Innovation Policy in Tough Times on Tight Budgets

The Case for Regional Innovation Clusters

SOURCE: SP Jonathan Sallet explains the need to move place-based technology innovation policy forward, especially in difficult economic times.

We are pleased to print Jonathan Sallet’s Keynote Address at the American Chamber of Commerce’s EU Innovation Conference delivered today in Brussels. Jonathan Sallet is Special Advisor on Regional Innovation Clusters at the Center for American Progress, Senior Adjunct Fellow at Silicon Flatirons, University of Colorado, and co-chair of the Integrated Legal Strategies Practice at O’Melveny & Myers LLP.

In the midst of a difficult economic recovery, it is only natural that we are here today to discuss the best means to restore sustained economic growth and broadly shared prosperity.

And we are concentrating on an important strategy. We all know now that regional economies are fundamental—a key ingredient in national economic success.

We know that industries in a cluster register higher employment as well as higher growth of wages, more businesses, and more patents.[1]

Indeed, it is important to remember that clusters help create new sectors, rather than just strengthening old ones.[2] Recently, for example, I talked with a senior executive from a solar-panel company located in Denver. Why Denver? Because his CEO and important technological insights had been transferred from the aeronautics sector located in the same place.

So it’s no surprise that recent research indicates that productivity in regions with successful clusters is 12 percent greater than in other regions.[3]

We know all this through a combination of excellent academic work and careful analysis of case studies. Indeed, we are in a position to implement effective cluster strategies now in large part because of the substantial research efforts that have been conducted both in the United States and Europe.

In the United States, the work of Harvard University’s Michael Porter, of course, pioneered the way. And that work has been supported, and advanced, by scholars at The Brookings Institute, the Council of Competitiveness, the Center for American Progress, and Silicon Flatirons, the last two of which I work with now.[4]

In Europe, the work of the EU Clusters Observatory and the Directorates of Enterprise and Industry and Research, Innovation and Science have been—and remain—invaluable.[5] This work has significantly furthered both our theoretical and practical understanding of economic clusters, and will provide, I believe, a continuing benefit to European economic growth.

On this foundation of facts, we can build policy. You all may recall what Commissioner Maire Geoghan-Quinn said earlier this year: “It is the duty of politicians to be optimistic.”[6]

I think we should all strive to be politicians in that sense of the term today. We should all apply that spirit of optimism to the search for better solutions to our current economic challenges.

And in that spirit of optimism, I would like to offer a perspective from, and of, the United States.

Before we go forward, however, let’s talk about what we in the United States call these places. I like the phrase that the Obama administration is using—“regional innovation clusters.” I like it because it explains, piece by piece, the essential elements of smart clusters policy:

• Clusters are geographic places where the formula of economic growth is this: 1+1=3. Why? Because positive externalities and complementary forces attract businesses and help businesses located in the cluster to grow. That’s the kind of economic math we need.

• Innovation is the key driving force of economic growth, especially in developed economies. In encouraging innovation, we need to always remember that innovation is more than technology, and that it is not confined only to certain sectors, like computing and biotechnology. Perhaps it would be clearer if we called it “ingenuity”—the creation of additional economic value through the creation or recombination of knowledge in any sector, in any place.

• Regions explain the geography of economic activity—and thus where leadership needs to be located. In the United States, for example, most clusters cross state lines, not to mention municipal and other local borders. So the leadership can’t be defined by traditional political categories. Moreover, clusters can exist anywhere (urban, suburban, or rural) where competitive advantage exists. That means it is within these economic, not political, borders where economic strategies need to be created in the first instance.

I believe that the United States has evolved a distinct approach to the building of clusters—one that works from the ground up but enjoys strategic support of the federal government. The United States has long been a place where clusters have been studied and where they have prospered. Case in point: It’s hard to have a conversation about clusters that doesn’t mention Silicon Valley. But now, largely because of recent efforts by the Obama administration, the pieces of the American approach to clusters have truly come into place.

As you may know, the Obama administration is the first U.S. administration to expressly embrace the strategy of supporting what it calls “regional innovation clusters.”  Over the past two years, programs to support clusters have been launched at the Departments of Agriculture, Commerce and Energy, at the Small Business Administration, and in league with the National Science Foundation and the National Institutes of Health. Indeed, thus far in 2010, these departments and agencies have made 44 cluster-related grants, totaling about $150 million, to support efforts that range from the development of a regional food network in rural California to the commercialization of the next generation of medical device technology in the southeast United States.

The administration also recently formed an interagency task force to better coordinate the disparate federal efforts that are targeted to regional innovation clusters. And the administration has called on Congress to provide additional financial support for regional innovation clusters.

A clusters policy that is “Made in America” may not be suitable for any other part of the globe. But, in the spirit of transatlantic dialogue, I would like to talk this morning about this new American clusters policy and its capacity to stimulate economic growth. And I also would like to give a perspective on the next challenges that clusters policy will face, certainly in the United States and perhaps elsewhere as well.

We should be frank that clusters policy has not yet been embraced in the United States as widely as it should be. I first encountered the idea of clusters in the early 1990s when I worked in the U.S. Department of Commerce and Michael Porter came by to talk about his then-new idea. Although the practice of clusters seemed in the United States to be a naturally occurring phenomenon, and although state and local governments increasingly grasped the principles of building clusters, by the beginning of 2009, two big holes remained. First, the U.S. government had not adopted any explicit measures to support clusters. Second, mainstream economists still had not validated the critical tenets of what businesses and communities had already experienced.

We should also be frank that our knowledge of clusters is, in many respects, lacking. We do not know all that we could know or all that we would want to know about the economic impact of clusters. Nor do we know enough about the impact of governmental policies on cluster success. As a practical matter, it is difficult to run a “control” test of clusters policy—in these economic times we cannot withhold potential economic gain from a community for the sake of the scientific method. And, of course, the differences between clusters would make such tests difficult to assess.

And yet, despite these deficiencies, progress on clusters policy has been made, in the United States, in Europe, and around the world.

We now have an Obama administration policy in place, which is being implemented and expanded. And scholarship on clusters is moving forward, although not as quickly as one might wish. So, in the United States, the work of building support for the idea of clusters must proceed in parallel with the work of supporting clusters themselves.

In my view, the best way to build such support in the United States is to focus on three principles that I believe are critical to the next generation of clusters policy.

First, I believe that support for regional innovation clusters is more important in times of fiscal constraint, not less important. The politics of budget cutting is hard, but the consequences of getting those decisions wrong would be worse. This is a point that must become more broadly understood.

Second, I believe we must simultaneously lead and learn. We must build better policy now, because we cannot afford to wait, but we must simultaneously take steps to improve our understanding of clusters so that we can learn how to build better policy tomorrow. This is absolutely critical, particularly in a time when cluster policy is one among multiple economic-growth tools that must be tested. In a moment, I will briefly review the new initiatives implemented by the Obama administration, which I believe can teach us how to do both—to lead and to learn.

Third, we must reinforce the connection of clusters to a global economy. We are not playing the World Cup, with national challengers knocking each other off until a single champion is crowned. One way to think about clusters is as nodes connected to international networks. To achieve economic recovery, we will need both strong nodes and robust networks—of people, of commerce, and of places.

Let’s now address these three principles in more detail.

More innovation, little money

The truth is stark. The world’s real gross domestic product (after adjusting for inflation) dropped from a growth rate of 5.4 percent in 2006 to negative 0.6 percent in 2009.  We are recovering, however, with real GDP and private sector employment both growing in the United States. But growth remains too low and unemployment remains too high.

At the same time, there is a strong desire in Europe and the United States for an end to deficit spending. It seems safe to say that we are in for a prolonged period of tight budgets in order to ensure that we do not live above our means.

Most proposals to end deficit spending have focused on slashing government expenditures and cutting back on government programs. But, of course, there is another way to ensure that we do not live above our means: We can raise our means. We can grow our economies and create jobs.

Before we discuss the strategy of clusters specifically, it’s important to outline the key principles of innovation policy that should govern government in a world of tight budgets and tough economic conditions. That’s the context that will, I believe, help us to understand the critical role that a focus on regional economic policy can play (the glue, as it were, that holds together the other parts of a pro-innovation agenda).

I think it is axiomatic that fiscal responsibility, while necessary, is itself not sufficient. We cannot only cut our way to prosperity. We must take additional action to restore growth if we are to be able to return to full employment, to shoulder our social obligations, and to pass along real economic opportunity to our children and to theirs.

Recently, attention has turned to this issue. For example, the Information Technology & Innovation Foundation has just published an important paper entitled, “Innovation Policy on a Budget: Driving Innovation in a Time of Fiscal Constraint.”[7] In it, Rob Atkinson and his co-authors confront the challenge of designing innovation efforts to fit current budgetary and macroeconomic needs, and set out ten categories of action that the federal government can take which would increase support for innovation at little to no additional cost to the federal budget.

In this vein, let me offer a few, broad principles that I believe should guide innovation policy generally, and support for clusters, specifically.

First, we have to get the macroeconomics right. Fiscal and monetary policy must be pro-growth. There is, in the United States, a debate about whether we need to do more right now.

I’m of the view that we should ensure that demand does not collapse and that, over the next two fiscal years, the right policy is to ensure that we prevent the economy from stalling. It’s important to understand the divided nature of governmental spending in the United States to see why this is so important. The federal government’s stimulus package of 2009 totaled $787 billion, of which about $530 billion has now been spent.[8] But, at the same time, state spending has been dramatically curtailed.  And the cumulative effect of state cutbacks is significant. According to one analysis, state budget shortfalls from FY 2009 through FY 2012 will exceed a cumulative total of $600 billion dollars.[9]

And that is not all. Private expenditure is also at extremely low levels. It has been widely reported that nonfinancial U.S. companies have been holding as much as $1.845 trillion in cash and short-term assets that is available for capital investment.[10] As an aside, we need to create the conditions for investment, which goes hand in hand with innovation. But, as the OECD has explained, we also need to keep in mind the importance of public investment during times of crisis so as not to aggravate pro-cyclical behavior of firms who are themselves reducing investment.[11]

So, in the United States, we’ve been hitting the brake and the accelerator at the same time. With more state cutbacks on the way, it’s important that the federal government not allow the economy to stall. That’s why it’s so important that the Congress has just passed legislation providing additional incentives to small businesses, and why it is critical that other Obama administration economic initiatives be implemented, such as permanently extending the R & D tax credit, improving America’s infrastructure, and expensing capital investments made through the end of next year.

But the time will come, and soon, when budget-tightening will be paramount. One way to reconcile the two goals, by the way, is to employ an effective mechanism to assure markets that long-term structural deficit reduction will be governing federal policy in fiscal 2013 and beyond.

Second, we must provide the public goods—education, basic R&D, workforce development—that the markets will not provide in sufficient quantity on their own.

Third, the operations of government must be attuned to innovation as a core goal. Innovation-oriented spending is not only efficient but also can jumpstart markets and innovation that might otherwise not exist. Governmental procurement processes therefore should have innovation as a built-in objective.

Fourth, all forms of governmental regulation and oversight should have innovation as a very explicit goal. In the 1980s, the U.S. government adopted a requirement that all new federal regulations be subject to a cost-benefit analysis before promulgation. Today, we should mandate analysis of a proposed regulation’s impact on innovation as a part of every regulatory analysis. This includes tax codes, international trade, and all forms of domestic regulation.

Fifth, micro-economic strategies must be used that will promote broad economic growth in an efficient and inclusive way. They must support but not supplant business strategies. They must focus on positive-sum, not zero-sum, outcomes. And they must reform or even eliminate past programs that are not effective.

I should say that there isn’t a big constituency in the United States for things labeled “microeconomic.” If you had a choice between being a macroeconomist or a microeconomist, which would you choose?

But the very best tools for economic growth must be used, and cluster strategy is one of the very best tools.

How can this be done in a time of tough budgets? We really must be ruthless about asking whether dollars or euros spent in the past should be spent in the future.

Cutting budgets is tough. It is an inexorable law of politics that every program that has been funded for a while will tend to acquire both a champion and a constituency. The champion’s career is entangled with the program. The constituency relies on it. Both will tend to find reasons for its continuation.

Regional innovation clusters, however, represent the champions and the constituencies of the future.  These are businesses that can grow but have not; communities that can thrive but do not; people who will work but who cannot now find employment. As beneficiaries of cluster initiatives, these people, businesses, and communities are politically invisible. Indeed, they may not even yet know how thriving clusters will advantage them.  But it is the obligation of public-policy leaders to represent them in the here and now.

Innovation itself is like that—it’s imagination and commitment to a product or service or market that does not yet exist. It’s a look to the future. We can, here in the United States and around the world, fuse the two—innovative policy for an innovation economy.

There are important reasons why an innovation policy focused on regional innovation clusters is particularly critical in a time of tight government budgets. They all revolve around a single idea—more bang for less buck.

Cluster initiatives do not require substantial public sums to be successful. The focus of clusters policy is on encouraging private parties to collaborate and on leveraging nonpublic resources. Public funds frequently represent a relatively small proportion of a cluster’s collective budget.  The basic principle underlying cluster initiatives is leverage—by creating incentives for private parties to coordinate their activity and share resources, an initial public investment can be leveraged at a 4, 5, or even 10-1 ratio. And, by federal budget standards, the total amount of spending is very low, representing less than 1 percent of the federal innovation budget.[12]

Here’s a leading example of how public funds can be leveraged. Over the past 15 years, the Dan River region in Southside Virginia has developed a burgeoning technology cluster. This region, which previously had an economy centered on tobacco and the textile and furniture industries, now boasts a strong network of research institutions, a growing technology-oriented workforce, and a variety of high-tech companies in areas such as polymers.

And yet public funding for the Dan River region was largely limited to partial support of the regional institution that coordinates strategy and resources across the cluster, the Institute for Advanced Learning and Research.[13] But IALR only succeeds because it is able to marshal private and university resources to carry out its mission—public funding for IALR is dwarfed by the funds provided by private sources in connection with cluster activities.[14]

Other clusters have similar patterns. Although projects connected with the Albany nanotechnology cluster received more than $800 million in public funding, the cluster has attracted approximately $5 billion in private investment—a ratio of better than 5-to-1.[15] And a representative of the Artisanal Cheese cluster in Vermont recently reported that the cluster was able to leverage public funds on a ratio of 11-to-1.[16]

In addition, cluster initiatives rely on a bottom-up approach that improves the likelihood of success, and, therefore, the efficacy of public policies. In the United States, the focus has been on using competitive processes in which the local clusters present their own strategies, to be tested against each other. This, I believe, is very important. As a result, before any federal money is provided to a regional innovation cluster, regional leaders must design an innovation strategy, organize stakeholders, and otherwise lay the foundation for a successful innovation cluster. And because of the competitive process, the likelihood of eventual success is greatest.

Take, for example, several recent regional cluster innovation grants awarded by U.S. agencies.  On September 23, 2010, the Department of Commerce announced the six winners of the i6 Challenge, a $12 million innovation competition led by the Department’s Economic Development Administration with the assistance of the National Institutes of Health and the National Science Foundation.[17] The i6 Challenge divided the United States into six economic regions and invited the clusters from each region to compete over who had the strongest proposals for accelerating the commercialization of technology and expanding new venture formation.  Each of the six winners of the i6 Challenge, therefore, needed to provide a better proposal than every other applicant from their region. Unsurprisingly, the winners were clusters which were well-organized, with broad local coalitions and networks and with substantial private resources, and which possessed a comprehensive strategy for how to win the i6 Challenge money.

Case in point: The winner from the Denver Region was a St. Louis-based coalition comprised of three St. Louis-based research universities, including Washington University; the Donald Danforth Plant Science Center; the St. Louis County Economic Council; and the St. Louis Development Corporation, all of which teamed up to present a proposal to advance bioscience technology commercialization through, among other things, collaborative targeted pre-company translational research and the provision of incubation funding for new bioscience companies.[18]

Two weeks ago, the U.S. Small Business Administration announced an “Innovative Economies” grant program, under which it provides 10 clusters with $600,000 apiece to strengthen small business participation in their clusters.[19] The 10 “Innovative Economies” awardees were selected from 173 applicants and, as with the i6 Challenge, represented clusters that are already well-organized at the local level and that possess detailed innovation strategies. Awardees included the Illinois Smart Grid Regional Innovation Cluster, a collaboration of more than 100 entities including 70 businesses in the Chicago area focused on the acceleration of smart grid innovation, deployments, and new market developments, and the Upper Michigan Green Aviation Coalition, a public-private partnership with 41 active members that focuses on expansion of the green aviation industry.[20]

Similarly, in late August, the Department of Energy announced that the Greater Philadelphia Innovation Cluster was the winner of its $129 million Energy Regional Innovation Cluster, or E-RIC competition.[21] The Greater Philadelphia Innovation Cluster is a consortium of five industry participants; 11 academic institutions; two U.S. Department of Energy laboratories; and several economic development agencies, and the cluster’s winning proposal was to create an energy innovation hub centered on the Philadelphia Navy Yard, which has its own utility infrastructure and thus is well-suited to test out new energy-related technologies.[22] Participants in the competition, including the winner and many of the losing consortiums that bid for the grant, say the exercise led them to develop important new links within their regional innovation ecosystems—links they believe would only be further strengthened by such federal cluster catalyst programs.

And last month, the Department of Agriculture announced the 27 winners of its Regional Business Opportunity Grants, selected from more than 400 applicants.[23] As with the other cluster initiatives, the grantees were well-organized coalitions with comprehensive innovation strategies.  For instance, the California Association of Resource Conservation and Development Councils—an association that is composed of 11 councils that provide economic and natural resource conservation aid throughout California—received a Regional Business Opportunity Grant to develop a regional food system, add value to livestock processing and marketing, utilize biomass, and develop renewable energy and agricultural resources.[24]

These forms of competition offer another advantage. Federal support can address the impact of clusters on national priorities. That’s back to the need to fix market failures. If, for example, market forces would underinvest in important new technologies that would benefit the nation as a whole—say support for a new electrical “smart grid” or new healthcare technologies—then federal support can be magnified and enhanced by using a national framework as one portion of the competitive process. Thus, a national priority can be addressed in an effective manner that relies on local leadership and the involvement of business and community institutions, including research universities.

Finally, cluster initiatives can provide a substantial return on investment. The research that has been done on clusters shows that they lead to statistically significant increases in productivity, job growth, wage growth, new industry incubation, and patent development.[25] In fact, a recent Harvard Business School study found that regional innovation clusters not only enhance growth opportunities for the businesses that form the cluster itself, but also actually enhance growth opportunities and direct and indirect job creation in other industries.[26]

The success of individual clusters is striking. Over the past decade, for example, the Indiana Life Sciences Cluster has funded BioCrossroads, a cluster initiative that provides seed investments and business development assistance to over 250 start-up companies and nonprofit enterprises that address specific cluster needs. During that period, job growth in the cluster outpaced national life sciences growth 17.2 percent to 15.8 percent, and the cluster now supports over 52,800 workers.[27] In the case of the Puget Sound Video Game Industry Cluster, the region has leveraged off the Seattle area’s existing strength in software and design to create a cluster that generates $4.2 billion in annual output and has created more than 50,000 additional jobs for the Washington State economy.[28] And the biomedical cluster in Northeast Ohio, which is now made up of more than 600 firms, “grew at an annualized rate of 7.4 percent from 2003 to 2008 and in 2008 alone attracted $395 million in venture capital and National Institutes of Health funding.”[29]

Now is the time for the federal government to play a critical role in supporting regional efforts by framing, facilitating, and funding cluster strategies. By that, I mean that the federal government can identify the critical national goals, such as energy independence, that serve the national interests. The federal government can improve the efficiency of cluster strategies by improving the delivery of various forms of federal expertise to the clusters that need them and by increasing the ability of clusters to learn from each other. And, of course, in difficult fiscal times for states, the federal government can provide additional resources that can smartly leverage existing local and private funds. As Jason Furman, the deputy director of the White House National Economic Council, recently put it very succinctly: “In the face of fiscal constraints, the president is committed to spending federal resources responsibly, on programs that we know work…We know that this cluster strategy works.”[30]

Next steps in cluster-based public policy

Today’s conference will dig into great detail on the role of clusters in the creation of new economic growth. I will briefly review some of our current experiences, just to support my proposal that support for regional innovation clusters is particularly important now.

As I said earlier, clusters are geographic places where the formula of economic growth is this: 1+1=3. By this I mean, more formally, that a “cluster” is a geographic region that generates positive externalities that quicken or increase the ability of firms to create value through innovation. The positive externalities flow from the natural interchanges between businesses that come from proximity—say the ability of new businesses to connect with angel investors or venture capitalists—which creates an environment that is more conducive for the next business to connect with its own sources of capital. Positive externalities can, of course, be spurred by nonbusiness action, such as the ability of companies to access basic research being conducted by local universities.

The term “innovation” in the phrase “regional innovation clusters” is a term we should define very broadly in several important ways: First, by recognizing the broad sweep of innovation itself; second, by remembering that innovation is not linked only to specific sectors; and third, by reemphasizing the manner in which innovation can be forged by both collaboration and competition.

As to the definition of innovation, let’s think of it in this context as the use of the creation of additional economic value through the creation or recombination of knowledge. This is not the same as the invention of technology. This is an important point. We tend to think of innovation as if it were the province of information technology or biotechnology or nanotechnology. But innovation can come from better business practices, novel uses of resources, or smart design.

Of course, innovation is not limited to “innovation industries.” It would be a mistake for every place in the world to try to be the world’s leader in, say, information technology or biotechnology. But we need not believe that they are the only sources of innovation. Any industry can become more innovative as a result of employing technological advances in the way that it does business. Even more fundamentally, innovation, as we’ve defined it today, can be employed by any business.

Like cheese. One of the most successful clusters in the Northeast United States is the Artisanal Cheese cluster in Vermont, which over the past 20 years has developed from a handful of local cheesemakers to a cluster with nearly 50 members who produce more than 150 varieties of cheese.  Although cheesemaking is far from a new industry, the Vermont Cheese Council has taken advantage of new technologies and collaborative approach to marketing, distribution, and R & D to post double-digit annual growth in production since 2003. The cluster is now supported by the Institute for Artisanal Cheese at the University of Vermont, the nation’s only research institution devoted to the artisanal cheese industry.[31]

The “regional” in the phrase “regional innovation clusters” tells us where to look for leadership, as well as providing an understanding of the borders of innovation. In a paper I co-authored last year, we reproduced a map of the United States, identifying 11 high-tech clusters located across the country.[32] Only 1 of the 11 clusters was entirely contained within a single state. And then, even within a single state, clusters will cross municipal and county lines. This puts a very large premium on defining a cluster initiative by economic, not political, borders.

Thus, a regional innovation cluster should be viewed as an ensemble of various organizations and institutions that are defined geographically, interact formally and informally, and contribute collectively to the achievement of all kinds of innovations within a given industry.[33] And each will be different, a fact that has important implications for any federal or multistate program. As Mark Muro and Bruce Katz at Brookings explained recently, cluster thinking and cluster strategies “are more a paradigm than a single program.”[34]

Of course, we know quite a bit already about what makes a cluster strategy successful.[35]

First, place matters. It is important for regional economies to emphasize what they can do best, capitalizing on existing strengths or new strengths that spring naturally from existing advantages. Solar power is a good strategy for New Mexico; hydroelectric power is not. Existence of institutions of knowledge-creation, availability of capital, and the presence of high-skill labor with programs to spur talent generation will all be parts of a region’s assessment of its competitive strengths.

Second, connections are key. The economic theory of a cluster recognizes the importance of both competition, which makes businesses more successful and increases consumer welfare, and cooperation, to create an environment of mutual advantage. Universities and community colleges, for example, can add to the store of knowledge and help educate workers in a manner that advantages multiple, even competing, local businesses. But that is best done with explicit networks of collaboration and knowledge-sharing of the kind found, for example, connected to the Albany nanotechnology cluster.

Third, practice makes perfect. As demonstrated by North Carolina’s Research Triangle and the greater Phoenix cluster, it can take a long time, even decades, to build a new cluster from scratch. The observation reemphasizes our belief that short-term gains will come mainly from existing advantages that have yet to be fully realized. An analysis of Tennessee’s furniture cluster, for example, both identifies existing strengths, such as office furniture, and also areas in which the region can be potentially competitive, such as mattress manufacturing.[36] Areas of potential strength are likely to be areas that will result in quicker results.

Fourth, success depends on local leadership. There is no substitute for the ability of local businesses, governments, nonprofits, universities, and colleges to all work together. That has been demonstrated in areas and industries as diverse as San Diego’s CONNECT program, Toledo’s photovoltaic cluster, and Minneapolis’s medical devices cluster. Toledo is a particularly good example. The University of Toledo, recognizing its strong engineering and manufacturing science programs and the city’s highly skilled workforce and economic infrastructure, led a 20-year effort to create a new photovoltaics and clean-energy cluster. The university has assembled a team of world-class faculty in photovoltaics and has built laboratories and support centers that have spun off dozens of businesses and reinvigorated the city. In partnership, the state of Ohio committed $18.6 million to the university in 2007 to spur the continued development of the photovoltaics cluster, generate new high-tech jobs, and increase industry revenue. From this university and government leadership, the Wright Center for Photovoltaics Innovation and Commercializiation is now an internationally recognized photovoltaics research and development center with infrastructure attractive to companies incubating the future generations of photovoltaic technologies.[37]

But our work is scarcely done. Let me identify just two important areas which require further attention as we further develop clusters policy.

The first is to reform the idea of economic development itself in order to ensure that economic-development efforts are tightly aligned with regional economic strategies. And that is tightly connected to the second—to make sure that distinct economic-development efforts are just as tightly coordinated with each other—which itself will boost the efficiency and efficacy of governmental programs.

Let me give you an example.[38] The Midwest of the United States has had it especially tough in these difficult economic times—declining manufacturing, higher unemployment, and shattered communities. Plenty of existing federal programs can help this region rebound from the Great Recession and build new industries to compete anew in the 21st century. But do these programs work? And do they work together?

Well, at least in this part of the country, businesses say these federal programs are too small and too disconnected from each other to be as effective as they must be. That’s the conclusion of a new report by noted regional economist Maryann Feldman of the University of North Carolina, Chapel Hill, and her graduate assistant, Lauren Lanahan. They find that federal funding to help companies innovate and commercialize new products and services, “at less than 10 percent of the $150 billion a year that the federal government invests in basic scientific research, is ‘small beer’—a trivial amount given the challenges our nation faces from our global competitors.”[39]

This new report, published by the Center for American Progress, is based on a survey of more than 4,000 companies in the Pittsburgh-Cleveland region. Its purpose is to inform federal policymakers about the effectiveness of their innovation programs.

While doing their research, though, Feldman and Lanahan also discovered that two important state-based innovation programs—Ben Franklin Technology Partners in Pennsylvania and Ohio Third Frontier—are mostly providing the right mix of resources that companies need to compete.[40] Alas, businesses say the two programs aren’t providing enough of it due to limited state fiscal resources.

Feldman and Lanahan’s report also highlights another problem with current U.S. clusters policy—a lack of coordination among cluster initiatives. Feldman and Lanahan found that these effective but limited state programs do not match up well with the welter of existing federal innovation programs. And they also concluded that “federal programs designed to implement these policies are divided into a chaotic array of ‘silos’—policy-speak for mutually unconnected programs—that make it exceedingly hard for the federal government to act upon any strategy designed to overcome our nation’s economic policy limitations.”[41]

This lack of coordination among cluster programs is not a new problem. In 2008, a Brookings report by Karen Mills, Elizabeth Reynolds, and Andrew Reamer identified 250 separate federal programs with activities connected to economic development. They concluded that “the federal government’s current approach of a multitude of fixed silos has high transaction costs, low synergy, and, ultimately, insufficient return on taxpayer investment.”[42]

Fixing this problem is vital to the long-term success of U.S. clusters policy. Federal efforts should be tightly aligned with economic strategies of regional innovation clusters so as to avoid federal programs that duplicate each other or fail to coordinate their activities. That is why it is so encouraging that the Obama administration just announced the creation of the new Taskforce for the Advancement of Regional Innovation Clusters, which has been charged expressly with fostering collaboration among six agencies and departments in order to support the success of regional innovation clusters.[43]

It is important, in Europe and the United States, and around the globe, for us to continue to learn while we lead. One aspect of the Feldman-Lanahan report that deserves particular emphasis is, of course, that the study asks businesses themselves to evaluate governmental action. That is very important because business needs to be a part of the creation of regional innovation strategy, its implementation and, therefore, its evaluation.

As we evaluate cluster efforts, we need to measure the real impact of governmental actions on cluster success in order to further refine what works and what does not. Important work has begun, of course. The OECD, for example, has explored very specifically the question of how best to evaluate the effectiveness of cluster policies. [44] These lessons learned from the development of cluster policies are worthy of study. And the Center for American Progress report that I discussed a moment ago starts down the same path.[45]

This is again an area where the Obama administration is making progress. The Commerce Department recently announced a $1 million grant to the Institute for Strategy and Competitiveness at Harvard Business School, headed by Michael Porter, to develop a nationwide cluster map analyzing regional assets, which should assist in the development of comprehensive cluster strategies.[46]

Networks and nodes

Finally, I’d like to address the relationship of clusters to the global economy. One of the most common definitions of the Internet is this: A network of networks. But if you look at one of the original hand-written diagrams of the Internet drawn in the late 1960s, it looks different. It’s a sketch of networks and nodes—four places, each at a research university, all linked together. And that makes sense, networks connect; nodes supply and consume content.

The world of clusters is like that—networks and nodes. As a technical matter, when we discuss the economic impact of regional innovation clusters, we are actually discussing “traded services,” or those economic activities created in the clusters and consumed elsewhere.

Most of the scholarship is, not surprisingly, focused on very local analysis. How does a cluster form? How does it perform. How can it be strengthened?

Some recent analysis, however, has begun to examine the international relationships that bind clusters together. Note that the phrase “international relationships” is common parlance, but it suggests, of course, that the building blocks of economic relationships are nation-states.

A better phrase might be “intercluster relationships.” Because, for all of our emphasis on clusters as the building blocks of national economic success, we have yet to ask ourselves: What do trade issues look like from the perspective of a cluster? In other words, would a cluster-focused examination of current international trade issues lead us to any increased understanding of the global economy and the public-policy that should be applied to those jurisdictional entities—nations—that house regional innovation clusters?

Regional economies have never operated in isolation. Not only do they trade with other places, but the citizens and entities that make up regional economies are often international in character. Large corporations are located in multiple countries, and they expect their employees to work together. Value chains stretch across continents. The interaction of people, a critical ingredient of cluster success, is not limited to face-to-face contact. Put simply, communities are not only geographic. Communities are also communities of people inhabiting the same discipline, for example. Or people who share a common heritage and move back and forth from their home nation to their new homes.

A study of the biopharmaceutical sector, for example, demonstrates that Boston biotech firms develop strong relationships with companies located in other clusters, both within and beyond the borders of the United States.[47] Thus, “biopharmaceutical clusters tend to broaden their support. . . . through a broad range of interregional, national, international or global formal and/or informal relationships.”[48]

Even more to the point, leading sectors are simultaneously very local and very global. Take two sectors with which I myself work—the Internet ecosystem and agriculture. In both, the motto might be: “Act local. Act global.”

Analysis of Internet markets starts at a scale even smaller than the cluster, asking for example about the choices in a marketplace available to consumers in their homes. But in today’s world of mobile broadband, even that market definition may seem too big. We all carry the Internet with us—personalizing and shaping it as we go.

At the same time, the information and communications marketplace is global in its essence. Not only because value chains stretch across continents but because some products—say the semi-conductors that power computing devices—are actually the same the world over. The product market is, in some sense, the whole world. One apt description of the ICT industry in Ireland, for example, described it as “boundaryless,” not because the geographic location of Irish business was missing on a map but rather “in the sense that its global character defies traditional stereotypes of domestic rivalry and collaboration.”[49]

Agriculture has the same characteristic. My wife and I own a small farm near the Chesapeake Bay in Maryland, in the United States, where she’s set to grow vegetables for market next year. There is nothing much more local than the place where a seed is planted. And, of course, in the United States, local food harvests and distributions have been the basis for the growth of new regional innovation clusters themselves—in Northeast Ohio for instance.[50]

But the challenge of agriculture could not be more global. The United Nations estimates that agricultural production will just about have to double in the next forty years if we are going to be able to supply a global population that will reach nine billion people.[51] That is an innovation challenge of the first order.

So let’s think for a moment about how intercluster relationships might be studied.

Start with the biggest trade issue facing the United States right now—the economic relationship with China.

The tension is palpable. The Obama administration is pressing China to stop undervaluing its currency, which boosts China’s exports. Last week, the U.S. House of Representatives voted by a huge majority to give the Obama administration authority to impose tariffs on almost all Chinese imports to the United States, more than $300 billion worth, in retaliation for China’s failure to revalue its currency in the face of estimates that a fairly valued Chinese currency could add as much as a half-million jobs in America.[52] Then U.S. Treasury Secretary Timothy Geithner weighed in on the eve of the annual meetings of the International Monetary Fund and World Bank, calling for the two nations’ global trading partners to pressure China to revalue its currency. Meanwhile, tariff battles are escalating—most recently when China announced that it would impose big tariffs on American poultry, the latest skirmish in a contest over the application of antidumping rules.[53]

Currency and tariffs are, of course, classic instruments of national policy. But clusters are implicated as well.

Here are two views. One paper published earlier this year called expressly for a cluster-based approach to enhance US-China economic relationships, arguing that “China has the labor costs advantage, while America has technology and capital advantage. A comprehensive mutually beneficial merging of both advantages is certain to transform and enhance the Chinese industrial cluster.”[54]

From a very different perspective comes the recent petition filed by the United Steelworkers  union claiming that China “engages in illegal practices that stimulate and protect its domestic producers of green technology, ranging from wind and solar energy products to advanced batteries and energy-efficient vehicles.”[55] The trade union charges that China restricts access to critical raw materials, provides improper subsidies and export financing, discriminates against foreign firms and products, and improperly forces foreign firms to transfer intellectual property to China, all with adverse consequences to the U.S. economy.

This is not the place to decide the merits of the Steelworkers complaint. China has rejected it, saying that its actions are appropriate. The steelworkers, of course, plan to press on. But even without deciding the merits, it may be possible, nonetheless, to consider whether the theories advanced by the union offer a perspective on an interclusters trade policy. One could think of a similar set of allegations designed to draw the line between a permissible and impermissible support of clusters. Such an approach might argue that clusters are inherently local and global, so that their policies should not distinguish between foreign and domestic participants.

Such an approach would bring us back to the “boundaryless” cluster and the observation that markets are increasingly very local and supremely global. The node of a cluster may be in a particular place, but its network is not—it is network for capital, for supply, for collaborators, for the creation and sharing of intellectual property, for design, for manufacture and, of course, for customers. Moreover, participation in the cluster, by this token, is international as well—as firms congregate to find mutual advantage without regard to their nation of origin, as we have seen in leading clusters in both the United States and Europe. In other words, the node is local but the network is not.

From the perspective of a nation, this may be confusing. Foreign and domestic firms are labeled as such by reference to national borders, national origins, and national headquarters.

But from the perspective of a cluster, the picture may look simpler. Regional innovation clusters fuel local economic growth, without regard to the ostensible nationality of the participant firms.

Let’s ask ourselves, then, if the following statements are true and if they could contribute to our understanding.

Cluster-based policy does not ask, “Who are you?” It asks, “What is your contribution to economic growth in this place?”

Cluster-based policy does not ask, “Is your business domestic or foreign?” It asks, “What are the strongest ways you can build a network that fuels economic success and the creation of positive economic spillovers that make the cluster and its participants stronger?”

And cluster-based policy does not ask, “How do we artificially motivate businesses to move from one place to another?” It asks, “How do we encourage our regional innovation cluster to be as competitive as it can be?”

I do not mean to suggest that the principles of trade policy should be ignored. Issues of currency manipulation, for example, can only be analyzed at the national or supranational level. I only suggest that we might increase understanding of how commerce actually works—and how it should work—by devoting more attention to the relationships between clusters and asking ourselves, “What does intercluster trade policy look like?”

At the end of the day, the conclusion is simple—regional innovation clusters need international trade. And international trade is what moves information, goods, and services between clusters. In the future, I suggest that the relationship between these nodes and the global networks should gain additional emphasis. We need to empower the nodes and the networks and achieve a better policy understanding of how they may work together.

Conclusion

There’s a lot on the table as we begin our discussions today. Let me just briefly recap the important points that I have tried to emphasize.

First, clusters policy is more important, not less important, in tough times and tight budgets.

Second, we must simultaneously lead and learn, implementing better policies today, and learning from each other how to improve those policies even more in the future through the collection and analysis of data.

Third, we must reinforce the connection of clusters to a global economy and begin to ask, “How do regional innovation clusters view their relationship to that global economy?”

We have assembled the right people in the right place today.  We might consider ourselves a one-day cluster—global in composition, local in our discussions.  Ready to learn and, of course, to lead.

Acknowledgments

The author would like to thank Charles Borden for his substantial editorial assistance and the following individuals for their insightful comments: Brad Benthal, Peter Cowhey, Karen Maguire, Mark Muro, and Ed Paisley. The views expressed herein are those of the author’s alone and not necessarily shared by any of the institutions with which he is affiliated.

Endnotes

[1] Mercedes Delgado, Michael E. Porter, and Scott Stern, “Clusters, Convergence, and Economic Performance” (Cambridge: Institute for Strategy and Competitiveness, 2010), available at http://www.isc.hbs.edu/pdf/DPS_ClustersPerformance_08-20-10.pdf.

[2] Ibid.

[3] Michael Greenstone, Richard Hornbeck, and Enrico Moretti, “Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants,” Working Paper 07-31 (MIT Department of Economics, 2007).

[4] Mark Muro and Bruce Katz, “The New ‘Cluster Moment’: How Regional Innovation Clusters Can Foster the Next Economy,” (Washington: Metropolitan Policy Program at the Brookings Institute, 2010); Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” (Washington: Metropolitan Policy Program at the Brookings Institute, 2008); Council on Competitiveness, “Collaborate: Leading Regional Innovation Clusters” (2010); Maryann Feldman and Laura Lanahan, “Silos of Small Beer: A Case Study of the Efficacy of Federal Innovation Programs in a Key Midwest Regional Economy” (Washington: Science Progress, 2010); Jonathan Sallet, Ed Paisley, and Justin Masterman, “The Geography of Innovation: The Federal Government and the Growth of Regional Innovation Clusters” (Washington: Science Progress, 2009); “Entrepreneurship Initiatives,” available at http://www.silicon-flatirons.org/initiatives.php?id=entrepreneurship.

[5] “World Class Clusters at Your Fingertips,” available at http://www.clusterobservatory.eu; “European Commission: Enterprise and Industry,” available at http://ec.europa.eu/enterprise/index_en.htm; “European Commission: Research Directorate-General,” available at http://ec.europa.eu/dgs/research/index_en.html.

[6] “Máire Geoghean-Quinn, EU Commissioner for Research, Innovation and Science Interview,” available at   http://www.research-europe.com/index.php/2010/05/595.

[7] Robert D. Atkinson and others, “Innovation Policy on a Budget: Driving Innovation in a Time of Fiscal Constraint,” (Washington: The Information Technology and  Innovation Foundation, 2010), available at http://www.itif.org/files/2010-innovation-budget.pdf.

[8] “Overview of Funding,” available at http://www.recovery.gov/pages/textview.aspx?List=%7BEB595CCA%2DD93F%2D48F4%2DAF96%2D11E2D41DE73D%7D&xsl=Charts/FundingOverviewChartTextView.xsl.

[9] Elizabeth McNichol, Phil Oloff, and Nicholas Johnson, “State Continue to Feel Recessions, Impact,” (Washington: Center on Budget and Policy Priorities, 2010), available at http://www.cbpp.org/cms/?fa=view&id=711.

[10] Justin Lahart, “Companies Still Holding Lots of Cash,” The Wall Street Journal,September 17, 2010.

[11] Organisation for Economic Co-Operation and Development, “Policy Responses to the Economic Crisis: Investing in Innovation for Long-Term Growth” (2009), available at http://www.oecd.org/dataoecd/59/45/42983414.pdf.

[12] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[13] The IALR is central to the success of the Dan River Region; it “provide[s] research services to [the region’s] technology sector, use[s] distributed research in conjunction with Virginia Tech to stimulate start-up companies, incubate[s] early stage companies and provide[s] state-of-the-art learning facilities and services for the region’s educational system.”  See Council on Competitiveness, “Collaborate: Leading Regional Innovation Clusters”

[14] Ibid.

[15] Rick Moriarty, “New York State Plans to Spend $28 Million to Create Nanotechnology Lab in Salina,” Syracuse Post-Standard, September 9, 2010.

[16] Remarks of Allison Hooper, Founder of Vermont Butter and Cheese Creamery, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[17] U.S. Department of Commerce, “U.S. Commerce Secretary Gary Locke Announces Winners of i6 Challenge,” Press release, September 23, 2010.

[18] Ibid.

[19] U.S. Small Business Administration, “SBA Announces Support for 10 Regional ‘Innovative Economies’ Clusters, Local Job Creation,” Press release, September 20, 2010.

[20] Ibid.

[21] Muro and Katz, “The New ‘Cluster Moment’”

[22] Ibid.

[23] Closing Keynote Remarks of U.S. Secretary of Agriculture Thomas Vilsack, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010, available at http://www.usda.gov/wps/portal/usda/usdahome?contentidonly=true&contentid=2010/09/0488.xml.

[24]U.S. Department of Agriculture, “Secretary Vilsack Announces Awards to Support Regional Economic Development Strategies,” Press release,  September 23, 2010.

[25] Delgado, Porter, and Stern, “Clusters, Convergence, and Economic Performance”; Greenstone, Hornbeck, and Moretti, “Identifying Agglomeration Spillovers.”

[26] Delgado, Porter, and Stern, “Clusters, Convergence, and Economic Performance”

[27] Muro and Katz, “The New ‘Cluster Moment’”

[28] Ibid.

[29] Ibid.

[30] Remarks of Jason Furman, Deputy Director of the National Economic Council, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[31] Muro and Katz, “The New ‘Cluster Moment’”

[32] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[33] Abdelillah Hamdouch, “Conceptualizing Innovation Clusters and Networks” Working Paper 3 (Research Network on Innovation, University of Lille, 2008).

[34] Muro and Katz, “The New ‘Cluster Moment’”

[35] Sallet, Paisley, and Masterman, “The Geography of Innovation

[36] Ibid.

[37] Ibid.

[38] The following passage is adapted from Ed Paisley and Jonathan Sallet “Rebuilding Regional Economies,” Cleveland Plain Dealer, September 23, 2010.

[39] Feldman and Lanahan, “Silos of Small Beer”

[40] Ibid. at 29-31.

[41] Ibid.

[42] Mills, Reynolds, and Reamer, “Clusters and Competitiveness”

[43] Remarks of Jason Furman, Deputy Director of the National Economic Council, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[44] Organisation for Economic Co-operation and Development,  Reviews of Regional Innovation: Competitive Regional Clusters (2007).

[45] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[46] U.S. Department of Commerce, “U.S. Commerce Secretary Gary Locke Announces Winners of i6 Challenge”

[47] Hamdouch, “Conceptualizing Innovation Clusters and Networks.”

[48] Marc-Hubert Depret and Abdelillah  Hamdouch, “Multiscalar Clusters and Networks as the Foundations of Innovation Dynamics in the Biopharmaceutical Industry” (Regional Studies Association, 2010).

[49] Roy Green and others, “The Boundaryless Cluster: Information, Communications & Ireland” (2001).

[50] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[51] United Nations Department of Public Information, “Food Production Must Double By 2050 To Meet Demand From World’s Growing Population,” Press release, October 9, 2009, available at http://www.un.org/News/Press/docs/2009/gaef3242.doc.htm.

[52] Sewall Chan, “The U.S.-China Exchange Rate Squeeze,” The New York Times, September 18, 2010.

[53] Keith Bradsher, “China Imposes a Steep Tariff on U.S. Poultry,” The New York Times, September 26, 2010.

[54] William Lawrence and Weidong Sun, “A Cluster Approach towards Enhancing Chinese-American Trade Opportunities” (2010).

[55] United Steelworkers, “United Steelworkers’ Section 301 Petition Demonstrates China’s Green Technology Practices Violate WTO Rules,” available at http://assets.usw.org/releases/misc/section-301.pdf.

Tags: Innovation, innovation clusters

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