A Public Policy Perspective on InnovationDriven Development Strategies: The North Carolina Example

1
A Public Policy Perspective on Innovation-Driven
Development Strategies The North Carolina Example

• Robert McMahan, Ph.D.
• State Science and Technology Advisor
• Exec. Director, NC Office of Science and
  Technology

2
Since WW2, the Mix of Jobs Has Been Changing
This trend in evidence since the end of
WW2 Manufacturing is now lt10 of total non-farm
employment Today 15 of NC Workforce is engaged
in production
http//www.frbsf.org/csip/analysisEssay1.pdf
3
At the same time, income disparities have been
widening

• The consensus is that the main cause was
  technology, which increased the demand for
  skilled workers relative to their supply, with
  freer trade reinforcing the effect.

http//www.economist.com/world/displaystory.cfm?st
ory_id7055911
4
In 1950s North Carolina

• Poor Economic Conditions
• Concentration in low-wage primary/crop industries
• Tobacco, Cotton
• Furniture
• Textiles
• Low-wage Jobs
• 49th in per capita income in the US
• Brain Drain
• Need to diversify expand economy

5
Combined with Strong Committed Leaders
6
Yielded Creation of RTP

• Early 1950s Idea emerged that the regions
  three universities (Duke, NCSU, UNC) could act as
  magnet to attract companies
• 1956 Research Triangle Committee, Inc. formed
  to promote the establishment of industrial
  research laboratories and other facilities
• 1956 Director (George Simpson) appointed to
  lead the Committee and advertise RTP to research
  companies throughout the US
• 1957 For-profit company (The Pinelands) formed
  independent of the Committee purchased or
  optioned more than 1,699 hectares of land
• 1958 Archie Davis raised nearly 2 million in
  private donations (not investments!) in 60 days
• 1959 Dissolved Pinelands and Formed Research
  Triangle Foundation of North Carolina, a private,
  non-profit organization to develop and manage the
  land also formed Research Triangle Institute
  (RTI)
• 1959 Chemstrand Corporation announces its
  decision to locate in RTP, becoming the parks
  first major industrial tenant

7
Key Question asked in 1950s in NC

• In the face of major structural changes in the
  Economy
• How to leverage local strengths and diversify the
  NC economy?
• How to bridge the research and Commercial Sectors
  in an effective way to enhance the economic
  well-being of the state?

8
Lest we forget - there was resistance

• 1956
• Let me see, if I really understand what it is we
  are talking about here, you want the professors
  here and all of us to be the prostitutes and
  youre going to be the pimp.
• -William Carmichael, representative of the UNC
  System,
• to Romeo Guest, developer and contractor

1990 Looking back now, it seems so obvious that
all these groups had a lot to gain by working
together. But back then, it wasnt so obvious .
. . What it took was the willingness of
public-spirited leaders from various segments of
the community to downplay their
differences. -George Simpson, founding director
of the Research Triangle Committee, reflecting on
the history of RTP
9
In hindsight, success was attributable to

• Cooperation among the 3 Research Universities in
  initial discussions that led to the Park
• Creation of bridging institutions, e.g. RTI

10
In hindsight, success was attributable to

• Statewide focus of citizens and a tradition of
  interaction
• No dominant city at time of formation
• Most initiatives were Statewide (e.g. Art
  Museum, Symphony)
• Statewide philanthropy efforts
• Fed a Statewide Perspective

11
Other Factors

• State leaders were accustomed to working in small
  groups that thrived on interaction
• Tradition since the Civil War era
• And FinallyLuck and Timing
• Emerging consensus in 1950s that technology was
  linked to economic prosperity
• Sputnik in 1957 created urgency
• Two tireless Governors Hodges and Sanford

12
Late 50s saw the emergence of

• a competitive market for Ph.D.s in SE
• A Research Park would create a ideal environment
  to
• Attract ST industry
• Capture Retain Graduate Pool from Universities

13
RTP

• 2,800 hectares in total size
• 13 kilometers long and 3.2 kilometers wide
• 450 hectares available for development
• 2 million square meters of developed space
• gt 2 BB in capital investment
• Nearly 140 companies
• 50 of the employees work for multinational
  corporations
• All 100 counties in NC have connections to RTP
  companies

14
Resident Breakdown by Size 2006

• Employment
• 12 largest companies 30,150.
• Remaining 124 companies 7,335.
• Nearly 42 of companies have lt 10 employees
• Among large organizations, the majority are
  branch plants of large corporations,
• most of which do not have headquarters in NC.

15
Fundamentally the Park

• Represented a planned approach to ST-based
  economic development
• Like Austin, San Diego, N.VA benefited from city
  and state as well as corporate and university
  involvement
• Contrasted to 128 and San Jose
• More organic and less facilitated

16
NC Recognized Early the Importance of Creating
Structures to Institutionalize change
NC Board of Science Technology Helped to Create
Initiatives That Have Made NC an International
Model

• e.g. Biopharma / Biotechnology
• and works to to identify the next
• Emerging Industries Nonwoven Textiles
• Grid Computing
• Advanced Materials / Manufacturing /
  Nanotechnology
• Fuel Cells

17
North Carolina has been successful

• It was among the first states in the nation to
  recognize that knowledge-based economic
  development creates high-growth companies and
  well-paying jobs.
• Over fifty years ago it began making long-term
  investments
• in universities and in
• science and technology as drivers of economic
  growth.

18
Biotechnology Center as a direct example of a
Bridging Institution

• A patient, evolutionary model
• The State committed initial investments largely
  to create academic positions and infrastructure
  at NC universities.
• Later became economic development organization
• In 1980, not an industry

19
Currently in Biotech

• Third leading state in biotechnology
• 324 Bioscience companies
• 31 Publicly traded
• 30 Ag-bio companies 2nd largest concentration
  in US (after CA)
• 45 Based on University technology
• 80 CROs worlds largest concentration

20
Currently

• 48,000 employees
• 10 average annual employment growth 1996-2006
• Projected to lead the nation in employment growth
  in biopharma through 2014
• Direct Support Industry 28,500 employees
• 3BB Payroll
• Average salary 72,000 pa (avg mfg 37,000)
• 145MM in state income taxes
• 4x employment multiplier

21
NC has made significant progress and has been
truly innovative

• BioNetwork
• training, curricula and equipment to develop a
  world-class workforce
• Education
• New Schools, 21c Skills
• Engaged Universities not just IP
• Continuum/seamless models of education
• Leaderhip in raising standards for students
• Emphasis on Individual Training and Workforce
  Development

22
NC Statewide
23
RTP Growth (1960-2001)
Number of jobs
Number of firms
24
Recent Accolades

• 1 High Tech Region in US (Research Triangle
  Region) "Projections 2006 - Daring to
  Compete A Region-to-Region Reality Check,"
  Silicon Valley Leadership Group, August 2005
• 1 Preferred State for Location and Expansion
  (NC) Plants Sites and Parks,
  October 2004
• 2 Best Place for Business Careers
  (Raleigh-Durham) Forbes, May 5, 2005
• 3 Hot Cities for Entrepreneurs (Raleigh-Durham)
  Entrepreneur Magazine, September, 2005
• 3 U.S. Metro Area for Biotech/Life Sciences
  (Raleigh-Durham-CH) Milken Institute, June 2004
• 5 Most Entrepreneurial City in the United States
  (Raleigh) Visa's New Innovation Index,
  October 2004

25
Next Kannapolis Research Campus

• 1BB Private Public Investment
• Site of Pillowtex
• 320,000 ft2 Core Laboratory facility, a
  state-of-the-art contract manufacturing biogenic
  facility, and Dole Institute
• Centers for Advanced Fruit and Vegetable Science
• Institute for Excellence in Nutrition
• Centers for education and training for
  biotechnology
• Institute for Translational Medicine
• 350-acre campus is expected to total
• 1 million square feet of offices and laboratory
  space,
• 350,000 square feet of retail and commercial
  space and approximately
• 700 residential units.

26
(No Transcript)
27
Challenges ahead In the Next 10 years, existing
clusters of strength will shift

• BioPharma will commodify
• Will become like the specialty chemical industry
• More and More Generics
• Biologics surpassed Pharma approvals in 2004
• FDA qualification not enough Medicare in the
  drivers seat
• Emphasis on Wellness
• 82BB worth of Blockbusters will lose patent
  protection in US by 2007
• Diagnostics things that tell you what to take
  will be the value point
• The center of mass is moving from Pharma to Life
  Sciences

28
Nonetheless, the major issues facing NC today
29
are the same as 50 years ago

• A Vibrant, Globally Competitive Diversified
  Economy
• University Involvement in Economic Development

30
But the latter question is a bit different

• Was
• How can the Universities help attract industries
  to the State?
• Now is
• How can the Universities more broadly contribute
  directly to economic development?

31
In an Ecosystem that is now the product of two
symmetrical processes
Globalization
Regionalization
Increasingly, we must organize to link the
response and capacities of naturally occurring
economic regions within/across states to global
economic conditions.
32
Because we have traditionally focused on Capacity
Building

• NC has built an enormous capacity for innovation
  in science and technology.
• Despite these investments in technology, however,
  the state ranks only
• in the middle of US states in terms of the vigor
  and impact of its high-tech economy.

33
National Position
NC ranks in the 2nd tier of innovative states
Milken Institute State Technology and Science
Index Enduring Lessons for the Intangible
Economy (2004)
34
Underlying this

• North Carolinas ranking reflects the academic
  rather than applied focus of its investments in
  Research and Development.
• North Carolina must become more efficient at
  converting its innovation capacity into economic
  outputs.

35
Strong in Basic University Research

• University RD
• 4 / 1000 of GSP spent in University research
• 20 of relative total
• MA 5 / CA 3.50

36
Industrial RD

• Not as strong in Private Sector RD
• 15 / 1000 of GSP spent in University research
• National Average 19
• 80 of Total
• MA 40 / CA 30

37
As a result in Total RD

• We are slightly below average in total RD
  spending
• 21 / 1000 of GSP spent
• National Average 25
• MA 50 / CA 38

Milken Institute State Technology and Science
Index Enduring Lessons for the Intangible
Economy (2004)
38
Relationship
Industry funds and conducts more RD than all
other sectors combined. Dominance of University
RD anticorrelates with dynamism of technology
economy Inputs are not Outputs Universities do
the R, companies the D

39
Drives us Disproportionately Weaker in Outcomes

• Milken 200 Best Performing Cities Nov 2004
• 1 yr 5 yr Rolling View / Outcomes Only
• Job creation
• Jobs retention
• Wage and salary increases
• Economic growth, and
• business creation survival
• RDU 34th among large metros (not 4th), Charlotte
  50th (not 30th), Asheville 92nd, Wilmington
  117th, G-WS 165th (not 45th).

40
Even in the RTP
Our Strength is in inputs NC is
disproportionally weaker in conversion of
invention to innovation.
48 In Gazelles 22 in Churn (Outputs)
1 In Innovation Capacity (Input)
41
The Same Trends are in Evidence in Emerging
Sectors
NC/RDU is among the top 10 U.S regions in
university-based nanotech research
42
But RDU is Not in the Top 10 U.S. regions for
Nanotech Firm Entry
NC/RDU is not among the top 10 U.S regions in
nanotech business creation
43
Which suggests to us that

• Pure university-based regional economic
  development policies are not effective enough to
  "upgrade" localities to a higher tier of
  innovative activities alone.
• The presence of a "critical mass" of
  agglomeration in the area surrounding the
  university is required in order to expect
  substantial local economic effects of academic
  research.

44
A Policy View

• From an Economic Perspective, we increasingly
  view
• University Basic Science and Technology
  Research Systems as a form of Mixed
  Infrastructure
• Their primary economic value comes from what they
  produce downstream
• Enabled by collaborative bridges to engines in
  the private sector

45
ReinforcedWe See the Impact of

• Public RD falls dramatically with Metro Size
• 300MM in Academic RD yields
• 112 Innovations in Tier 1 avg. pop. 3MM
• 16 Innovations in Tier 2 avg. pop. 1MM
• 5 Innovations in Tier 3 avg.
  pop. 400K
• 4 Innovations in Tier 4 avg. pop. 200K

The same amount of university research
expenditure yields substantially different levels
of local innovation activity depending on the
concentration of economic activities in the area.
Source Attila Varga, 2000
46
Exacerbated by the structure of Federal
University RD investments -

• The top 200 institutions account for
  approximately 96 of all RD expenditures
• Top ten institutions account for approximately
  17 of all RD expenditures
• Top 20 institutions account for approximately 34
  of all RD expenditures
• Institutions ranked between 101 and 200 accounted
  for approximately 20 of RD.
• (NSF 2004 data, Bardo and Evans 2006)

47
Federal RD Expenditure 1970-2002
NSF 2006 data Bardo and Evans 2006
48
Academic Expenditure of RD (NSF 2006)
Academic RD Expenditure 1970-2002
Current university expenditures
Disproportionately Big R Little d
Basic Research
Applied Research
Development
(NSF 2006, Bardo and Evans 2006)
49
NCs Second Quartile Rank in ST Economic Dynamism

• Our percentage of university research is higher
  than typical of first tier states
• While the percentage of industry RD is lower.
• Interestingly, Vargas models confirm this.
• Vargas data included two metropolitan areas from
  North Carolina Charlotte and Raleigh-Durham.

50
Commercialization Activity Downstream

• Depends upon the local infrastructure of Bridging
  Institutions
• And Private Sector Critical Mass
• Enhanced by development of social capital within
  a particular geographic region.
• Redefining the mission of (some of) the
  Universities in the system to include economic
  development?

51
The importance of Bridging Institutions

• Business RD plays a very critical role in the
  economic well-being of a metropolitan region.
• The role of university RD is much less clear
  and at best indirect.
• the magnitude of the contribution that
  universities research and technology development
  activities play in enhancing regional economic
  development is small compared with other factors
  (Goldstein and Renault, 2004 744).

52
Clearly

• Differences in public RD Intensity cannot
  explain the differences in metro company creation
  rates
• Industrial D appears much more important than
  Public R in explaining regional technology
  development activity
• Industry Performs
• 89.1 of Technology Development
• 64.1 of Applied Research
• 15.5 of Basic Research in US

53
To Underscore in 2004
20 Starred Institutions account for 1/3 of
Federal RD Spending Highlighted States are top
quintile in economic growth rate
NSF, 2004 and the Economic Development
Administration
Bardo and Evans 2006
54
Yet the National Academies specifically Recommend
to States
Sustain and strengthen the nations traditional
commitment to long-term basic research that has
the potential to be transformational to maintain
the flow of new ideas that fuel the economy,
provide security, and enhance the quality of life
(National Academies, 2006 7).

• But empirical data do not necessarily show a
  clear linear relationship between the volume of
  RD and economic prosperity.

55
Yet the National Academies specifically Recommend
to States
Sustain and strengthen the nations traditional
commitment to long-term basic research that has
the potential to be transformational to maintain
the flow of new ideas that fuel the economy,
provide security, and enhance the quality of life
(National Academies, 2006 7).

• So as a state strategy, are the volumes proposed
  justified on economic development grounds?
• As we have seen in NC, there is no necessary link
  between funding basic research and creating
  innovations.

56
Interestingly

• It is generally assumed that high levels of RD
  will be closely associated with a rapidly growing
  globally competitive economy
• North Carolinas experience is that relationship
  does not hold as expected.
• We have made a great deal of investment in a few
  locations, but outside of these the state
  continues to reflect traditional economic
  structures.

57
Basic University Research

• University RD
• 4 / 1000 of GSP spent in University research
• 20 of relative total
• MA 5 / CA 3.50

58
But Trends in K12 Workforce Prep
North Carolina High Schools graduate 6 of 10
entering 9th grade students 63 Graduation
Rate, ranked 42nd in the country
http//www.manhattan-institute.org/html/cr_baeo_t2
.htm
59
Net Tech Creation Rate
Compared to other states, NC is creating tech
companies at a lower than average rate.
60
Which Means

• we are beginning to think differently about the
  role of the University and Research Institutions
  in Building Regional Economies
• And structure institutional collaborations around
  them
• While developing a clearer understanding of our
  actual competitive regions and the economic
  structures that are driving those regions.

61
UNC System

• 16 Universities
• 1BB in Sponsored Research Program

62
Rethinking the Organization and Mission across a
Diverse University System

• The universitys ability to address economic
  transformation and development issues must not be
  based solely on internal university conditions.
• Policies need to promote creating effective
  university/regional relationships based upon the
  specifics of the relationship of the university
  to its service region
• Linking distribution of academic programs, RD
  support, and facilities to integrated regional
  economic development plans.

63
Which leads to a different process
Bardo and Evans 2006
64
And the Recognition in Structures that

• Knowledge-driven basic research should not be
  justified on economic development grounds.
• though it has very significant long-run
  implications
• Purpose-driven basic and applied research is
  most likely to produce economic outcomes in the
  short- and medium-run,
• but there still have not been clear policy
  discussions on the allocation of funding to these
  types of research.
• Opportunity is to create systemic linkages
  between long-term benefit-based research outcomes
  and more short- and medium-run economically
  focused institutions.

65
In one sense, we are re-examining the Bush linear
Model
66
Keys to this view

• A single university will not reasonably be
  expected to be successful in emphasizing all
  types of research.
• Economic development policy must link
  institutional mission with particular types of
  research.
• Clearly defining university missions within a
  state-level policy framework is the key to
  linking higher education and economic
  development.
• Budgets must reflect this alignment

67
From a State-level Public Policy Agenda

• Since NC has multiple universities, it is not
  necessary for any one institution to focus
  equally on all four quadrants of RD.
• Traditional research extensive institutions
  remain the best venues for knowledge-driven
  research and purpose-driven basic research.
• We must begin to examine how other Universities
  can be developed to support disproportionately
  purpose-driven applied research
• as appropriate to their location and the
  opportunities within the regions of the state to
  which they can be linked.

68
Which ultimately will force reconsideration

• of the Carnegie Classifications as institutional
  drivers for regional institutions
• i.e. what is our peer?
• missions defined by degree programs offered?
• This is a confusion of taxonomy with mission
• Conventional university classifications are of
  limited utility in defining how resources and
  approaches might be used to address economic
  development needs.

69
Finally, a Core Missing Piece -

• The US is unique in the developed world in not
  having an organized post-secondary training
  system for the non-college bound.
• lt 0.3 of all workers enter apprenticeships
• 30 of new jobs require a college degree, but
  90 require some post-secondary vocational
  training.

70
Balance in Post Secondary?

• In 2000, for every 1 of public money America
  spend on post-secondary training,
• we spent 55 on college student subsidies.
• Drivind a tendency among community colleges to
  eliminate remedial and vocational/technical
  offerings in favor of college transfer
  programs.

71
State Policies must begin to foster an integrated
educational system

• A seamless transition between high schools,
  community colleges and colleges and universities.
• We must stop thinking that community colleges
  offer fundamentally different types of education
  than universities
• promoting clarification of mission between the
  two institutions.
• To date we have spent a great deal of effort
  controlling the inputs into higher education
  instead of focusing on the outputs.

72
At the emerging core of NCs public policy
response?

• The development of human capital is a more
  critical policy issue than RD.
• Innovation as a concept is not the same as
  research.
• The key to our economic future is innovation
  coupled with entrepreneurship.
• Greater attention will need to be paid to
  research and product or process outcomes, less on
  simply inputs.

73
Lessons

• Tripartite
• Government
• Business / Industry
• Higher Education
• Policies must be embedded in Budgets and
  Structures to Prevail
• There is no unifying set of development
  principles for this effort.
• Gaining a competitive edge is highly
  idiosyncratic to a region and will depend on the
  strategy forged in the region itself.
• Know your assets and play to your strengths
• Focus on the common good and have bridging
  institutions
• Proximity and Location Matter
• Leadership willing to take risks and face
  criticism
• Persistence Patience

74
Broadly, an environment for Building Globally
Competitive Businesses

• Education and Human capital development
• Respective capacity to fulfill the technical and
  business (workforce) requirements.
• These are particular strengths in NC by design
• An Economy that prizes Innovation and
  Entrepreneurship the conversion of knowledge
  into economic outcomes
• Coordination of Resources at the Regional Level
• Public Private Collaboration
• Out of the Box interfaces and Approaches

75
Future will Require a Reversal of Emphasis

• Reversed policy is rooted in a broad effort
  focused on growing entrepreneurs
• Some attention is given to retaining the
  businesses in a region.
• Only a small portion of effort is focused on
  recruiting, and then only those firms that
  complement the regions competitive strategy.
• At the state and local level, at least, current
  policy is exactly the reverse.
• In a global economy where competitors are
  everywhere, the cost of recruiting businesses
  will be difficult to sustain.

• At the state and local level, current policy is
  overwhelmingly aimed at recruiting businesses.
• The dollars spent on these efforts run into the
  billions of dollars, while the impact is
  increasingly questioned by analysts.
• Some effort is aimed at retaining existing
  businesses, with limited attention to stoking
  innovation or growing entrepreneurs.
• (Buss 2001 National Council of State
  Legislatures 2000)