The Innovation Economy

1. The Innovation Economy Presented at “Innovation Matters! Building Competitive Advantage in States”, 2004 / 2005 National Governors Association Workforce Development Policy Forum, Miami, January 2005 Graham S. Toft Economic Competitiveness Group Thomas P. Miller and Associates and GrowthEconomics gtoft@tpma-inc.com graham@growtheconomics.com 317 894 5508 941 383 0316

2. Outline • What Every American Wants to Know - - What is Happening to Us? • High Stakes for States - - Who is Getting a piece of the PIE? • PIE Jobs • Major Implications of PIE for States • Wrap UP – Keep Your Eye on the PIE - - Try ILPO Magic!

3. 1. What Every American Wants to Know What is happening to us and what to call it? Digital Economy High Tech Economy Global Economy Innovation Economy Knowledge Economy

4. PIE = Pan-National Innovation Economy 1. What Every American Wants to Know (cont.) “Knowledge is the ingredient that underlies the competitiveness of regions, nations, sectors or firms. It refers to the cumulative stock of information and skills concerned with connecting new ideas with commercial value, developing new products and, therefore, ‘doing business in a new way.’ At its most fundamental level, the knowledge-base of an economy can be defined as: The capacity and capability to create and innovate new ideas, thoughts, processes and products, and to translate these into economic value and wealth.” Source: World Competitiveness Index

5. 1. What Every American Wants to Know (cont.) • Some attributes of PIE • High productivity / low inflation (even danger of deflation) • Rapid technological change • High capital / labor ratios (capital deepening) • Deregulation and market liberalization • Global marketplace • Sub-national regionalism • Mobility of: • Capital • Innovations / Ideas • Business • People

6. 1. What Every American Wants to Know (cont.) Some Attributes of PIE (cont.) • Churning • Business locate, then relocate (some off shore) • Small Businesses start – many fail. • Businesses grow – Businesses decline( even big businesses). • Jobs increase – jobs decrease (often at the same time). • People come – people go. • Theoretical Underpinnings: Joseph Schumpeter: “Gales of creative destruction.” or, is it “wails” or “sails” • Many state and local economic policies and fiscal strategies have not adapted to PIE

7. 1. What Every American Wants to Know (cont.) When did it start? When will it end? Start: During the last business cycle (1991 – 2001) but many of the discoveries leading to the .com boom began a decade before. Discernable improvement in U.S. productivity began in 1995, next is global productivity improvement – in the BRIC’s (Brazil, Russia, India, China). End: Barring major geopolitical disruptions, global health epidemics or natural disasters, this is a long-lasting “industrial revolution” - - with major consequences for organization of work, type of work, location of work, global interdependencies and shifting competitive advantage of nations, states, localities.

8. 1. What Every American Wants to Know (cont.) Why is it different this time? • Knowledge explosion (doubling every 10 years) • Accelerated exchange of knowledge / ideas due to advanced telecommunications and transportation. • Transforming nature of many new discoveries - - transforming health / longevity, lifestyles / work-styles, urban form, value chains, global relationships . . • Speed: Reduced cycle time from discovery to development to deployment.

9. 1. What Every American Wants to Know (cont.) Why is it different this time? • Rapid growth in global brain-power - - global talent-force! • Global consumerism that offers market niches at scale economies • Without high-level innovation/productivity, the U.S. would be crushed by its “twin deficits” and global recession could follow.

10. 1. What Every American Wants to Know (cont.) Note: There are several “economies” running in parallel and overlapping with the “Innovation Economy”.

11. 1. What Every American Wants to Know (cont.) In summary, great uncertainties today call for discerning the engines of growth for the future This is the century of: • Asia (high savings, emerging middle class, high motivation) • Transforming technologies - - Biotech; Nanotechnology; Advanced Materials, Energy and Food; IT is now a given - - next jump is Internet 2 • An Aging Workforce, even in the less developed world (the 50 – 60 year olds are your future!) • The emerging “Creative Sector” Agriculture / Mining / Construction Manufacturing The Creative Sector Services

12. 1. What Every American Wants to Know (cont.) This is the century of:(cont.) • Trade / Global Markets • The Entrepreneur States and localities without an appropriate response to each of these will hurt; many are not well prepared.

13. 2. Big Stakes for States - - Who is Getting a Piece of the PIE? Top 10 most competitive states 2004 - - The Economic Competitiveness Group’s State Competitiveness index (2004). (Measured by five drivers, 88 metrics) WA CA UT AK DE IA MA CO VA WY What’s common: strong technology / innovation base or resource base; most have above average human capital base.

14. 2. Big Stakes for States - - Who is Getting a Piece of the PIE? (cont.) Growth States 2004 - - Dynamism Sub-driver from the Economic Competitiveness Group’s State Competitiveness Index (positive change in gross state product, business growth, head quartered companies, incubators, capital formation, exports, income per capita, bank deposits, foreign investment) HI MO NV FL AK OK NM VA WI PA What’s common: Many mid-size states on the move. Some showing multi-year turnaround.

15. 3. PIE Jobs • Lots of mid-level jobs - - the “new working class” comprised of mid-level technicians, professionals, paraprofessionals, managers / supervisors. • Multi-skilled: • Basic skills (literacy , numeracy, basic computer) • Technical skills (specific to the occupation). • Social skills (communication, team work, networking) • Investigative and problem-solving skills

16. 3. PIE Jobs (cont.) • Life Skills (time and financial management, self-mastery) • Strategic skills (optimism; leadership, inquisitive about the future; self-directed, self initiating; agility / flexibility) • Entrepreneurial skills • Multicultural skills. • More part-college, industry-credentialed jobs • More self-employment • More contingent, contract employment

17. 4. Major Implications of PIE for States The Innovation Economy is very fluid, unpredictable (Schumpeter’s “gales of creative destruction”). Best suited to localities, states, nations that provide solid economic foundations for very agile firms and talent-acquiring workers. Not suited to heavy-handed public sector direction - - operates too slowly and lacks market signals. A danger in getting it wrong - - a real opportunity to get it right!

18. 4.1 The Really Big Picture Paradigm Shift: Create wealth and good jobs will happen. • You and fellow state leaders are in it for the long haul. Economic transforms transcend political / electoral lead times, • Even in tough times you will have pockets of growth - - monitor and understand where wealth is being created. • Don’t walk away from your mainstay industries - - they are undergoing innovative transformations also.

19. “Go with the flow”; Ride the horse, don’t try to kill it. You can shepherd but not direct. Avoid picking winners. • Don’t tax productivity-enhancing investment (e.g. business equipment taxation); don’t unduly tax human capital (workers comp and unemployment insc.) • Do tax real property (especially land value). Growing real estate values are part of the Asset Economy. • Keep the public very well-informed and ahead of the game.

20. Innovation development calls for a bunch of non-economic conditions as well as economic e.g. quality of life for entrepreneurs, schools that value math and science highly, career technical education that tightly links school and workplace. Hot jobs grow in cool places.

21. Organize state government around what matters to the innovation economy: Adult learning (technical and further education); entrepreneurial education; small business development and “growth from within”; business and industry liaison (engaged S & L government).

22. Remember the state budget is usually more than 10% of state GDP. How these monies are used, influences state economic growth. • China, get over it!

23. 4.2 Implications for State Economic Development Paradigm Shift: Balance “inside-out” growth with “outside-in”. • Avoid “cluster-mania” - - works sometimes, some places, some industries and not others. Some economic developers and state leaders have never seen a cluster they didn’t like! Become skilled in nurturing industry alliances and see if they grow (e.g. OR)

24. Cultivate an entrepreneurial climate (in schools, in business organizations, in civic institutions [social entrepreneurship]). Know your angel network of potential investors. If not there, nurture it. Develop an entrepreneur attraction program to your state – some are foot loose! • Have a very flexible pot of money for your business assistance / incentives. Traditional incentive packages may not work.

25. Capitalize on your knowledge industries, each state has them! - - don’t write off your institutions of higher learning: • Advanced Technology Centers co-located at community colleges / technical institutes. • Business attraction efforts in college towns that link graduate student output and research in specific university departments with business needs. • University research parks and technology incubators. • Economic research on the state’s changing economy (lots to learn and to track).

26. Find ways by which small / mid-size enterprises can obtain strategic intelligence at modest cost. (“economic gardening” approach). • Find ways to accelerate wide-spread broadband deployment. • Aggressively advance trade and foreign direct investment.

27. 4.3 Implications for State Talent Development • Experiential learning is back. Don’t walk away from your career technical education system, transform it! • No child left inflexible. End senior high school as we know it. • Off-shoring, embrace it! Build really creative economic adjustment strategies (for individuals and firms) in cooperation with economic development agencies. Pdgm Shift: “workforce” to “talent-force”

28. 4.3 Implications for State Talent Development (cont.) • Silos are for losers - - reinvent the human capital bureaucracy (state universities / colleges, community colleges, WIA, Adult education / ABE, Career Technical Education) for agility / flexibility. • Learning is for life, seriously! Paradigm Shift: from “workforce” to “talent-force”

29. Wrap Up: Keep Your Eye on the PIE- - ILPO Magic! • Am I fostering and supporting a creative, innovative climate for large and small businesses alike, especially for new ventures? • Am I fostering life-long learning, combining classroom instruction with the experiential? • Am I creating cool places for residents of all socioeconomic groups? • Do I believe optimism can be learned and am I attempting to change aspirations and expectations? Four ingredients for successful state economic and workforce development: Innovation - Learning - Place-making - Optimism

30. Discussion Economic Competitiveness Group Thomas P. Miller and Associates www.tpma-inc.com 317 894 5508