Chapter 1

Innovation in the States

Over the past 30 years, a global consensus has formed on the importance of innovation as the principal way to address the challenges of economic development, public health, national security, and protection of the environment. Many of the world's leading countries are making unprecedented investments in promoting innovation through increased funding for research and development and through sustained support for universities and innovative small and large businesses. They are also implementing new programs and public-private partnerships to encourage the commercialization of new ideas in the marketplace.1

Box 1-1
The New Focus on the Innovation Ecosystem

Reviewing the evolution of thinking about the rationale for public policies to support growth, a recent OECD paper2 documents the move:

   From: “a traditional approach based largely on product market interventions (production subsidies, state ownership, tariff protection), through market failure-correcting taxes and subsidies operating mainly on factor markets (R&D incentives, training subsidies, investment allowances, help with access to finance.)”

   To: “A focus on interventions that help build systems, create networks, develop institutions and align strategic priorities.”

_________________________

1For a comparative review of the challenges and opportunities faced by the United States in the face of global competition for the next generation of innovation, see National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, C. Wessner and A. Wm. Wolff, eds., Washington, DC: The National Academies Press, 2012.

2Ken Warwick, “Beyond Industrial Policy, Emerging Issues and New Trends,” OECD Science, Technology, and Industry Policy Papers, No. 2, Paris: OECD Publishing.



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Chapter 1 Innovation in the States Over the past 30 years, a global consensus has formed on the importance of innovation as the principal way to address the challenges of economic development, public health, national security, and protection of the environment. Many of the world's leading countries are making unprecedented investments in promoting innovation through increased funding for research and development and through sustained support for universities and innovative small and large businesses. They are also implementing new programs and public- private partnerships to encourage the commercialization of new ideas in the marketplace.1 Box 1-1 The New Focus on the Innovation Ecosystem Reviewing the evolution of thinking about the rationale for public policies to support growth, a recent OECD paper2 documents the move:  From: “a traditional approach based largely on product market interventions (production subsidies, state ownership, tariff protection), through market failure-correcting taxes and subsidies operating mainly on factor markets (R&D incentives, training subsidies, investment allowances, help with access to finance.)”  To: “A focus on interventions that help build systems, create networks, develop institutions and align strategic priorities.” 1 For a comparative review of the challenges and opportunities faced by the United States in the face of global competition for the next generation of innovation, see National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, C. Wessner and A. Wm. Wolff, eds., Washington, DC: The National Academies Press, 2012. 2 Ken Warwick, “Beyond Industrial Policy, Emerging Issues and New Trends,” OECD Science, Technology, and Industry Policy Papers, No. 2, Paris: OECD Publishing. 7

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8 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 1-2 Statement of Task Responding to the challenges of fostering regional growth and employment in an increasingly competitive global economy, many U.S. states and regions have developed programs to attract and grow companies as well as attract the talent and resources necessary to develop a knowledge-based economy. These state and regionally based initiatives have a broad range of goals and increasingly include significant resources, often with a sectoral focus and often in partnership with foundations and universities. An ad hoc committee, under the auspices of the Board on Science, Technology, and Economic Policy (STEP), will conduct a study of selected state and regional programs in order to identify best practices with regard to their goals, structures, instruments, modes of operation, synergies across private and public programs, funding mechanisms and levels, and evaluation efforts. The committee will review selected state and regional efforts to capitalize on federal and state investments in areas of critical national needs. This review will include both efforts to strengthen existing industries as well as specific new technology focus areas such as nanotechnology, stem cells, and energy in order to better understand program goals, challenges, and accomplishments. The committee will convene a series of public meetings and fifteen symposia involving responsible local, state, and federal officials and other stakeholders. These meetings and symposia will enable an exchange of views, information, experience, and analysis to identify best practice in the range of programs and incentives adopted. Eleven symposium summaries will be prepared. Drawing from discussions at these symposia, fact-finding meetings, and commissioned analyses of existing state and regional programs and technology focus areas, the committee will subsequently produce a final report with findings and recommendations focused on lessons, issues, and opportunities for complementary U.S. policies created by these state and regional initiatives. Innovation clusters— localized groups of companies developing creative products and services within an active web of collaboration that includes specialized suppliers and service providers, universities, and research institutes and organizations— are now widely associated with higher levels of economic growth and competitiveness.3 Based on this recognition, there is an 3 Richard R. Nelson and Nathan Rosenberg, “Technical Innovation and National Systems” in Richard R. Nelson, ed., National Innovation Systems: A Comparative Analysis, Oxford: Oxford University Press, 1993; Michael Porter, “Clusters and the New Economics of Competition,” Harvard Business Review, 1998. For more discussion, see Chapter 2.

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INNOVATION IN THE STATES 9 increasing global competition for the investment, knowledge, skills and resources associated with innovation clusters.4 PARAMETERS OF THIS STUDY The scope of this report is limited in terms of focus and opportunity. The Committee chose to spotlight noteworthy initiatives underway in a limited set of states and regions. Arkansas and Hawaii provide examples of two states that have not traditionally been leaders in high-technology innovation, but are now investing in education and are seeking to harness their universities as engines of regional growth. Illinois, Michigan, and Ohio are three Midwestern states that are rapidly shedding their “rust belt” image by investing in emerging sectors such as biotechnology, advanced batteries, and flexible electronics and by leveraging and reorienting existing assets to once again become global manufacturing hubs. The development of a nanotechnology cluster in New York’s Albany region is a significant development: one based on a public- private initiative that has grown to attract large investments by semiconductor firms in the region, and related initiatives by federal, state, university, and non- profit organizations that are generating further positive synergies. It is important to note that while the report does make a number of references to individual state programs, it does not address the operational details of state and regional programs to advance innovation. This report focuses on the policy level, abstracting a broader set of best practice lessons in policy from the programs reviewed. The choice of regions and states selected in this study was, to a considerable degree, also driven by the willingness of leading policymakers, business leaders, and academics in these states and regions to engage with the Committee in an in-depth dialogue on these issues. The selection of regions and states reviewed is necessarily limited; our purpose here is to use the experiences of these states to highlight some of the emerging strategies, new types of investments, and new policies that states are deploying to address the innovation challenge. Based on the strong interest and positive participation in the workshops and conferences that the committee has held in the course of this study, we believe that this report and the associated conference summaries can serve as a valuable reference to many state and federal legislators, state and federal officials in the executive branch, and others who may not have had the opportunity to review the experiences of other states. 4 Mary Jo. Waits, “The Added Value of the Industry Cluster Approach to Economic Analysis, Strategy Development and Service Delivery,” Economic Development Quarterly 14(1):35-50, February 2000. 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, p. 20. For more discussion, see Chapter 2 of this report.

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10 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 1-3 Meetings and Reports in this Series The Future of Photovoltaics Manufacturing in the United States Conference held on April 23, 2009, in Washington, DC Report published by The National Academies Press, 2011 Growing Innovation Clusters for American Prosperity Conference held on June 3, 2009, in Washington, DC Report published by The National Academies Press, 2011 Clustering for 21st Century Prosperity Conference held on February 25, 2010, in Washington, DC Report published by The National Academies Press, 2012 Building the Arkansas Innovation Economy Conference held on March 8-9, 2010, in Little Rock, Arkansas Report published by The National Academies Press, 2012 Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities Conference held on July 26-27, 2010, in Livonia, Michigan Report published by The National Academies Press, 2012 Building Hawaii’s Innovation Economy Conference held on January 13-14, 2011, in Honolulu, Hawaii Report published by The National Academies Press, 2012 Building the Ohio Innovation Economy Conference held on April 25-26, 2012, in Cleveland, Ohio Report published by The National Academies Press, 2013 Building the Illinois Innovation Economy Conference held on June 28-29, 2012, in Evanston, Illinois Report published by The National Academies Press, 2013 Building the New York Innovation Economy Conference held on April 3-4, 2013, in Troy, New York Report published by The National Academies Press, forthcoming

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INNOVATION IN THE STATES 11 STATE-LED DEVELOPMENT OF INNOVATION CLUSTERS In the United States, in contrast to a number of other advanced countries, until very recently virtually all initiatives to promote innovation clusters took place at the state and regional level, albeit generally with the benefit of federal R&D funding. States confront stark economic challenges in the global era, including the growing competition from foreign enterprises, often backed by comprehensive government industrial policies, erosion of traditional manufacturing sectors, the wholesale movement offshore of industrial chains, rising unemployment and ultimately, declining population.5 Efforts at industrial revival using traditional policy tools, including industrial recruitment and financial incentives to industry are now being complemented by more technology-based indigenous growth strategies.6 Since the early 1990s, a number of states have increasingly viewed support for innovation clusters as a leading policy tool for fostering the international competitiveness of local industries. The Emergence of Cluster Strategies For much of the Twentieth Century states pursued economic development by seeking to recruit companies from other states by offering a more competitive business and regulatory environment, lower taxes, supportive government policies, and financial and infrastructure incentives.7 States saw 5 Jason Forcier, Vice President of Automotive Solutions for A123 Systems, a U.S.-based maker of lithium batteries commented at one of the symposia convened for this project that “in terms of where the battery industry will be based, the competition is no longer only between states and Michigan, Mississippi and Alabama. This is a case of the United State competing against countries. China has a very aggressive subsidy policy. They continue to amaze me with new announcements.” China pays a direct subsidy of $8,800 per vehicle to electric vehicle manufacturers in five cities. Municipal governments have announced credits of up to an additional $5,000 per car. Jason Forcier, “The Battery Industry Perspective,” National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, Washington, DC: The National Academies Press, 2012. In October 2012, A123 Systems filed for bankruptcy and accepted a bailout from Wanxiang Group Corp., China's biggest maker of automotive components. "Troubled Battery Maker A123 Fell Short on Job Creation, Defaulted on Some of its Debt," Grand Rapids Press, October 17, 2012. U.S. state and federal government initiatives have provided substantial financial support for the development of electric vehicles, including state tax credits, federal funding of R&D and investment, and federal extension of $25 billion in debt capital to finance the development of more energy-efficient vehicles pursuant to the Advanced Vehicles Manufacturing Program (ATVM). See Chapter 4, "The Michigan Battery Initiative," in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit. 6 For a recent review of state and regional policies on innovation-led growth, see David B. Audretsch and Mary L. Walshok, eds., Creating Competitiveness, Entrepreneurship and Innovation Policies for Growth, Northampton, MA: Edward Elgar, 2013. 7 Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly, 18(2):114,

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12 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 1-4 Innovation and Jobs In a widely cited recent book, Enrico Moretti, Professor of Economics of the University of California at Berkeley, argues that innovation has a disproportionately powerful impact on job creation—for each new hi tech job created in a city, five additional jobs are created in the same city outside the high tech sector, both in skilled and unskilled occupations. While jobs in most sectors have some multiplier effect, "the innovation sector has the largest multiplier of all: about three times larger than that of manufacturing."8 High tech jobs also pay considerably higher levels of compensation than the average wage levels, so that expansion of such jobs increases a region's standard of living.9 States' recognition of the nexus between innovation, job creation, and rising standards of living underlies many of the state and regional development efforts described in this report. Measuring the impact of innovation-based development programs on direct and indirect job creation is necessarily an inexact and subjective exercise, but the record if some state and regional efforts over time is impressive. A 2009 study of Philadelphia’s University City Science Center (an urban research park and high tech incubator) found that 155 companies had originated, incubated, and received mentorship there which were still in existence, and accounted for 15,512 direct jobs and 25,825 indirect and induced jobs.10 A recent assessment of Arkansas' 15-year effort to promote innovation based economic growth found that between 2008 and 2011 the states innovation-based programs had fostered 135 new companies directly employing 1,259 workers and that job gains in knowledge-intensive industries during the same period exceed 6,000.11 New York's nanotechnology initiatives attracted investments from 300 companies accounting for an annual in-state payroll of $1.4 billion annually as of 2012.12 2004. For more discussion on the role of economic development incentives, see Chapter 4 of this report. 8 “The Multiplier Effect of Innovation Jobs,” MIT Sloan Management Review June 6, 2012; Enrcico Moretti, The New Geography of Jobs, Houghton-Mifflin, 2012. 9 A benchmarking study of the Purdue Research Park conducted in 2011 found that employees of companies located in the Park received annual wages of $63,000 in 2010, 65 percent higher than the Indiana average. Thomas Miller and Associates, Purdue Research Park: Driving Today’s Economy—An Economic Impact Study of the Purdue Research Park Network, May 2011, p. xv. 10 At the time of the study the Center had been operational for 46 years. Most of the firms included in the survey had less than five employees during their incubation phase; by 2009, four of these firms had over 2,000 employees. Economy League of Greater Philadelphia, The University City Science Center: An Engine of Growth for Greater Philadelphia, September 2009, pp. 6, 23-28. 11 See Chapter 8, “Arkansas—Workforce and Wind Power.” 12 See Chapter 7, “New York Nanotechnology Initiative;” “Nanotech Makes U.S. Job-Creation Special,” Albany The Times Union, September 13, 2012.

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INNOVATION IN THE STATES 13 Ohio's Third Frontier program had given rise to 15,945 direct jobs and 79,565 indirect jobs as of mid-2012.13 While innovation-based job creation is well documented, innovation initiatives are not a panacea for unemployment. We note that in New York's Capital region, where state and industry investments in nanotechnology has created thousands of new jobs in the past decade, unemployment in January 2013 was 8.4 percent and rising, the highest figure for any month since figures were collected starting in 1990.14 State and regional economies confront dramatic challenges, including foreign competition and the destabilization of traditional industries by technological change. Innovation initiatives may not compensate for ongoing job losses but they can lay the seeds for future growth. their primary competitors as other states.15 At present, states’ focus is shifting from intramural rivalries to competition with other regions of the world for leadership in the industries of the future. Reflecting this new focus, states are fostering the development of local innovation clusters through long-term investments in human capital, scientific infrastructure, and knowledge-based entrepreneurship. They are seeking to leverage private and federal investments in research and infrastructure, in some cases with dramatic success—for example, the State of New York’s investment of some $1.2 billion in Albany’s emerging nanotechnology cluster has drawn an estimated $13 billion in private nanotechnology investments into the region as of 2012.16 States are engaged in sectoral industrial promotion policies in promising emerging technologies—Michigan in electric energy storage, Arkansas in wind energy, Kansas in biotechnology, Ohio in flexible electronics, photovoltaics, and biomedicine. They are building research parks, research institutes with common infrastructure within universities, and incubators. Interestingly, a number of states have undertaken studies of best practices in other states and foreign countries.17 The federal role in state and regional economic development is changing. Traditionally the federal government influenced regional development through regulatory and legal policies that defined the economic environment with respect to intellectual property, the rules of competition, taxation levels and international trade. The federal government spent heavily on research, primarily by universities, often in a fragmented and uncoordinated 13 See Chapter 6, “Rebuilding Ohio’s Innovation Economy;” Ohio Third Frontier, 2012 Annual Report. 14 See Chapter 7, “New York Nanotechnology Initiative;” “Area Jobless Rate Rises,” Albany The Times Union, March 13, 2013. 15 Lawrence W. Reed, “Time to End the Economic War Between the States,” Regulation No. 2, 1996. 16 Albany The Times Union, “Nanotech Makes U.S. Job Creation Special,” September 19, 2012. 17 Theresa McLendon, Building a Knowledge-Based Economy in Arkansas: Strategic Recommendations by Accelerate Arkansas, 2007.

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14 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES manner. 18 Federal programs associated with regional economic development were a confused jumble of roughly 200 largely disconnected initiatives.19 A few key sectors related to agriculture, energy, national security and public health benefitted from very substantial federal support for research that enhanced their position in international competition, but in most manufacturing and services sectors, the federal government was reluctant to make comparable investments. Procurement by the federal government provided critical early stage demand for some new industries, enabling them to achieve economies of scale and to enter commercial production, but these were exceptions largely limited to defense- related or dual use technologies.20 In many cases, states and regions promoted innovation clusters without concerted federal support in the years after the mid-1990s. Since 2009, however, the federal government has begun to augment state programs with its own explicit cluster-promoting initiatives. Examples would include “energy- innovation hubs,” established under the auspices of the Department of Energy; financial support for cluster development by the Economic Development Administration and the Small Business Administration; and a newly launched National Network for Manufacturing Innovation (NNMI), a multi-agency collaboration to establish regional hubs of manufacturing excellence engaging universities, companies, and government.21 Most—albeit not all—state and regional cluster initiatives seek to build on existing local industrial competencies and natural resources to establish industries of the future rather than creating those industries entirely from scratch. (See Table 1-1.) Susan Crawford, then of the National Economic Council, has observed that an effective cluster “seems to require the preexistence of something successful on the ground that needs to be encouraged.”22 18 National Research Council, Research Universities and the Future of America: Ten Breakthrough Actions Vital to Our Nation's Prosperity and Security, Washington, DC: The National Academies Press, 2012. 19 Otis Graham Jr, Losing Time: The Industrial Policy Debate, Cambridge, MA: Harvard University Press, 1992. For further discussion of the nature of federal spending on research see Part VI of this report. 20 David C. Mowery, Chapter 29—“Military R&D and Innovation,” in Handbook of the Economics of Innovation Volume 2, Elsevir, 2010, pp. 1219-1256. 21 See NSTC, “National Network for Manufacturing Innovation: A Preliminary Design,” Washington, DC: The White House, January 2013. The report notes that “The Federal investment in the National Network for Manufacturing Innovation (NNMI) serves to create a manufacturing research infrastructure for U.S. industry and academia to solve industry-relevant problems. NNMI will consist of linked Institutes of Manufacturing Innovation (IMIs) with common goals, but unique concentrations.” 22 See Susan Crawford, National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011, p. 35.

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INNOVATION IN THE STATES 15 TABLE 1-1 Building New Clusters on Existing Competencies Location Historic competency/resource New industry Toledo Glassmaking Photovoltaics Arkansas Electric generation and Wind power generation transmission and transmission Akron Polymers Biomaterials, flexible electronics Hawaii Agriculture Biofuels Northeast Ohio Machinery Medical equipment Kansas Agriculture Biosecurity Maine Boat building Composite-based high performance boats IDENTIFYING BEST PRACTICES It is clear from the symposia that while historically successful innovation clusters warrant study, there is no magic formula for success. The University of North Carolina’s Maryann Feldman, who has extensively studied the cluster phenomenon, warns that innovation clusters are not “economic development sausage machines” where the right ingredients added at one end produce the desired result at the other. She observes that cluster formation reflects the local qualities of the places where it occurs, the most important of which are local social processes that combine with a vision of a new way of doing something to create new products, processes and industries. She concludes that “an economic development strategy that will work has to be predicated on a deep understanding of the location.”23 That said, it also emerged from the symposia that certain practices and techniques had proven successful in more than one or two innovation clusters and might readily be borrowed or adapted elsewhere under different local circumstances.24 In the present exercise, 23 Maryann Feldman, “Cluster Development: A Path to Growth,” in Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit., pp. 49-50. 24 Michael Crow of Arizona State University notes that his institution “found that all the things that were important in California and in other innovation clusters made sense but could not be copied in Arizona. If you attempt to replicate what was done in Silicon Valley, it just will not work. You need to learn from them, draw on their lessons, and then work out your own solution.” Michael Crow, The Role of Research Universities in the Formation of Regional Innovation Clusters: The

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16 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Box 1-5 The Complexity of Innovation25 Innovation is the transformation of ideas into new products, services, or improvements in organization or process. Some innovations are incremental; others are disruptive, displacing exiting technologies while creating new markets and value networks. These innovations can lead to new economic opportunities, job growth, and increased competitiveness. A key characteristic of innovation is that it is highly collaborative and often multidisciplinary and multidirectional. To be effective, policies to encourage and accelerate innovation need to recognize this reality. Innovation is often described in terms of stages: basic research, applied research, followed by development and commercialization. In the real world, this process is often not linear. Indeed, research can sometimes address challenges that are both fundamental and applied at the same time. Many products are the result of multiple R&D iterations and draw upon technical sources other than their immediate R&D progenitors; many research projects generate results that are not anticipated—sometimes the unexpected outcomes are valuable in their own right. Importantly, innovations are often closely tied to the manufacturing process itself. FIGURE 1-1 Schematic of the non-linearity of innovation. Impact of Arizona State University on Metropolitan Phoenix,” in Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit., p. 40. 25 Adapted from Table 1-1 in National Research Council, Rising to the Challenge: U.S. Innovation Policies for the Global Economy, op. cit.

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INNOVATION IN THE STATES 17 Ideas that result from the formalized exploration of knowledge do lead, in the long run, to innovations, but to expect this to be the case in the short run is misguided for both firms and governments. While innovation is not a direct consequence of R&D, it is also clear that continuous public investment has been critical in training a large number of people over many years and in creating the necessary environment to foster new technology-based businesses. This complexity of the innovation process also highlights the role that a variety of intermediating institutions play in fostering collaboration among the many participants—including individual researchers, universities, banks, angel investors, venture capitalists, small and large companies, and local, state and national governments—across the innovation ecosystem. What sets the United States apart from most other industrial nations is that there is no overarching national innovation strategy to support, much less coordinate, disparate initiatives to build commercially oriented industries. Paradoxically, this complexity with its many opportunities for entrepreneurship may be a major strength of the U.S. innovation system. Indeed, Nobel laureate economist Elinor Ostrom has extensively documented the adaptive advantages of open, institutionally diverse systems over linearly designed systems.26 a number of basic realities, institutional practices, policy measures, and trends have emerged with implications beyond their immediate local context in particular cases.  U.S. research universities often play a key role in innovation-based regional economic development and are a cornerstone of U.S. international competitiveness. The university-driven character of the U.S. innovation system is a significant differentiator between this country and most other technologically- advanced countries, where the role of the academic research institution has been subordinated to other institutional arrangements. The United States enjoys the best university system in the world, and U.S. research universities have played a central role in driving the country’s industrialization in the Nineteenth and early Twentieth Centuries and in making the transition to the knowledge-intensive economy of the late Twentieth and early Twenty-first centuries. University research programs and facilities supporting cooperative R&D programs with local industries, and specialized training programs are key to all of the recently- emerging clusters examined in this study.27 For this reason, it is a serious matter 26 Elinor Ostrom, Understanding Institutional Diversity, Ewing, NJ: Princeton University Press, 2005. 27 See for example, remarks by M.R.C. Greenwood, “Presentation of the Hawaii Innovation Council Report,” in National Research Council, Building Hawaii’s Innovation Economy: Summary of a

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18 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES of concern that U.S. public universities now confront a steep decline in their traditional sources of funding (primarily state budgets) which threatens their ability to play their traditional role as innovation drivers.28  Cooperative research arrangements involving universities and companies play an important role in fostering innovation.29 In the past three decades, a veritable explosion in cooperative research centers has occurred in the United States. These entities, known variously as joint laboratories, centers of excellence, engineering research centers and industry-university research centers, break down barriers between academic disciplines and between scientific research, engineering applications, and commercialization of products and processes. Government organizations funding R&D are shifting their emphasis from support of individual researchers to funding these research centers, effectively creating public-private partnerships.30 Companies taking part in such endeavors are changing their own approach to research, investing in facilities and projects that represent industrial commons,” to be shared by other companies in a given industry.31  Faculty recruitment, including the creation of endowed chairs, has emerged as an important tool in innovation-based economic development.32 By attracting and holding prominent scientists and engineers as faculty members, universities not only improve the quality of their curricula and Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012. See also remarks by John Ahlen, Michael Gealt and William Harris in the panel on “Universities and Regional Growth” in National Research Council, Building the Arkansas Innovation Economy: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012. 28 NSB, Diminishing Funding and Rising Expectations, pp. 9-12, 19, 2012. For further discussion of the decline of funding of public universities, see Chapter 3. 29 See for example, remarks by Luis Proenza, “Relevance, Connectivity, and Productivity: The Akron Model,” in National Research Council, Building the Ohio Innovation Economy: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2013. See also remarks by Timothy Killeen, “The New York Innovation Economy and the Nanotechnology Cluster: The Role of SUNY” at the National Academies April 2013 symposium on New York’s Nanotechnology Model: Building the Innovation Economy, held in Troy, NY. 30 Craig Boardman and Denis Gray, “The New Science and Engineering Management: Cooperative Research Centers as Government Policies, Industry Strategies, and Organizations,” Journal of Technology Transfer, February 2010, p. 447. For more discussion on cooperative research centers, see Chapter 3 31 “Timken, UA Launch Venture—‘Open Innovation’ Partnership Allows University Students to Develop New Applications of Core Technology,” Akron Beacon Journal, October 20, 2012. For more discussion of the role that companies play, see Chapter 6. 32 This reflects a change from an earlier focus on a negative-sum pursuit for relocating established businesses to a competition for scientific and business talents.

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INNOVATION IN THE STATES 19 enhance their reputation, but also stimulate local economic development and attract federal and foundation research grants. Entrepreneurial faculty are particularly prized and sought after. The state of Georgia was among the first ten states to adopt an “Eminent Scholars” program in 1992.33 This program created endowed chairs at the state’s universities to attract faculty from out of state, in particular individuals who had already founded companies or who had developed ideas they were seeking to commercialize.34 More states have since followed in recent years. The University of Hawaii is reportedly implementing a plan to recruit top scientists and engineers in areas where the university has a decisive strategic advantage due to its location—the disciplines of volcanology, oceanography, and astronomy.35 In 2002, South Carolina’s legislature funded the Endowed Chairs Act to attract first-rate academic researchers to the state’s universities.36 Pursuant to a similar program in Ohio between 2005 and 2007, Case Western Reserve University attracted five academic-entrepreneurs to its biomedical program who secured $60 million in research grants during this period and started multiple companies to commercialize results. These prominent academics brought teams of experts with them to Case Western and helped the university recruit new staff.37  Innovation intermediary organizations often make significant contributions to innovation-based economic development. 33 Virginia was the first to adopt this program in the 1960s, with Ohio serving as the second adopter in 1983. They were followed by Tennessee, North Carolina, Louisiana, Georgia, and Arizona. See Maryann P. Feldman, Lauren Lanahan and Iryna Lendel, Experiments in the Laboratories of Democracy: State Scientific Capacity Building, Economic Development Quarterly, forthcoming. 34 “Georgia’s Technology Scholars Get a Tip of the Hat from Miller”, The Atlanta Journal- Constitution, April 15, 1998; “Research Group Supportive of UGA Scientists,” Atlanta Banner- Herald September 26, 2010. A 2013 audit of the Eminent Scholars Program by the state of Georgia found that the Eminent Scholars and their research teams had attracted about $270 million in non- state funding, supporting about 14,000 jobs at the state’s universities in 2012. Georgia Department of Audits and Accounts, Performance Audit Division, Georgia Research Alliance: Requested information on State-Funded Activities, January 2013, p. 1. This program is similar in concept to the Canada Research Chairs program, which has established 2000 research professorships—in eligible degree-granting institutions across that country. According to their website, “The Canada Research Chairs program invests $300 million per year to attract and retain some of the world's most accomplished and promising minds.” Accessed on May 10, 2013 at . 35 University of Hawaii Innovation Recommendations, University of Hawaii. 2011. See also remarks by M.R.C. Greenwood, “Presentation of the Hawaii Innovation Council Report,” in National Research Council, Building Hawaii’s Innovation Economy: Summary of a Symposium, op. cit. 36 Presentation of David McNamara, South Carolina Research Authority, “Building the South Carolina Innovation Ecosystem,” National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit, p. 15. 37 Dan Simon, for example brought 15 doctors and scientist with him from the Brigham and Women’s Hospital in Boston, and had built up a division of 59 professionals at CWRU’s University Hospitals Heart & Vascular Institute in mid-2008. “The Fab Five,” Cleveland The Plain Dealer July 20, 2008; “Influx of Researchers boosts NE Ohio Economy: Researchers Pump Millions into NE Ohio Economy,” Cleveland The Plain Dealer July 20, 2008. For other examples, see Chapter 5.

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20 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Often possessing a deep knowledge of local research and workforce competencies, innovation-based economic development organizations can align local institutions, assets, skills, and resources to advance the innovation potential of states and regions.38 One example is the Oklahoma Center for the Advancement of Science and Technology, whose mission is to diversify and grow Oklahoma’s economy through strategic investment in developing, transferring and commercializing technologies.  Successful innovation-based economic development is often fostered by a small number of key individuals bridging the space between science and commercialization. Susan Crawford, formerly of the National Economic Council, has pointed out that in fostering innovation, “it is so important to find that local leader who makes things go, the person who is tightly networked and who understands how community works.”39 The successful innovation clusters examined in this report reflect, to a very substantial degree, the efforts of a few individual actors capable of bridging the gap between academic science and commercialization of new technologies.40 These innovation professionals are found in various intermediary organizations working to translate scientific knowledge into commercial products and processes. They have been active at different points in time during the past half century, have come from different backgrounds and have held diverse positions in their role as innovation enablers. It is important to note, indeed emphasize, that these individuals did not act alone, and were not solely responsible for the progress described. Despite their diverse backgrounds, what these individuals share in common is an ability to appreciate the commercial potential for scientific discoveries and to mobilize the disparate talents and resources that combine to make successful commercialization possible. By definition, they have not acted alone. They have functioned as individual innovation intermediaries, coordinating their 38 See, for example, Rebecca Bagley, “The Role of NorTech: Promoting Innovation and Economic Development,” in National Research Council, Building the Ohio Innovation Economy, Summary of a Symposium, op. cit. For a review of the role of the Michigan Economic Development Corporation, see Eric Shreffler, “Michigan Investments in Batteries and Electric Vehicles,” in National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities, Summary of a Symposium, op. cit. 39 Presentation by Susan Crawford, National Economic Council, in National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit., p. 37. 40 For a review of the key role played by Alain Kaloyeros of the College of Nanoscale Science and Engineering in developing the Albany nano cluster, see the remarks by Michael Fancher at the National Academies April 2013 symposium on “New York’s Nanotechnology Model: Building the Innovation Economy,” held in Troy, NY.

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INNOVATION IN THE STATES 21 jurisdictions’ efforts to align locally developed knowledge with local resource to advance innovation.41  State-of-the-art equipment has played a key role in the development of successful innovation clusters. A number of recent state initiatives to develop innovation clusters have demonstrated the powerful gravitational pull that can be exerted by state-of-the art scientific research infrastructure, particularly equipment and facilities that are costly and difficult for individual firms to acquire and operate.42 New York State’s Albany Nanotechnology initiative featured the establishment of the world’s only university-based 300-millimeter semiconductor wafer fabrication facilities and clean room—a joint investment by the state and IBM—which was cited as a decisive locational advantage by other major microelectronics firms that subsequently established operations in Albany.43 Youngstown, Ohio, invested in an incubator built out with a sophisticated software-testing lab and high-speed fiber optic connections and has succeeded in drawing a group of successful software companies—including a firm relocating from Silicon Valley and another which in 2007 had become the fastest-growing software company in the United States.44  Non-profit organizations, philanthropies and foundations, and university affiliated research foundations can play a critically important role in regional innovation initiatives. 41 National Research Council, Building the Arkansas Innovation Economy: Summary of a Symposium, op. cit., March 8, 2011. 42 Chad Mirkin, professor of chemistry at Northwestern University and director of the International Institute for Nanotechnology, observes that in forming innovation hubs a region needs a “state-of- the-art infrastructure, which is required to do the initial basic research and requires funding that is “seldom available locally.” He indicates that “This is where the role of government is essential, applied in the form of federal and sometimes state grants to provide the physical innovation environment. … Such investments are beyond the reach or interest of the private sector, including the capital community, and depend on close partnerships with public agencies to lay the groundwork for innovation.” See Chad Mirkin, “Welcome and Introduction,” National Research Council, Building the Illinois Innovation Economy: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2013. 43 Presentation by Gary Patton, “IBM’s Strategic Alliance Partnerships,” at the National Academies April 2013 symposium on “New York’s Nanotechnology Model: Building the Innovation Economy,” held in Troy, NY. See also, “U Albany Lands R&D Center,” The Times Union November 21, 2002. For more discussion of the role that Albany’s locational advantages played, see Chapter 7. 44 “Youngstown Ohio: A Young Town Again,” The Economist October 8, 2009; “Research Company to Open Office in Downtown Tech Block,” Youngstown Vindicator January 12, 2010. For more discussion of Youngstown, see Chapter 6.

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22 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES Private foundations and philanthropies have played an extraordinarily important role in the development of some innovation clusters and their actual and potential value warrants increased recognition. Foundations are typically less burdened with bureaucratic structures than government agencies. In some cases, foundations benefit from being managed by private sector entrepreneurs and others with experience in the business world. As a result, some foundations are willing to take risks, and are able to act quickly. They are sometimes able to bring substantial resources to bear on new initiatives or institutions.45 From an economic development perspective, many foundations concentrate their investments in limited geographic areas.46 North Carolina’s Research Triangle Park arguably owes its existence to an extraordinary outpouring of giving by North Carolinians for the good of the state, administered through a foundation, in the 1950s.47 In Ohio both philanthropic and university-based research foundations have played a central role in the conversion of the state’s industrial base from traditional manufacturing to a more innovation-based economy— most importantly, during the past decade, local foundations pooled their resources and supported a small number of non-profit, professionally-staffed economic development organizations that have functioned as catalysts for knowledge-based industrial revitalization.48  Entrepreneurs need early-stage financing to bring new ideas to the marketplace. At most of the symposia convened for this study, local economic development officials and entrepreneurs have lamented the difficulty encountered by would-be innovative startups in attracting sufficient early stage 45 George W. Bo-Linn, Gordon and Betty Moore Foundation, “Building the Workforce and the Universities,” National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, Washington, DC: The National Academies Press, 2011, pp. 108-113. 46 Heinz Endowments concentrates its investments in Southwestern Pennsylvania, which includes Pittsburg. The Cleveland Foundation Focuses on Northeast Ohio. The Moore Foundation makes over half of its awards to recipients in California, Christina Gabriel, Bomani Howze, The Heinz Endowments, “How Innovation Clusters are Reviving the Economies that ‘Urban Renewal’ Destroyed,” National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit., pp. 105-108; George W. Bo-Linn, Gordon and Betty Moore Foundation, ‘Building the Work Force and the Universities,” Growing Innovation Clusters for American Prosperity: Summary of a Symposium, op. cit., pp. 108-113. 47 Albert N. Link, A Generosity of Spirit: The Early History of Research Triangle Park, Research Triangle Park: Research Foundation of North Carolina, 2005. For more discussion about the history of Research Triangle Park, see Annex B. 48 For a review of initiatives by the Cleveland Foundation, see Ronn Richard, “Economic Development in Ohio: The Role of Community Foundations,” in National Research Council, Building the Ohio Innovation Economy: Summary of a Symposium, op. cit. See also The Plain Dealer “Philanthropy is Our Way of Life of Greater Clevelanders,” December 26, 2010. For more discussion of the role of foundations in Ohio’s successful initiatives, see Chapter 6.

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INNOVATION IN THE STATES 23 financing.49 Studies commissioned by state economic development authorities to address their prospects for innovation-based development commonly deplore the dearth of early-stage financing as a serious problem.50 Even in California, long viewed as a Mecca for startups seeking venture capital, the availability of early stage financing has declined substantially since the onset of the financial crisis in 2008.51 In Illinois the Chemistry of Life Processes Institute—a pioneering interdisciplinary biomedical research institution at Northwestern University—fostered two promising start-up companies but could not find local sources of early stage financing so both companies left the state to begin operations in the areas in which they secured venture capital.52  Policy continuity and sustained funding are essential for the development of innovation clusters. Michigan’s battery initiative, featuring lithium-ion technology for application in electric vehicles, and Toledo’s emerging photovoltaic cluster, have fostered start-up companies that currently face highly uncertain demand for their products over the short run.53 Some firms have failed or retrenched and the risk exists that foreign industrial groups with greater financial stamina and government support will eclipse promising U.S. industries in their infancy. In the past, nascent U.S. sectors in emerging technologies have benefitted from federal procurement in the early stages, which has enabled them to generate revenues and achieve cost competitiveness. 49 See, for example, comments by Barry Weinman, “Converting University Research into Start-up Companies,” in National Research Council, Building Hawaii’s Innovation Economy: Summary of a Symposium, op. cit. As used here, the term “early stage financing” refers to capital made available to an innovator in the initial phases of the start-up of a company to commercialize a new technology. It includes “seed” stage financing (comparatively small sums used for proof of concept and lining up startup capital); start up financing (pre-commercial funding of product development and early marketing efforts); and the first round of financing after start-up, usually involving a venture capital company of fund. The seed and start-up phase are often funded from the innovator’s own resources and/or angel investor. See generally, Illinois Venture Capital Association, “Definitions,” . 50 Arkansas’ Task Force for the Creation of Knowledge-Based Jobs concluded in a 2002 Report that “a key element that has been missing from the entrepreneurial equation in Arkansas is the lack of venture capital to keep new, knowledge-based businesses in the state.” Report of the Task Force for the Creation of Knowledge-Based Jobs, September 2002. 51 In the first three quarters of 2012, biomedical firms in California obtained nearly $2 billion in venture capital investment—a substantial figure, but well below the nearly $4.5 billion raised in 2007, and quite possibly short of the annual total of $3.5 billion raised in 2011. “California Biomedical Industry Still the Biggest, Despite Tight Financing,” Alameda Times-Star January 8, 2013. 52 O’ Halloran, Thomas, Building the Illinois Innovation Economy: Summary of a Symposium, op. cit. For more discussion of the Chemistry of Life Process Institute, see Chapter 6. 53 See National Research Council, Building the U.S. Battery Industry for Electric Drive Vehicles: Progress, Challenges, and Opportunities—Summary of a Symposium, op. cit., which highlighted the need for adequate demand to sustain the emerging advanced battery industry in Michigan.

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24 BEST PRACTICES IN STATE AND REGIONAL INNOVATION INITIATIVES  Political leadership and stability play an important role in successful state and regional innovation-based developments. Some of the most successful innovation clusters reflect, in substantial part, the existence of longstanding bipartisan support from local political leaders, which has provided a stable environment for long range investments in innovation. In North Carolina, the Research Triangle Park was supported for decades by successive Democratic and Republican governors. In New York, the Albany nanotechnology initiative enjoyed bipartisan support. It was launched by Governor George Pataki, but has subsequently been supported strongly and effectively by Governors Eliot Spitzer, David Paterson, and Andrew Cuomo.54 Ohio’s Third Frontier program, one of the most ambitious and successful state innovations-promotion schemes, has enjoyed bipartisan support and is embedded in the state constitution.55 The Path Forward The examples of successful practices cited above should not be taken as an ironclad formula for success. They are intended to identify needs and illustrate arrangements that have proven to be a promising path forward. As noted above, the development of regional clusters is not formulaic and much depends on continuity and the commitment of the political leadership that makes available a critical mass of funding and involves institutional partners, both private and public, that are committed to broad goals as well as specific outcomes. The observations above do identify key elements of successful cluster development, reflected in the examples reviewed by this report. There are no doubt many other examples and many nuances on those identified here. The material presented in the body of the report provides concrete illustrations of these principles. OVERVIEW OF THE REPORT This volume draws together our findings from a series of conferences and workshops on state and regional initiatives to foster growth and employment through innovation, supplemented by research on the global competitiveness challenge and federal, state, and regional policies and programs. The report is organized as follows: Chapter 2 discusses the role of clusters in state and local economic development efforts. Chapter 3 describes the opportunities and challenges facing universities as drivers of innovation and regional growth. 54 Darren Suarez, “Challenges and Opportunities for the New York Innovation Economy,” at the National Academies April 2013 symposium on “New York’s Nanotechnology Model: Building the Innovation Economy,” held in Troy, NY. 55 James Leftwich, “Investing in Ohio,” in National Research Council, Building the Ohio Innovation Economy: Summary of a Symposium, op. cit.

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INNOVATION IN THE STATES 25 Chapter 4 reviews the evolution of state strategies in economic development, from a short-term focus on industrial recruitment to longer-term investments in education and knowledge-based growth. In complement to the state role, Chapter 5 highlights the federal role fostering regional development, not only through funding for scientific research but also via support for innovation clusters, protection of intellectual property, trade policy, and procurement. Chapters 6 and 7 provide detailed case studies of major initiatives underway in Ohio and New York to develop and sustain new economic drivers. Chapter 8 reviews recent initiatives in Arkansas and Illinois to develop their innovation economies.

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