the global recession, have reduced their support for the public research universities and held back on incentives to stimulate small business formation.  Reflecting surging investments in Asia and elsewhere, the U.S. share of global R&D investments by government and industry has dropped from 39 percent in 1999 to 34.4 percent in 2010.  Stalled immigration reform results in the loss of some PhD students to U.S. competitors, even though they have been educated in the United States at considerable government expense.  Manufacturing expertise in a wide variety of high-technology products has shifted overseas.  Early-stage financing for small firms has fallen, with seed stage investments dropping 48 percent in 2011.  The innovation ecosystem provides insufficient support for the translation of discoveries into successful products.

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34 BUILDING THE ILLINOIS INNOVATION ECONOMY “We are still excellent at getting ideas, building prototypes, and starting small companies,” he said. “We generate the innovation, but it is often someone else that takes that innovation overseas, builds out the supply chain, and creates a profitable new industry.” Dr. Wessner suggested one reason the United States allows this to happen is a tacit assumption that the country is becoming a service economy and can afford to let others become the leaders in manufacturing. In counterpoint to this assumption, he said, are the policies of major U.S. trading partners. Virtually all of them provide extensive assistance for not only R&D but also in creating policies that speed the translation of innovations toward the marketplace. Countries with such policies include Germany, France, the United Kingdom, Brazil, India, Taiwan, China, South Korea, and Japan. “The rest of the world,” he said, “is also increasingly focused on providing sustained support for universities, funding for research, and help for small businesses.” As an example, he outlined China’s goal to become an “innovation- driven economy” by 2020. China is a large country, he said, but still struggles with a high rate of poverty. Nonetheless, it invests boldly in innovation, doubling its spending on basic research between 2004 and 2008 and providing tax incentives for enterprises that invest in R&D. Like Taiwan and South Korea, China continues to invest in new, world-class universities, while the United States relies on universities built generations ago. Key strategies are to build innovation clusters through the development of large S&T parks and acquire technologies and talent from abroad.2 China, he said, has gained competency partly by compelling foreign firms that seek to sell in the Chinese market to set up manufacturing plants in China. For example, it enforces “domestic content” rules by “enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.”3 The workings of such a strategy can be seen in the wind energy industry. The Chinese requirement of 70 percent domestic content has led to a drop in the foreign share of wind energy production from 75 percent in 2004 to 14 percent in 2009.4 An example on a very different scale is that of Singapore, which has a population of only 4.5 million people. The goal of this city-state is to be Asia’s preeminent financial and high-tech hub. Singapore has a GDP per capita of about $61,000, compared with about $48,400 for the United States.5 Singapore plans to invest about $5 billion under its Research, Innovation, and Enterprise 2015 plan. The Agency for Science, Technology, and Research (A*STAR) has 2 Mu Rongpin, UNESCO Science Report, 2010. 3 China’s National Medium- and Long-Term Plan for the Development of Science and Technology, 2006-2020. 4 U.S. Chamber of Commerce, 2011. At the same time, the share of the Chinese wind market held by China’s three largest domestic wind firms, Sinovel, Goldwind, and Dongfang, has risen to more than 80 percent of wind power equipment sales within China. 5 Comparable figures, in terms of purchasing power parity and U.S. dollars, are: Germany $39,211, the European Union $31,000, and China $8,400. Source: The World Bank, 2011.

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PROCEEDINGS 35 created strategies to attract a skilled R&D work force from abroad, provide funding for early-stage firms, stimulate private-sector investments, and operate Singapore’s famed research parks, Biopolis and Fusionopolis. Taiwan’s’ innovation strategy is equally ambitious, and has already created a successful research and development structure of public-private partnerships. The Hsinchu Park complex houses universities, research institutes, and businesses, including two of the world’s top semiconductor foundries, Taiwan Semiconductor Manufacturing Companies (TSMC) and United Microelectronics Corporation (UMC). Its Industrial Technology Research Institute (ITRI) has proven to be an effective mechanism to support research, development, and commercialization, and a mechanism that smoothly moves university graduates into positions in industry. It has also emulated aspects of the U.S.’s Small Business Innovation Research (SBIR) program to deliver generous public support for startup companies. “Asian countries have copied some of our programs because they are diligent in observing what the rest of the world is doing,” said Dr. Wessner. “Their programs don’t all work; they make mistakes, some have problems with corruption, and sometimes they lack peer review. But the scale of the effort is impressive.” Both the ITRI of Taiwan and the Fraunhofer institutes of Germany, he said, could be understood as training grounds for skilled scientists and technicians. “The question is not whether this strategy is the best one, but which strategies the United States needs to adopt to remain competitive.” A common perception is that the United States cannot compete with low-wage companies, but the example of Germany suggests that labor costs are only one determinant of competitiveness. German manufacturing wages average about $46 an hour, while the United States average is about $34 an hour.6 German businesses are heavily taxed and tightly regulated, and most have representatives of labor unions on their boards, yet the Germans export massively to China. Other features of the German innovation strategy include a focus on traditional industries, such as chemicals, autos, and appliances—a strategy criticized as low-growth by many economists. Its medium-sized firms (Mittelstand), many of them family owned, succeed with high-quality products for niche markets, including machine tools and appliances. The educational system features an extensive and advanced network of vocational training institutions, including continuing vocational training for workers. Manufacturing firms enjoy stable access to finance. Germany’s Fraunhofer model is also an example of a global best practice, he said. With a focus on applications, the network of 60 research institutes provides effective R&D support for both SMEs and large companies. The program’s $2.4 billion annual budget is diversified by sector, with contributions from the German federal and state governments, contracts with 6 Bureau of Labor Statistics, “International Comparisons of Hourly Compensation Costs in Manufacturing, 2009,” News Release, March 8, 2011, Table 1.

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36 BUILDING THE ILLINOIS INNOVATION ECONOMY manufacturing clients, and publicly funded research projects, including EU projects. Seven Fraunhofer Institutes have been established in the United States, demonstrating that this model could work here. Germany’s innovation strategy is well-funded, multifaceted, and, by some measures, quite successful. As mentioned, German industry has had considerable success in exporting goods to China, which doubled in value between 2007 and 2011 to €65 billion.7 Even during the current recession, Germany’s federal and state governments plan to raise spending levels for education and research to 10 percent of GDP by 2015, with 7 percent targeted for education and 3 percent for research. Its new High-Tech Strategy 2020 also seeks to create lead markets in Germany, intensify cooperation between research and industry, improve the framework conditions for innovations, and launch an Excellence Initiative to strengthen select universities. He turned to the topic of government spending to support research and development. Combined public and private outlays in the United States, at $415 billion (2010), far exceed that of China ($149 billion), Japan ($148 billion), and Germany ($83 billion), the next three largest spenders. Despite this leadership, however, over half of U.S. government’s R&D (which was $148 billion in 2010) is spent by the Department of Defense ($78 billion), and some 90 percent of that amount is dedicated to weapons systems development.8 “There are good reasons for this defense research and development expenditure,” said Dr. Wessner. “We are at war, and we have to make sure military equipment works right the first time and every time.” But because the amount of nondefense R&D spending by DoD is so small, there is little support for “the scientific seed corn for the future.” Beyond that, he said, “we are seriously overstating to ourselves what we are spending in the research space.” For example, federal spending as a share of GDP has been declining since the mid-1960s.9 While R&D spending by the private sector has continued to rise, and provides a major source of innovation, he said, a high proportion of private- sector spending is dedicated not to fueling innovation, but to incremental improvement of existing products. Such spending patterns reflect major risks for the United States, he said. One is complacency about the U.S. competitive position vis-à-vis its major trading partners. A second is the fiscal strain caused by current military engagements; for FY2011, the estimated spending in Iraq of $51 billion and in Afghanistan of $120 billion10 together exceeds the total U.S. R&D budget of $148 billion. Spending also focuses on current consumption rather than investments for the future, in contrast to the strategies of Germany, China, and other countries. The United States pays limited attention to the composition of 7 Financial Times, April 20, 2012. Before 2000, Germany had virtually no exports to China. 8 American Association for the Advancement of Science, 2010. 9 National Science Board, Science and Engineering Indicators 2012, Arlington, VA: National Science Foundation, 2012. 10 Estimate by the Congressional Research Service.

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PROCEEDINGS 37 the economy, including trade and investment policy, and fails to focus sufficiently on the commercialization of research and on manufacturing. While some question the government’s dominant role in supporting basic research, many are unaware of the government’s long-standing role in developing U.S. industries. American society celebrates the “Yankee ingenuity” of the “lone inventor,” but since the nation’s founding, many of its most celebrated inventors have received substantial assistance from the government. He then showed a slide highlighting the important role that the federal government has played throughout the history of the republic in developing major transformative technologies and key U.S. industries.  1798─Grant to Eli Whitney to produce muskets with interchangeable parts, founds first machine tool industry in the world  1842─Samuel Morse receives award to demonstrate feasibility of telegraph  1903−Wright Brothers fly, fulfilling the terms of an Army contract!  1915─National Advisory Committee for Aeronautics instrumental in rapid advance in commercial and military aircraft technology  1919−Radio manufacturing (RCA) founded on initiative (equity and Board Membership) of U.S. Navy with commercial and military rationale.  1925−U.S. Postal Act launched U.S. Aircraft Industry  1940s, ’50s, ’60s─Radar, Jet Aircraft, Computers, Satellites, Nuclear Energy, Semiconductors  1969-1990s─ Government investment in forerunners of the Internet (Arpanet) and establishment of the Global Positioning System  2000s−Focus on Nanotechnologies, Flexible Electronics, Biomedical Research, Additive Manufacturing. “The effects of government-supported R&D are all around us,” he said. “You drive on the interstate highway system to a federally supported airport, board a federally supported airframe powered by federally supported turbines, and take off under the guidance of the federal air traffic control system to go to a federally supported university to review the prospects of a promising company receiving federal awards to commercialize its technology developed through federally supported research. Even so, some seem to forget these close linkages between public policy, private companies, and national growth.” Finally, he turned to the topic of manufacturing and its role in innovation. Manufacturing matters to the economy as a whole, he said, and the steady decline in manufacturing employment since 1980 is a cause for concern. Today, manufacturing produces $1.6 trillion of value each year; supports an estimated 18.6 million jobs in the United States, about one in six private-sector jobs; strengthens the nation’s technological capacity, with U.S.-based

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38 BUILDING THE ILLINOIS INNOVATION ECONOMY manufacturers conducting half of all private R&D; improves competitiveness; and expands trade.11 Local production is necessary to sustain innovation, particularly for process technologies; and in many cases, advanced manufacturing depends on the co-location of design and production so that a network of feedback and teamwork leads to continual product improvement and the next innovations. Some people argue that manufacturing job losses are caused by growth in productivity, he said, an argument with some merit. But many job losses reflect actual decline of output that is neither inevitable nor normal. This is demonstrated by the fact that manufacturing is growing in many productive nations, including developed nations, such as Germany, with high costs, high taxes, and strict regulations.12 Often ignored are the effects of “modern mercantilism” that involves combinations of currency manipulation, closed markets, tax subsidies, tariffs, direct subsidies of free land and capital, discriminatory national procurement, and forced transfer of IP and obligatory joint ventures.13 “So this decline should be of grave concern to us,” he said. “We need to develop more manufacturing onshore.” In response to the decline in the U.S. trade balance for manufactured products—including advanced technology products—since about 1988,14 the President has announced a new National Network for Manufacturing Innovation. In addition, the President’s Council of Advisors on Science and Technology (PCAST) released a report advocating a series of actions to strengthen advanced manufacturing. It makes 16 recommendations organized under three “pillars”:  Enabling innovation  Securing the talent pipeline  Improving the business climate 15 In the same month, he said, the National Academies STEP Board released a report on innovation that includes detailed studies of innovation systems in the United States and other nations. 16 This report documents the rapid transformation of the global innovation landscape and recommends these four key goals for the United States: 11 National Association of Manufacturers, 2009. 12 The Information Technology & Innovation Foundation, 2012. 13 See Clyde Prestowitz, “Competitiveness Council wide of its mark,” Foreign Policy December 16, 2011. 14 Gregory Tassey, “Rationales and mechanisms for revitalizing U.S. manufacturing R&D strategies.” Journal of Technology Transfer January 29, 2010. 15 President’s Council of Advisors on Science and Technology, Capturing Domestic Competitive Advantage in Advanced Manufacturing, Washington, DC: The White House, July 2012. 16 National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, Charles W. Wessner and Alan Wm. Wolff eds., Washington, DC: The National Academies Press, 2012.

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PROCEEDINGS 39  Learn about and monitor innovation policies in other countries;  Reinforce the policies and programs that provide the foundations for knowledge-based growth;  Capture greater value from public investments in research through partnerships and support for applied research and manufacturing; and  Cooperate more actively with other nations to advance innovations that address shared global challenges. “We can all see that we have to work harder,” Dr. Wessner concluded. “The limitations of our system are clear for us to see, not least when it comes to education and worker training. Our current vocational training efforts are simply not enough. I know we can do better, and make better use of the tools we already have to meet the innovation challenge in the 21st century. I think this conference can be one step toward addressing this challenge.” Discussion A questioner asked about the value of export controls on sensitive technologies. Dr. Wessner agreed that the issue presents a classic problem of exports versus security, with one solution being to in build “higher walls around much smaller number of technologies,” but he argued that “universities to the maximum extent possible should remain untouched by those kinds of controls.” The controls are more damaging than helpful when they prevent people from doing important research, he said, and it is not in the nation’s interest to prevent talented researchers in U.S. institutions from working on critical topics on the basis of their immigration status. “A talented scientist who’s a foreign national one year,” he said, “might be an American citizen a few years later. Or she might have to return to work in South Korea or China if it is impossible to find work in the United States.” AN OVERVIEW OF FEDERAL CLUSTER POLICY John Fernandez SNR Denton Mr. Fernandez, who introduced himself as “a Midwesterner,” and who is a former mayor of Bloomington, Indiana and former assistant Secretary of Commerce for Economic Development, brought a combination of federal and regional experiences to the conference. Currently practicing law with SNR Denton in Washington, he said he would offer an overview of cluster policies at the federal level, much of which would be familiar to “people outside Washington. We tend to be the last ones to adopt these smart policies that are happening everywhere else in America.”

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40 BUILDING THE ILLINOIS INNOVATION ECONOMY Clusters—An Established Concept The idea of clusters as part of economic development strategy is not new, he said. “Even the small agency I used to run has supported research in this area for almost 20 years.” A body of work has been funded by the federal government, tools have been developed for practitioners, and work has been done by academic researchers and think tanks. He cited studies on cluster-based economic development, measuring regional innovation, linking regional competitiveness to investment, and clusters of green businesses. “We were doing clusters even in Bloomington, Indiana,” he said. In 1996, Bloomington led an effort to build a public-private partnership in support of the local life science and information technology industries. It used the “classic cluster model,” he said, bringing together sources of innovation and research from the university and small businesses, some of which commercialized the new technologies. It aligned the development of local talent from both the university and the community colleges in trying to build an innovation ecosystem. A new element in the past few years, he said, is the federal government’s interest in not only studying clusters but actively participating in planning and supporting them. This shift has been gradual, he said, and slower than he would like, but he did call it significant.17 “In context of the global economy,” he said, “the only way you can compete is as regions. The federal government is in a unique position to finance and be a catalyst to help groups work across state or other political borders. That’s always a challenge, especially for elected officials.” He recalled from his days as a mayor that his constituents expected him to create jobs only in his own back yard—not the back yard of the next town. “The federal government is different, because it can get people to move and act across borders,” he said. “We saw that here in Chicago when we helped fund a regional study of the area where parts of Wisconsin, Michigan, Illinois, and Indiana come together. We can be a catalyst for some of these things.” He acknowledged that it might seem odd to emphasize the policy of cluster development in 2012 when it had been studied and acknowledged for decades. He argued, however, that changes in policy took place only slowly in Washington, and the new emphasis on innovation was accepted only slowly. An important turning point, he said, was the America COMPETES Reauthorization Act of 2010, when the Federal government and Congress agreed on the value of regional strategies and embedded in the Act new authorities that actually drive 17 He cited several recent studies that describe this policy development, including:  Maryann Feldman and Lauren Lanahan, “Silos of Small Beer: A Case Study of the Efficacy of Federal Innovation Programs in a Key Midwest Regional Economy,” Science Progress 2010.  Mark Muro and Bruce Katz , “The New ‘Cluster Moment’: How Regional Innovation Clusters Can Foster the Next Economy,” Washington, DC: The Brookings Institution, September 2010.  Jonathan Sallet, Ed Paisley, and Justin R. Masterman, “The Geography of Innovation—The Federal Government and the Growth of Regional Innovation Clusters,” Science Progress 2009.

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PROCEEDINGS 41 those strategies. The Act provided a definition of a regional cluster as a geographically bounded network of similar, synergistic, or complementary entities engaged in a particular industry sector. He said that cluster entities also share specialized infrastructure, labor markets, and services. Funding for cluster authorities was not yet available, he said, “but at least the structure is there, and the acknowledgment that something real can happen, with the federal government playing a meaningful role.” One essential shift in the 21st century, he said was a change in economic development characteristics. Examples include shifting from:  domestic competition in a zero sum game toward global competition and collaboration in a positive sum game;  a primary goal of providing jobs toward increasing productivity and per capita income;  incentives to attract or retain cost-driven firms toward investments in talent and infrastructure to support innovation-driven clusters;  incentives to attract cost-driven firms toward innovation networks connecting inventors, financiers, and transformers;  performance metrics that include quantities of jobs and firms toward those that measure quality of jobs, wage and income growth, and innovation. “We’re still operating in Washington with the 20th century model,” he said. “When I first started to talk about cluster policy on Capitol Hill, you’d have thought I was trying something radical.” A More Catalytic Approach He suggested moving money away from “the old, stale, inadequate, unnecessary” models of economic development, where money is spent “on things everybody knew didn’t work.” Instead, he proposed moving it into “new areas we knew could be catalytic and have high impact.” He noted that Congress is still dominated by legislators from small towns and rural environments, and the traditional mindset is suspicious of clusters. “Many legislators hear only that you’re going to give more money to university communities. It they don’t have a university where they live, they stay with the old stuff: roads, bridges, or another industrial park. While many people fear they have nothing to gain from the new economy, the truth is that they are already in that economy. There is tremendous innovation happening everywhere in America, including rural communities, but we have to get people moving into the 21st century.”

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42 BUILDING THE ILLINOIS INNOVATION ECONOMY A Focus on Clusters Economic development today, he said, is about the global economy. It requires aligning human capital with job needs; developing enabling infrastructure; increasing spatial efficiency; creating effective public and civic culture and institutions; and enhancing regional clusters. “I believe that to build an ecosystem,” he said, “you need an intermediary, and the best kinds are public-private partnerships organized around industry sectors. Industries are the agents that classically drive regional clusters.” From the outset of the Obama administration, he said, his agency was very involved in cluster initiatives. With clusters a priority, he had the opportunity to develop and apply new tools to support innovation. A primary objective, he said, was to “knock down some silos” between agencies with common economic development objectives. Some barriers were difficult to overcome, he said, but a group of people formed who were willing to try to improve access. The first structure to attempt this was the White House Taskforce for the Advancement of Regional innovation Clusters (TARIC). The Department of Energy, in particular, was able to apply some cluster principles at their innovation hubs, which in themselves represented proto-clusters. These became known as Energy Regional Innovation Clusters, or ERICs. “They were an opportunity to shine a thin bright light on the concept,” he said, “so all of us rallied around and did that.” ERICs involved six agencies and $130 million in federal investments; the first of them was the Greater Philadelphia Innovation Cluster. There were other opportunities for collaboration as well. The Space Coast Cluster focused the work of four agencies on clean technology and clean energy. The concept was to connect the laboratories of the Environmental Protection Administration with the small business community and support the creation of new businesses and jobs. The Southern Ohio Water Cluster, locate at EPA’s Water Technology Laboratory in Cincinnati, also became an ERIC, championed by the Small Business Administration. SBA Administrator Karen Mills had been a proponent of clusters for many years, and supported a wide range of activities. He said that many federal initiatives are opposed on the grounds that the government should not be picking winners or losers. “But we’re not doing that,” he said. “That’s the beautiful thing about this approach. We’re not picking any winners; applicants and people are. They’re saying, Based on the strength of our economy, or the DNA of our regional economy, these are the areas where we think we have the best opportunities; help us accelerate what we’re doing. As a result, we fund a wide range of sectors, including the smart grid, nuclear energy, hydrogen fuel cells, agriculture, and defense.” The Economic Development Administration (EDA) also collaborates with the cluster-mapping initiative of Michael Porter at Harvard University to provide tools for policy makers. Goals are to track cluster initiatives, analyze

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46 BUILDING THE ILLINOIS INNOVATION ECONOMY investment in Illinois; and  Raise awareness and visibility for Illinois’ innovation ecosystem and advocate for state and federal policies to enhance its development. The ISTC enhances talent, investment, and job growth, he said, through strategic public-private partnerships, leveraging the state’s world class assets and federal projects to enhance Illinois’ standing as a hub for innovation and entrepreneurship. “We are only as strong as our member organizations,” he said, referring to many of the conference participants, including Argonne National Laboratory, University of Chicago, Northwestern University, the University of Illinois, Illinois Institute of Technology, Abbott Laboratories, Baxter, industry groups, and non-profits. The ISTC also works with partner NGOs, many of which were represented that day. The value and the strength of the ISTC, he continued, was its ability to build bridges across sectors, disciplines, and institutions. The ISTC, he said, “is an incubator for executable ideas and fundable projects that works to advanced knowledge and create value.” He saw the organization also as a “nexus between industry, government, and academia,” and said he would like to position Illinois to seek “very targeted, sector-based dollars and initiatives.” The ISTC had recently worked with Argonne, for example, on a $100 million proposal for a DOE energy storage hub. It had also worked with the University of Illinois to join the national network of advanced manufacturing discussed earlier in the day. The Coalition has a global focus, he said, including a partnership in smart grid technology with the Korean government and another in bioscience with Shanghai and Brazil. He said the ISTC has three objectives in building an Illinois innovation economy. The first was stakeholder engagement, or harnessing diverse stakeholders, to bring more of them into contact through networks and pathways. “We have a lot of brainpower in the state,” he said, “and oftentimes the key is to get the right mixture of people and connect them across institutions and industries.” The second objective was to expand early-stage financing. This was especially urgent, he said, because the economic downturn had driven financing toward later, less-risky stages of company growth. Without early-stage funding, “promising technology takes far longer to commercialize.” The third challenge was infrastructure and asset alignment. While Illinois has a strong knowledge and research infrastructure through its national labs and universities, these assets need to be better mapped and aligned to create a more efficient and productive ecosystem. He noted that Governor Quinn had taken the leadership role in cultivating the Illinois Innovation Council, which he called “a dynamic group of public-private partners,” to develop and facilitate the state’s strengths. The Council, chaired by Brad Keywell of Lightbank, works to “connect the dots among research, talent, and ideas.” The organization is very open, he said, welcoming anyone to attend and present ideas. He followed up on the Governor’s description of the Open Data

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PROCEEDINGS 47 Initiative. Placing government data sets online, he said, was inspired by federal government policy and intended to find creative new ways to use state government data sets locally, both for policy makers and in support of new entrepreneurial activity through new data applications. “We do plan to expand this initiative,” he said, “to have more municipalities take part at the local level and competitions that invite developers to use the data in new ways.” An active area for the ISTC, he said, is the Policy Academy on Advanced Manufacturing, which originated with discussions by the National Governor’s Association. Illinois was one of seven states selected to participate in this Academy, partly because of its global leadership in not only food and agriculture, but also in the manufacturing fields of biomedical devices, heavy machinery and equipment, and green technologies. He said that since 2010, some 36 percent of all new jobs were created in manufacturing, and that the group seeks to ensure that U.S. companies can continue to compete globally in innovation. The ISTC’s role is to better connect the efforts of industry, government, and research institutions, “which aren’t as connected as they need to be.” Another key element of the Coalition’s mission, he said, was to make sure that state legislators and policy makers are aware of innovation activities, especially those in science and technology. To build this awareness, the Coalition has helped to establish the Research, Development, and Innovation Caucus of the Illinois General Assembly in Springfield, the state capital, in order to advise state leaders on efforts appropriate to state policy. “This is a bipartisan group we created last session,” he said, “and right away it has had some tangible impact by extending the life of the R&D tax credit and reauthorizing the Treasury’s Investment Fund.” The ISTC also generates an Illinois Innovation Index, in partnership with the Chicago Metropolitan Agency for Planning (CMAP), World Business Chicago, and the Chicagoland Chamber of Commerce. The function is to educate stakeholders through a monthly publication that reports on key metrics of the Illinois innovation economy, including analysis, benchmarking, and promotion of innovation and entrepreneurial activity metrics. It tracks data on such topics as venture capital growth, STEM education, patents, and trademarks. A second major area of interest to the ISTC is early-stage financing. As described earlier by Governor Quinn, the state was able to leverage $78 million in treasury funds from the State Small Business Credit Initiative. The funding has been used to support three programs that spur institutional lending to small businesses and one program to leverage private venture capital in start-ups and high-growth businesses. The VC fund, or Invest Illinois Venture Fund, received $20 million of that allocation to support young, innovative companies judged to have high potential for future growth. By the time of the conference, this fund had invested $4.2 million in 14 deals, leveraging about $16.7 million in private investments. The ISTC also works to align various assets with infrastructure to improve available space for innovation, especially in technology parks. Current

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48 BUILDING THE ILLINOIS INNOVATION ECONOMY efforts are focused on the 1871 Digital Tech Incubator, a 50,000-square-foot technology park to launch and grow early-stage technology start-ups.19 The state has made a capital commitment of $2.3 million, and is being joined by private firms, including Comcast, Cisco, and Chase. A number of universities have opened offices there, as has the ISTC itself. The ISTC has also helped to promote the state’s research and technology parks, including the Illinois Science and Technology Park in Skokie on a site once occupied by Searle and Monsanto laboratories. This site is being “reinvigorated” as a public-private partnership with the initial stimulus of a $20 million capital commitment from the state government and the collaboration of the Forest City Science + Technology Group. The site is designed as a home for spinouts of Northwestern University, already including NanoInk, Nanotope, Polyera, and NanoSonix, and will also serve as a hub for STEM learning. Partners include the village of Skokie and community colleges that will use the site for technical training programs. A parallel infrastructure project is the Open Innovation Network, intended as a statewide database of researcher expertise, publications, patents, grants, and unique facilities or equipment. For a long time, he said, policy makers and planners had felt the need to gather information that is fundamental to building university-industry collaborations and better equipping research leaders to build teams ready to compete for federal funding opportunities. He then introduced his colleague Edward Fetters, director of program management at the ISTC, whose primary responsibility is the Illinois Nanotechnology Collaborative (INC). Mr. Fetters said that the INC was a good example of what the ISTC does—working in different sectors that have overlapping strategic strengths. This project began with a planning grant from the Small Business Association (SBA) in September 2010 to develop a road map based on the potential of nanotechnology to be a major economic driver for the state. The road map calls for the pursuit of challenges based on current talent and assets, including the fields of energy, clean water, personalized medicine, and advanced manufacturing. Current assets, he said, include more than 70 nanotech companies, including both pure-play nanotech companies and others with nano-enabled products. The state has more than 20 departments or divisions conducting nanotechnology research at its major universities and national labs, as well as at the clusters already located at Northwestern’s Illinois Science and Technology Park and the Research Park at the University of Illinois. The nanotechnology report just being released by ISTC carried a full market analysis of nanotechnology assets, research talent, and infrastructure. It also described federal funding trends and identified a series of grand challenges 19 The organization 1871 was named for the year of the Chicago fire. In the words of the organization’s website: “The story of the Great Chicago Fire of 1871 isn’t really about the fire. It’s about what happened next: A remarkable moment when the most brilliant engineers, architects and inventors came together to build a new city.” .

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PROCEEDINGS 49 the state is advised to pursue on the basis of the nanotech ecosystem in place. The first such challenge was energy and energy storage, because of its “great global importance, funding priority for the federal government, and the assets already present in Illinois.” Technologies developed in the state, for example, power the batteries of the Chevrolet Volt—although the batteries themselves are manufactured in Holland, Michigan. Other energy-related nanotechnology efforts include:  Nano-structured materials to improve hydrogen membrane and storage materials and catalysts for fuel cells;  Nanoscience-based options to convert waste heat from computers, automobiles, homes, and power plants to usable electrical power;  Wires containing carbon nanotubes to reduce power losses in the electric grid during transmission. A second grand challenge for nanotechnology, he said, was the provision of clean water. For example, nanoparticles may someday be used to clean industrial water pollutants from groundwater through chemical reactions that render them harmless—at much lower cost than pumping the water out of the ground for treatment. Also, in Milwaukee, startup companies are using nanotech filtration for water from Lake Michigan, he said, and “we should be doing the same.” The next set of opportunities he listed under the topic of personalized medicine. For example:  Nanotechnology can make the tools of medicine cheaper and more effective through large-scale replication of nanostructures;  Research and diagnosis can be made more efficient, as single-molecule detection technologies increase efficiency and decrease misdiagnoses;  Sensors and implantable devices can be developed to allow for continuous health monitoring and semi-automated treatment. Finally, the grand challenge of advanced manufacturing is designed to collaborate with the White House’s National Manufacturing Initiative to apply nanotechnologies or nanomaterials to new or existing manufacturing. Opportunities include the application of novel process to known nanoscale materials, components or devices, or the use of wholly new nanomaterials or processes. The Illinois Nanotechnology Collaborative has the potential build a strong new infrastructure for Illinois, said Mr. Fetters, but only if the research can be commercialized and connected to real-world applications and companies. The INC, he said, can help aid these commercialization efforts, act as a clearinghouse for nanotechnology activities, educate the public and public

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50 BUILDING THE ILLINOIS INNOVATION ECONOMY officials, and advocate for the nanotechnology ecosystem in Illinois. The group’s report on nanotechnology was made available during the conference on its website.20 To implement its plans, the INC has developed a portfolio of supporting resources: 1. Its Proof of Concept Centers are designed to accelerate the commercialization of innovations by facilitating the exchange of ideas between university innovators and industry via mentors associated with the center. Both Northwestern and the University of Illinois were named by a recent report of the Kauffman Foundation as model locations to establish such centers.21 According to the plan, the centers will be virtual, not requiring physical structures. 2. A Shared Facilities Program is essential for the complex endeavors of nanotechnology, which require specialized and expensive tools. Nanotech start-ups seldom have access to such tools, while larger institutions do. The ISTC supports a nanotech commercialization grant program to ease the financial burden of facilities that wish to help start- ups but need to offset the staff and overhead costs. 3. A Workforce Development Program is needed to train people to work in companies as they scale up. Currently, many nanotech companies employ PhD-level lab technicians, who are the only people with the requisite skills. This model is not scalable for a profit- motivated companies, when an A. A.-level lab technician with proper training could do the work at half the salary. Because companies prefer to be located where a skilled workforce is located, Illinois is likely to benefit from reinforcing the skills level of its young people through two-plus-two high school and community college programs or standalone community college programs. A new project providing hands-on training to students is the Nanotechnology Employment, Education, and Economic Development Initiative (NE3I) run jointly by Illinois Science + Technology Park, NanoInk, Oakton Community College, the State of Illinois, and the Village of Skokie. It is reinforced by Illinois Pathways STEM Learning Exchanges, a partnership between the state Department of Commerce and Economic Development and the state Board of Education. “The goal,” he said, “is to create a pipeline of students and professionals with the skills needed to work in nano labs.” 20 . 21 “Proof of Concept Centers: Accelerating the Commercialization of University Innovation,” Ewing Marion Kauffman Foundation, January 2008.

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PROCEEDINGS 51 4. Matching SBIR Grants for small firms. “As venture funding moves toward later stages, we need that early-stage financing. Illinois both needs to capture more SBIR funding and to create the support to make that happen. The ISTC approach is to create technical assistance programs to help folks in their applications, and to provide matching grant funding to accelerate the research itself that is funded by SBIRs.” A PERSPECTIVE FROM THE IT INDUSTRY Dennis Roberson Illinois Institute of Technology (IIT) Dr. Roberson, who has worked both in academia at the Illinois Institute of Technology and in the private sector, at Motorola, said that he would offer a “decidedly different, very personal” perspective on the information technology (IT) industry and what is required to “create true innovation in that area.” He began with the assertion that innovation occurs most often where innovation has occurred before. “That may seem odd,” he said, “but it is the case. We talk about it daily: an innovative company or individual or institution. The reason we talk about it is that people establish themselves and move in a progression engendered by their environment. This environment is an essential ingredient of some institutions.” Such an environment is progressive and desirable, he said, and it can be supported by forums, recognition, facilities in universities, and government entities. “It can also be squelched,” he added. Underlying innovation is a well-educated, creative workforce, and there are many ways in which the innovation ecosystem falls short in generating this workforce. Such a workforce depends “training in innovation itself,” he said, and in entrepreneurship. Innovation occurs in large as well as small companies, but large companies often lack the structure that “allows innovation to take flight.” Other elements needed to create this workforce are the continuing education programs of universities, the partnerships between cities and community colleges, “and the obligation of companies to support the continuing education of their own employees.” This last notion was often forgotten, he said, when businesses overlooked their responsibility in the continuum of education. “I become angry listening to companies complain about not finding the people they need. It is the job of these companies to educate people who are emerging into new jobs, and even to train students who are new and raw but who have great talents.” Also required as a platform for innovation, he continued, is infrastructure, for which Chicago is well known. The first major route for sending goods east and west across the United States, he recalled, was the waterway linking the Mississippi River to the Great Lakes, with a portage from the Chicago River to the Illinois River. To this form of transit was added the

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52 BUILDING THE ILLINOIS INNOVATION ECONOMY railroad structure, including both transcontinental and many local lines, and later the Interstate Highway System. Illinois ranks third in the nation in total Interstate miles, after the much larger states of Texas and California.22 In addition, he said, the highways and railroads of Illinois provide all- important rights-of-way in laying fiber-optic cable for the internet and “Internet 2.” The availability of broadband is not only critical for innovation, he said, but its production is also becoming a greater engineering challenge nationwide. “We have a huge need for power to maintain the Internet and the web,” he said. “Information technology is the biggest user of electrical power in the United States now; the big databases of Google and Amazon and Microsoft and government are the modern steel mills. They absorb power to run the electronics and then more power to cool it. Having reliable power that is hopefully green is essential to the IT industry.”23 Innovation requires the right physical spaces to support creative activity, he continued, including environments that promote interaction. “It’s nice to talk about working at the beach, or at home,” he said. “But for innovation you need places to interact with other people.24 Being together as human beings is really important. You need access to one another as well as to the equipment supply.” He added several more features essential to an innovation ecosystem:  Community: In addition to actual work spaces, innovators need inviting living spaces in safe communities with a wide array of entertainment opportunities: parks, restaurants, culture events, sports. “If you’re going to have an innovation infrastructure, you need an environment that supports human activities.”  Services: Innovation requires the nuts and bolts used by business if an idea is to find a smooth transition toward the marketplace, including the functions of accounting, business planning, payroll administration, and taxes. The ecosystem needs both general and specialized legal services to support business formation, agreements, and intellectual property issues, as well as marketing, public relations, human resources, and event planning.  Financing: The Midwest, unlike Silicon Valley, does not have a strong tradition of capital formation and venture investment, he said. For IT start-ups, a range of private investment forms are needed, including personal investment, sweat equity, willing friends and family, IT- knowledgeable angels, category-specific venture capital firms, accessible private equity, and IT industry-savvy commercial banks. “People have to learn that it’s okay to invest in a start-up,” he said. 22 . 23 The largest supercomputers, such as IBM’s Sequoia, may draw more than 5 megawatts of electricity. 24 The conference was held at the Allen Center at Northwestern University.

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PROCEEDINGS 53 “We need IT-savvy banks in Chicago that are ready to invest here, and IT start-ups that grow past the habit of going to Silicon Valley banks.”  Government: Local and regional governments need to offer a more supportive structure for innovation, featuring clear regulations, competitive tax and fee regimes, support for major conferences, and better access to International connections, such as consulates. He concluded with his own personal assessment of the innovation ecosystem. He offered a grade of “B” for the first six areas he emphasized: conducive environment, educated workforce, network infrastructure, supportive work environment, community, and services. He gave financing and government the grade of “C.” “We’re not where we need to be to support an IT industry here in Chicago,” he said. “Things are happening, and the governor and mayor and agencies are working hard to support them. But we don’t have the maturity we need. And in some cases we have a financial deficit we’re trying to work our way out of. Government and financing operate in very conservative ways that don’t always lend themselves to what is needed to build an innovative IT ecosystem.” DISCUSSION A questioner asked Dr. Wessner if there were innovation models the United States should understand and possibly emulate. Dr. Wessner replied that the U.S. needs to be more aware of policies and programs underway in other countries and to adapt (rather than emulate) these to our own circumstances, where appropriate. To do this, we need to pay better attention to what other governments are doing. The Office of Naval Research does a good job at this, he said, with its global reach, but a problem for the federal government generally is its difficulty in coordinating relevant information from many sources. And while the armed services have a long history of tracking other countries’ technological developments, he said, hardware is not sufficient to assure our national security. We rely on the whole civilian economy to ensure our security, and “making the kinds of investments described at this conference is a key to national security, going forward.” A questioner noted a consensus among speakers regarding the scarcity of early-stage financing and the effect of that scarcity in limiting growth. “What we need is innovation in science parks, using SBIRs and other early financing,” he said, “but the ideas that come out of the academy are starving to death. What do we need to do to build a local venture ecosystem in which part of the investment is early stage? Is there a role for government and the private sector in working together?” Mr. Fernandez advised looking at the entire spectrum of innovation activities. “There used to be a steady flow of angel money and early-stage money as people made leveraged buyouts and then reinvested some of the proceeds back

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54 BUILDING THE ILLINOIS INNOVATION ECONOMY into the system. There is not a very active LBO market now, so we don’t see that flow of money. Revising tax policies and regulations that hold back the start-ups can help attract more investment money without having to comply with onerous SEC requirements. When asked how long it might take to bring about regulatory changes, Mr. Fernandez said that a shortage of funds was not the central problem. “Remember that not every new business is worth funding. But for those that are, there is a lot of money out there. If you have the right technology and the right business, you can find the funding.” Mr. Fernandez added that there is funding in Illinois as well, despite its distance from Silicon Valley. “There are funds that focus on niches, and investors who invest locally. Here we have several funds that invest in IT and digital technologies. The ICT ecosystem has been developing over a series of years into different areas. The capital is here, the talent is here; now we want to eventually grow here as well.” Dr. Wessner advised that Illinois should secure a better share of SBIR money, and that small firms in the state could benefit from coaching on how to apply. Coaching could not only bring a higher chance of being selected for a grant, but also of making optimal use of it to develop the business. An added benefit of receiving an SBIR award, he added, was the intangible “seal of approval” it bestowed, and this often attracted private investment. Dr. Roberson observed that “we in academia tend to believe that our ideas are more open than they are.” In an SBIR application, as in many aspects of innovation, “very often the challenge is to make sure that your idea really is right.” For ideas that are indeed “right,” he said, funding is likely to be available—even in Illinois, where the financing picture has “enormously improved” in the last decade. Dr. Mirkin commented on the conservative economic understanding of innovation, which is that the economic success or failure of new products and firms should be determined solely by the free market. “Many economists and even smart people in business don’t understand the need for substantial public investment in basic research,” he said, “and then participation beyond that.” The research process is essential in providing the ideas and raw material for innovations, and government has an essential role in supporting both the research and the climate for translational development of the research. Venture capital can be an active participant, he said, but most venture funding is “follow- on money” that does not participate at the early, riskier stages when help is needed most. He argued that the National Academies had an essential role in educating people about the innovation process. Mr. Fernandez added that successful innovation depended “on more than institutional mechanics. I grew up in the Midwest, where entrepreneurial failure was not okay. You were ostracized, you had huge problems with your next funding. We still penalize risk-taking in the Midwest to a much greater degree than in other parts of the country; in California, if you have not failed at least once, you are not an entrepreneur. It’s a cultural mindset [prevalent]

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PROCEEDINGS 55 through the banking system and the industrial community.” He recalled growing up in Kokomo, Indiana, where the founders of Eli Lilly, Ball Company, Firestone and many others took great risks as pioneers in building up regional economies in the Midwest. “Now we’ve got all this money and we don’t apply it to new risk.” Dr. Wessner commented that the nanotechnology center directed by Dr. Mirkin, like the modern university in which it is embedded, was very different from how such a center would have been organized 30 years earlier. The professors of the 21st century are concerned not only with their traditional responsibilities of teaching, research, and outreach, but also with inventions, patents, and the possibility that they might be able to translate their research into start-up firms. Like Dr. Mirkin, Dr. Wessner rejected the view of some academic economists that the free market alone should determine the success or failure of technology-based start-up firms. He said that the development of even the most promising firms could easily be derailed by a variety of market failures, such as those arising from imperfect information for potential investors. For markets to behave perfectly, he said, they need perfect information—about the potential of an innovation, the workings of competing firms, and market demand. But perfect information is not available in real world innovation. He noted that analysis by Joseph Stiglitz, Michael Spence, and George Akerlof of “asymmetric information,” has been recognized with an Economics Nobel Prize. In the case of small-firm development, he said, asymmetric information makes it harder for small companies to raise money because the investment community cannot fully understand the potential of their innovation. This underscores the essential role for public funding and policies designed to support small firms. For example, he said, states should make sure that bankruptcy laws do not reinforce an anti-failure culture. The federal government should ensure that the Economic Development Administration (EDA) is adequately funded to promote the growth of promising young firms. The Small Business Administration should reverse certain reforms that offer awards only after a spinoff company is formed rather than when it is still in formation. Neil Kane of Illinois Partners Executive Services said he had been working for well over a decade to help commercialize the results of research in universities and federal labs that is funded by taxpayers. “What I’m observing,” he said, “is that in the late ‘90s, the state of Illinois had money which provided early-stage seed capital, frequently in the form of grants, to do a lot of university-stage commercial development. I agree that most technologies taken out of universities aren’t yet ready for commercialization, and therefore not good candidates for venture capital. Clearly there’s a gap, and it’s worse now, because the ‘smart’ VC money is all chasing mobile, social, and internet opportunities. That’s where you don’t have to move atoms around, so you grow much faster.” There are two problems for the research-based firms, he added. The first is the technology risk, and the second is that investors are funding only

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56 BUILDING THE ILLINOIS INNOVATION ECONOMY companies with revenues. “It’s the biggest impediment I see now,” he said, “getting these companies off the ground. And I’m not sure I have a suggestion. Maybe proof-of concept centers will help, and maybe finding sources to match SBIR money will help.” Dr. Roberson said that Illinois is now moving to a point where its focus is on the new economy, “which is good; but when this focus excludes the old traditional economy, that’s not so good.” This is especially true for Illinois, he said, where there is great strength in traditional institutions, which generate many innovative ideas. Such ideas added value to “old economy” areas, he said, transforming them in the process—something that local investors were not taking advantage of. He added that two recent investments in promising new Illinois research developments had been made not by U.S. investors, but by one venture capitalist from Russia and another from China. Arthur Pancoe, a successful investor and medical research analyst with deep roots at Northwestern, said that he had worn many hats in his long career, and that he was “not quite as pessimistic” about the ability to find alert Illinois investors ready to support good ideas. Having personally donated $10 million to fund a medical research building at the university, he advised that certain government tax policies were a major barrier to small-firm formation and development.