Early-stage venture capital, private equity, near equity, angel, and other capital resource providers offered insight over the course of a four-hour session. The fund I represented, Maine-based CEI Community Ventures, or CCV, was one of a handful of early-stage equity providers, and one whose charter includes a focus on investment in rural communities in northern New England. Three private equity funds were in the room—late-stage investors such as these often back or own manufacturing companies located in rural communities. The question posed to the group: How can we (the feds and the private sector) collaborate to direct capital to regions that have not typically been high priority for the risk capital community?

The USDA has an understandable interest in leveraging rural markets’ natural assets to serve high-growth sectors such as renewable energy. Additionally, the agency has long supported value-added food and agriculture ventures, sectors in which CCV has made three VC investments since 2005. Biofuels, both waste agricultural stock and newly grown agri-fuel sources, were top of mind for the secretary.

Vilsack asked what the federal government could do to improve access to capital in rural areas. As one might imagine, different capital providers brought different perspectives to the question. Private-equity folks spoke about regulation (less of it) and access to credit markets (more of it). Early-stage VC funds wanted to see the feds make more capital and tax credits available to spur private-sector investment. All early-stage funds present advocated for support of the agency’s Rural Business Investment Companies, or RBIC, program, an initiative funded out the 2002 Farm Bill as a partnership between USDA and the Small Business Administration, or SBA. RBIC was modeled on SBA’s 2000-2001 New Markets Venture Capital, or NMVC, program, which licensed six funds—including CCV—to commit high-risk capital and a unique grant pool to underserved and distressed communities in targeted regions. The RBIC initiative licensed only Meritus Ventures (an early-stage fund based in Kentucky) before program funding was withdrawn in 2005.

From a risk-capital perspective, the rural scene is challenging. Early-stage funds seeking high growth with proven teams are hard pressed to find them laying low in the woodlands, lowlands, or mountains of rural communities. But for a handful of experimental—and so as yet unproven—funds focused on rural and underserved communities, the early-stage equity market has gravitated, for logical reasons, to urban markets. Rural challenges include limited high-growth investment opportunities in sectors that attract capital, few experienced VC management teams, and difficulty attracting management talent to rural communities. It’s not that potential CEOs and senior managers don’t want to live in great livable cities like Portsmouth or Manchester, but they often have to consider what their options are if the venture doesn’t work out and they’ve moved their family to a rural area with fewer fallback opportunities than in a metro area like Boston.

A similar problem exists in finding experienced VCs who want to play in rural markets. A fund targeting rural markets is likely to find few similar funds with whom to co-invest. Small funds do not afford managers the capacity to attract the best talent, let alone continue to support its investments through multiple financing rounds. For this reason, I made a case to USDA to be cognizant of a minimum fund size ($25 million) that can support a fee structure and follow-on investment capacity.

Like many in the room, I supported Vilsack’s case for focusing on renewable energy, though noted that biofuel-based business models are challenging for their commodity nature and regulatory uncertainty. Many venture capital and growth equity funds supported biomass early in its evolution and—having been burned—are not so enthusiastic to double down in this post-recession environment. Biomass is a challenging sector in that its supply source and its end product are commodities, products that compete on volume and thin margins, not a great combination for venture capital.

I and others offered strong support for the value-added producer segment, which can bring higher growth rates and gross margins to rural areas. For example, the fund I manage has had a good run so far in support of food plays, including Pittsfield, New Hampshire-based Rustic Crust. But mine was a qualified endorsement, given that this, too, is a field with limited co-investment support. Risk capital tends to be biased toward high-margin, high-growth web businesses like Facebook and Groupon. This paucity of co-investment capital increases the risk of failure, since a processed food company will find it challenging to support growth through the early stages of development. Companies fail for a lot of reasons—access to growth capital is a pretty important one.

There’s no easy answer to Vilsack’s aim to see greater funding flow into rural markets, but it’s great to see this traditional agency reaching out and looking at how innovation tools like equity can address the short- and long-term challenges of rural economies.

Michael Gurau is president of CEI Community Ventures and is raising a new fund (Clear Venture Partners) to focus on early-stage ventures in secondary rural and small metro regions in New England. You can reach him at mg@clearvcs.com.

The speakers agreed with Rep. Hoyer that manufacturing is essential to the American economy and that the United States needs a solid long term game-plan to keep manufacturing clean and in America.  The discussion echoed the main points of a CAP Paper “Low Carbon Innovation: A Uniquely American Strategy for Industrial Renewal” that was released at the event.  Below is a summary of the paper. You can also access the full report here, and the introduction and summary here.

Innovating for a Low Carbon Future

Our nation’s innovation and competitive drive in the 20th century powered the U.S. economy to global leadership, helped win two World Wars and one Cold War, created unprecedented and broad-based economic prosperity, and established the technology that enabled the conquest of the moon and today’s Information Age.  Today, this same engine of innovation is in serious jeopardy as we look across the competitive landscape of the 21st century.

There are a number of reasons for this.  First, in recent years the manufacturing sector, which for decades supplied millions of Americans with stable, well-paying jobs and sustained our country’s ability to innovate has shrunk. U.S. companies found many reasons to shift manufacturing overseas. This not only costs jobs but also, as the Harvard Business Review points out, it costs our economy’s ability to make high-tech products and invent new ones.

Compounding this threat to American competitiveness in coming years are the increasing risks that U.S. businesses will face from global warming. The consequences of global climate change will deliver real, and potentially very large, economic costs.  America also suffers from a confused planning environment for infrastructure and economic decision making, which makes it difficult to move forward on any comprehensive plan to bolster sustainable economic growth. Congressional inaction on climate legislation and policies to deploy clean and efficient energy technologies here at home are creating deep uncertainties for business planning.  Meanwhile, our competitors in other nations, are already retooling their industries and infrastructure for a clean energy future.

The U.S. needs clear long-term climate and clean energy policies, and a supporting low-carbon economic growth strategy to overcome the challenges above.  Accordingly, in a paper entitled “Low-carbon Innovation: A Uniquely American Strategy for Industrial Renewal,” the Center for American Progress is proposing a low-carbon economic growth strategy to keep America the innovative industrial leader of the world.   The strategy builds on our existing regional ecosystem of economic development policies and it aligns policies across different branches of government.  The purpose is to put forth smart incentives that engage private capital markets in deploying essential low-carbon technologies and reinvigorating investment in cutting-edge infrastructure.

The U.S. economy is an “innovation-driven” economy, according to the World Economic Forum. The United States became a global economic leader by building a diverse economy driven by a continuous innovation business model—one that values inventing, manufacturing, and continually reengineering value-added products and sophisticated technologies. Innovation is our area of expertise and it is at the center of our low-carbon industrial strategy.

Building innovation networks that are greater than the sum of their parts

In the paper we’ve identified five types of market actors whose participation is essential for low-carbon industrial renewal, and identified key policies for each to spur the innovation.  These include:

Coordinating policymakers and regulators

Policymakers, regulators, and program officers in federal and state agencies play an important role in  every stage of innovation and industrial development, whether by siting new transmission infrastructure,  permitting a new wind farm, providing programmatic support to help finance an advanced manufacturing facility, or coordinating public R&D research funds. Policymakers, regulators, and  government agencies can directly facilitate the growth of low-carbon markets and industries by aligning all efforts to build strong market demand, by influencing government procurement practices, and by offering clear frameworks for business planning within their rulemaking and legislating.

Empowering clean energy researchers

From advanced electric vehicle batteries to super-cheap solar panels to the manufacturing processes that produce them, research conducted in government, university, and corporate labs is critical to advancing innovation and the growth of low-carbon industries. Public policies provide important support for scientists and engineers as they work to create low-carbon solutions to industrial challenges, and ensure their discoveries can move quickly into the market.

Mobilizing clean energy manufacturers

Manufacturers who develop the supply chains, production processes, and marketing strategies to scale up the supply of American clean energy products, equipment, and technology play an important role in innovation and form the basis of industrial growth. Public policies play a critical role in helping America’s existing industrial base navigate the transition to a clean energy economy, supporting worker training and retooling manufacturing for low-carbon technologies.

Incentivizing clean energy investors

The task of innovating and scaling up a new technological foundation for U.S. industry based on clean energy requires harnessing flows of private capital. Clean energy and energy efficiency standards can send powerful signals to investors on the permanence of clean energy markets, while targeted financing assistance programs can help mitigate risks and unlock private capital for clean energy. These policies can leverage private capital more effectively within stalled capital markets and can improve incentives for private investment in clean energy research, commercialization, and deployment.

Engaging clean energy consumers

The consumers of clean energy products and technology provide the critical domestic market demand that makes industrial growth and innovation possible. Without consumers to purchase and use zero-emission vehicles, building owners and construction firms to use energy-efficient building materials, or utilities to invest in and operate renewable-energy-generating technologies, there is no revenue stream for the manufacturers of those goods, no reason for investors to provide capital, and no market application for clean energy research. Consumer-driven demand—from families to businesses to utility companies— is what makes clean energy innovation and industrial transformation possible.

Public policies can increase demand for clean energy goods and services by establishing meaningful incentives for utilities, building owners, and consumers to invest in clean energy technologies instead of fossil-fuel energy generation. Indeed, policy is essential to dramatically increase the predictability, transparency, and long-term certainty of clean energy markets to reach economies of scale and bring down cost.

The bottom line is that when these five groups work together by exchanging information, money, and risk, the network they form is more innovative than the sum of its parts. Together they can accomplish what none of them can do alone. With this understanding, we’ve organized our discussion of specific policies through the lens of how to engage each of these constituencies and encourage the formation of an informal national clean energy innovation network. In the paper we further lay out the principles for how policy can align the interests of each of these industrial and economic actors around shared efforts to drive low-carbon innovation in America’s economy.

Access the full report here.

Access the executive summary here.

Bracken Hendricks is a Senior Fellow at the Center for American Progress. Sean Pool is an Assistant Editor with the Center’s Science Progress project. Lisbeth Kaufman is a Special Assistant at the Center.

Vibrant entrepreneurial markets such as those in and around Boston and Silicon Valley are nationally recognized for their high-octane venture capital fuel. Perhaps less well known is the degree to which the federal government has served as something of a “venture catalyst” by providing nondilutive grants, equity, contracts, and resources to high-growth startups. Some examples include:

• The Department of Defense, which supports, with research contracts, important technologies that support military (and, subsequently, commercial) applications, particularly its legendary Defense Advanced Research Projects Agency, or DARPA
• The Small Business Investment Company program, or SBIC, a more-than-50-year-old program that complements private-sector capital in support of growth companies
• The Small Business Innovation Research, or SBIR, program, a nearly 30-year-old program that provides grants to small businesses in support of federal needs for research that also have commercial corollaries
• The Department of Energy, which most recently added a Defense Department-inspired energy-centric version of DARPA called the Advanced Research Projects Agency—Energy, or ARPA-E, to its private-sector support suite for energy innovation

For decades, the federal government has  partnered with the private market to advance public product or service innovation needs related to defense and energy security—and, of course, to serve its agenda for jobs, competitiveness, and economic growth. For the most part, programs from Small Business Administration (SBIR, SBIC) and defense technology spending have been well supported on both sides of the political aisle. Most of these programs are agnostic to the demographics of an applicant—whether location, gender, race, or income. Whether applying from VC-hub Boston, MA, or Biloxi, MS, individuals and companies of all variety have access to some form of federal grant, loan, or equity.

But during the last two decades, two of the past three presidents have focused particularly on underserved communities and people. The Clinton administration’s New Markets Tax Credit and New Markets Venture Capital programs (run by the Treasury and SBA, respectively) seek to fill the capital gap that exists and persists for these target places and people. The Obama administration has continued the tradition, adding new initiatives that focus on underserved people, regions, and sectors. These programs provide resources from multiple agencies to women, minorities, Native Americans, veterans, and low-income communities.

A few examples include the Small Business Administration, with both existing and new programs that support loans and mentoring for small businesses, and the Treasury’s Community Development Financial Institution, or CDFI, Fund, which supports loan and equity pools that focus on targeted rural and urban low-income communities. SBA recently announced a chair for its new Advisory Council for Underserved Communities. The Advisory Council was formed to look across SBA’s assets (and others of the government) to align similar initiatives that serve targeted low-income people and places. Even the Obama administration’s multiagency Regional Innovation Cluster push—covered in SP in February—includes specific callouts for addressing underserved in each of the SBA and EDA cluster funding initiatives.

Indeed, the Economic Development Administration by mandate has always been about addressing low-income, high-unemployment, and otherwise challenged communities in disaster zones, regions with substantial outmigration of population, or those suffering from the loss of industries. The EDA’s recently announced i6 Green competitive grant for innovative Proof of Concept Centers mirrors a number of similar Obama initiatives in that it seeks to drive the innovation ecosystem (in this case on the green economy) but does so with EDA’s emphasis on distressed regions. The program enables existing grantees from SBIR programs at the National Science Foundation, the U.S. Department of Agriculture, and the Environmental Protection Agency that are part of winning i6 Green consortia to share half of the $12 million program award. This unprecedented flexibility and multiagency approach—with a single agency leading and other agencies contributing—are emerging hallmarks of Obama’s efforts to reduce silos and to align resources at the federal level.

As I noted in February, two new $1 billion SBA capital access programs are intended to drive debenture-funded risk capital into underserved inner cities and into clean energy, respectively. While clean energy is a pretty hot area for VCs in their traditional hunting grounds of Silicon Valley and Massachusetts, it’s still very much an emerging sector in other communities. Driving more risk capital into this strategic sector will make a difference for U.S. competitiveness—especially with countries like China plowing far more government money into this strategic high-growth sector.

Providing incentives for venture capital and mezzanine investors to drive capital into underserved regions that don’t normally see private investment dollars, too, is smart strategy. Our tech-and-innovation economy cannot be just about the rich city centers like Boston or the Silicon Valley. Other metropolitan regions need to develop the patterns of innovation and entrepreneurship that drive long-term economic growth. Consistent with its democratic roots, the Obama administration attends—if not equally, then meaningfully and substantively—to the underserved rural regions of our country that need essential capital and innovation infrastructure as much or more so than their rich city brethren.

At risk of appearing self-serving, let me share with you one emerging success story that speaks to the importance and impact of public-private partnerships such as those described above. Since 2000, I have managed one of six Clinton-era venture capital funds—part of the so-called New Markets Venture Capital, or NMVC, funds licensed by SBA  in 2000-2001. The NMVC program is an SBA initiative that matches 1-to-1 venture capital raised in the private sector for the purpose of directing this innovation rocket fuel in regions that lack the kinds of assets one finds in Boston. The fund I’m involved in backed nine companies, eight of which saw their first professional capital from this specialized pool, and all of which leveraged each dollar from the fund 5-to-1 with private follow-on capital.

One of the fund’s two remaining investments is Nanocomp Technologies, an advanced nanomanufacturing  company that has subsequently received several DOD contracts, SBIR awards, and recently a special designation that is given to a handful of companies in the United States deemed “essential to national defense.” This designation comes with additional federal funding—which will leverage additional private capital to help get this technology to scale to solve real problems related to both national defense and  commercial customers.

The product is an advanced material with game-changing structural, thermal, and electrical properties that has applications in aviation, electrical transmission, thermoelectric power generation, and commercial electronics, among others. It is among the lightest, strongest, and most electrically and thermal conductive materials known to man, and was presented in 2010 by the Office of Science and Technology Policy to President Obama as one of the three most significant nanotechnology innovations of 2010. Since I led the company’s first professional round of capital in late 2006, the company has grown from 2 to 40 staff and looks to grow to a few hundred in the next five years. With the help of the NMVC program, the company was able to locate its headquarters and manufacturing facility in an economically distressed region in New Hampshire.

While it’s early to declare this investment a victory, this emerging company funded through a public-private partnership makes a hell of a case for specialized federal programs that support innovation and entrepreneurship in underserved regions. These kind of public-private partnerships catalyze private-sector innovation to develop game-changing technologies of national priority, move private investment dollars, and create jobs in underserved regions. That’s a good thing for future U.S. economic competitiveness and broad-based prosperity.

Michael Gurau is a venture capitalist with CEI Community Ventures and is also president of Clear Innovation Partners, a company formed to catalyze and accelerate regional innovation clusters.

At the forum, the president and his White House team engaged with small business owners and entrepreneurs to discuss how bottom-up, place-based innovation and small business development policies are helping to reinvent American industry. In particular, the president praised the Rust Belt for its emblematic endeavors to reinvent itself as the Tech Belt. “Each time I come here, you’ve done more to retool and reinvent yourself,” the president said. “And that is something [Cleveland] is doing right now. It’s reinventing itself.”

At the event, cabinet members hosted break-out sessions on the various building blocks of innovation-led economic growth, including entrepreneurship, access to capital, smart tax policy, workforce development, export assistance, and clean energy. The president also commented on how one of his new signature public-private partnerships, Startup America, is making job opportunities more accessible by helping bring together different types of public and private innovation participants to help cohere nascent networks of knowledge creation and technology commercialization. “[It] doesn’t cost the U.S. Treasury anything to set up but may make all the difference in terms of success,” the president said.

One of these innovation building blocks, as we’ve long argued at Science Progress, is a concerted federal investment in the formation of bottom-up, place-based innovation clusters. “We’re all familiar with clusters like Silicon Valley,” said the president.

When you get a group of people together, and industries together, and institutions like universities together around particular industries, then the synergies that develop from all those different facets coming together can make the whole greater than the sum of its parts.

Last year, Science Progress and the Center for American Progress published an in-depth case study that showed the real impact that federal investments have on crystallizing regional innovation clusters comprised of small business incubators, universities, suppliers, manufacturers, and other innovation participants. The report talks about the important role that federal programs have in facilitating collaboration and leveraging investment from both the public and private sectors to create jobs in emerging industries.

President Obama spoke about the need to forge better connections between businesses and colleges, and the importance of workforce development in ensuring our businesses remain cutting-edge and competitive.

When it comes to workforce development, one of the most important things that we’ve all learned is how important it is to get businesses in early with the universities and the community colleges—a hugely underutilized resource—to develop the actual training program so that young people have the confidence if they go through this training program, they’ve got a job; businesses have confidence that if they hire these young people who went through this training program, they are trained for those jobs.

The collaboration that takes place between researchers, manufacturers, and investors in these clusters, or “entrepreneurial ecosystems,” is a critical ingredient for technology development and commercialization. Using liquid crystal displays as an example, President Obama noted the importance of fostering collaboration between researchers in universities, and local investors and entrepreneurs who can help bring their research to market. The Liquid Crystal Institute at Kent State University was a critical source of basic and applied research which fed the creation of the Flex Matters cluster, a fast growing global epicenter for the research and manufacturing of flexible electronics.

But without help from a U.S. Small Business Administration contract, as well as assistance from a local innovation cluster development organization called NorTech, that research may never have made it into the hands of investors, entrepreneurs, and manufacturers who could use it to create new technologies, companies, and jobs. The president recognized Kent Displays, one of the first manufacturers to emerge from the nascent innovation cluster, as a pioneer in advanced manufacturing and as a kernel for the now growing technology cluster in the Midwestern Tech Belt.

At the core of the conference was a notion that intelligent investment will lead the United States out of the economic recession.  But the president made the distinction between vital investments in innovation that we need to win the future, and other spending that we must scale back.

We’ve also got to get our fiscal house in order,” the president said, “and that’s why I’ve put forth a budget that includes a five-year spending freeze that will help reduce the deficit by $400 billion and will get annual domestic spending down to the lowest levels since Dwight Eisenhower. I want to work with Democrats and Republicans to make even bigger dents in our deficits—find new savings, cut excessive spending wherever it exists. At the same time, we can’t sacrifice investments in our future.

Indeed, Science Progress has done a lot to show how federal investments in research, development, and commercialization of new technologies are critical for sustaining long-term economic growth and competitiveness. It has been clear since his State of the Union address that the president agrees. Investments in cutting-edge research, workforce training, and next-generation transportation and communication infrastructure are key components of his Strategy for American Innovation.

I was just with a group of young people, and one young man who is in the sciences pointed out that he’s concerned that his professors are having more and more trouble getting grants because our R&D budgets in this country have been declining as a relative share of GDP. We’ve decided we’ve got to increase that back up. And that’s part of our budget—investing in innovation.

And there’s reason to hope that the president will put his money where his mouth is when the budget debates between House and Senate get tough. President Obama has shown he’s hustling to make the lofty goals in his Strategy for American Innovation into political reality. In his speech at Cleveland State, he even added a new word to his oft-repeated recipe for winning the future: “If we want to win the future, we’re going to have to out-innovate, out-educate, out-build, and yes, we are going to have to out-hustle the rest of the world.”

Sean Pool is Assistant Editor for Science Progress. Elaine Sedenberg is an Intern at Science Progress and an undergraduate in honors biochemistry at the University of Texas at Austin.

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It’s hard to imagine a meaningful response to President Obama’s “Sputnik moment” that does not involve the nation’s research universities. With a history measured in centuries rather than years or decades, combined endowments in excess of $250 billion, Nobel prize-winning faculty, and a generation of students as intellectually curious and socially committed as any in history, research universities are among the crown jewels of our society. The demise of many leading private research facilities further underscores the importance of universities in igniting a national innovation agenda.  In the words of Stanford’s President John Hennessy, “If the universities don’t work on the world’s biggest problems, who will?”

Since the publication three months ago of our book Engines of Innovation—The Entrepreneurial University in the 21st Century, readers and reviewers have agreed that universities have no choice but to assume leadership in what some are calling a “national reset.” As is often the case, the real challenge is how to make it happen. Although one size never fits all, we want to suggest some basic principles and make some recommendations to make universities more innovative and as a result increase their impact on the world’s biggest problems.

First, we want to assert a core belief: Universities are about problem solving—the bigger, the better.  They encourage independent and unfettered thinking. They have stood the test of time because of the unique position they occupy somewhere between government, religion, and private enterprise. Increasing the impact of universities involves building on their unique culture, which is particularly well suited to foster innovation.

A corollary to this belief is that commercialization, in and of itself, is not central to the mission of most universities. Private corporations and NGO’s that respond quickly to markets, customers, and opportunities are much better suited to turn new knowledge into viable enterprises. Relationships between universities and the private and civic sector are important because they help academics determine what problems to work on, and they increase the impact of the work that is being done. The new companies, jobs, and wealth created by relationships between academia and the private sector are important by-products of the academic enterprise. If these relationships help universities become better problem solvers, the rest will take care of itself.

We are convinced that culture is more important than structure in encouraging innovation.  Encouraging problem-centered, multidisciplinary teams that can quickly come together and, as appropriate, come apart, is one important element of an innovation culture.  Tolerating, and even celebrating, failure is another. Examining the reward structure, especially as it applies to young professors, is also important. Welcoming innovators and entrepreneurs as speakers and teachers has an enormous and often unpredictable impact on university culture. Ultimately we are talking about an environment that gives permission and encouragement to innovate and then gets out of the way.

High-impact innovation requires that universities focus on big problems. This is what best furthers the university’s research and teaching mission and is most consistent with its core competencies. It is also what captures the imagination of students, faculty, and alumni and is the best use of its existing resources. Big problems, especially these days, are highly complex and require multiple perspectives and points of view. No other institution in our society can assemble teams of physicians, engineers, chemists, biologists, and computer scientists to attack a particular disease. We suggest that such teams are even more effective if they include an ethicist, an economist, and a historian.

Maximizing innovation at a research university also requires involving the entire campus, not just the sciences and engineering. This is a lesson that was hammered home on our own campus after the publication of our book. During a symposium led by the chairman of the history department, we discussed the need to accept failure as part of the innovation process. It was suggested that the history department could be renamed the Department of Ambiguity and Failure and, as such, had an important role to play in both encouraging risk taking and learning from mistakes. We also learned that when high-impact innovation is characterized as attacking the world’s biggest problems, humanists and social scientists are eager to join with scientists and engineers in the problem-solving process.  Soon after the symposium, a veteran faculty member stopped one of us on campus and said, “I have one piece of advice:  Get history and chemistry, and the hearts and minds will follow.”

We have found that to be the case not only in the traditional disciplines, but also in medicine, public health, education, law, journalism, and business.  No one wants to be left out of a great mission, and attacking big problems certainly qualifies.

Redefining who can belong to the academic community will also impact the volume and quality of innovation on a university campus. The arts long ago realized that practitioners were essential to the effective teaching of dance, music, writing, and filmmaking and welcomed nonacademics to join their departments. Such an approach can be applied throughout the university by enlisting practitioners as innovators and entrepreneurs in residence.  Adding practitioners to the multidisciplinary teams we have already described results in dramatic and often unexpected impact, and they often provide an important bridge between academia and the commercial world.  In response to a question from a delegation from Malaysia asking what was the single most important action that could be taken to develop a culture of innovation on a university campus, we answered, “Invite some entrepreneurs to join the faculty and then get out of the way.”

The last principle we want to emphasize is that creating an innovative environment within a university requires the support of the ecosystem that surrounds the university. By now it should be clear we believe a university cannot by itself maximize all of the new knowledge it creates. It requires a robust collection of entrepreneurs, financers, large corporations, and nongovernmental organizations to truly perform its function as an engine of innovation. In some cases, innovation hubs have naturally grown up around great universities, and in others, they have been purposefully created. Whatever the case, high-impact innovation will not happen without a supportive adjacent eco-system. Where such systems do not exist, public and private efforts should be focused on creating them.

The process of writing our book, the run-up to its publication and countless conversations, seminars, and a universitywide symposium have provided us with many ideas for maximizing innovation and impact at research universities. We begin with funders—government, foundations, and individual donors—because in the current environment of austerity, outside funding can have an extraordinary impact on university culture. Government and foundation grants that are problem based insist on measurable goals and require multidisciplinary cooperation and can contribute significantly to creating an on-campus culture of innovation. Grants that require partnerships with external companies or other entities and the participation of practitioners as well as academics are also a good idea. Employing competitions and prizes that require the kind of cooperation we have described will provide funding agencies with incredible leverage if such cooperation is a pre-condition for receiving funding. The recently passed America COMPETES Act explicitly authorizes the use of such competitions by federal agencies, and private foundations such as the Gates Foundation have demonstrated the impact of prizes and competitions as well.

Every university will approach differently the challenge of increasing impact by creating a more innovative environment.  A day-long symposium at our own university yielded a series of provocative suggestions, including the following:

1. Encourage multidisciplinary classes, preferably problem based, as a means of encouraging multidisciplinary research.
2. Consider establishing one campuswide initiative with a multiyear duration focused on a single problem as a way of marshalling resources and creating a unified mission.
3. Involve the humanities and social sciences in problem-based teams because they provide an important perspective that is often missed if only scientists and engineers participate.
4. Create physical environments that facilitate cross-disciplinary conversations.  We are absolutely convinced that space matters.
5. Establish clinical experiences because they ignite passion. Getting students, especially graduate students, in touch with real problems will “fire them up.”
6. Help younger faculty to negotiate the university bureaucracy so that they can maximize the impact of their work and succeed in their discipline.
7. Encourage collaboration with practitioners as a way of increasing impact.  Entrepreneurs in residence is a great model.

The president’s Sputnik moment should be a cause for celebration among those of us who work in higher education. It is an invitation to academics to do more.

On October 6, Spanish wind giant Gamesa Corp Technologica SA, a leading global designer and manufacturer of wind turbines, and Northrop Grumman Shipbuilding, America’s largest shipbuilder, signed a research and development agreement to jointly develop two prototypes of what will be the world’s largest offshore wind turbine, known as G11X -5.0 MW. The prototypes will be built piecemeal and then deployed and tested for kinks in U.S. waters, likely off the Virginia Coast.

At five megawatts each, just one of these turbines running at full speed could power nearly 4,000 homes. The turbine also builds off of Gamesa’s recent incremental innovations that have made its previous designs operate more efficiently and cost-effectively. These include:

• Innoblade: a blade that has been divided into sections allowing it to be easily transported. It also includes new aerodynamic features to minimize noise.
• Multismart: a turbine control system modulating the pitch of each blade, reducing vibration and lessening load.
• ConcreTower: a tower made of steel and concrete with the aim of reducing costs and facilitating transportation.
• Flexifit: a crane coupled to the nacelle (the main housing for a wind turbine) that can hoist or lower components such as the drive train or generator.
• GridMate: a permanent magnet synchronous generator using a full converter, “to guarantee the compliance with grid connection regulations.”

Once a final design for the turbine and marine stabilization platform are finalized, Gamesa will build a manufacturing facility to mass-produce the equipment, creating hundreds of jobs, according a spokesperson. Gamesa was the first foreign turbine manufacturer to come to the United States and since then has established two turbine manufacturing facilities in Pennsylvania that today sustain 800 permanent manufacturing jobs. Despite being a foreign-owned subsidiary, Gamesa’s U.S. operation has one of the highest domestic content rates (more than 50 percent) of any turbine maker in the country.

What’s more, on October 7, Interior Secretary Salazar finally approved the lease for the Cape Wind wind farm, bringing to a close the nine-year regulatory and political stalemate that had ensnared it. Cape Wind will deploy 130 turbines designed and built by Siemens Energy, and an agreement between Cape Wind Associates, LLC, Mass Tank Sales Corporation and EWW Group of Germany will result in the construction of first manufacturing facility for offshore wind foundations and other metalwork in the U.S., creating hundreds of jobs.  Cape Wind is the first of a handful of offshore wind projects currently winding their way through various local, state, and federal regulatory hurdles in search of approval. According to a third party analysis, the Cape Wind project will create between 600 and 1,000 construction and manufacturing jobs in the region while boosting labor income, state GDP, and increasing tax revenue by millions of dollars.

On October 12, Trans-Elect, a major transmission line developer, announced its intention to develop a subsea electrical transmission backbone that could one day connect and support the thousands of megawatts of offshore wind capacity being planned for development off the East Coast. This American Wind Connection would span 350 miles from northern New Jersey to the North Carolina/Virginia border and could support enough wind farms to power 1.9 million homes upon its completion in 2016. What is unique about this particular proposal is that its backers—Google; Marubeni Corp., a Japanese trading firm; and Good Energies LLC—have no plans to ask for a single federal dollar to finance the project. This indicates that offshore wind energy is approaching profitability and commercial readiness today.

At Science Progress we have written extensively about the formation of bottom-up innovation “clusters” or “ecosystems” around particular technologies in certain regions of the country. These networks are often anchored around a particular geographic location where shared infrastructure, favorable policy conditions, and a large pool of human talent can be leveraged by collaborating public and private entities. All of these recent announcements show the clear outlines of what could be the kernel of an offshore wind technology innovation cluster anchored in the Northeast and extending across the country.

The Northeast and Mid-Atlantic are particularly well-suited to serve as a cradle for a new offshore wind innovation ecosystem thanks to of a host of region-specific assets. These include:

• The availability of a vast amount of potential offshore wind resources (over 60,000 megawatts).
• A shallow coastal shelf that extends miles out to sea. These shallow waters make it cheaper and easier to install large turbines further out to sea where they can harness stronger and more consistent ocean winds while remaining virtually out of sight.
• Close proximity to large population centers where the power can be used, day or night.

Innovation networks form when different types of firms in an industry collaborate, create shared objectives, and exchange money, knowledge, and risk in the pursuit of those objectives. This can happen through a joint agreement for technical collaboration and development between companies with R&D operations, such as that of Gamesa and Northrop Grumman; through an economic exchange between buyer and seller, such as Siemen’s sale of 130 of its turbines to Cape Wind; or through advancing an investment in infrastructure, such as Google’s intention to take a stake in the development of the American Wind Connection.

All of these interactions exemplify the kind of collaboration among technology researchers, producers, users, and financiers that is so essential to the formation of a functional innovation ecosystem. New project finance expertise will be developed as Google, Good Energies, and Marubeni Corp. work with Trans-Elect to piece together the first-of-its-kind multijurisdictional offshore transmission system. The infrastructure created by this collaboration will make it easier for project developers to accelerate construction of planned and future offshore wind farms in the Northeast, which in turn will drive demand for turbines and equipment designed and produced by Siemens, Gamesa, Northrop Grumman, General Electric, and others.

All of these activities will help to increase scale and decrease cost while creating jobs in the Northeast and in turbine component manufacturing plants around the country. According to a recent report published by Oceana, the offshore wind industry in the United States has the potential to create and sustain as many as 212,000 permanent American jobs annually by 2030. This is more than three times as many jobs as the American Petroleum Institute predicts could be created by aggressive expansion of offshore oil and gas drilling. This finding is consistent with an analysis released by CAP and the Political Economy Research Institute last year that showed a similar figure.

The offshore wind innovation milestones reached this week stand as a testament to the innovative power of America’s entrepreneurs and businesses but much more could be accomplished if the government were to take an active partnership role in this nascent innovation network. Innovation ecosystems thrive when private sector producers, users, financers, and researchers can collaborate closely with public sector regulators, program administrators, and policymakers to address both market and regulatory barriers to technology development.

While the preliminary accomplishments of the American Wind Connection, Cape Wind, and the Gamesa-Northrop partnership demonstrate the potential of America’s private sector to innovate, so much more would be possible if the federal government could articulate a remotely coherent offshore wind energy strategy. The federal government needs to address regulatory hurdles like ones that ensnared Cape Wind for decades.

Some steps have been taken, such as the formation of the Atlantic Offshore Wind Energy Consortium among 10 Eastern states and the U.S. Department of the Interior, and the recent rulemaking by the Federal Energy Regulatory Commission, which will make it easier to site new clean energy transmission lines like the American Wind Connection. But much more is needed and our economic competitors are beating us to the punch.

Earlier this year China beat the United States to join the offshore wind club alongside Denmark, the United Kingdom, Ireland, Germany, the Netherlands, and Sweden. This puts China’s command-and-control economy fully two years ahead of the United States in offshore wind, since the first U.S. wind farm, Cape Wind, will not be complete until 2012 at the earliest. (see chart)

(Data from the National Renewable Energy Laboratory, p. 42.)

As technologies like offshore wind advance along the innovation lifecycle toward commercialization and maturity, mobilizing large amount of private capital becomes a paramount objective. But private capital won’t flow where there is no return, so besides collaborating to clear away regulatory hurdles, it must also sustain policies to keep demand for clean energy technologies strong.

Until now, the states have carried the burden of implementing demand-driving renewable energy standards in a piecemeal fashion, and these policies have been instrumental in helping the wind industry increase scale and reduce costs as much as it has. But in our current environment of political uncertainty and state budget shortfalls, this patchwork of policies is in jeopardy. The job then falls to the federal government to provide the regulatory clarity and long-term policy certainty needed to keep big investors at the table financing innovation.

There is a lot of work to do but the events of the past week have shown that the building blocks are there to develop a job-creating innovation ecosystem for offshore wind energy in the American East. With a little federal leadership, America’s private sector is ready to bring its capital and expertise to the table to build the factories, wind farms, and research centers that will drive energy innovation into the future.

Sean Pool is Assistant Editor at Science Progress.

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.

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Event: Regional Innovation Clusters: Advancing the Next Economy

Amid today’s stumbling economic recovery, policymakers are examining a variety of measures to help businesses compete and grow their workforces. As part of this effort, it is critical that they understand how regional economies across our country stitch themselves together from the bottom up—what makes them tick and what they need to grow and thrive in the 21st century. Alas, federal innovation policies aimed at boosting the competitiveness of our economy through investments in science and technology commercialization are often grounded in 20th-century economic development strategies that overlook the importance of regional economies and no longer match the needs of the 21st-century global economy.

Academics and policymakers alike understand the limitations of our current policies at the macroeconomic level. Federal funding for these commercialization programs, at less than 10 percent of the $150 billion a year we invest in basic scientific research, is “small beer”—a trivial amount given the challenges our nation faces from our global competitors. And 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.

At the regional level, however, many businesses and universities, state economic development agencies and community colleges, venture capitalists and commercial bankers all depend on current federal innovation policy funds to pay for or complement their own efforts to boost commercialization of game-changing discoveries, incremental manufacturing, and service innovation alike. Despite the clear limitations of existing federal innovation programs, they remain important to our national economic competitiveness. So understanding the efficacy of these federal innovation programs is the first step toward understanding how to improve them or replace them.

That is what we set out to do in this paper in one regional economy of our country—the eastern Midwest region that includes Pittsburgh in western Pennsylvania; and Cleveland, Akron, and Youngstown in northeast Ohio. The region, anchored by its major cities Pittsburgh and Cleveland, faces distinct challenges and opportunities. Regional economic growth, of course, is everywhere local and interconnected, but how much so depends on the vibrancy of each region’s innovative ecosystem. Silicon Valley in California, or the Route 128 corridor around Boston are famous “regional innovation clusters” in which businesses large and small, universities, federal labs, and financiers interact every day in a heady mix of creativity that powers our nation’s innovation economy. Places that have tried to copy their unique recipes, however, have not been very successful. And those places that succeeded at creating a high technology regional economy, such as North Carolina’s Research Triangle Park and San Diego’s Connect project, found that they needed to pave their own path.

In similar vein, Hollywood has a different mix of players who achieve the same thing in southern California for our entertainment industries. And Nashville serves the same purpose for country music. The upshot: Every successful regional innovation cluster defines itself idiosyncratically and specifically to its own context, depending on its own defining economic activity—be it entertainment, biotechnology, information technology, or advanced manufacturing.

But older industrial areas such as Pittsburgh, Cleveland, Akron, and Youngstown are places with substantial infrastructure and a proud industrial heritage that are struggling to redefine themselves in the global economy. The large corporations headquartered there that served as the backbone of the region’s 20th-century industrial economy are neither as numerous as they were 50 years ago nor as central to the region’s core economic competitiveness. In many different ways these companies have squandered their competitive advantages or watched as the forces of globalization overwhelmed those advantages.

This leaves entrepreneurship (defined as new firm formation and scale-up) and innovation (defined as the creation of value in an economy no matter the size of the company or the source of the idea) as the most viable strategies for the economic future of the region. Our study sought out these new players in this region’s innovation ecosystem to ask them not only about the efficacy of federal innovation programs but also about how they interact with each other—how much they felt they worked and lived in an emerging regional innovation cluster. Along the way, we also asked these players about the region in search of the strengths and weaknesses of this once-thriving, metal-bending region of our country in the 21st century.

Our survey of these firms and players on these subjects is the first one ever conducted. And our one-on-one interviews with dozens of key players in this new ecosystem only buttressed what we learned from our survey. We found in the eastern Midwest of our country an ecosystem of innovation and entrepreneurship that is emerging and vibrant, but also fragile, requiring the sustained efforts of local, state, and federal agencies working together to help firms survive and thrive. Problem is, we also found that local innovation programs that connect well with entrepreneurs are limited in scale, and the handoff with federal programs can be problematic at best because these programs are also limited as well as disconnected from each other.

Within this one region, we find examples of companies that have worked well with the limited resources available to them. But many others still have a ways to go. We also find universities and state economic development agencies that thoroughly understand the role they need to play in developing a thriving regional innovation cluster. But we also learn about the limitations these institutions face.

In the pages that follow, we will detail the results of our survey then present our overarching analysis of this seminal and difficult data-gathering effort accompanied by our on-the-ground interviews. The information we gleaned is admittedly difficult to assemble into succinct categories. The complexity of the region’s rolling transformation from industrial heartland to a new innovation-driven ecosystem for the 21st century is very hard to capture in clean “snapshots.” Briefly, however, we discovered that:

• Financing is lacking both for young innovative companies and for established medium-sized companies as they try to carry promising new or incremental technologies to market.
• Accessing federal innovation funds is exceedingly time consuming, often self-defeating, and in the end usually too small to be of enduring use.
• State and local innovation funds are pursued to a greater degree than federal programs but are too small for the needs of the region’s firms.
• Federal, state, and local funding programs nonetheless can be useful in attracting private financing even though these programs are not well-coordinated.

These findings are troubling for a variety of reasons. Many entrepreneurial business ventures depend on these government programs as they discover, develop, and begin to move innovation toward the market. Without critical public support, these entrepreneurs may not be able to survive. For a long time, economic development policymakers have recognized that the infamous “valleys of death,” where good ideas lack the financing to become companies that hire well-paid workers, seriously threaten the creation of new firms and the expansion of existing firms. This debilitating financing gap is compounded by current economic conditions and a banking crisis. The result: The entire spectrum of small- and medium-sized firms and even larger firms in the region face a crisis in securing expansion and working capital.

But our survey turned up some promising news, too. Specifically:

• Finding management, engineering talent, and well-trained workers in the region is not a significant challenge for companies.
• Startup companies and established small- and medium-sized firms are building on the region’s historical strength in industrial activity to create new products and services in emerging industry clusters within the region.
• These companies recognize they operate in clusters and would welcome a regional innovation cluster coordinator who could bring together private sector companies; nonprofit organizations such as universities; and federal, state, and local government officials to better align economic policy with the needs of companies in the region.

These core findings underscore the need for the federal government to overhaul its innovation policies and to work more closely with state and local leaders in the public and private sectors to sort out what works and what does not. Our study also points to the need to completely rethink how we go about encouraging regional economic development in the 21st century.

Proposing specific policy proposals based on one survey of one regional economy would not be wise, but there is enough academic research and policymaking experience about innovation to support a set of policy principles that are buttressed significantly by the research we have just completed. We will detail these, too, in the pages that follow, but briefly we believe that:

• Bottom-up, locally organized innovation programs that stitch together federal, state, and local economic development programs would serve our national economy best in the 21st century. This should be financed through public-private partnerships that include all the players in a given regional innovation cluster.
• The federal government has a major facilitating role to play in this process— one that includes significant increases in financing without monopolizing decision making.
• Each locally organized cluster will be different and thus will need region-specific support from federal, state, and local governments.

We believe our survey and our analysis demonstrates the need for the Obama administration and especially Congress to embrace these principles as they go about reforming our economic development programs to meet the needs of the 21st-century innovation economy. Pittsburgh, Cleveland, Akron, Youngstown, and their surrounding communities are changing rapidly because of globalization and in reaction to globalization. Our policymakers in Washington, in statehouses, and in municipal town halls need to give them the tools they need to succeed.

Maryann P. Feldman is the S.K. Heninger Distinguished Chair in Public Policy at the University of North Carolina, Chapel Hill, and Lauren Lanahan is a graduate student in the Department of Public Policy at the University of North Carolina, Chapel Hill.

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Event: Regional Innovation Clusters: Advancing the Next Economy

These new policies ensure that scientists, engineers, and taxpayers alike get the most out of those federal investments in basic research and development by taking what researchers know about the process of moving ideas from the lab to the market and linking universities, businesses, and the government in an effort to grow regional economies. The first steps begin on Wednesday, when the Subcommittee on Technology and Innovation of the House Science and Technology Committee will hold a hearing on “Supporting Innovation in the 21^st Century Economy.” Then on Thursday, the full committee will markup bills authorizing the Advanced Research Projects Agency-Energy, R&D programs within the DOE Office of Science, and DOE’s Energy Innovation Hubs program.

This isn’t just a matter of pouring more money into R&D—though additional resources are important. The Hubs program in particular contains an experiment just underway that will create a new “Energy Regional Innovation Cluster,” or  E-RIC, which will develop technologies for energy efficient buildings. Grant recipients for this cluster will be announced this summer, pending funding, and Congress should ensure that money is available for FY 2011 to realize the potential of this project.

With $130 million in financing over five years, the E-RIC project is a partnership between seven federal agencies that will help build the regional cluster, advancing research, development, and commercialization of energy efficiency technologies and creating high quality jobs. Applicants for the grants must self organize themselves in regional groups to bid for the funds, promoting bottom-up collaboration to ensure the best ideas and best practices combine for the best outcomes. DOE is in the process of setting up two additional Hubs: one that focuses on Fuels from Sunlight, where researchers will investigate methods to produce clean fuels directly from solar energy, and another on Modeling & Simulation for Nuclear Reactors.

The E-RIC embraces the idea that sustained and targeted efforts can help grow “innovation clusters,” or geographic regions where dynamic interactions between university-based scientists and engineers, local businesses, and public sector institutions generate new technologies and economic growth. The approach aligns with proposals laid out in the Science Progress report, “The Geography of Innovation,” which argued that federal policy should support cluster building that both aligns with national priorities in areas like energy efficiency, but that also leaves leadership to regional communities. The agencies hosted an information session in Washington, D.C. in February to explain the application process in detail to the interested consortia from around the nation.

Cultivating new clusters around the country is an important component of the Obama administration’s strategy for boosting innovation in the United States and maintaining our competitiveness in the global marketplace. In 2010, for example, Chinese government investment in science and technology is expected to increase 8 percent, according to reports in Science. Our nation must meet this challenge.

The E-RIC project is the first pilot of the Interagency Regional Innovation Clusters Taskforce and brings together the Department of Energy, the Department of Commerce’s Economic Development Administration and National Institute of Standards and Technology/Manufacturing Extension Partnership, the Department of Labor, the Department of Education, the Small Business Administration, and the National Science Foundation.

Collaboration on the issue of building efficiency is a national priority because buildings consume almost 40 percent of the energy produced in the United States and account for some 40 percent of carbon emissions. Energy efficiency deployment is the low-hanging fruit of greenhouse gas reduction strategies, but expanding efficient technologies for commercial and residential building design and operation will reduce energy consumption and energy bills for citizens and businesses alike.

The regional anchor for this effort will be a new Energy Innovation Hub located at a university, a DOE national laboratory, a nonprofit organization, or a private firm. The hub will receive a $22 million grant in its first year from DOE, with up to $25 million a year for up to four years afterwards. Department of Commerce and EDA funding for economic development and economic adjustment assistance can total $5 million for up to five years. Along with additional funds from NIST/MEP and the SBA, the interagency partnership is significant because it will be the first such coordinated federal regional innovation effort. As the authors explain in “The Geography of Innovation”:

Never before has the U.S. government devoted a single penny to a comprehensive national program specifically dedicated to supporting regional innovation clusters and business incubators that fuse the geographically shared resources of universities and other research organizations, companies, research centers, governments, and workers.

The benefits of this approach can be manifold, which is why it is important that the proposal is a collaboration between seven federal agencies with dovetailing expertise. Research is the basic fuel of an innovation cluster, but like a car engine, there are many complicated moving parts necessary to capture the full ignition energy of those new ideas. Technology transfer offices within universities help scientists patent the most promising concepts and commercialize it by licensing the work to companies that use it to design new products. A regional cluster forms when those companies spring up in the vicinity of those research institutions, taking advantage of not only the intellectual property, but the talented workforce.

Building those businesses requires money and talent. In the most well known U.S. innovation clusters—places like Silicon Valley and metro Boston area—there is a wealth of skilled workers and investment capital. But in regions that lack that pre-existing pool of expertise, cash, and ready business leadership, economic development organizations can help forge relationships and lay the foundations for new enterprises. For instance, institutions can provide low-cost office space and legal assistance to start-up companies. Last year the National Economic Council and the Office of Science and Technology Policy explained in a strategy report:

In various regions of the U.S., entrepreneurs are collaborating with local researchers, educators and industry leaders to foster specialized knowledge, technical expertise, and cutting-edge products. This will help American businesses retain and achieve new levels of competitiveness.

The result is a virtuous circle that feeds new ideas, products, jobs, and economic growth.

Moreover, the federal investment in the cluster will not be the only money flowing in to support the effort. Instead, the federal money will support state-level economic development work that has suffered under the precipitous decline in revenues. It will also leverage private investments in the commercialization process. The process of developing new products that solve national problems in building system efficiency will further capitalize on some of the billions of dollars the government pours into basic energy research every year.

The congressional hearings this week on applied innovation through the new multi-departmental E-RIC program could be just the beginning of this new bottom-up federal funding model for innovative regional economic development. We at Science Progress would argue that it’s about time.

Andrew Plemmons Pratt is the managing editor for Science Progress.

The key feature of the proposal unveiled today is that these seven federal agencies will seek bids from regional economies around the country, requiring a “bottom up” self-organizing effort by states and localities, universities and federal research labs, workforce development agencies and the private sector. This was one of the key recommendations in our paper, “The Geography of Innovation,” and is widely regarded among economic development experts and innovation gurus as the best way to build regional innovation clusters in the United States. Capitalizing on our country’s unique regional science and technology strengths, entrepreneurial flair and strong work ethic, targeted federal funds will help these regional clusters self organize and compete on a global scale.

The Center for American Progress is at the forefront of the push to create more energy-efficient buildings and the new green jobs to do the retrofitting and weatherization work, presenting a variety of policy initiatives to the administration and Congress. These efforts, in tandem with a soon-to-be-recognized-and-funded regional innovation cluster dedicated to the same technologies and workforce development objectives, are an important way for the U.S. economy to grow and thrive on the back of 21^st century innovation technologies.

Fortunately, the budget request for fiscal year 2011 that the Obama administration released on Monday includes foundational investments that will help the United States remain the leader among innovative nations. Congressional leaders should support the president’s vision by adopting these investments in their budget later this year.

In keeping with the president’s pledge to freeze domestic discretionary spending, the overall increase in research and development is only a modest 0.2 percent increase over FY2010, but by trimming defense-related research, the budget requests a 5.9 percent boost for non-defense R&D for a total $147.7 billion for federal R&D. This is an important step toward investing 3 percent of the country’s gross domestic product in public and private R&D—a goal President Obama laid out in a speech last spring to the National Academy of Sciences.

This also continues the about-face in funding trends begun last year. The Bush administration allowed the federal R&D investment to decline in real dollars after FY2004. Some sectors were hit harder by this neglect than others. Flat funding for the National Institutes of Health from 2004 through 2008 led to a situation in which the purchasing power for the inflation-adjusted budget actually declined 13 percent over the course of those five years. In addition to the two-year, $10 billion boost the American Recovery and Reinvestment Act directed to NIH last year, the president’s budget calls for a $1 billion bump in annual funding, for a total of $32.1 billion.

The budget expands support for R&D over the next fiscal year, but it also continues laying the foundation for sustained advances in science and technology by moving along the path to double the budgets for the National Science Foundation, the Department of Energy’s Office of Science, and the Commerce Department’s National Institutes of Standards and Technology. The Center for American Progress advocated this doubling effort in the 2007 report, “A National Innovation Agenda.”

To that end, the request expands the DOE Office of Science budget by 4.6 percent to a total of $5.1 billion. The Advanced Research Projects Agency-Energy would receive $300 million to fund high-risk, high-return research. ARPA-E funds blue-sky projects in advanced energy technologies, and is modeled on the fabled Defense Advanced Research Projects Agency, where bold thinkers have the resources to “aim for the fences.” The DOE budget also includes $107 million for the three existing Energy Innovation Hubs, and adds a fourth Hub focused on batteries and energy storage.

Jonathan Sallet, Ed Paisley, and Justin Masterman noted in their Science Progress report, “The Geography of Innovation,” that the hubs will help “spur the development of the innovation clusters that will help solve our national energy challenges, create jobs, and promote widespread economic growth.” Targeted regional innovation support is also a focus of president’s budget for the Economic Development Agency, with $75 million to support innovation clusters that leverage local competitive strengths. The “Geography of Innovation” authors explain wisdom of this place-specific approach, writing that “regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations.”

“One of the changes that I would like to see,” the president told an audience at Georgetown University just a few months into his administration, “is once again seeing our best and our brightest commit themselves to making things—engineers, scientists, innovators.” This budget pours more resources into that goal, with $3.7 billion for science, technology, engineering, and math education. This builds on the administration’s public-private Educate to Innovate partnership that will enhance STEM education in schools across the country.

The NSF budget would also support the next generation of scientists by increasing the number of Graduate Research Fellowships. An 8 percent increase in the requested NSF budget, totaling $7.4 billion, maintains its doubling trajectory.

An 18.3 percent increase over FY2010 in NASA’s R&D portfolio would bring the total to $11 billion. Writing last year in Science Progress, former presidential science adviser Neal Lane and former Director of the NASA Johnson Space Center George Abbey advised reversing a trend of neglect for the agency’s scientific work. They recommended that scientific research, including earth observations, should be a top priority for NASA. This budget embraces the same priorities, reflecting the administration’s commitment to “to deploy a global climate change research and monitoring system.” As well, a 21 percent increase (for total of $2.6 billion) for U.S. Global Change Research Program, which spans 13 agencies, will advance our understanding of global warming and enhance our ability to adapt to a changing climate.

In short, as Science Progress editor-in-chief Jonathan D. Moreno points out today on the main website of the Center for American Progress, “We observed in Science Progress on several occasions that the founders of our country appreciated the new nation’s need for strength in science, oftentimes more than some of their benighted successors in government. That’s why it is encouraging that we have a president and an administration with a vision in the founders’ spirit. Now Congress needs to do its job to ensure that the United States of Science rescues America—and perhaps the assumptions behind the global stability on which we depend—from a decade of financial mismanagement.”

Andrew Plemmons Pratt is the managing editor for Science Progress.

The administration is asking for $75 million “to support the creation of regional innovation clusters that leverage regions’ competitive strengths to boost job creation and economic growth,” a goal Jonathan Sallet, Ed Paisley, and Justin Masterman championed in the Science Progress report, “The Geography of Innovation.” Part of the key to this approach is that is allows policymakers to pay close attention to regional strengths. As the report authors explain: “Geographic regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations.”

As well, the Department of Energy budget includes substantial investments in research and development to spur clean energy innovation. That includes $107 million for three existing and one proposed Energy Innovation Hub. The Hubs, as the full DOE request says, “establish larger, highly integrated teams working to solve priority technology challenges that span work from basic research to engineering development to commercialization readiness.” These hubs, write the “Geography of Innovation” authors, are forward-thinking centers that will “spur the development of the innovation clusters that will help solve our national energy challenges, create jobs, and promote widespread economic growth.”

I believe that the federal government can maximize the benefits of science and research parks, an integral part of sparking innovation and creating jobs in the US, by supporting regional innovation clusters to promote a comprehensive, long-term economic growth and development plans across regions in the United States.

My recommendation is that regional innovation clusters should become the centerpiece of a reauthorized Economic Development Administration (EDA), empowering the agency to work with businesses, universities, community colleges, state and local governments and community leaders to foster regional competitiveness strategies. This will help boost job creation and business growth by spurring the creation and growth of successful regional ecosystems, striking exactly the right balance between federal leadership and local responsibility and between the private and public sectors. Science parks and regional innovation clusters are two vital parts to a long-term solution – science parks will drive the clusters forward while the regional innovation cluster will strengthen and support the local framework in which the park can thrive. This broader effort will be the most effective and sustainable.

Read Sallet’s full testimony (pdf).

Of course we’ve heard this before, especially with reference to Japan. As I’ve traveled around the country this past week many conversations have touched on two topics: the recent change in government and the efforts by the new, more liberal administration to confront the corruption and waste that are contributing to Japan’s version of our economic crisis. Then there are references to the “lost decade” that still shadows the diminished Japanese giant. Far fewer companies are paying for those infamous thousand dollar lunches in the Ginza, let alone financing leisurely chats at the disappearing geishas. The purchase of Rockefeller Center that so shook Americans seems as remote as the Shogun.

To be sure, China is not Japan, but it’s easy to get caught up in the criteria of the moment. Next month I will be in Beijing for the third time in four years, where the air is indeed thick with excitement about the next Shanghai tower and robust economic growth. But atmospheric Beijing restaurants frequented by Western expats and visiting scholars are also full of talk about continuing unrest in rural areas, environmental catastrophe, the lack of a leadership succession, and the Communist party’s anxiety about any incident that could trigger another Cultural Revolution, which still cannot be discussed in public.

Yet it is true that, for the moment at least, America’s self-confidence has been shaken. Worries that something is deeply wrong with the country were nearly universal in the late 1960s, and the 1930s, and so again in the early 2000s. Brooks is right that rekindling an innovation economy focused on regional clusters would go far to making Americans productive and optimistic again; that is exactly the cause we’ve championed at Science Progress. It’s also the orientation that can distinguish the American spirit from the Chinese system, which so far still lingers far behind as an innovation center.

One element of the American story that Brooks fails to mention that has been key to our success is immigration. Even the Japanese scientists I’ve spoken with agree that Chinese students are far more likely to spend virtually all their time at their work. A Japanese grad student told me that universities have had to remove makeshift beds from the labs so that Chinese students would stop sleeping there and stimulating rumors of sexual harassment. China has not shown that its system can unleash the combination of ambition and creativity that has long found such fertile soil in the United States—and in my view it never will. We should refocus our efforts on continuing to attract new waves of new Americans who can re-energize the American future and remind us why we came to America in the first place.

Jonathan D. Moreno is the Silfen University Professor of Medical Ethics at the University of Pennsylvania, a Senior Fellow at the Center for American Progress, and the Editor-in-Chief of Science Progress.

Innovation is the critical component of long-term economic prosperity, driving productivity growth and (if spread across key sectors of the economy) ensuring broad-based economic growth. Sparking innovation, however, requires capital (which is threatened by the current economic downturn), skilled-labor, scientific and technological advances, and creative collaboration between government and the private sector. Innovation cannot be dictated, but it can be cultivated.

In this paper, we focus on the importance of President Barack Obama’s call for a new federal effort to support regional innovation clusters. We know now—from a solid record of state and local achievements and academic research—that regional innovation clusters are a critical component of national competitiveness. Geographic regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations. Think information technology in Silicon Valley, music in Nashville, manufacturing in the Pacific Northwest, or life sciences in Massachusetts.

The United States, we argue in this paper, requires innovation policies for which responsibility is shared between regional leaders and the federal government. Leadership must begin in the clusters themselves—with local understanding of competitive strengths and strategies to increase the shared advantages that economists recognize as “positive externalities.” The federal government, however, can and should assume a vital role in which it frames critical national challenges, facilitates the flow of information and expertise to and between regions, and helps finance, in a competitive and leveraged fashion, valuable activities that clusters would otherwise be unable to undertake.

To that end, President Obama has requested that $100 million be appropriated in fiscal year 2010 for the Economic Development Administration of the Department of Commerce to support regional innovation clusters and associated business incubators.[1] That request is, by itself, a very small portion of the federal innovation budget. The U.S. government each year spends about $150 billion on basic scientific research and development. The EDA funding would help scientific breakthroughs resulting from this research find their way into new products and services that, in turn, could help foster broad-based economic growth.

We believe it is vitally important for Congress to appropriate this $100 million. After all, we devote less than 1 percent of our nation’s basic R&D budget to programs that support regional clusters, unlike our most aggressive international competitors (see box on page 2). As this paper will demonstrate, a relatively small federal initiative can be managed so that it yields significant economic advantages.

Such support could help create the next powerhouse information technology company like Google or the next pioneering biotechnology company like Genentech—and these are only two of the thousands of new companies, large and small, that spawned their groundbreaking technologies on university campuses in Silicon Valley before becoming Fortune 500 companies. New businesses, in turn, create new jobs, bolstering the overall economic well-being of the nation.

This $100 million would be money well spent. The reason: Never before has the U.S. government devoted a single penny to a comprehensive national program specifically dedicated to supporting regional innovation clusters and business incubators that fuse the geographically shared resources of universities and other research organizations, companies, research centers, governments, and workers.

Federal involvement is needed. Although the United States boasts a series of successful clusters, their true potential has not been fully realized. Cluster initiatives, according to a recent Brookings Institution report, are “too few” and they are “thin and uneven in levels of geographic and industry coverage, level and consistency of effort, and organizational capacity.”[6] Moreover, traditional clusters are under terrible stress. The automobile cluster in the Midwest is suffering not just from the perspective of the automobile manufacturers and their direct workers, but also with regard to the impact on the supply-chain, including specialized suppliers and local communities. Automobile parts manufacturers told the Treasury Department earlier this year that 130,000 jobs had been lost in eighteen months.[7]

Federal support to help innovation clusters improve their competitive strengths makes good economic sense. Begin by considering what regional economic clusters are and how they work. A simple, working definition is this: Clusters are geographic concentrations of companies, suppliers, support services, financiers, specialized infrastructure, producers of related products, and specialized institutions (such as training programs) whose competitive strengths are improved through the existence of shared advantages. So, for example, a successful cluster connects companies with academic institutions, research labs, and other nonprofit organizations in order to create the kind of virtuous cycle of competitiveness that creates jobs, stimulates business formation, and improves productivity.

What are the kinds of advantages shared by the participants in clusters? They could be a set of workers who boast particular skills, such as building boats in Maine. Or community colleges that offer training to manufacturing workers in places where advanced manufacturers are located. Or companies that decide to locate somewhere because of the presence of well-trained employees. Or research centers that conduct basic research into biotechnology close to start-up biotechnology companies. Anything, really, that creates what an economist would call a “positive externality,” a benefit that is captured not just by a single company, but by entire communities.

Positive externalities are nothing new. Nor are high-tech innovation clusters. Some, like Silicon Valley or the Route 128 corridor outside Boston, boast world-class universities and research institutions anchoring fervent communities of networked high-tech information technology and biotechnology companies served by a critical mass of commercial, legal, and financial talent. And some, like Akron, Ohio, have leveraged historical expertise; Akron’s rubber industry has spawned an innovation cluster anchored by companies committed to polymer science and advanced manufacturing innovation.

Here is what is new: The notion that regions can work closely with the federal government to consciously focus on the creation of shared advantages within clusters to create jobs, create businesses and, of course, stimulate long-term economic growth.

Job creation and business creation, the main economic benefits coming from innovative clusters, mostly spring from so called “high impact” companies (high-tech startups and established companies alike) that sell goods and services outside their clusters to both national and international markets, drawing revenue back into the cluster.[8] These “traded” services boost regional economic growth and national economic competitiveness. As measured by patent rates, productivity rates, and other innovation metrics, an innovation cluster creates new companies and new jobs in a helter-skelter but overall positive direction.

The federal government, of course, does spend money on a variety of innovation programs designed to help communities across our country create some of the ingredients necessary to replicate the success of thriving high-tech innovation clusters, such as the San Diego biotech cluster, the medical devices cluster around Minneapolis, and Research Triangle Park in North Carolina. These programs help fund the early commercialization of innovative products and services as well as regional workforce development and economic development efforts to provide the infrastructure necessary for innovative companies to flourish.

But these programs fall short of their true potential precisely because they are not organized in a systematic fashion to reap the advantages of an innovation cluster. The programs often fail to coordinate their work and leverage their unique strengths toward innovation cluster development as their central mission. That’s why a modest federal investment in a national cluster development program would multiply the benefits of our existing federal innovation programs, coordinate these efforts, and match federal expertise to the weaknesses and needs of regional clusters.

Policymakers must absolutely ensure they maintain the serendipity, competition, and ad hoc collaboration that have characterized successful clusters in the United States. The importance of regional clusters to competitiveness, however, raises three interrelated policy questions:

• Do federal programs that fail to focus on all of the ingredients needed to create a successful innovation cluster lack the direction and heft to make a difference?
• Can a government program dedicated specifically to the creation of new innovation clusters make a difference?
• And are there other factors that account for the unique innovative qualities that make Silicon Valley and Route 128 a success yet doom efforts in other regions of the country to failure?

The answer is “yes” on all three counts, which presents policymakers with a troubling dilemma: how best to invest limited federal resources?

This paper offers policymakers a guide through this dilemma. In the first part of the paper, we will explore briefly the lessons learned by those who have both led and researched innovation clusters over the past several decades. We will reconfirm the observation that, first and foremost, “place matters.”[9] Successful regional innovation clusters are not fungible—success rests upon differentiated competitive advantages that exist for different reasons in different parts of the country.

We will then demonstrate that access to finance matters, too. The greatest challenge that clusters need to bridge is the so-called “valley of death” financing gap that leaves young innovative companies with good ideas unable to fund the commercialization of those ideas due to the lack of seed-stage and early-stage financing. The current financial crisis has widened this valley, not just for young companies, but also for established companies that once could turn to more liquid debt and equity markets or to local or regional lenders and investors to fund their new ideas. Strategies to attract new private capital to regional innovation clusters are critically important.

There’s also a similar dearth of human capital—both managerial and workforce—in many regions of the country that wish to create or expand vibrant innovation clusters. American workers are very productive and much of our nation’s manufacturing sector could operate profitably in the United States if we took advantage of our global leadership in research and development, innovation, and process technologies to forge more competitive regional economies. The problem is we don’t do that today in any nationally systematic way involving clusters. The result is a growing structural unemployment problem with seemingly few solutions to match our productive workforce to the needs of innovative regional businesses.

Overcoming all of these connected hurdles requires us to rethink how we go about supporting clusters. So, also in the first part of this paper, we will examine how forward-thinking state and metropolitan governments have adopted practices that foster strong clusters, creating jobs, helping established companies grow and, of course, providing opportunities for new businesses. The key lesson for regional governments: Patience and leadership are necessary in the creation of all clusters.

Cases in point: North Carolina’s Research Triangle Park and San Diego’s CONNECT cluster—two regions that focused on all the ingredients needed for success, including federal funding—took several decades to reach their current prominence among U.S. clusters and were piloted there by a coterie of forward-thinking government, university, and business leaders. Newer clusters that recognize the importance of patience, such as those budding around the Arizona State University in Tempe, the Washington, D.C. metropolitan region’s many universities, and in rust belt cities in the Midwest such as Pittsburgh, are making headway.[10]

In the second part of the paper, we will discuss the reasons why Congress should support, and how the Obama administration should effectively implement, the president’s proposal that the Economic Development Administration be appropriated $100 million to support regional innovation clusters and associated business incubators. We will demonstrate that the Obama proposal is the answer to the failures of federal support identified in our earlier discussion of federal efforts. And we will show how this new effort—alongside dedicated White House leadership—can simultaneously increase the effectiveness of other federal programs, such as Small Business Innovation Research and Small Business Technology Transfer programs, which are administered by a variety of government agencies in coordination with the Small Business Administration, and the efforts of other Commerce programs, including those housed at the National Institute of Standards and Technology and the National Science Foundation. (See Appendix for a summary of the main federal programs that could measurably increase the impact of a clusters approach).

Support for clusters through the Department of Commerce’s EDA must be targeted at what matters most to innovation: The shared advantages that accrue to businesses, workers, and communities alike when the success of a cluster spawns a virtuous cycle of economic growth. Operating at the micro-economic level, the EDA must show a keen understanding of the ecosystem of innovation to ensure that its targeted innovation investments go where they can make a difference building cluster infrastructure and thereby do the most good for the longest time.

Specifically, we will explain how the Obama proposal provides the missing elements that are needed to support state and regional leadership. The federal government should leave leadership to the regional community, which knows best its own competitive advantages. But a bottom-up approach can reach the top level of government, with EDA supplying necessary funds to allow clusters to create shared resources, and with universities, community colleges, and research centers supplying a national framework against which the importance and success of clusters can be measured. Funding should be tightly connected to effective information exchanges, which will strengthen the ability of clusters to plot their own competitive strategy, and aligned with other federal programs through, for example, so-called “one-stop shops.”

We conclude this paper by sketching out the critical program-design elements that should be endorsed in the appropriations process for the proposed $100 million for EDA to implement a federal clusters strategy. Specifically, in this paper we propose that EDA should:

• Administer a competitive matching-grants program, with established criteria used to ensure the greatest impact of federal funding, among them an emphasis on local leadership from the private and public sectors, including universities and other research institutions.
• Align the cluster selection process with national priorities such as energy-efficiency, advanced manufacturing, and new technologies when administering this matching grants program.
• Assist economically distressed areas of the country by pooling regional resources from within and outside of distressed areas in order to bring together a critical mass of university savvy, business acumen, and productive workers.

No single grant application should have to meet all these criteria, but having these three principal guidelines in place will help ensure transparency and effectiveness. Funding should be focused on building the common infrastructure of innovation in a region, which effectively lowers the cost of business growth and creation. Examples include program development plans for business incubators and research centers, worker-training programs, and technology-transfer efforts focused on small- and medium-sized companies. Where regions have no effective clusters, smaller planning grants should also be available for the creation of strategies based on comparative advantages.

Time to act

Support for regional innovation clusters and business incubators is good public policy—and good political leadership. Successful cluster policies have been implemented at the regional level by both Republican and Democratic officials alike because clusters represent a pragmatic approach that requires collaboration with the business community and that, when successfully implemented, benefits communities as a whole.

Similarly, pioneering research into the role of clusters by policy advisors to both Democrats and Republicans has created a bipartisan foundation that increases the chances that, once initiated, federal cluster efforts will be supported for a long time by members of both parties. This is important because, as we have noted before, patience matters and, therefore, federal clusters efforts must be able to garner long-term political support.

Moreover, in a coming time of budget austerity, the regional cluster initiative does not require large sums of funding. That’s because federal support will be leveraged, providing resources that are not otherwise available but always contingent on regional governmental and private resources to amplify the impact of federal dollars. In fact, federal support in fiscal year 2010 budgets would come at an important time for state governments, which are under tremendous fiscal pressures. States including Ohio, Kansas, Connecticut, and Pennsylvania have either reduced economic development spending or encouraged large reorganizations of programs to control it.

Over time, the implementation of regional cluster strategies can increase the effectiveness of other federal spending. Just within the Department of Commerce itself, for example, export promotion and technology outreach programs at the International Trade Administration and NIST, respectively, would be strengthened by their links to effective cluster strategies, which in turn could supply valuable expertise to increase EDA’s own effectiveness. Even more importantly, federal support for regional innovation clusters presents an important opportunity for EDA to forge a close partnership with the Small Business Administration, whose own programs reach deep into local communities.

In the pages that follow we will present our analysis, conclusions, and recommendations in greater detail. In the end, we hope the case is made that Congress needs to appropriate that first $100 million toward a national program for regional innovation clusters. We are confident this step will help ensure that the $150 billion taxpayers invest annually in basic scientific research and development can better deliver on the promise of more and better jobs, new businesses, and transformative technologies across our nation.

Download this report (pdf)

Jonathan Sallet is a managing director of The Glover Park Group and a former director of the Department of Commerce’s Office of Policy and Strategic Planning under Secretary Ron Brown. (The views expressed herein represent only his views, and not those of his firm or any client thereof.)

Ed Paisley is Vice President for Editorial at the Center for American Progress and Editorial Director of Science Progress, A CAP project. He is a 20-year veteran of business and finance journalism who was previously responsible for award-winning coverage of technology finance and international finance at The Deal, a specialist Wall Street publication, and at Institutional Investor magazine.

Justin Masterman worked first as an Intern and then as a Special Assistant for Science Progress at the Center for American Progress. A recent graduate of the University of Pennsylvania, where he was a University Scholar, Justin wrote about innovation policy and economic development for Science Progress.

Notes

[1] Although the $50 million allocated for business incubators is not money explicitly dedicated to regional innovation clusters, business incubators perform a very important support function in innovation clusters. The business incubator programs accelerate the creation and development of successful businesses, an essential component of innovation clusters.

[2] Steven Ezell, “Benchmarking Foreign Innovation: The United States Needs to Learn from Other Industrialized Democracies” (Science Progress: January 12, 2009).

[3] Information gathered from program website available at http://www.competitivite.gouv.fr/index.php?&lang=en

[4] Karen G. Mills and others, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies.” (Washington: Brookings Institution) available at http://www.brookings.edu/reports/2008/04_competitiveness_mills.aspx.

[5] Michael E. Porter, “Why America Needs an Economic Strategy,” BusinessWeek , available at http://www.businessweek.com/magazine/content/08_45/b4107038217112_page_4.htm.

[6] Karen Mills, Elisabeth Reynolds, Andrew Reamer, and others, “Clusters and Competitiveness: A new federal role for stimulating regional economies.”,” (Washington: Brookings Institution, April 2008). Pgp. 6.

[7] The Economist, “The American Car Industry,” The Economist, February 19th, 2009, available at http://www.economist.com/business/displaystory.cfm?story_id=13145718.

[8] Zoltan J. Acs and others, “High-Impact Firms: Gazelles Revisited,” Small Business Administration, available at http://www.sba.gov/advo/research/rs328tot.pdf.

[9] Maryann Feldman, “Place Matters: Innovation Springs from Many Seeds, But Soil Is Equally Important.” (Washington: Science Progress, Center for American Progress, January 2009).

[10] http://www.scienceprogress.org/innovation-clusters/ provides some specific
regional examples.

And why not? Research Triangle Park was a critical factor in transforming North Carolina from the nation’s second-poorest state in 1959 to one of its fastest growing technopoles in the country, and the third-largest biotechnology cluster in the Western hemisphere, after California and Massachusetts.

Yet the basic science park model of using low-cost land as a lure and lens for technology companies is showing signs of aging. Big science park projects from Russia to Nevada are in financial trouble as public funds for speculative development dries up. And newer variants of the science park model, such as technology incubators, are starved for funds as the venture capital industry retreats to safer bets on late-stage start-up companies with identifiable exit strategies.

In the United States, federal, state and local governments are attempting to plug gaps into a deeply strained national innovation system. In Pennsylvania, strategic investment of tobacco settlement funds were channeled into life sciences clusters beginning in 2001. The SkySong expansion of Arizona State University’s campus in Scottsdale is a blueprint for how to orient university research around rapid technology transfer to industry and entrepreneurship. The Obama administration’s 2010 budget proposal calls for spending $50 million in 2010 to “create a nationwide network of public-private business incubators to encourage entrepreneurial activity in economically distressed areas,” alongside another $50 million to develop regional centers of innovation.

Today, tried-and-true technology-based economic development models face an uncertain future, yet there is a renewed sense that breakthroughs in science and technology are the key to post-recession growth over the long-term. That’s why it is so intriguing that the Research Triangle Foundation of North Carolina, which develops and manages the park under the leadership of CEO Rick Weddle, decided not to rest on its laurels and hard-won success of the past 50 years, but to instead partner with the Institute for the Future to develop a 20-year forecast of science parks and technology regions. The forecast, “Future Knowledge Systems,” is available as a free PDF download at http://www.iftf.org/iasp and as a print-on-demand booklet.

The report, drawing on over 50 experts both inside and outside the science parks and the economic development profession, paints a picture of two decades marked by upheaval in the way technology clusters grow and develop and are cultivated by public policy planners. Building on a scan of 14 key trends, the forecast highlights four areas of high uncertainty that will present strategic dilemmas for anyone seeking to spur technology-based economic growth.

The first area of high uncertainty is the future of universities as both ivory towers and economic engines. In the span of a generation, universities have supplanted industry and governments as the primary sites for basic scientific research. But the ability of educational institutions to transfer technology to the marketplace is in disarray even as the expectation of universities’ economic role grows.

What seems likely is that many universities will embrace entrepreneurialism and accelerate technology transfer while others will deliberately reject a larger role in the economy or simply be unable to do so effectively. One culprit is a focus on patent licensing as a cash cow for universities. A recent survey by the Association of University Technology Managers found that fewer than half of the 300 universities active in technology transfer make money through licensing. Research by the Kaufman Foundation argues that the focus on big payoffs from patents means that many universities neglect other paths and mechanisms for commercializing discoveries. And then there is still considerable debate among faculties and university administrators about the appropriate relationship between basic science and market-oriented research.

The second area of high uncertainty is the rise of ecological economics. Sustainable economic growth that incorporates the cost of carbon emissions will carry a price, but the basic ecoscience and economics to compute that price are in their earliest days. How much carbon and other externalities will cost over the next ten years, and where and how these costs will be measured will have huge impacts on where research and development activities locate, and how they combine physical spaces and virtual tools to increase productivity and energy efficiency.

These costs are at present unknowable. Clean energy legislation now moving through Congress will impose costs on carbon but also spur new investment in clean energy—investments that will flow in uncertain directions depending on the science. While increased costs of construction, facilities operations, and transportation will all impact science parks and technology incubators, federal investments in energy research hubs will also create new demand for space. With eight clean-energy research centers proposed by the Obama administration, the Department of Energy’s ambitious plan could plant the seeds for new clusters of technology-based economic development.

The third area of high uncertainty will be the expansion and evolution of new science networks and new institutions driven by the web and globalization. We are on the cusp of a new information revolution in the scientific world—professional societies, journals, and other institutions that set the basic rules of who can call themselves a scientist, and how they should conduct research and share results, and how they are rewarded, are under tremendous strain. Something will replace these institutions, but how these new networks of science will connect to existing technology clusters is unclear.

The final area of high uncertainty is the life sciences sector and the question of whether it will ever make any money. Industry observers, most notably Gary Pisano of Harvard Business School, note that over the past thirty years the biotechnology industry has yielded $300 billion in revenue, but consumed just as much investment capital. In essence, while biotech firms created numerous new technologies, what they have not created are profits for their investors. Unless life sciences can move beyond this profitless growth stage and serious structural challenges to discovery and innovation can be fixed, the much-anticipated 21^st century bio-industrial complex might never blossom into the economic linchpin many hope for.

Scenarios of the future

While trends are valuable for understanding directions of change, the future is messy and will be shaped by trends acting in combination. To understand what the big picture for science parks might look like, the Institute for the Future developed three scenarios in the “Future Knowledge Systems” report that illustrate how these uncertainties might lead to different outcomes.

Scenario 1: Science and Technology Parks 3.0

In 2030, we will still recognize science parks, but rather than simply managing collections of shiny office buildings they will be actively working to cultivate knowledge ecosystems—collections of people, companies, networks, and know-how—by providing gathering spaces for people to collaborate. Their boldest move a decade from now will have been their push into green technologies, going beyond merely carbon-neutral toward carbon-negative. Science parks, in short, will transform themselves into “living labs” for ecological and economic sustainability.

Scenario 2: Rise of Research Clouds

Like the Oort cloud of comets that surrounds the solar system—massive yet invisible, and occasionally firing off a life-laden payload towards the Sun—networks of small collaborative lab spaces will exist around universities, big corporations, and legacy science parks. Tied together by social software, these collaborative labs will become a place where big companies and small startups can co-locate in close proximity despite very different space needs and ability to pay—something the real estate model of science parks could never figure out.

Scenario 3: Dematerialized Innovation

In this scenario, a failure to plan for contingencies such as high energy prices, declining productivity in R&D, or an extended recession will require companies to take a scalpel to R&D once again, dramatically cutting their need for traditional science park space, and pushing what’s left into highly virtual collaboration platforms. Today’s platforms for crowd-sourcing innovation such as Innocentive will become the model for dematerializing the corporate lab. No more science parks get built.

Policy Implications

The purpose of these scenarios is not to be a pointed forecast. No one can predict the future. But they can be used as a kind of litmus test or yardstick for economic development strategy and policymaking. What are our goals? What decisions today might create the conditions that push us towards one scenario or another?

In that light, there are several policy implications for the United States, states and regions, and local communities. At the federal level, we need to look at how funding can be directed at the physical infrastructure that supports not just basic research, but also technology transfer. The economic stimulus package, for example, enacted earlier this year contained significant funding for biomedical research facilities—yet existing research centers already have a considerable backlog of discoveries with commercial potential that is not being fully explored.

Accelerators, incubators, and other mechanisms for moving discoveries out of the lab should be supported. Economic developers often misunderstand the relationship between scientists and entrepreneurs. In a few rare cases, one remarkable individual excels both in lab science and business. More often than not, however, researchers prefer to move on to the next intellectual challenge rather than invest the time needed to develop a lab discovery to the proof-of-concept phase and then to a marketable product. Accelerators—organizations that bring together researchers, entrepreneurs, and investors—are increasingly popular in the life sciences, where technology transfer requires much longer periods of time and much larger capital investments.

At the state level, policy needs to shift from solely focusing on universities and individual development projects and develop grand visions at the regional level that can guide and coordinate actions over many years. The success of North Carolina over the past 50 years stemmed from not only its ability to create such a grand vision, but also from the consensus to sustain that vision across multiple generations. It took decades for the Research Triangle to fully reverse the “brain drain” that threatened the state’s future. The trans-generational handoff of stewardship over this grand vision is a tricky but essential act of political leadership.

Finally, at the local level, communities need to spread investments across projects that complement each other and leverage existing industrial and knowledge assets. Instead of copying Silicon Valley, think of ways that imported technologies can be used to re-invent local industries in manufacturing, services, or agriculture.

Anthony Townsend is Research Director in the Technology Horizons Program at the Institute for the Future, a Silicon Valley-based think tank established in 1968. His research and analysis on science, innovation and place can be found at http://www.iftf.org/innovation.

SBIR is the single largest federal program dedicated to support of our nation’s innovative small businesses, making over $2.2 billion in annual competitive grants to small businesses engaged in the innovative research and development. The smaller Small Business Technology Transfer (abbreviated STTR) program funds R&D partnerships between small businesses and universities.

The House version of the bill modernizes SBIR by increasing Phase I award sizes to $250,000 from $100,000 and Phase II awards to $2 million from $750,000. The Senate version makes more modest increases, to $150,000 for Phase I and $1 million for Phase II. The grant sizes are important given the dearth of seed-stage and early-stage risk capital from angel investors and venture capitalists amid the economic downturn.

Both bills, however, allow venture capital-backed small businesses to once again apply for awards, repealing a restriction on these businesses that had been in place since 2003. A comprehensive study of the SBIR program by the National Academies found that venture capital-backed small businesses were often the most innovative and successful and that shutting VC-backed startups out of SBIR funding was ill-advised.

The two bills open the funding to venture capital-backed small businesses in different ways and to different extents. The House version allows SBIR grants to small companies so long as no single VC firm has a majority stake in the company. The Senate version deals with the issue differently, opening only a limited number of awards to small businesses with venture capital funding, specifically directing the National Institutes of Health to award no more than 18 percent of its SBIR awards to small companies majority-owned by VC firms and directing the other agencies to award no more than 8 percent of theirs to such companies.

Both bills were passed in an overwhelmingly bipartisan fashion, so crafting compromise legislation in conference committee should not threaten final passage of the legislation by the full Congress. President Obama is expected to sign the legislation since his administration is keen to implement more coordinated innovation policy involving not just the SBIR and STTR programs but also the array of other innovation programs. The reason: Innovative small businesses are one of the primary sources of economic growth, jobs, and the development of the technologies that will help us solve pressing national challenges such as health IT, clean energy, advanced manufacturing, and high-speed transit. Stronger and more sustained support for innovative small businesses is a smart choice for America as we deal with the recession and a more competitive global economy.

For more on SBIR/STTR and its crucial role in the national innovation infrastructure, see the features on Manufacturing Innovation and on a National Innovation Framework. Also, check out the Science Progress series on Innovation Clusters for an in-depth look at how they can play a central role in national innovation policy.

Despite the challenges, 27 states paid up to $100,000 for a spot on the exhibition floor at the annual Biotechnology Industry Organization International Convention last month. The Convention is the largest assembly of the biotechnology industry and attracted over 20,000 participants this year, including industry executives, scientists, and politicians.

The numbers make it clear why states are vying for biotech companies to do business in their cities; BIO indicates that each job in the bioscience sector creates 5.8 additional jobs in the national economy, and every dollar of National Institutes of Health funding generates more than twice that amount in state economic output.

Several experts on innovation clusters—the regional hubs like California’s tech-heavy Silicon Valley or metropolitan Boston, a major life sciences center—have taken in-depth looks on Science Progress at the policies and partnerships that can foster their growth and boost regional economies.

Cities in the biotech game should capitalize on their existing strengths, like Atlanta with its Center for Disease Control and Prevention, Dewin writes. As well, Pennsylvania complemented its own state resources when it formed the Pittsburgh Life Sciences Greenhouse, a nonprofit biotechnology initiative that provides support for entrepreneurial life-sciences enterprises, in 2000. Since Pennsylvania has the third-highest number of colleges and universities in the United States, PLSG took advantage of university research grants and helped commercialize university technologies, which benefit from nearby regional markets. Using already available assets may be crucial since there is a real threat of losing the benefits—including jobs—of biotech developments to other innovation clusters if companies need to relocate to access other resources, Dewin wrote.

“Growing Innovation Clusters for American Prosperity” will convene academics, business leaders, policymakers, and government officials to discuss and consider how to promote the growth of innovation clusters across the country. Attendees will hear from: Karen Mills, administrator of the Small Business Administration; Susan Crawford, Special Assistant to the President for Science, Technology, and Innovation Policy; Michael Crow, President of Arizona State University; and many other leaders in their respective fields. As General Motors and Chrysler move through bankruptcy, unemployment climbs higher, and global competition gets fiercer, the time is ripe to chart a path forward that has innovation cluster development at the center of American economic strategy.

The event will be held on June 3rd, from 8:45am to 5:00pm, in the Lecture Room at the National Academies, 2100 C Street NW, Washington D.C.

Please contact Adam Gertz (agertz@nas.edu) if you are interested in attending.

To learn more about innovation clusters, see our “Regional Centers of Innovation 101.”

One of the results is SkySong, an “innovation intermediary” at ASU that offers programs and services to facilitate networking connectivity, boost regional marketing, and accelerate the formation of seed capital and venture capital behind promising new technologies and young companies while leveraging a host of other workforce development and entrepreneurial training resources from multiple sources, both public and private. SkySong, just over a year old, has become the new home and central location for a number of ASU programs that assist in the advancement of technological innovation, cross-disciplinary collaboration, and industry linkages in the Phoenix metropolitan area.

The SkySong Innovation Center is a 1.2 million square foot mixed-use facility developed in partnership with the City of Scottsdale and private-sector developers and financiers. But SkySong is more than a physical place—it now serves as the critical innovation intermediary (see sidebar) for the region as well as a physical hub for student, faculty, and community and global entrepreneurs. SkySong is an assembly point for knowledge and technology research and commerce, which serves as a nucleus for an entire open-ended community of entrepreneurs dedicated to innovation and learning.

The Center breaks from the traditional real estate-focused “research park” by acting as a hub for knowledge-driven industries, technology innovation, and commercial activity. At SkySong, ASU has a place to accelerate all of its affiliated enterprises, which fall into four general categories:

• Spinout companies formed from ASU inventions and technologies (28 over the last 5 years).
• Companies receiving training, mentoring and networking services from ASU Technopolis (385 companies, 800 entrepreneurs).
• Companies located at SkySong, or in the process of evaluating the U.S. market (currently 44 enterprises from 11 different countries).
• Student ventures supported by ASU’s Edson Student Entrepreneur Initiative (60 student ventures, 150 students).

These successes are the result of SkySong quickly becoming a meeting point that connects a host of diverse actors to enhance the regional innovation economy. SkySong’s global orientation raises the stature of the center by increasing opportunities for local and regional companies as well as attracting international innovators with different approaches through the diversity of entrepreneurs. This intermingling creates an innovative culture at SkySong which supports Greater Phoenix’s growth in the global innovation economy.

SkySong, which opened in January 2008, has just started the process of building a vibrant regional center of innovation—a process that may take some time to bear sustainable fruit. Its development, though, provides valuable lessons for other universities and innovation policymakers. SkySong’s role as a critical innovation intermediary in the Greater Phoenix area is the culmination of ASU’s concerted effort to engage innovators and entrepreneurs through various channels over the past six years. The evolution of these services can provide a number of lessons to other entities and regions seeking to strengthen their innovative environments. These lessons (explained in greater detail later in the paper) include:

Technology Transfer

• Focus on executing rapid and efficient deals through licenses to industry and investors on reasonable terms, as opposed to short-term revenue realization
• Recognize that technology license agreements cannot be standardized across industries, and that a reasonable and flexible approach to deals is required

Capital Networks

• Establish strong investor networks to create interest in capital formation events
• Deliver good leads to investors to establish reputation as excellent source of opportunities
• Develop programs that bind investors to the innovation center and the university through creative ways such as leveraging global networks

Entrepreneurial Training and Global Acceleration

• Implement an account management system to track companies progress and needs and determine top prospects for growth
• Build a dedicated global business development function to provide companies with customer leads

Student Entrepreneurship

• Understand that entrepreneurship is not solely a business discipline—students from any area of study can benefit from experiential learning opportunities
• Acknowledge that students can make important contributions to companies’ growth while enhancing their own learning and future career prospects

Connectivity, Marketing, and Leverage

• Coordinate with other regional economic development entities to maintain and advance messages and purpose
• Recognize that a multi-faceted, two-way global environment is an important marketing and operational differentiator

In the analysis that follows, we will review how SkySong acts as an innovation intermediary in the ways presented above, and how our programs and services developed over time to reach the critical mass we believe is now evident in our innovation cluster. In the end, we believe science and innovation policymakers in Washington and statehouses around the country could learn from our experience and in turn help our cluster and others flourish.

Place Matters

The Greater Phoenix metropolitan area provides a rich platform for innovation-based economic development. The region has over four million people and is the 14th largest U.S. metro economy, with over $180 billion in annual economic activity. Its population growth (one of the largest and most consistent in the United States) is driven by in-migration of young professionals: 25 percent of in-migration is comprised of people ages 20 to 29, and approximately half of them come from California.

Due to the influx of new talent and relatively low tax and regulatory burdens, Greater Phoenix and Arizona consistently rank as desirable places to start and grow companies. Entrepreneur magazine, for example, recently ranked Phoenix as the top city for entrepreneurs for its desirable climate, high population growth and infrastructure, which support growing markets. Additionally, Greater Phoenix and Arizona have deep-rooted ties to the semiconductor and aerospace sectors, resulting in a complex network of second-and third-tier suppliers.

More recently, clean technology and biosciences companies have emerged as a result of a series of investments from the state, private sector and municipalities. And Greater Phoenix continues to benefit from its location adjacent to California, connected by over 170 flights daily (90 minutes to Silicon Valley, 60 minutes to Los Angeles/San Diego) and yet advantaged by a lower business operating cost structure and a high, but affordable, quality of life.

Greater Phoenix is one of the largest U.S. metros with only one research university, Arizona State University. Accordingly, compared to many other universities around the world, ASU plays an unusually proactive role in stimulating economic growth. ASU’s vision of the “New American University” is to realize a new and differentiated model of higher education. A major imperative of this vision is taking responsibility for the social and economic well-being of the region. With over 67,000 students across four campuses, ASU’s presence spans the Phoenix metropolitan area.

SkySong: Innovation Intermediary as Regional Economic Driver

ASU—and SkySong in particular—assist in the advancement of technological innovation, cross-disciplinary collaboration and industry linkages in the Phoenix metropolitan area. ASU interacts with all companies and organizations affiliated with SkySong for mutual benefit, whether it be education, research, or workforce development. The university has located its entrepreneurial education and technology transfer units at SkySong, as well as other programs and services that coalesce into a complete suite of resources that provide beginning-to-end support for innovative ventures.

SkySong’s approach gives multiple options to prospective companies, from leased suites and offices to access to hot desks and virtual access. These options broaden the range of companies that can utilize all the benefits provided at SkySong, which has become the platform through which ASU develops a vibrant network of global entrepreneurs and innovators. The development of SkySong in 2004 and 2005 was based on the best practices of global innovation centers worldwide. These include:

• Active involvement from a research university or other research institutions
• Dynamic mixed-use campus with at least 16/6 use (16 hours a day, 6 days a week)
• Global orientation
• Numerous leasing options to attract the most tenants and participants
• Defining themes and cluster initiatives necessary for success
• Political and community support

These practices have underpinned SkySong’s development and its successful opening in 2008. While not all features are in place (some mixed-use elements are still under development), the vast majority of these principles have been realized at SkySong.

Innovation Intermediary Function: Connectivity

SkySong serves as a connection point to create networks for the development of an innovative environment which includes ASU researchers, entrepreneurs and students, private enterprise, capital investors, other research organizations, non-profits, and global partners. This broad network creates numerous pathways for innovators to move ideas from conception to the marketplace.

Greater Phoenix is a geographically disperse place, covering over 2,000 square miles. While many of its municipalities are creating vibrant hubs within their cities, SkySong serves as the singular hub where people who are interested in global innovation and entrepreneurship can meet. Over 40 enterprises from 11 countries are located there, along with a critical mass of ASU’s university-wide innovation and entrepreneurial units.

Additionally, hundreds of events drawing thousands of visitors are held at SkySong. Through its physical design of centrally located cafes and deliberate lack of visual privacy, student entrepreneurs can find themselves drinking tea next to an angel investor, or an entrepreneur from Mexico can meet a government official from Singapore, or a U.S. congressperson can meet a faculty member on the verge of creating a spinout company.

Innovation Intermediary Function: Marketing

When SkySong was conceptualized in 2004 and 2005, the technology community in our region was already completely globalized. Yet that reality had not translated into policies and programs in Greater Phoenix. Greater Phoenix had no World Trade Center, and its sole incubator was closed in 2002. Efforts to attract foreign direct investment attraction were underfunded relative to other regions of our country or other countries of similar scale.

Consistent with the findings of its global benchmarking study, ASU officials determined that SkySong would not only be a vehicle to accelerate in-state technologies and enterprises, but also a global portal to attract innovators from around the world interested in accessing the U.S. market, as well as to inspire Arizona-based entrepreneurs to export and globalize. ASU decided to recruit small and large global companies that could engage in beneficial exchange with the university on multiple levels.

SkySong’s global marketing efforts leverage ASU’s global partnerships with universities that share a similarly entrepreneurial mindset in countries such as Mexico, Turkey, Ireland, and Singapore. In several countries, SkySong has engaged consultants to promote SkySong and ASU in their respective regions. At the same time ASU has partnered with the primary economic development organizations, the Greater Phoenix Economic Council and the Arizona Department of Commerce, and these organizations in turn are now more focused on foreign direct investment. The U.S. Department of Commerce’s Export Assistance Center, the primary agency in Arizona that assists Arizona-based companies to export and globalize, also has located its headquarters at SkySong.

The greatest marketing asset is SkySong’s design as a full-service hub for global, national, and Arizona enterprises. SkySong reduces the cost, risk, and time of entering the U.S. market. ASU has built on the natural advantages of a highly-ranked business climate, deep technology base, and favorable geographic location to bring heightened visibility to Arizona, the American Southwest, and the university among innovators throughout the world.

Innovation Intermediary Function: Programs

The scale and diversity of the programs offered by SkySong differentiates it from other regional innovation centers. ASU provides numerous vehicles for venture capital formation and business acceleration for students, faculty, and U.S. and global entrepreneurs at SkySong. SkySong offers these companies programs in the following areas:

• Technology transfer
• Direct investment
• Seed capital
• Entrepreneurial training
• Global acceleration
• Student entrepreneurship

Each of these programs is critical in its own right to the successful commercialization of innovative products and services, and each of these ingredients is part and parcel of numerous success stories from other, more established innovation clusters such as Silicon Valley or Route 128 in Massachusetts attest. SkySong, however, is pioneering the combination of these six programs to rapidly build a new innovation cluster.

Technology Transfer

Arizona Technology Enterprises, a separate limited liability company formed in 2003, acts as ASU’s exclusive intellectual property management and technology transfer organization. Because the Arizona state constitution does not permit public universities to hold any ownership in spinout companies, AzTE acts as a proxy for the university with the legal ability to hold equity in ASU spin-out companies, as well as equity in “spin-in” companies—firms willing to exchange an equity stake for access to SkySong’s services. Operating as a separate entity from the university frees AzTE from typical institutional constraints, yielding additional flexibility and speed in its deal-making activities.

AzTE’s core strategy and operations are focused on deal flow, rather than revenue generation. Many university technology transfer offices have zero or negative income, with licensing income being highly concentrated among infrequent “blockbuster” technologies developed by a small subset of universities (most with medical schools). In fact, few university licenses generate any substantial licensing income. In fiscal year 2004, for instance, according to the Association of University Technology Managers, only 0.5 percent of all licenses (111 out of 22,465) generated over $1 million in revenues. In addition, significant monetary return on investment can take five to fifteen years to materialize after the initial patent application is filed on a university invention.

With these lessons, AzTE focuses instead on maximizing opportunities to move university technology to the industry as a long-term investment strategy. The organization manages its intellectual property for deal flow density rather than for revenue—in other words, work to maximize the number of inventions and discoveries actually moved into use instead of trying to realize near-term income from fewer and bigger deals. Speed to market, flexibility, and even some risk-sharing are critical elements in AzTE’s approach to licensing deals with industry and investors.

This evolution to an emphasis on creative and efficient deal flow is closely tied to ASU’s view that technology transfer is an important mechanism for dissemination of the University’s knowledge creation—a pathway that requires a longer-term perspective with regard to outcomes irrespective of financial rewards.

In addition, AzTE is leveraging its professional staff and resources and expanding its intellectual property portfolio through agreements with universities outside the United States. AzTE is collaborating with Tecnológico de Monterrey in Mexico and Dublin City University in Ireland to protect and commercialize in the United States selected intellectual property developed by their researchers. This returns discretionary income to the universities, including ASU through AzTE’s share of licensing income, for reinvestment in their research and educational enterprises. AzTE also has a technology-transfer collaboration agreement with the University of Manchester, which mutually benefits each organization through the provision of additional resources and networks to carry out their activities.

In the United States, AzTE has a formal agreement with the University of Pennsylvania’s Center for Technology Transfer for each organization to market the other’s technologies.

Direct Investment

ASU’s strategy to increase investment capital is to create its own funds when possible and build specific mechanisms that result in local and national capital placed in ASU-affiliated ventures. The ASU Catalyst Fund, for example, is designed to prepare early-stage technologies for licensing. While the fund is small (approximately $250,000 annually), it has been successful in targeting its investments. In the four years since inception, it has invested $1.15 million in 26 ASU technologies, eight of which have been spun out as part of the creation of a new company or licensed to an existing company, and five more are in the licensing process.

Funds provided by the ASU Catalyst Fund are unsecured loans that are paid back with first revenue dollars if the technology is successfully commercialized. Investment decisions are based on the commercial potential of the technology as well as the impact the funding will have on moving the technology to market.

ASU is looking to increase the capitalization and scope of the fund to include technologies that may not have been invented at ASU but which may be strategic in other ways to the University. These technologies may be from partner institutions that are commercialized at SkySong or complement ASU research. ASU has also been successful in the past year in reaching three “spin in” agreements, which give ASU, through AzTE, an equity stake in companies to which SkySong provides business services. The Catalyst Fund provides another mechanism that can entice companies into a spin-in agreement.

Seed Capital

ASU Technopolis, ASU’s premier initiative to coach and connect community entrepreneurs and innovators to private sources of capital has been the administrator for the Invest Southwest Capital Conference since 2006. Similar to events held in regions throughout the United States, Invest Southwest attracts local and national investors who see presentations from approximately 15 competitively selected and highly coached companies that are optimal early stage investment targets.

Since 1992, 50 percent of the companies presenting at Invest Southwest and its precursors have received capital investment through the conference. Venture capital firms represented in recent years include Palo Alto, CA- and WaltAdvanced Technology Ventures; In-Q-Tel, the Arlington, VA-based venture arm of the Central Intelligence Agency; Silicon Valley’s Bay City Capital and Focus Ventures; and Salt Lake City-based EPIC Ventures. The most recent conference included 124 investors in attendance.

Another significant event, the ASU Technology Forum, organized by AzTE, focuses more specifically on ASU technologies, providing capital investors with visibility into ASU research. Equally important, the forum provided researchers connections with the commercial contacts that can direct technologies in a market-driven direction. The initial forum, held in February 2009, had 130 attendees, include 50 capital investors.

In December 2009, ASU will combine these two events, and add a Global Technology Showcase to include its partners in Mexico, Singapore, Turkey, Ireland, Brazil, and the United Kingdom. By broadening the scope, ASU can provide more value to attending investors, increasing its attractiveness as a licensing partner and a convener of global innovation.

ASU also works globally to increase seed-capital investments in early-stage technology companies. In 2008, for example, ASU Technopolis coordinated and managed Invest Mexico, the first national risk capital conference in Mexico, which was modeled on Invest Southwest. ASU’s university partner, Tecnológico de Monterrey, utilized its broad networks in Mexico to identify promising technology companies. ASU brought U.S. investors, and Tecnológico de Monterrey invited leading Mexican angel investors. ASU Technopolis coached the Mexican entrepreneurs on how to present their business value proposition in the language of global private equity investment. As of May 1, 2009, two presenting companies (out of ten) are nearing investment deals with Mexican angel investors who attended the conference. Discussions for a similar event in Ireland are also underway.

Entrepreneurial Training

ASU Technopolis brings together entrepreneurs, venture capitalists, and creative thinkers in the Phoenix region. Modeled after the University of California at San Diego’s CONNECT program, ASU Technopolis encourages innovation and economic development by providing fledgling technology and life sciences entrepreneurs with skills and strategies necessary to convert ideas into commercially viable businesses. Guidance is available for product development, business infrastructure development, proof-of-concept capital formation, revenue development, and access to funding.

ASU Technopolis facilitates and stimulates economic development by offering a series of rigorous programs taught by successful, “been there, done that” entrepreneurs. Programs include Small Business Investment Research grant-writing workshops and Launch Prep, a new venture capital basics course, offered on a non-competitive basis. In contrast, participation in the Technopolis Mentoring Program is highly competitive. The Mentoring Program utilizes the large number of retired CEOs and other high-level business executives who live in the Phoenix metro area to create two- or three-person mentoring teams to work with select companies for a six-month period.

Through ASU Technopolis, approximately 800 entrepreneurs and innovators representing 376 companies have received coaching and mentoring. Some notable results include the subsequent funding of $27.5 million for Ulthera, a medical device company, $5 million of National Institutes of Health grants to Kinetic Muscles and $3.5 million for Flypaper Studios, a software company.

Global Acceleration

ASU SkySong has designated staff members who work with SkySong companies to provide business development services and establish connections with ASU. Business development is a key selling point and critical resource, particularly with international companies with less established U.S. networks. The Global Business Development Director is responsible for generating sales and investment leads to support companies’ expansion in the U.S. market. The generation of sales leads supports company growth and closer connections with ASU.

Similarly, the Corporate Liaison is responsible for forming relationships between companies and ASU, which may include linkages to the research enterprise, technology transfer, specialized facilities, and executive education programs as well as to students. ASU SkySong is currently developing an account management system to systematically track and oversee these relationships, ensuring continuity of service and attention across programs.

SkySong staff in this area create highly interactive and long-term relationships between global innovators and networks tied to ASU. The SkySong platform is extended through partnerships with innovation centers throughout the world, such as iAxil in Singapore, Dublin City University’s Invent in Ireland, and most notably, the United States-Mexico Foundation for Science, or FUMEC. Funded by Mexico’s Secretary of the Economy, FUMEC has located its sixth “TechBA” location in Arizona as a place for Mexican technology companies to expand their global reach. SkySong also hosts the statewide headquarters of the U.S. Department of Commerce’s Export Assistance Center, which works with Arizona-based companies to assist them in entering global markets.

Student Entrepreneurship

Student entrepreneurship programs also support companies at SkySong via internships, market research projects, and product development services, all at competitive business rates. These programs demonstrate the value that creative student workers can have on business success. Nearly every company at SkySong cites access to ASU’s large, diverse, and talented workforce as a prime asset of SkySong.

University-wide experiential learning programs are concentrated at SkySong so students can gain real-world entrepreneurial experience in an environment that includes innovators from Arizona and around the world, investors, and service providers. Associated programs, listed below, are part of ASU’s institution-wide “Entrepreneurship at ASU” initiative, which is supported by a $5 million grant from the Ewing Marion Kauffman Foundation as part of the Kauffman Campuses Initiative.

Unlike many universities, ASU’s approach weaves entrepreneurship throughout all academic disciplines. ASU has signature entrepreneurship programs in the arts, nursing, journalism, and non-profit management, as well as in the business and engineering schools. The effort includes spurring new research into innovation in Greater Phoenix, new curriculum development, and experiential learning to create a large pipeline of entrepreneurs to benefit the region. Student experiential learning entrepreneurial programs based at SkySong include:

• Edson Student Entrepreneur Initiative, which provides a total of $200,000 in entrepreneurial training and mentoring and office space each year to approximately 10 student-led ventures per year. ASU’s approach is distinct in that it invests in for-profit and not-for-profit enterprises led by students from across the university and maximizes the number of ventures supported as opposed to traditional business plan competitions that fund only a small number of proposals.
• Entrepreneur Advantage, which provides $2,000 to $5,000 grants to approximately 25 student-led entrepreneurial projects per year. The goal of this program is provide students who have entrepreneurial aspirations but not as yet a focus for a sustainable venture with hands-on experience in entrepreneurship. Edson and EAP together have provided over $850,000 funding over the past four years to 90 student ventures and projects involving more than 200 students.
• Sun Devil Entrepreneurship Network, which connects small, innovative businesses with entrepreneurially minded ASU students. Startups benefit by gaining access to talented workers while students gain the experience of working in an entrepreneurial, and frequently global, environment.
• Technology Ventures Services Group, which is a teaching laboratory where students from several disciplines, including law, business, engineering, and science, work together to conduct technology assessments, patent status investigations, business modeling, competitive analyses and market assessment/research.
• InnovationSpace, which is an interdisciplinary product development course made up of design, engineering, and business students who work with companies on comprehensive product launches, while emphasizing social and environmental responsibility.

Students are also engaged in the design and operation of SkySong. A special competition was organized to operate the Sky Cafe, a central meeting point within the ASU space at SkySong and managed by ASU students. Design students are selected to provide displays and exhibits that enhance SkySong’s innovative environment. A cohort of anthropology students is part of the Phoenix Innovation Study, which is using SkySong as a case study for the process and management of innovation in the Phoenix metro area.

Innovation Intermediary Function: Leverage

SkySong is a partnership between ASU, ASU Foundation, the City of Scottsdale, and the private sector, including financial services company USAA and property development and real estate companies The Plaza Companies and Higgins Development Partners. All partners will benefit financially from the project over the long term. Since SkySong has been established, ASU has leveraged the platform to create new, innovative programs in partnership with industry.

For instance, ASU created a joint venture with Rolls-Royce to commercialize a handwriting verification technology. In this case, management of the corporate venturing arm of Rolls-Royce was convinced this technology had potential in the U.S. market, but until engagement with SkySong had no vehicle for its commercialization. ASU was able to identify a management team (via a “reverse” business plan competition open to entrepreneurs throughout Greater Phoenix) and is currently incubating this new startup company at SkySong. Other companies have expressed interest in utilizing this program to commercialize their selected technologies.

Conclusion

Going forward, ASU will focus on continual improvement of program delivery. Efficient, hands-on, market-oriented programs will maintain growth at SkySong, resulting in significant benefits for the entire region. Quality of service will raise the profile of SkySong, ASU, and Arizona as a global hub of innovation.

In technology transfer, we believe that our focus on doing rapid and efficient deals through licenses to industry and investors on reasonable terms—as opposed to short-term revenue realization—will prove to be effective in getting more ASU technologies to the point of public utilization. Success of these innovations will attract additional capital options to advance more technologies to later stages that are the current focus of capital investors. But we recognize that technology license agreements cannot be standardized across industries, and that a reasonable and flexible approach to deals is required. Collaborations with other technology transfer offices are useful in expanding our capacity and resources to effect technology transfer.

The capital networks ASU has established through successful delivery of events and conferences need to be deepened. Investors are more likely to engage with reliable partners who deliver good leads. ASU is increasing the quality and quantity of its portfolio through its own research growth, business attraction efforts and global partnerships. This portfolio growth will raise the profile of ASU as an investment partner. We also plan to foster closer relationships with individual investors and firms to deliver specific opportunities of interest to them.

We plan to continually adjust our resources to focus on the most promising geographical markets and industry verticals. Implementation of an account management system to track company progress and needs and determine top prospects for growth is underway and will be critical to this analysis.

ASU also will continue to provide experiential learning opportunities for students from all disciplines, and ensure that students can make important contributions to companies’ growth while enhancing their own learning and future career prospects. As SkySong continues its build out, an increasing number of students will have the opportunity to operate a business, work for a global technology company, or provide advanced business services to growing companies at SkySong. To help develop student entrepreneurship even more widely, we plan to develop closer working relationships with local high schools to spur interest in entrepreneurship at younger ages, creating a greater flow of interest not only at ASU, but whatever university the student may attend.

Finally, as a developing innovation intermediary SkySong needs to deepen and enhance its connectivity, marketing, and leverage. Coordination with other regional economic development entities is necessary to maintain and advance messages and purpose. We will expand on these efforts by focusing not just on attraction, but growth and investment strategy. And SkySong’s multi-faceted, two-way global environment, which is such an important marketing and operational differentiator for our cluster, needs to be expanded to include relationships with an increasing number of countries.

In short, ASU will continue to advance SkySong’s connectivity within Arizona, the United States, and globally to achieve its promise as a hub of global innovation. While SkySong’s launch has not occurred in an ideal economic climate, its approach and services have been successful in attracting an international mix of innovation-focused companies and organizations. Sustaining SkySong’s growth will require continued evolution and experimentation with program development to ensure that SkySong takes its place alongside San Diego and North Carolina’s Research Park Triangle as successful regional centers of innovation.

Julia Rosen is Associate Vice President, Innovation and Entrepreneurship in the Office of the Vice President for Research & Economic Affairs at Arizona State University.

Keith Aspinall is a Research Analyst in the Office of the Vice President for Research & Economic Affairs Arizona State University.

Augustine V. Cheng is the Managing Director and Chief Legal Officer of Arizona Technology Enterprises.

The Manufacturing Extension Partnership program is not very well known even among technology and innovation experts in the administration and on Capitol Hill. But MEP should be a more widely recognizable acronym, not only for what it does, but also for what those involved with it have learned over the past 20 years. Intriguingly, the program is a lesson in government discovering what small- and medium-sized businesses need and then delivering those services—actions most people rarely consider a government program capable of.

But first, what is MEP? The Manufacturing Extension Partnership is a program within the National Institute of Standards and Technology, or NIST, which is housed in the Department of Commerce. MEP was created by the Omnibus Foreign Trade and Competitiveness Act of 1988 “to enhance productivity and technological performance in United States manufacturing.”^[1]

Over the past 20 years, MEP developed from a small pilot program with three centers into a sprawling system of 59 centers in 393 locations in every state and in Puerto Rico, employing over 1,600 specialists in business and manufacturing. MEP provides small- to medium-sized manufacturing companies with a wide array of fundamental services, helping them to become more efficient, resilient, and strong in an increasingly competitive global market. With $125 million allocated to the MEP in the proposed fiscal 2010 budget, up about $15 million from fiscal 2009 levels, the program is on a strong financial footing and is poised to expand and improve its services.

After eight years of flat growth during the Bush administration, MEP is poised once again to play a small but vital role in helping America’s small manufacturers compete with international rivals in the increasingly global marketplace. The MEP’s work on process efficiency improvements as well as growth, technology, and innovation strategies is a smart allocation of finite government resources tailored to draw in matching funds from the private sector. As confirmed by dozens of case studies (some described below), the MEP program is often the difference between life and death for small- and medium-sized companies beset with difficult challenges, struggling to survive.

Our economic future depends on the success of these businesses as we move further into the 21^st century, which is why support for MEP and other initiatives that encourage innovation and technology acceleration is a smart choice. Above all, though, an examination of the program’s effectiveness over the past 20 years as it adjusted to new challenges while its leaders learned what worked and what didn’t provides good policy lessons for other Obama administration efforts to boost applied innovation in the coming years.

This essay will examine the history of the MEP program, particularly how it has adjusted to new realities, to understand why it is now poised to play a new role helping small- and medium-sized businesses grow and prosper by tapping new technologies at federal labs—the program’s initial, yet premature, mission 20 years ago but one well-suited to today’s challenges.

The Importance of Manufacturing

Before we examine the MEP program in depth, however, we need to set the macroeconomic stage. The U.S. manufacturing industry plays a key role in the American economy, accounting for 12 percent of gross domestic product as well as 10 percent of U.S. nonfarm employment.^[2] Companies large and small provide jobs for millions of Americans and spur technological innovation and regional development by competing hard in national and international markets.

The vast majority of these manufacturing companies are small- and medium-sized businesses that face the highest hurdles to remain competitive in a global economy. Companies with 500 employees or less account for 95 percent of all manufacturing establishments, half of all manufacturing employment, over half of total U.S. manufacturing value-added, and a wide distribution of high-wage jobs across the United States.^[3]According to the Department of Commerce, 350,000 of these types of companies operate in the United States, and a 2003 study conducted for the National Association of Manufacturers highlights the continued importance of small manufacturers to U.S. economic performance.^[4] The NAM study found that:

• Manufacturing growth spurs more additional economic activity and jobs than any other economic sector. Every $1 of final demand for manufactured goods generates an additional $0.67 in other manufactured products and $0.76 in products and services from non-manufacturing sectors.
• Manufacturing salaries and benefits average $54,000, compared to $45,600 for the private sector overall. The higher pay and benefits and opportunities for advanced education and training that are available in manufacturing are particularly attractive to potential employees.
• Manufacturers are responsible for almost two-thirds of all private sector research and development—$127 billion in 2002.
• Manufacturing productivity gains are historically higher than those of any other economic sector. Over the past two decades, manufacturing averaged twice the annual productivity gains of the rest of the private sector.

Unfortunately, small- and medium-sized manufacturing companies are too often the least able to quickly introduce new products and technology, reduce costs, and increase quality. Indeed, as globalization began to hammer U.S. manufacturers in earnest in the early 1990s many small- and medium-sized manufacturers were the least able to meet the challenge. According to a study conducted by the National Research Council of the National Academy of Sciences in 1993, small manufacturers were often unfamiliar with changing technology, new production techniques, and the latest business management practices. Yet, they were too isolated to learn from market competition to change their ways or seek out good advice, and too small to find the financing they needed to upgrade their operations even if they decided upon an innovative upgrade or shift in their operations.[5]

The Birth of the MEP

Enter the Manufacturing Extension Partnership. The Omnibus Trade and Competitiveness Act of 1988 directed the Secretary of Commerce via the Director of the National Institute of Standards and Technology to establish a manufacturing technology centers program, the precursor to MEP. The centers were to provide small manufacturers with technology developed in NIST labs as a way to improve manufacturing productivity. Labs were to license the NIST-developed technology to state-based centers, which would in turn charge fees to manufacturers who utilized the services provided by the centers.

Congress urged participation from universities, industry, state governments, and other federal agencies. Proposals to establish centers were solicited from qualified non-profit organizations and evaluated based on regional need, technology resources, technology delivery mechanisms, and management and financial plans. Applicants were required to contribute 50 percent or more of these centers’ proposed capital and maintenance costs for the first three years and an increasing share up to 80 percent in the sixth year.

Alas, it soon became clear there was a significant gap between the technology developed in federal labs and the capabilities of many small manufacturers to utilize the technology, even with the help of the manufacturing technology centers. In fact, most small manufacturing companies had more foundational needs—for things like management information technology, financial management systems, and fundamental business processes to improve cost efficiency and profitability. In response, tactical and strategic changes were made during the 1990’s, reorienting the services provided by the centers from technology transfer to more basic productivity improvement assistance, services not dissimilar from basic consulting.

This shift met with success as the number of centers grew from 7 in 1992 to 75 (with 400 satellite offices) in 1996, providing services to all 50 states and Puerto Rico. Helping drive the shift was funding from the Defense Advanced Research Projects Agency’s Technology Reinvestment Project, a $1 billion commercial investment program started in the 1992 fiscal year. One of the largest funding programs in the history of the Department of Defense, the TRP sponsored 133 projects that had military as well as commercial uses, referred to as “dual-use projects.” Small businesses were strongly represented in the projects receiving DARPA funding, with 58 percent of the approved proposals having a small business involved in the project.^[6] DARPA support was integral in the expansion of the manufacturing technology centers as funding for new projects spurred small businesses to seek assistance from the centers.

Additionally, the enactment of the Technology Administration Act of 1998, which eliminated the sunset provision in the initial 1988 legislation, allowed for ongoing federal funding of the centers. This reform was accompanied by the program name change to the Manufacturing Extension Partnership, and a new funding formula that mandated one third of funding would be provided by the MEP Program, one third would come from state, city/town, or nonprofit sources, and one third would be collected as fees from the small manufacturers helped by the program.

This public/private/nonprofit structure is vital to the success of the MEP program, a unique partnership in which each stakeholder contributes its singular resources. The partnerships are built differently from place to place. In some areas, states provide most of the local funding, while nonprofits and city/town governments do not significantly contribute. In other areas, nonprofit organizations such as economic development agencies or entrepreneurship advocacy groups, as well as universities, contribute most of the local funding.

Overall, federal funding (from the MEP) and private funding (from the manufacturers) is important to the overall success of the partnership. However, state, city/town, and nonprofit funding is integral as this funding secures local players as stakeholders in the program, and synergizes with the local economic development plans that are essential for comprehensive regional development.

The MEP Program Today

As mentioned above, the MEP program today consists of 59 manufacturing extension centers and 393 satellite locations throughout the United States and Puerto Rico. Each center works directly with local companies to provide expertise and services tailored to their most critical needs, including employee training, new business practices, the application of information technology, and basic process improvements. Services are delivered through direct assistance from center staff, outside consultants or some combination of both.

The MEP centers themselves are a diverse network of state-university-based, and freestanding nonprofit organizations. Each center’s size is based largely on an individual center’s ability to match federal funding at the time of the initial award. In fiscal year 2008, ending September 30, 2008, the last year in which complete data are available, MEP served 31,961 manufacturers.

The early shift in philosophy from technology transfer to consulting services, as well as the rapid expansion across the country, proved to be a winning strategy. An independent study of the efficacy of MEP centers in 2007 found that MEP services led to: Improved productivity among 8 in 10 MEP clients; 57,000 jobs created or retained; $10.5 billion in new or retained sales; $2.2 billion in new private investment, and cost savings of over $1.4 billion. The study also found that:

• 91 percent of clients were either satisfied or very satisfied with the quality of services received
• 89 percent of clients were more competitive as a result of services
• 86 percent of clients took actions more quickly with assistance of its local center
• 80 percent of clients improved employee skills
• 79 percent of clients took actions at a lower cost
• 76 percent of clients improved the work environment for employees. ^[7]

The MEP centers achieved this record of success for many different reasons, the study concluded. Predominantly, though, success came through a number of services that helped companies reduce costs to improve competitiveness.

A New Direction

Yet once these companies streamline their production processes, make their workforce and workplace more efficient, and reduce overall costs through business operations improvements, many still do not have the top line growth strategies in place to take their development to the next level. This realization has led to new MEP efforts to guide companies not only toward greater efficiency but also toward developing new products, entering new markets, and integrating innovative technologies. These new growth services are designed to give companies the tools they need to not just survive but thrive in the global marketplace

The core of these new growth programs is the development and implementation of a nationwide technology acceleration system. The acceleration program strives to catalyze manufacturing innovation in products, processes, services, and new business models, building on the increased efficiencies and lower costs cultivated by MEP’s bottom-line services.

These new growth programs, not dissimilar in philosophy from that of the MEP-precursor manufacturing technology centers, connect small manufacturers with sophisticated federal, state, or university R&D labs, with an eye toward boosting manufacturer capabilities and growth opportunities, as well as where manufacturer needs are connected with technology solutions developed at research laboratories.

Two examples highlight the success of these endeavors in helping companies first make important process improvements and then, eventually, helping them embrace technological innovation, grow into new markets, and develop new products.

Process Equipment & Service Company

The New Mexico MEP recently worked on bottom-line improvement strategies with PESCO, a manufacturer of oil and natural gas production equipment, to streamline its product development and general operations. Over the course of a year, PESCO production increased by 25 percent. Since 2002 the company has doubled production while reducing work hours and maintaining the same level of staff.

In addition, the New Mexico MEP helped PESCO reorganize its “cash-to-cash” process (the time from when an order is placed and materials procured to when it is invoiced and paid) and its accounts receivable (the amount of money owed by customers but as yet unpaid), two areas in which companies can easily lose significant sums of money. With the help of the local MEP, PESCO reduced its accounts receivable process to 35 days from 58 days and its “cash-to-cash” cycle to 95 days from 133 days.

Based on recommendations from the MEP, PESCO also developed a trailer system that more efficiently moved a product through the manufacturing process. These efficiency improvements modernized PESCO’s product line, turning it from a 200-hour process into a 150-hour process. With all of these improvements, profit margins increased, boosting wages and allowing for greater employee retention.^[8]

Questech Corporation

The Vermont MEP worked with Questech Corporation, a leading manufacturer of natural stone and metal tile, to discover, build, and develop new technology that would increase revenue and better meet customer demand. In response to internal surveys that showed maintenance as one of the primary problems customers had with Questech’s tile products, the company sought to develop a revolutionary product that addressed these concerns. Vermont MEP “coaches” met with the Questech team during the discovery process to provide general assistance, help with the cultivation of ideas, and keep the team on track.

Within six weeks of the initial MEP consulting session, Questech launched a test of their new tile maintenance product in a large showroom in Albany, New York. The new innovation carries an anticipated yearly revenue increase of $30,000, with the anticipated establishment of Q-Seal (the new product) in New England by spring 2008.^[9]

MEP Partner Programs within Government

MEP also works closely with other government programs and agencies to leverage different expertise, strengths, and resources. MEP has partnership programs with the Department of Labor’s Workforce Innovation in Regional Economic Development, or WIRED program, the Small Business Innovation Research grant program run by various government departments, the Environmental Protection Agency’s Green Supplier Network, National Institutes of Health, the Environmental Protection Agency, the Food and Drug Administration, and the National Science Foundation. These partnerships are integral to the work of the MEP, and to the greater project of building American economic competitiveness.

WIRED has a uniquely effective partnership with the MEP. The WIRED Initiative is a program intended to develop talented high-skill workers as a means of catalyzing U.S. economic growth. The initiative focuses on distressed regions of the country, areas recovering from natural disasters, highly dependent on a single industry, or significantly influenced by outsourcing. The program supports innovative approaches to education and workforce development, preparing workers to better compete both within the United States and globally.

MEP has run pilot programs for WIRED in eight distressed regions, developing best practices for technology transfer and innovation activities that WIRED has implemented across its network. This work has been closely aligned with the new MEP growth strategies focused on implementing innovation and technology in small manufacturers.

Additionally, the MEP works directly with the Small Business Administration’s Small Business Innovation Research and Small Business Technology Transfer programs, helping small manufacturers apply for funding from the SBA as well as assisting SBIR/STTR awardees maximize the money’s impact on operations and efficiency. With more than $2 billion available via the SBIR route yearly, small manufacturing companies are often transformed by the grants, making partnership with the MEP very attractive.

MEP and NIH also have developed a one-year SBIR pilot project in which NIH will provide $375,000 for MEP to work with a number of so-called NIH Phase II awardees, for-profit companies(with potentially commercializable ideas that have passed phase I feasibility studies to establish the scientific/technical merit of proposed research and development efforts. Phase II awardees cannot receive more than $750,000 total for a period not to exceed 2 years. Results of the MEP/NIH SBIR pilot are expected to be used in guiding a larger two-year funded partnership between MEP and NIH to improve the commercialization efforts of their Phase II awardees—a critical issue for NIH and other federal SBIR agencies.

Future Plans

The MEP stands a crossroads. With a wealth of historical wisdom on what works and what doesn’t with respect to small-and medium-sized business development, the MEP is poised to play an essential role in spurring a nationwide economic recovery and building the public-private partnerships that are vital to the stimulation of our nation’s latent innovation capabilities.

MEP’s strategy to tap private, university, and federal labs for new technology of use to small- and medium-sized manufacturers, especially via the government programs outlined above, is certainly timely today. This technology transfer activity was MEP’s original mandate, and while untenable twenty years ago, it is now widely considered a good template for how to boost American innovation and global competitiveness.

The key to the MEP’s success, however, is and will be its partnerships. Small- and medium-sized manufacturers are a lot more receptive today to these public-private partnership growth strategies than they used to be. Utilizing MEP as a conduit for the transfer of technology from R&D laboratories as well as a consultant on how to maximize the benefits of the technology on efficiency and cost is now less foreign to these manufacturers. Process improvement assistance, while still important, is not going to be as common a MEP strategy as working with their clients on developing new markets, new products, and innovative solutions to complex technology problems. This should help strengthen the small- and medium-sized manufacturers that are the backbone of our entrepreneurial economy and our source of global strength.

Justin Masterman is a Science Progress Intern who recently graduated from the University of Pennsylvania.

Endnotes

^[1] Omnibus Foreign Trade and Competitiveness Act of 1988, 15 U.S.C. § 278k (1988)

^[2] U.S Department of Commerce, Bureau of Economic Analysis. 2007.

[3] Defense Manufacturing in 2010 and Beyond: Meeting the Changing Needs of National Defense, Board on Manufacturing and Engineering Design, Commission on Engineering and Technical Systems (National Research Council, 1999).

^[4] “Securing America’s Future: The Case for a Strong Manufacturing Base,” Prepared for the NAM Council of Manufacturing Associations by Joel Popkin and Company (June 2003).

^[5] NRC Study, 1999.

[6] “A Review of the Technology Reinvestment Project,” Potomac Institute for Policy Studies (January 1999).

^[7] “Delivering Measurable Returns,” Fiscal Year 2007 Results of the MEP program, cited on MEP website: http://www.mep.nist.gov.

^[8] Information from MEP website: http://www.mep.nist.gov.

^[9] Information from MEP website: http://www.mep.nist.gov.

Or so the theory goes.

In practice, getting a direct financial return from research activities requires universities to patent their work and thereby obtain ownership of the intellectual property that they can sell or license. Since the passage of the Bayh-Dole Act in 1980—which allows public entities to patent ideas derived from federally funded research—universities around the country have set up technology transfer offices and aggressively worked to patent research-related ideas. The number of university patent offices has increased one hundred-fold, and the number of university patents sixteen-fold, since 1980, according to research by Stanford University intellectual property professor Mark A. Lemley.

In the best cases, patenting and licensing work well. New York University, for example, stands to reap nearly $1 billion in royalties for work it did on Remicade, a successful arthritis drug, notes journalist Richard Monastersky in a recent article in the Chronicle of Higher Education. But substantial financial returns are not always in the cards. A survey conducted by the Association of University Technology Managers found that in 2003, only 15 of 191 surveyed institutions received more than $20 million in licensing revenue.

What’s more, a university’s technology transfer office and its mission to earn money for the university can get in the way of deploying new ideas. Universities and researchers are reluctant to discuss ongoing research with private companies prior to starting the invention disclosure or patent process for fear of losing their IP rights. And they can also be cautious about disclosing too much about an idea for fear that companies will be able to make use of the research without paying a licensing fee, notes journalist Ed Silverman in a recent article in The Scientist.

Universities can also maximize the value of their patents if they offer purchasers exclusive licenses. Problem is, such licensing may inhibit widespread use of technologies, making it difficult to do further research to build on that patent. The result, according to Columbia University economics professor Richard R. Nelson, is that the economic and social gains of the innovation are less than they would otherwise be. These barriers to the free flow of information between researchers and companies are rising just as private corporations are increasingly turning to a model of open innovation to enhance their IP. More and more companies are making their research results—and even patented ideas—freely available to a wide group of users, most famously IBM Inc., which put 500 of its software patents in the public domain in 2005 as part of its push to become a software services company.

IBM had a good business reason to embrace open innovation—companies using IBM’s ideas are more likely to turn to it for information technology services work—but it isn’t just immediate profits the company is after. IBM and other companies now recognize that the open model offers strong complementarities among different kinds of knowledge, and that encouraging others to follow your lead, and refine and extend your knowledge, makes it more likely ideas will be developed more quickly.

But open innovation can run counter to university revenue maximization. The science journalist Silverman cited on unnamed researcher at Utah, for example, who had developed software for designing medical devices who was then discouraged from making it available as open-source software—to encourage other researchers to extend and refine his ideas—because the university’s technology transfer office wanted to reap its commercial potential.

So what should the government and universities do about these conflicting trends? Most importantly, they’ll have to recognize that openness and the free flow of information in research are critical to promoting innovation. They’ll need to balance their interest in getting financial paybacks with creating an environment where researchers—and companies—can engage in the kind of ongoing dialogue and information sharing that leads to progress.

The government and universities also need to be wary that putting too much emphasis on patents and exclusive licensing, which could work against their broader objectives of harnessing idea creation as a new economic driver. One way to do this is to consider measures to separate a university’s networking function—promoting conversations among academics, industry, and the public—from the intellectual property function, as the University of California-San Diego has done by creating its Connect program apart from the technology transfer office.

One of the hallmarks of San Diego’s rise as a biotech powerhouse has been a strong network of formal and informal cooperation, best typified by UCSD Connect, an outreach program started in the 1980s. UCSD Connect helped organize and foster strong shared social capital, engaging the business community and the research community, and drawing participants from around the world. The program was so successful that entire University of California system now uses it.

The federal government should also put more emphasis on non-exclusive licensing to maximize the social gains from research. If a share of royalties from exclusive licenses had to be returned to the federal government, for example, then universities would have stronger incentives to license most ideas non-exclusively.

Looking at these steps and other ways to ensure that the creation of intellectual property at universities using federal dollars results in the best science and the most effective innovation can help test the efficacy of technology transfer programs in boosting broad-based economic growth. If done right, these efforts may lead to new technology transfer models that could help the United States further refine they way we finance science, technology and innovation in the 21^st century

Joseph Cortright is Vice President of Impresa, a Portland-based consulting firm that specializes in community- and regional-based innovation.

References

Blumenstyk, G. “Colleges Seek a Record Number of Patents,” Chronicle of Higher Education (2004) 51: A27. Available at: http://chronicle.com/weekly/v51/i15/15a02701.htm

IBM:  500 Patents: http://www.ibm.com/ibm/licensing/patents/pledgedpatents.pdf

Lemley, M.A., “Are Universities Patent Trolls?” Palo Alto, CA, Stanford University (2006): 20. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980776

Monastersky, R. “New York U. to Receive $650-Million in Sale of Future Rights to Lucrative Drug,” Chronice of Higher Education (2007). Available at: http://chronicle.com/weekly/v53/i37/37a02401.htm

Nelson, R.R., Innovation, Institutions and Economic Growth, Cambridge, Harvard University Press (2005).

Silverman, E., “The Trouble with Tech Transfer,” The Scientist (2007), 21: 40.

Of particular significance was the opportunity for me to meet with staff at the Institute for the Promotion of Innovation by Science and Technology in Flanders (known by its Dutch abbreviation, IWT).^[2] Flanders is a region of northern Belgium with substantial autonomy within the Belgian federal state; this community has benefited from a series of constitutional reforms that have decentralized power to various parts of the country and made Flanders more prosperous.^[3] Many have recognized that a key component of this regional success has been their comprehensive model to innovation. In fact, the National Academy of Sciences recently undertook an international review of regional clustering efforts that foster innovation, and selected Flanders for a major symposium discussion and subsequent report.^[4]

Since the late 20^th century, Flanders has been at the crossroads of EU innovation, attracting foreign investment by multinationals to produce many of its technological exports, ranging from automaking to pharmaceuticals. Recently, business surveys indicate that Flanders is uniquely attractive to foreign direct investment in part because of well-targeted tax incentives, which make the region attractive to foreign investment in key growth areas such as services, logistics, nanotechnology, pharmaceuticals and communications.^[5]

Case in point: Swiss food giant Nestlé SA was the most recent beneficiary of these tax breaks; relocating to Flanders allowed Nestlé to restructure its pension plans to benefit from a more favorable regional tax rate. Flanders also offers tax allowances for R&D personnel, with a one-time tax exemption for companies hiring additional research or quality assurance personnel.^[6]Also, there are a set of other incentives, such as value-added tax, notional interest deductions and other incentives, which when taken together, a company can reduce considerably its taxable base.^[7]

Of course, tax breaks alone cannot guarantee corporate participation and cluster growth. Fortunately, Flanders already benefits from a set of attractive strengths that include a well-located infrastructure, strong universities, and an educated workforce, but the Flemish government has long recognized that government intervention is still needed to overcome key innovation challenges (see sidebar). That’s why in the early 1990s it formed IWT to stimulate economic growth and nurture cluster development.

IWT is a regional public institution that provides research-and-development and innovation support to newly formed high-tech startup companies as well as long established public companies. It has several financial tools and an annual budget of about $307 million.^[8] Any company that does business in Flanders can ask IWT for financial support for a technological project. Three types of technology projects qualify for support:

• Basic industrial research
• Prototype or development activities
• Mixed research that combines basic industrial research and prototype or development activities.^[9]

While direct funding of this kind of basic and applied research is always vital to seeding new innovation opportunities, IWT’s role does not end there. The institute also provides a suite of support mechanisms to local industry in the field of technology transfer, searches for equity investment or joint venture partners, and international subsidy options.^[10] Last but certainly not least, IWT has a coordination mission, which strives to create strong cooperation between all organizations in Flanders.^[11]

IWT promotes knowledge transfer via platforms that allow a cluster’s universities and businesses to meet and collaborate.^[12] It has set up the Flemish Innovation Network that allows companies, especially small- and medium-sized enterprises, to access the knowledge and expertise of about 250 advisors. So far, 1,100 small- and medium-sized enterprises and 250 large companies have benefited from this suite of services, including a number of successful university spin-off companies. One such startup from the Catholic University of Louvain, for example, developed its own microwave drying technology. It published a technology offer via IWT network services, which yielded several leads to possible applications for their technology, including an English company that supplies drying installations.

But not all IWT interventions have been successful. After all, like it or not, there are still strong market forces at work. One notable example is Flanders Language Valley, an innovation cluster in Ieper, a town situated in a rural part of Flanders. In recent years, the language cluster entered a crisis due to problems with its core corporation, Lernout & Hauspie Speech Products. At its peak, Lernout & Hauspie had a market capitalization of almost $10 billion, but financial fraud and mismanagement led the company to its demise, bankruptcy, and purchase by Nuance Communications.

Extracting lessons learned from cluster formation and failures is an important evaluative area for IWT. To better interface these regional efforts with larger Pan-European ones, IWT also serves as the key Flanders point of contact for the E.U. Seventh Framework Programme, FP7, the E.U.’s chief instrument for funding research, bundles all research-related EU initiatives together to achieve the community’s goals of growth, competitiveness, and employment. Case in point: FP7’s Innovation Relay Centre initiative, a key E.U. effort to provide integrated innovation and business support to small businesses across the European Union, is a core supporter of the Flemish Innovation Network.

In sum, IWT provides a comprehensive strategy by leveraging its three core tasks: Subsidies, Services, and Coordination (see figure below).^[13] The subsidies ensure basic research and development continues apace and leads to high-tech commercialization. The services help ensure commercialization succeeds. And the coordination provides the Flemish cluster with the links to other clusters and markets to create more innovation growth opportunities for Flemish institutions and companies.

(Figure reproduced with permission, Maarten Sileghem, IWT. Flanders, 2008).^[14]

One additional service area for IWT could soon be to provide program evaluation and monitoring for its participants, an idea that staff have started to look at more carefully. The reason: third-party evaluation can be expensive and complex, especially for small-and medium-sized enterprises, and outcomes can be measured more comprehensively.

Potential Lessons for the United States

Naturally, the United States and Flanders differ considerably in size and innovation capacities, but there are still important lessons we can learn from Flanders when considering how to implement a national strategy to energize U.S. regional innovation clusters. Here are four clear lessons for U.S. policymakers:

• It is best to have a dedicated organization designed to nurture regional innovation clusters. An organization that emulates the IWT, with its three core tasks, can enhance the environment and conditions that are necessary for economic growth through university-industry cooperation and innovation. Today, the United States lacks that national program to develop such dedicated regional innovation organizations, and states and municipalities boast too many that are ineffective because there is not enough regional coordination or federal direction. This is a critical gap in U.S. innovation policymaking.
• Business research-and-development tax breaks and tax credits alone may not be sufficient, but it sure helps. Corporations are always looking to reduce the costs of doing R&D. One key role that a new IWT-like organization in the United States could do is assist participants in maximizing these tax credits, and serve as a general clearinghouse for possible deductions.
• It is important to refrain from picking “winners or losers” when considering who to fund. IWT, for example, has no thematic priorities. When one considers the large variety of clusters in the United States with their unique comparative advantages, it is more sensible to focus on improving the general sustainability of the environment for each cluster rather than trying to pick one over the other.
• In the end, it is all about creating jobs. The top outcome metric for an IWT-like organization should be the number of new jobs produced. Usually the discussion about cluster development is expressed either by total dollar investments, products produced, new companies created or drawn to the cluster or scientific discoveries. While these are valid measures of innovation, the true confirmation of a thriving regional economy is its ability to create new technologically-based jobs.

The long Flemish experiment building a regional innovation cluster within the federal state of Belgium and within the even more complex political and economic environment of the European Union clearly offers the United States some key lessons. As the Obama administration fleshes out its early policy decision to help foster these kinds of innovation clusters in our country, they would be well served to explore the Flemish cluster in detail.

Elmer Yglesias is a researcher at the Science and Technology Policy Institute, where he specializes in the evaluation of federal science and technology programs and their impact on the public good. The opinions expressed herein are those of the author and not of the Institute or any other sponsors. The author thanks the European Union Visitors Program for their support and meeting coordination with staff at the IWT-Flanders.

Endnotes

[1] “Clusters and Competitiveness,” EDA America, US Dept of Commerce, Economic Development Administration. Fall 2008 Issue. “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies.” Brookings Institution:

http://www.brookings.edu/reports/2008/04_competitiveness_mills.aspx

[2] Institute for the Promotion of Innovation by Science and Technology in Flanders (IWT) website (including publications):

http://www.iwt.be

^[3] See “Belgium’s devolution conundrum”: http://news.bbc.co.uk/2/hi/europe/7640198.stm

[4] “Innovative Flanders: Innovation Policies for the 21st Century: Report of a Symposium.” Committee on Comparative Innovation Policy: Best Practice for the 21st Century, the National Academies. Washington, DC. 2008. ISBN-10: 0-309-11606-6. (Report available at http://www.nap.edu)

[5] “Heart of Europe.” World Finance. World News Media, London:

http://www.worldfinance.com/news/worldnews/europe/article201.html

[6] World Finance, ibid.

[7] See “Notional Interest Deduction”, Deloitte.
www.deloitte.com/dtt/cda/doc/content//Notional%20Interest%20Deduction.pdf

[8] Ibid, IWT, http://www.iwt.be

[9] World Finance, ibid; IWT Activity Report, 2007.

[10] Ibid, World Finance, ibid; IWT Activity Report, 2007.

[11] Ibid, World Finance, ibid; IWT Activity Report, 2007.

[12] IWT Activity Report, 2007, pg. 9

[13] Sileghem, ibid. pg. 4.

^[14] Sileghem, ibid. pg. 4.

The result? Our country is beginning to lose its innovation leadership and national competitive advantage because we do not coordinate innovation policy across federal, state, municipal, and university boundaries and do not adequately support high-growth entrepreneurial companies. The federal government pours approximately $150 billion annually into basic scientific research but then largely fails to ensure this money results in the kind of broad-based economic growth that makes our products and services the most competitive on the planet.[1] This is a travesty because it is innovative small businesses that have generated between 60 to 80 percent of net new jobs annually over the last decade as they grow and prosper, according to the U.S. Small Business Administration.[2] These same companies also employ 30 percent of high-tech workers such as scientists, engineers, and information technology workers.
Today’s economic crisis, however, is also an opportunity to restimulate our knowledge economy, if recent history is any guide. After both the 1990-91 and the 2000-01 recessions, small businesses of less than 20 employees were by far the dominant job creators in our country.[3] The Office of Small Business Advocacy in the Small Business Administration shows that during the three years after the 2000-01 recession, the smallest of our companies (one to four employees) provided 79 percent of the net new jobs in the subsequent three years. Similarly, after the recession of 1990-91, small businesses created 89 percent of net new jobs (see sidebar for case studies in Pennsylvania and Kansas).

Furthermore, small- and medium-sized enterprises produce between 14 times more patents per employee than large corporations, another key measure of innovation-led growth.[4] Indeed, small companies are a key source of innovation for themselves and for large companies in terms of fueling mergers and acquisitions as well as technology licensing activities. Many new commercially viable ideas for new products and services and other technological discoveries flow out of small start-up companies commercializing publicly funded research—companies that go on to become major players or are acquired by others to boost their own competitive advantage. Either way, our economy benefits enormously.

What worked after the last two recessions, however, may not work so well today given the fragile nature of our financial markets, which is why we need a national innovation framework to help ensure this commercialization process runs more smoothly and efficiently. In fact, the already massive funding gap for young innovative companies—the other Achilles’ heel of our innovation-led economy—has only grown wider over the past decade. The so-called “valley of death”—the early-stage funding gap for young entrepreneurial companies (see Figure 4)—has always existed for early-stage innovation and entrepreneurs, but it has widened because of the current national economic crisis.

Venture capitalists are husbanding their financial resources to keep their current portfolios of startup companies alive and have already moved further up the financial cycle. The average investment by venture firms last year was $8.3 million per investment and only about 4 percent of the capital went to early-stage companies.[5] Angel investors—individual investors with a keen eye for technology—who previously had filled the role of assisting some startups cross this valley of death reduced their investments by over 26 percent in 2008, and the availability of investment capital among angels decreased dramatically by 40 percent over the same period.[6]

To be sure, past federal efforts to coordinate the complex mix of policies and federal funding have resulted in significant new programs and much-needed investments that have clearly helped to grow technology companies in the United States. The passage of the Bayh-Dole Act in 1980—which allowed universities to patent innovations that grew out of government-funded basic research—is responsible for the continuing flood of new companies with new ideas (backed by private investment capital) into our economy. And the Small Business Innovation Development Act in 1982—which established the rule for federal agencies to commit 2.5 percent of their extramural research budgets to the Small Business Innovation Research program, or SBIR—continues to serve as key bridge financing for start-up companies working in areas to address unmet needs in public health, defense, energy, telecommunications, and aerospace—all science arenas that boast intensive research-and-development requirements.[7] The findings from the recent assessment of the SBIR program by the National Academies indicated that the program leads to significant new knowledge formation and intellectual property disclosure, and affects commercial outcomes.[8]

(There is currently an ongoing debate about the future of the SBIR program in Congress. The SBIR program is one of the most innovative public funding programs in the world, and it must be reauthorized on a longer-term basis of at least six to eight years with many of the suggested enhancements by the National Academies’ Assessment.)

Other government programs since then have also helped to boost our nation’s innovation-led economy. One is the Technology Innovation Program of the National Institute of Standards and Technology to accelerate innovations in areas of critical national need, which has produced significant results. Other efforts, however, were more scattershot and certainly less coordinated. We will detail these efforts in this paper before turning to our own set of recommendations to weld the successful innovation programs and funding mechanisms into a far more effective national innovation framework.

And what are those recommendations?

We argue in the pages that follow for a national effort to support innovation, entrepreneurship, and the advancement of both technologies and early-stage businesses. Specifically, we propose a new National Innovation Framework to structure and strengthen an integrated system for the strategic acceleration of the nation’s innovation economy. Most importantly, we propose through this framework to formulate widespread participation of multiple interests including federal and state government, the private sector, universities, foundations, and the investment community. Our National Innovation Framework contains three new structural elements for a widespread national innovation strategy:

1. The Federal Innovation Partnership and a National Innovation Advisor
   This new partnership program and new office would coordinate federal technology innovation programs through a Federal Innovation Partnership with a new high-level National Innovation Advisor who has access to the president.
2. The National Innovation Seed Fund and Technical Assistance Grant Fund
   This funding program would create a $2 billion National Innovation Seed Fund, or NISF, to invest in experienced early-stage capital providers, including venture capital and angel funds as well as other public and/or private funding authorities. The purpose of the NISF is to jumpstart new knowledge economy jobs that will shape America’s future alongside a Technical Assistance Grant Fund that would provide entrepreneurial support resources and services to portfolio companies and NISF fund managers.
3. The National Private-Public Partnership Innovation Program
   This new nonprofit program, modeled on the already up-and-running Innovation America public-private partnership program, would accelerate the growth of the entrepreneurial innovation economy in America and oversee the National Innovation Seed Fund by coordinating government, university and private-sector players in early-stage investment capital, commercialization, technical and entrepreneurial mentoring, and workforce development related to innovation development.

As we will demonstrate in this paper, the time is now to implement these three elements of a national innovation framework. Together, we believe these programs will again set our nation on the road to innovation-led economic prosperity in the 21st century that could well trump 20th-century successes.

Early efforts without a central model

Technology and innovation experts around the country came to recognize in the 1980s and 1990s that the United States was losing its cutting-edge competitiveness in science, technology, and innovation despite the vast amounts of federal funding for basic research and development. A consensus was growing that the federal, state, and municipal governments in league with universities and federal laboratories needed to work together more cooperatively to build our scientific estate and innovation leadership.

By the middle of the 1990s these grave concerns resulted in a series of early efforts to address the problems—efforts that in hindsight prepared the groundwork for what needs to be done today but alas were not followed up on at the end of the decade. Still, these early efforts need to be briefly explored for the early consensus they brought to U.S. innovation policy prescriptions.

In early 1995 these concerns first found collective voice when former Governors Richard Celeste of Ohio—a Democrat and creator of the Edison Programs in Ohio—and Dick Thornburgh of Pennsylvania—a Republican and creator of the Ben Franklin Technology Partners program—formed a bipartisan, 20-member State-Federal Technology Partnership Task Force consisting of national leaders including governors, state legislators, research-and-development leaders, and chief executives from business and academia.[9] These leaders worked in collaboration with the Carnegie Commission on Science, Technology and Government; the National Governor’s Association; the American Society of Mechanical Engineers; the White House Office of Science and Technology Policy; and the National Conference of State Legislatures to evaluate opportunities for collaboration between the state and federal technology programs.

The task force made recommendations on ways to redefine the state-federal science and technology relationships and generate enhanced innovation and commercialization—with the emphasis of the taskforce on greater cooperation. One of the major outcomes of the task force was the creation in late 1995 of a national nonprofit organization, the State Science and Technology Institute by the Battelle Memorial Institute, which has a mission to improve state and regional economies through science, technology, and innovation. SSTI exists today and continues to work to achieve this mission and became a free-standing organization in 2000.

That same year, John Gibbons, Assistant to the President for Science and Technology, announced the creation of an interagency review of science and technology programs to help foster better state and federal government cooperation to advance national goals. This review was initiated in response to growing state investments in science and technology and the need to enhance state-federal partnerships to realize greater national benefits. The interagency review was led by U.S. Department of Commerce Undersecretary for Technology Mary Good under the auspices of the National Science and Technology Council chaired by the president. The group had representatives from all federal science and technology agencies.

In 1997, President Bill Clinton created the U.S. Innovation Partnership to coordinate federal and state efforts to stimulate the development and use of new technologies that could help the United States meet the common goals of generating economic growth, improving our schools and health care, better protecting the environment at a lower cost, and reinventing government at all levels. USIP task forces were established around specific areas and some policy recommendations emerged. Alas, both the USIP and the undersecretary for technology in the U.S. Department of Commerce ceased to exist under the Bush administration.

Starting anew in 2005

Many of the recommendations offered by the State-Federal Technology Task Force in 1995-1996 and USIP in the late 1990s are relevant today. And they should be revisited under the Obama administration with the major difference being the role of innovation not just on technology. Indeed, after six years of neglect under the last administration, federal and state leaders on both sides of the political spectrum began to develop their own strategic approaches to innovation policies. Some of those efforts included:

• The National Innovation Act of 2005. The NIA, sponsored by Sen. John Ensign (R-NV) established a President’s Council on Innovation to develop a comprehensive agenda and coordinate federal effort to support innovation.9
• The National Competitiveness Investment Act of 2006. The NCIA, sponsored by Sens. Ensign and Joseph Lieberman (D-CT), established a President’s Council on Innovation to develop a comprehensive agenda and coordinate federal effort to support innovation.[10]
• The America Competes Act of 2007. The ACA, the work of a bipartisan group of lawmakers, built on the NCIA to increase research investment, strengthen science & technology educational opportunities, and develop an innovation infrastructure. Many of the recommendations from ACA have gone unimplemented.[11]
• The National Governor’s Association initiative of 2007. This effort created the Innovation America Partnership, which established a public-private partnership to coordinate innovation efforts with outlined roles for state, federal, and private jurisdiction. Governor Janet Napolitano of Arizona—now Homeland Security Secretary—led this effort. Gov. Napolitano also created the Innovation America Foundation.[12]

In addition, last year two important new efforts to create a nationwide innovation policy body were launched: one in the Senate and one from a leading nonprofit technology policy group. In Congress, the National Innovation and Job Creation Act of 2008 was introduced by Senators Susan Collins (R-ME) and Hillary Clinton (D-NY), which sought to establish a National Innovation Council to improve the coordination of innovation activities. And later that year the widely discussed proposal to create a National Innovation Foundation—which would coordinate technology and innovation policy under one roof and then pool and leverage investments—was proposed by Robert Atkinson of the Information Technology and Innovation Foundation.[13]

Many different elements of these programs are a part of our proposed National Innovation Framework, but we would argue that they have not been adequately networked together to achieve the sustainable collective outcomes the United States needs today to create an integrated national innovation strategy. Our goal is to establish that integrated operating model so that the United States can construct a fully networked and optimized infrastructure for the greater coordination and success of overall U.S. innovation strategy—an integrated network that leverages the best that the federal government and state governments, universities and nonprofit groups, and the private sector can bring to the table.

We believe it is important for existing state and federal agencies to retain their current funding and implementation roles so that they can maintain their mission-oriented goals and not lose time sparking a new, innovation-led economic recovery. But we recognize that better coordination is absolutely imperative.

That’s why our National Innovation Advisor and federal innovation partnership program would convene to evaluate effectiveness, return on investment, and redundancy in programming in order to reduce any unnecessary overhead and maximize the amounts of funding invested in outcome-driven research and commercialization. Further, this new coordinating effort will identify gaps that exist in federal technology innovation programs and respond better to the current economic environment. This effort will enable our National Innovation Seed Fund to fill a major early-stage funding gap for innovative entrepreneurs in the United States. We now turn to this National Innovation Framework.

The Need for A National Innovation Framework

According to the recent Global Innovation Index study completed by the Boston Consulting Group, the National Association of Manufacturers, and the Manufacturing Institute, innovation leadership has shifted to more nimble emerging and developed economies, where their governments are investing heavily in science and technology and innovative approaches to increase their respective market shares of the global knowledge economy.[14] Foreign counterparts have successfully plucked best-practice strategies and approaches in supporting entrepreneurship and early-stage business development. Combined with the primary competitive advantage of cheaper labor costs, these efforts are now paying big dividends for these societies.

Analytical chemistry in China, clinical trials in India, biomedical engineering in Singapore, and a number of back-office and other outsourced industries have gained strong footing abroad and have effectively cut into America’s competitive share in high technology. The study ranked the United States eighth in innovation leadership behind Singapore, South Korea, Switzerland, Iceland, Ireland, Hong Kong, and Finland. The study evaluated both innovation inputs, such as fiscal and education policies, and outputs such as patents, technology transfer from basic university research, research and development, and business performance (see Table 1).

The Global Innovation Index also called for a bold national innovation strategy to encompass their recommendations, but they did not propose a central operating model for widespread implementation. What our nation needs is a National Innovation Framework—an operating model that offers less complexity, more accountability, and more cooperation among businesses, technology organizations, innovators, investors, entrepreneurs, policymakers, and university leaders. We use the term “operating model” because the provision of any service—and we consider innovation policy implementation a service that involves the interaction of multiple actors from both the public and private sectors alongside appropriate government involvement—requires implementation beyond the control of any one governmental agency.

The better designed and anticipatory this operating model is, the better it will be in delivering and implementing innovation policy that boosts our country’s economic competitiveness and job creation in a timely fashion and at the most efficient cost to taxpayers. Today’s leading high-tech and innovative businesses and industries that are the quickest to identify, carve, and sustain their business models are the most successful. They may not be the fastest to discover something innovative, but they are the fastest to piece together all the necessary components to become exceedingly profitable.

Yet at the same time we must help mobilize those that are quick to discover. Any single discovery can be an innovation that forms the basis for a new company or business opportunity for the inventor who improves the chances for success of another company but lacks the keen business knowledge to accelerate these discoveries. Many discoveries today are sitting on the shelves of universities, research laboratories, and corporations and go undeveloped for widespread public benefit due to the lack of know-how and underavailability of early-stage capital (see Figure 5 for a diagram of this technology lifecycle).

The upshot? The formation of a comprehensive innovation lifecycle business model—from discovery to product development to rapid distribution to end-user satisfaction—that delivers success through wealth creation, sustainability, and consumer trust is sorely lacking. To be sure, technology transfer offices at some universities, astute venture capitalists, and corporate research directors on the prowl bring all these elements together to create incredibly competitive and growing companies (think Google Inc). Yet a comprehensive national innovation framework to make this happen more consistently still eludes us. That’s why we believe a shared National Innovation Framework—a prioritized operating model that structures a collective national response for the strategic acceleration of the country’s entrepreneurial innovation economy—is now sorely needed.

Our National Innovation Framework would provide the best networked approach, leverage our innovation resources, and provide assistance to the growth of high-tech companies that are continuously changing the shape of our world. In turn, the growth of these very companies fuels our economic and job growth and serves as a considerable national competitive advantage to retain the highest skilled national talent and compete with the rest of the world on science and technology.

At the center of the framework sits a National Private-Public Partnership Innovation Program, which is a nonprofit organization composed of leading public- and private-sector innovation players. The organization would draw on the expertise of its partners to administer a $2 billion National Innovation Seed Fund and advise a collaborate effort with a federal National Innovation Advisor in the White House on how to tailor national innovation strategy to best meet the needs of newly emerging technologies and services (see Figure 6).

As our chart illustrates, key private and non-profit technology organizations, such as SSTI, National Association of Seed and Venture Funds, American Society of Mechanical Engineers, the Association of University Technology Managers, the Community Development Venture Capital Alliance and the Angel Capital Association, would work with federal agencies and their technology program managers. These efforts would be reported to a new National Innovation Advisor and the investment managers of an experienced public-private innovation seed-stage fund—through the National Public-Private Partnership Innovation Program, or NPPPIP. In this way, the best innovation strategy, advice and policy execution would be coordinated through a single organization with a direct link to the president and key private-sector and non-profit leaders. We now will present the individual components of our National Innovation Framework to demonstrate how these three programs would work in tandem.

Federal Innovation Partnership and National Innovation Advisor

Leading programs for a national innovation and competitiveness agenda

The keys to the success of this national innovation framework are the partnerships and federal leadership created in this operating model. Over the past 25 years, a new global innovation system has evolved in the United States, with support from government and industry for basic research in universities, nurtured by rapid growth in venture capital and implemented by industrial and services companies through strong investments in research and development, capital equipment, and information technology. This highly complex system of innovation, however, requires much closer collaborations and more alliances among federal funding agencies and private investors, industries, universities and government labs.

More than simply utilizing technology, innovation is the ability to take new ideas and translate them into commercial outcomes by using new processes, products or services in a way that is better and faster than the competition. The ability to do this requires an inclusive process among individuals, institutions, and organizations that results in new business models, new forms of engagement and, ultimately, new companies. Today, new companies create a greater portion of job growth than do established larger companies. In the new economy, innovation and productivity are the cornerstone of competitiveness and prosperity.

Our Federal Innovation Partnership program would address the lack of government coordination around national innovation and competitiveness. There has never been one federal agency or cabinet-level position responsible and accountable for overseeing the total federal technology investment portfolio. Nor is there one federal agency or advisor overseeing the balance of investment and technology research, which should be managed in innovation portfolio. The major objective of our federal innovation partnership program would:

• Align investments in programs strategically
• Access bridges into the commercial marketplace faster
• Eliminate redundancy
• Identify gaps in our nation’s technology portfolio
• Decrease administrative costs
• Measure outcomes to align performance of the programs.
• Serve as a clearinghouse of information and resources
• Require federal agencies to communicate and collaborate with one another to galvanize the country around a strategic innovation and competitiveness agenda
• Catalyze cooperation among the federal agencies on a shared innovation agenda

It is important, however, to form the Federal Innovation Partnership around the existing programs that the nation is using to support technology development and transfer, education, workforce and economic development, and industry-university collaborations. Initial programs identified that form the basis of this partnership boast about $3 billion in federal funding and include but are not limited to the following programs:

Federal Technology Innovation Programs

• Small Business Innovation Research grants program
• Small Business Technology Transfer Research grants program
• Technology Innovation Program
• Manufacturing Extension Partnership
• Workforce Innovation in Regional Economic
• Development program
• Federal Laboratory Consortium
• Experimental Program to Stimulate Competitive Technology
• Experimental Program to Stimulate Competitive Research
• Industrial Technology Program
• Partnership for Innovation
• Engineering Resource Center
• Industry-University Cooperative Research Centers

Federal Innovation Capital Programs

• Small Business Innovation Research grants program
• Technology Innovation Program
• Community Reinvestment Act
• Community Development Financial Institutions
• New Market Tax Credits

Such an array of programs perfectly illustrates why these programs are not widely understood or recognizable in the world of innovation and need to be administered through a Federal Innovation Partnership program. But at the same time, the wealth of program expertise in all of these programs should not be lost in the name of consolidation. For this reason, the federal innovation partnership program would include federal-level program administrators of the listed programs and other federal representatives deemed appropriate by the National Innovation Advisor and the Obama administration.

We believe outstanding amounts of knowledge exist in the federal agencies through managing these programs and it’s important to retain some level of independence in program administration. The Federal Innovation Partnership would add a level of oversight and ability to leverage resources and the strategic updating of programs to respond to the current global innovation environment. The chairman of the Federal Innovation Partnership would be the National Innovation Advisor, who will be an advisor to the President on strategic issues related to national innovation and competitiveness.

No cabinet level position in the Administration currently exists for maintaining America’s position as the global innovation leader, as well as making sure that federal agencies collaborate with each other and leverage resources effectively. The national innovation advisor in tandem with the Federal Innovation Partnership program would ensure consistency in the way the programs are administered and made accountable and they will work to update and enhance programs to meet the changing nature of what it takes to stay competitive globally.

Currently the federal budget for the listed Federal Technology Innovation Programs is approximately $3 billion. These programs effectively launch new technologies from the federal laboratories, small businesses, nonprofit research organizations, universities, and other centers of excellence in the United States. It will be important for the National Innovation Advisor to monitor the balance of the federal investment portfolio between basic, applied, advanced, and mature technologies and industries to improve our competitive position globally and recommend new programs, investments, and initiatives where needed.

The other programs represented in the Federal Innovation Partnership are existing Federal Innovation Capital Programs, which provide financial incentives for innovation-based development. Very few of these programs have been structured to support the rapidly growing entrepreneurial innovation economy of the United States. This needs to change. Our policy framework would enable this reform to happen at a federal level coordinated through the White House to ensure effectiveness.

As our National Innovation Framework chart on page 7 illustrates, the Federal Innovation Partnership program would work through the National Public Private Partnership Innovation Program to coordinate investments from the public-private National Innovation Seed Fund to direct innovation investment capital efficiently but opportunistically around the country. This public-private partnership of existing innovation associations and networks would provide outreach and investment-intelligence roles between the states and regions, and allow the federal government to align technology innovation investment programs with federal, state, regional and university programs.

National Innovation Seed Fund

A collective response to financing innovation-based businesses

The United States is currently losing is its innovation leadership and national competitive advantage by not supporting high-growth entrepreneurial companies. According to the U.S. Small Business Administration, innovative small businesses have generated between 60 to 80 percent of net new jobs annually over the last decade. These young companies employ 30 percent of high-tech workers such as scientists, engineers, and information technology workers.

Furthermore, small-and medium-sized enterprises produce between 14 times more patents per employee than large patenting companies. In short, small companies are a key source of innovation for themselves and for large companies in terms of fueling mergers, acquisitions, and licensing activities. See the diagram in Figure 7 for a quick understanding of the financing lifecycle that creates this innovation.

The current seed-stage and early-stage funding gap, which has always existed for early innovation and entrepreneurs, has widened recently because of the current national economic crisis. Banks and hedge funds are failing, and loans and lines of credit for working capital are at extremely low levels and unavailable for some. Venture capital has moved “upstream” to where the average investment by firms last year was $8.3 million per investment. Only about 4 percent of the capital went to early-stage companies, with all other investment activity occurring in later stage deals. Private and angel investors who once attempted to fill most of this gap reduced their investments by more than 26 percent in 2008, and the availability of investment capital among this category has decreased dramatically by 40 percent.

Over the past decade, state governments have led the charge in their own jurisdictions to address this early-stage financing gap or what has come to be known as “The Valley of Death” in the world of entrepreneurship. But now state budgets are also in crisis mode and have less money to invest in technology-based economic development initiatives. Recently Ohio, Kansas, Connecticut, and Pennsylvania, just to name a few, have all either reduced economic development spending or suggested wide consolidations to control it.

In April 2009, the National Association of Seed and Ventures Fund, at the request of the Small Business Administration, surveyed seed- and early-stage venture funds as well as entrepreneurial support professionals to find out the state of seed- and early-stage funding for innovative-based entrepreneurial companies. The survey found that 70 percent of seed/early stage venture investment funds are having a difficult time raising capital from private investors, pension funds, local, county and state authorities. The most startling finding was that nearly 90 percent of the already-funded companies surveyed are currently unable to attract follow-on capital, and that 70 percent of these companies need less than a million dollars to continue their business and product development (see Table 2).[16]

Creating a National Innovation Seed Fund

We believe the federal government can play a role in funding these entrepreneurial companies, thereby stimulating innovative job and small business growth. Neither traditional financial institutions nor venture capitalists are providing the gap funding of $500,000 to $2 million that seed-stage and early-stage companies need to grow. Our solution is to create a National Innovation Seed Fund sparked by a U.S. federal government investment. This fund would make venture investments in that key financing range to structurally address the “Valley of Death” funding needs of small companies, and would be invested equitably and equally throughout the innovative regions of the United States.

This new fund would be structured as a public-private partnership and would enlist experienced early-stage investors to manage the fund. The National Seed Stage Fund managers would work with the NPPPIP to engage the rest of the innovation ecosystem in the United States to ensure strategic oversight and success. The NPPPIP would determine the most experienced early-stage funds that would then invest in innovative companies in their regions. It would collaborate with state technology-based economic development organizations, national seed, angel, and other innovation-based associations and networks to leverage resources and create a connected national community of innovation.

Examples of organizations are the Ben Franklin Technology Partnership in Pennsylvania and the National Association of Seed and Venture Funds. The consortium of partnership organizations would guarantee the effectiveness of the National Innovation Seed Fund by creating quality investment opportunities with the investments and participation of the Federal Innovation Partnership program and the National Innovation Advisor. The overall purpose of the fund is to stimulate rapid knowledge-economy job creation as demonstrated can be done from the data from the Small Business Administration.

Federal money for the new seed fund would be appropriated through an agency such as the Small Business Administration or U.S. Department of Commerce’s Economic Development Administration or National Institute of Standards and Technology, and would be managed through the National Public-Private Partnership Innovation Program. The federal agency would manage the contractual relationship with the NPPPIP and maintain administration, audit, and financial reporting functions.

The investments would at some point generate a financial return on investment for the federal government, though for budget purposes those returns would have to be anticipated over the course of 10 years—like any venture capital firm would do—which means funds must be allocated until investment maturity can be realized five or more years into the future. More immediately, however, the $2 billion would be invested in new companies creating new high-skilled, high-paying jobs, thereby adding to immediate post-recession economic stimulation.

These types of seed fund investments would be made right before most venture capital firms would look at investing, which is risky but also rewarding. Many venture-backed companies are or quickly become the most innovative and prosperous companies in the world. A Global Insight report in 2007 found that venture capital-backed companies were directly responsible for just over 10 million jobs and $2.1 trillion in sales in 2005, which represents 9 percent of total private sector employment and 7 percent in total sales.[17] Furthermore, venture capital-backed companies created jobs three times faster and pay significantly more than the average private-sector jobs.

We have studied other sources to gauge the impact of a National Innovation Seed Fund and found that for each $1 billion invested in innovative small businesses a minimum of 100,000 high-skilled, high-wage jobs would be created. The Commonwealth of Pennsylvania’s Department of Community and Economic Development, the longest existing organization investing early-stage capital, in 2008 created or retained 8,150 jobs based on a total of $90.7 million in investments or $11,130 per job.[18] If you applied Pennsylvania’s $11,130 in seed dollars invested per job to the $2 billion of potential funding for the national innovation seed fund, 180,000 new jobs would be approximately created with the opportunity to retain many of the high-skill and high-paying jobs into the future. This same result was confirmed in a study completed by the Community Development Venture Capital Alliance of more than 50 providers of community development venture funds that make equity capital and grant investments to build entrepreneurial capacity and community wealth.

A National Public-Private Partnership Innovation Program

National innovation intermediary to implement different program elements

Our chart on page 7 illustrates that a non-profit National Public-Private Partnership Innovation Program sits at the center of our national innovation framework. This NPPPIP would administer unique innovation programs to fill the innovation life cycle gaps that exist in America today, including support in the areas of intellectual property and technology transfer, early-stage business and product development, early-stage financing, commercialization, technical assistance and mentoring and the implementation of other programs to address key issues. This program would also oversee the national innovation seed fund investments in tandem with the Federal Innovation Partnership program and the National Innovation Advisor.

Above all, though, this non-profit, public-private organization would act as a strategic mechanism to engage the innovation ecosystem like any strong outreach and implementation-driven organization. Its effectiveness would be supported by the consortium of partnership organizations, in which it will lead and also its partnership with the new Federal Innovation Partnership program and the National Innovation Advisor. The proposed partners in this organization would include but not be limited to the following organizations, which together represent significant sectors that support the acceleration of the nation’s innovation economy:

• American Society of Mechanical Engineers
• Angel Capital Association
• Association of Public and Land-grant Universities
• Association of University Research Parks
• Association of University Technology Managers
• Community Development Venture Capital Alliance
• National Association of Seed and Venture Funds
• National Business Incubation Association
• State Science and Technology Institute

The unique partnership of national organizations and associations practicing innovation-based economic development would provide a point of cross linkage for both practitioners and constituents, enabling it to implement significant programs with the buy-in of a variety of stakeholders including venture and angel networks, business incubators, research parks, university technology managers, and the nation’s largest network of engineers. This network will prove to be critical to launch a strategic innovation-based implementation agenda for our country.

Furthermore, this partnership will be able to elevate efforts and directly link with intermediaries and other bodies in states and localities throughout the United States, which is not currently a shared agenda by the federal government. Regional intermediaries have been effective in operating in states and localities to accomplish strategic agendas with multiple partners and many stakeholders.

These organizations can successfully launch a paradigm shift to transition and position places, people, and organizations to nurture innovation-based economies. Our approach introduces the concept of a comprehensive national broad-based innovation intermediary that would fulfill this role. And the ability of the organization to operate outside the realm of the federal government would help ensure swifter implementation and leadership on strategic agendas while receiving input from a National Innovation Advisor with access to the President and Federal Innovation Partnership of government agencies.

A further function of this organization would be to operate programs and serve as an accelerator that advances technologies into the marketplace for the increased stimulation of innovation in the national economy. The partners’ deep experience in this organization in early-stage investing would be instrumental in the deployment of the National Innovation Seed Fund as well as our proposed Technical Assistance Grant Fund, which would be administered by this non-profit organization. Support for this fund will come from the same originating agency of the NISF and remain a constant percentage of the overall investment pool.

The proposed Technical Assistance Grant Fund would serve as a support fund for early-stage investing, similar to the technical assistance fund currently affiliated with the New Markets Tax Credit program. The public-private partnership organization would select the best programs for business mentoring practices and due diligence support, and would provide funding for business incubation and acceleration models that incorporate virtual models, including the iBridge Network of the Kauffman Foundation and the National Innovation Marketplace currently supported by the U.S. Department of Commerce.

As project manager of the National Innovation Seed Fund and Technical Assistance Grant Fund, our public-private partnership organization would lead the charge in bridging problems in early-stage financing and commercialization of innovation-based enterprises. It would also operate other programs that are critical to building national innovation capacity, including those engaged in:

• Direct investment
• Commercialization
• Technical assistance, education, and mentoring
• Technology, economic and workforce development
• Networking, strategic planning, marketing, and branding

In short, the core competency of this organization will be the conception and formation of key innovation-based products and services that will assist the networks and leverage resources to the support networks working with individual entrepreneurs and others working to accelerate innovation on a national level.

Conclusion

Our National Innovation Framework boasts three core components: a National Public Private Partnership Innovation Program that sits astride a National Innovation Seed Fund and Federal Innovation Partnership Program, and collaborates with a new National Innovation Advisor. Together, the leaders of these components would deliver a central focus and create an optimized and integrated national network of many players that is essential to a national innovation strategy. We believe this structure is the best way not just to implement as well as enact a national innovation strategy.

The United States does not need a top-down innovation strategy that resembles government-led industrial policy, nor would such a proposal survive long in Congress or the halls of the Obama administration. Similarly, the United States simply cannot continue to run the current overlapping but uncoordinated sets of innovation programs that are failing to deliver the common national strategy our country needs to compete successfully in the 21st-century global innovation economy.

Instead, our country needs an innovation program that leverages the best talent from the public and private sector. It is the best policy solution. And it’s the best political solution on Capitol Hill. For this reason, we believe a national public-private partnership innovation program is what Congress and the Obama administration should pursue immediately due to our current window of opportunity and the risk of losing ground to competing nations daily.

About the authors

Richard Bendis

Mr. Bendis has distinguished himself as a successful entrepreneur, corporate executive, venture capitalist, investment banker, innovation and technology based economic development leader, international speaker and consultant in the technology and healthcare industries. He currently serves as the founding President and CEO of Innovation America, a national 501c3 not for profit, private/public partnership focused on accelerating the growth of the entrepreneurial innovation economy in America.

Mr. Bendis has been appointed to selected national innovation related organizations and committees that include the White House U.S. Innovation Partnership Advisory Task Force and Co-Chair of the Small Business Innovation Research Committee; the National Governor’s Association, Science and Technology Council of the State’s Executive Committee, the State Federal Technology Task Force, the National Academies committee on “Competing in the 21st Century: Best Practices in State and Regional Innovation Initiatives”; National Academies National Research Review of an Assessment of the SBIR Program; National Institute of Standards and Technology Manufacturing Extension Partnership National Advisory Board; U.S. Small Business Administration’s Angel Capital Electronic Network Board of Directors; American Academy for the Advancement of Science—Nominating Committee and the American Association Research Competitiveness Program Advisory Committee; Council on Competitiveness—Clusters of Innovation Committee.

Mr. Bendis has also served as a board member and representative to the National Association of State Venture Funds—Founding Board member and Executive Committee member; American Society of Mechanical Engineers—Strategic Innovations and Initiatives Committee; State Science and Technology Institute—Founding Board member and Executive Committee member; Eisenhower Fellowships Nominating Committee and the Ernst and Young Entrepreneurial Institute as a national/regional Judge.

Mr. Bendis continues to provide global consulting services to several international organizations including the International Science Parks and Innovation Expert Group, the United Nations, NATO, UK Trade and Industry, European Commission, French Embassy, the German Marshall Fund, and others global ventures.

Mr. Bendis also founded and served as the founding President and CEO of Innovation Philadelphia, a 3 state regional public/private partnership dedicated to growing the wealth and workforce of the Greater Philadelphia Region. Innovation Philadelphia managed a portfolio of programs in four distinct areas: Direct Equity Investment/Financing Assistance; Technology Commercialization; Global/Regional Economic and Workforce Development; and Market Research and Branding. Mr. Bendis is on the IP Board of Directors.

Previously, Mr. Bendis successfully leveraged a career in the private sector (with Quaker Oats, Polaroid, Texas Instruments, Marion Laboratories and Kimberly Services) and the venture capital industry (RAB Ventures) to lead the Kansas Technology Enterprise Corporation. As its president and CEO, he developed KTEC into a globally recognized model for technology-based economic development. Mr. Bendis also successfully built an Inc. 500 healthcare software company, Continental Healthcare Systems, Inc., which he took public on NASDAQ and later sold to an international conglomerate. In addition, Mr. Bendis manages his own angel investment fund.

Ethan Byler

Ethan Byler is Keystone Innovation Zone Coordinator at the Pennsylvania Biotechnology Center in Doylestown, PA. The Pennsylvania Biotechnology Center is a business incubator focused on translational research and business development with specializations in diagnostics and therapeutics for infectious diseases, hepatitis, and cancer. The Keystone Innovation Zone is designed to harness the knowledge of partnering institutions of higher education, private industry, and government resources to nurture and assist early-stage technology companies. Ethan’s responsibilities with the Zone include business development, technology transfer, and working with the Regional Biotechnology Council.

Mr. Byler formerly worked for a consulting company focused on technology-based economic development in Washington, DC, New Economy Strategies LLC. His work there included management of regional innovation and growth projects, initiatives focusing on capital formation and entrepreneurship, rural economic development and the design of government led interventions in technology and innovation-based economic development. He has worked on strategies in Pennsylvania, New Jersey, New Mexico, Alabama, Kentucky, Connecticut, Utah, North Carolina, Michigan and Colorado.

Prior to joining NES, Mr. Byler was an Analyst with the Federal Funding Programs at Innovation Philadelphia where he provided technical support on grant applications, business plans, and the presentation materials of early-stage companies attempting to secure financing through private investment or Small Business Innovation Research grant.

Mr. Byler holds a Masters Degree in Government Administration from the Fels Institute of Government at the University of Pennsylvania and a BA from the University of Charleston.

Please direct any comments or questions related to the contents of this paper to:

Richard A. Bendis
President & CEO
Innovation America
Phone: 215-496-8102
Cell: 215-593-3333
E-mail: rbendis@bendisig.com
web:www.innovationamerica.us

Ethan J. Byler
Keystone Innovation Zone Coordinator
Pennsylvania Biotechnology Center
Phone: 215-589-6426
E-mail: Ethan.Byler@ihvr.org

Acknowledgements

We would like to acknowledge those who have assisted in the development of the principles of the National Innovation Framework concept that we now present.

Jim Jaffe, President and Chief Executive of the National Association of Seed and Venture Funds and Founding Supporter of Innovation America.

Reese Meisinger, American Society of Mechanical Engineers.

Ed Paisley, Science Progress and Center for American Progress.

Jim Turner, Association of Public and Land-grant Universities.

Charles Wessner, Ph.D., Director of Technology, Innovation, & Entrepreneurship, The National Academies

We extend a special thanks to those who initially presented this concept at the meeting with the Obama Transition Team on December 17, 2008.

Rebecca Bagley, Deputy Secretary of Technology Investment, Pennsylvania Department of Community and Economic Development; National Association of Seed and Venture Fund Board Member; State Science and Technology Institute Board Member.

Rich Bendis, President and Chief Executive of Innovation America; NASVF Board Member; SSTI Board Member.

Dan Berglund, President and Chief Executive, State Science and Technology Institute.
Jim Jaffe, NASVF.

David Wilhelm, Founder and President, Woodland Venture Management; NASVF Board Member.

Endnotes

[1] American Association for the Advancement of Science, http://www.aaas.org/ (last accessed March 31, 2009).

[2] U.S. Dept. of Commerce, Bureau of the Census and International Trade Administration, “Advocacy-funded research by Kathryn Kobe,” 2007, available at http://www.sba.gov/advo/research/rs299tot.pdf.

[3] Source: Office of Advocacy, US Small Business Administration; Small Business Profiles for the States and Territories; published November 2008; Prepared Jan 9, 2009 for SBTC by Terry Bibbens.

[4] CHI Research, 2003, available at http://www.sba.gov/advo/research/rs225tot.pdf.

[5] Price Waterhouse Coopers, NVCA Money Tree Survey, Full-Year 2008.

[6] Jeffrey Sohl, “The Angel Investor Market in 2008: A Down Year In Investment Dollars But Not In Deals,” Center for Venture Research, March 26, 2008.

[7] The National Academies, “An Assessment of the Small Business Innovation Research Program,” 2007.

[8] State Federal Technology Partnership Task Force, Final Report, September 5, 2005.

[9] National Innovation Act of 2005.

[10] The National Competitiveness Investment Act of 2006.

[11] The America Competes Act of 2007.

[12] Innovation America Partnership of 2007.

[13] ITIF National Innovation Foundation.

[14] Boston Consulting Group and The Manufacturing Institute of the National Association of Manufacturers, “The Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge,” Available at http://www.bcg.com/impact_expertise/publications/files/Innovation_Imperative_in_Manufacturing_March_2009.pdf.

[15] Rich Bendis and others. “Presentation to an interagency working group of the Obama Administration Transition Team,” December 17, 2009.

[16] NASVF Survey Results, “Ninety Percent of Young Entreprenurial Companies Can’t Find Follow-On Funding,” April 8, 2009.

[17] Global Insight, Venture Impact, “The Economic Importance of Venture-Backed Companies to the U.S. Economy,” Third Edition, 2007.

[18] Pennsylvania Economy League. “The Economic Impact of the Ben Franklin Technology Partners, 2002-2006,” January 2009.

[19] Community Development Venture Capital,” A Report on the Industry Julia Sass Rubin, available at http://www.community-wealth.org/_pdfs/articles-publications/cdfis/report-rubin.pdf.

In addition to enhancing the discovery and development processes that occur within corporate, university, and government laboratories, enhancing the ecosystem that supports the commercialization process-including the institutional and individual actors-is critical for enhancing the overall return on investment, wealth creation and broad-based economic growth. And we are fortunate that the Obama administration “gets it.” One of the six major Department of Commerce initiatives highlighted in the White House Office of Management and Budget outline for the fiscal year that will begin October 1, 2009 is the following:

Expands economic development through the promotion of regional innovation clusters and the creation of a national network of public-private business incubators.

Specifically, the budget proposal includes $50 million for the Department of Commerce to create “a nationwide network of public-private business incubators to encourage entrepreneurial activity in economically distressed areas.” Further, a study conducted for the Department of Commerce’s Economic Development Administration and released on September 30, 2008, entitled Construction Grants Program Impact Assessment Report, highlights the following:

EDA’s strategic focus on innovation and entrepreneurship makes sense, in that investments in business incubators generate significantly greater impacts in the communities in which they are made than do other project types.

This key finding is particularly relevant in the current economic downturn when job retention and job creation is a high priority. Yet job creation—in good times and bad—is an indicator of healthy economic dynamism. The concept of an incubator as one element of an innovation and entrepreneurship ecosystem can apply at the local level in “economically distressed” areas—as envisioned in the White House’s budget outline—but it also makes sense to consider the application of business incubation more broadly, including development and alignment of incubators (and networks of incubators) with sources of innovation, such as university, corporate, and government labs.

In each case there is longstanding pressure on these institutions to enhance the conversion of technology into commercial value with respect to the rate of conversion and yield from the conversion process, which can be reflected in a comprehensive return on investment analysis that could include factors such as increase in aggregate revenues, increase in jobs, increase in companies, increase in risk capital, increase in number of serial entrepreneurs, and so forth.

It is also important to consider the role incubators can play in catalyzing the creation of—and supporting the success of—complementary elements within the innovation and entrepreneurship ecosystem. These elements include:

• Sources of capital, such as angel networks, venture capital firms, corporate venture capital funds
• Programs that develop entrepreneurial talent, particularly universities with highly evolved entrepreneurship degree and certificate programs
• Technology transfer and business development programs that are affiliated with corporate, university and government labs.

Various researchers have explored the concept of an entrepreneurship ecosystem, focusing in particular on regions that have demonstrated success over many decades, such as Silicon Valley and the Route 128 corridor in Massachusetts. Keys to success include production of innovation and intellectual property, the availability of resources, particularly risk capital, an entrepreneurial talent pool, and the extent to which these elements are able to freely flow across the ecosystem. Leading-edge, well-managed incubators have proven to be useful catalysts for the development of talent, the attraction of resources, and the enhanced flow of intellectual property from sources of innovation into new start-up company and corporate ventures.

These ingredients of successful innovation clusters are largely well understood, but how policymakers can encourage the growth of these clusters is less clear. The policymaking debate now going on in Washington centers on whether new funding for innovation should flow through:

• Existing programs
• A new public/private partnership programs that includes existing program managers and the private sector in crafting better innovation policy and investment decisions
• A new public innovation fund such as the one proposed by Robert Atkinson of the Information Technology and Innovation Foundation.

This debate undoubtedly reflects the tension between the need for short-term, high-impact economic stimulus that can help pull us out of the current economic crisis versus the desire for long-term restructuring of our innovation ecosystem to ensure that the United States is a leader in innovation globally.

A two-pronged approach seems most sensible. The existing U.S. entrepreneurship/innovation/risk capital ecosystem has evolved over the past 60 years and is the envy of the world. In the short run, we should take advantage of our leadership position in this arena. In my view, the federal government would be well-advised to establish a blue-ribbon panel of leaders with deep experience in the existing innovation ecosystem.

This panel should include representatives from the National Business Incubation Association, the Association of University Technology Managers, and the Center for Venture Education, alongside leaders from various government agencies such as the National Science Foundation, the Defense Advanced Research Project Agency, or DARPA, the Department of Energy, the Small Business Administration, the National Institute of Standards and Technology, and the National Institutes of Health that promote innovation through Small Business Innovation Research and Small Business Technology Transfer programs and other programs, such as those run by EDA.

These experts could quickly assemble a portfolio of ready-to-implement projects through which leading innovation-support organizations can have immediate impact on the growth of ventures already operating in strategic innovation domains. In addition, this blue ribbon panel should be charged with:

• Monitoring the impact of the near-term investments into the existing innovation ecosystem
• Identifying the highest leverage opportunities for medium-to-long term investments that can accelerate the further development of the innovation ecosystem to ensure continuing U.S. leadership.

Engaging in a two-pronged approach under the direction of a blue ribbon panel of the most experienced and accomplished leaders in the innovation ecosystem would enable the federal government to aggressively address short-term opportunities to leverage the existing innovation ecosystem and long-term opportunities to accelerate our nation’s continuing evolution into the global leader for driving economic and social development. In this way, we will achieve the greatest short-term impact on overcoming the current economic crisis while also ensuring the greatest return on public investment in advancing the U.S. innovation ecosystem over the long term.

Mark P. Rice is the Frederic C. Hamilton Professor for Free Enterprise at Babson College and the former Dean of Babson’s Graduate School, which has been ranked number one for entrepreneurship for the past sixteen years. Dr. Rice co-founded one of the first companies in the pioneering Rensselaer Polytechnic Institute Incubator Program in 1979, and subsequently served as the Director of the RPI Incubator, which in 2005 was recognized as the Randal Whaley Incubator of the Year by the National Business Incubator Association. In his doctoral dissertation research, Rice gathered extensive field data in ten incubators across the country, exploring the intervention mechanisms used to influence the critical success factors of new ventures.