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A Public Policy Perspective on Innovation-Driven Development Strategies: The North Carolina Example. Robert McMahan, Ph.D. State Science and Technology Advisor Exec. Director, NC Office of Science and Technology. Since WW2, the Mix of Jobs Has Been Changing.

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a public policy perspective on innovation driven development strategies the north carolina example

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

Robert McMahan, Ph.D.

State Science and Technology Advisor

Exec. Director, NC Office of Science and Technology

since ww2 the mix of jobs has been changing
Since WW2, the Mix of Jobs Has Been Changing

This trend in evidence since the end of WW2

Manufacturing is now <10% of total non-farm employment

Today ~15% of NC Workforce is engaged in production

http://www.frbsf.org/csip/analysisEssay1.pdf

at the same time income disparities have been widening
At the same time, income disparities have been widening

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

http://www.economist.com/world/displaystory.cfm?story_id=7055911

in 1950 s north carolina
In 1950’s North Carolina…

Poor Economic Conditions:

  • Concentration in low-wage primary/crop industries
    • Tobacco, Cotton
    • Furniture
    • Textiles
  • Low-wage Jobs
    • 49th in per capita income in the US
  • “Brain Drain”
  • Need to diversify & expand economy
combined with strong committed leaders

Archie Davis

Led fundraising efforts

Early Planning Meeting, c. 1958

Luther Hodges (Governor)and

Karl Robbins (private investor) c.1957

George Simpson

Director of Research Triangle Committee

RTF Board of Directors, 1959

Combined with Strong & Committed Leaders
yielded creation of rtp
Yielded Creation of RTP
  • Early 1950s – Idea emerged that the region’s three universities (Duke, NCSU, UNC) could act as magnet to attract companies
  • 1956 – Research Triangle Committee, Inc. formed to promote the establishment of industrial research laboratories and other facilities
  • 1956 – Director (George Simpson) appointed to lead the Committee and advertise RTP to research companies throughout the US
  • 1957 – For-profit company (The Pinelands) formed independent of the Committee; purchased or optioned more than 1,699 hectares of land
  • 1958– Archie Davis raised nearly $2 million in private donations (not investments!) in 60 days
  • 1959– Dissolved Pinelands and Formed Research Triangle Foundation of North Carolina, a private, non-profit organization to develop and manage the land; also formed Research Triangle Institute (RTI)
  • 1959 – Chemstrand Corporation announces its decision to locate in RTP, becoming the park’s first major industrial tenant
key question asked in 1950 s in nc
Key Question asked in 1950’s in NC:

In the face of major structural changes in the Economy –

How to leverage local strengths and diversify the NC economy?

How to bridge the research and Commercial Sectors in an effective way to enhance the economic well-being of the state?

lest we forget there was resistance
Lest we forget - there was resistance…

1956

“Let me see, if I really understand what it is we are talking about here, you want the professors here and all of us to be the prostitutes and you’re going to be the pimp.”

─William Carmichael, representative of the UNC System,

to Romeo Guest, developer and contractor

1990

“Looking back now, it seems so obvious that all these groups had a lot to gain by working together. But back then, it wasn’t so obvious . . . What it took was the willingness of public-spirited leaders from various segments of the community to downplay their differences.”

─George Simpson, founding director of the Research Triangle Committee, reflecting on the history of RTP

in hindsight success was attributable to
In hindsight, success was attributable to:
  • Cooperation among the 3 Research Universities in initial discussions that led to the Park
    • Creation of bridging institutions, e.g. RTI
in hindsight success was attributable to10
In hindsight, success was attributable to:
  • Statewide focus of citizens and a “tradition of interaction”
    • No dominant city at time of formation
    • Most initiatives were “Statewide” (e.g. Art Museum, Symphony)
    • Statewide philanthropy efforts
    • Fed a “Statewide Perspective”
other factors
Other Factors
  • State leaders were accustomed to working in small groups that thrived on interaction
    • Tradition since the Civil War era
  • And Finally…Luck and Timing
    • Emerging consensus in 1950’s that technology was linked to economic prosperity
    • Sputnik in 1957 created urgency
    • Two tireless Governors: Hodges and Sanford
late 50 s saw the emergence of
Late 50’s saw the emergence of

…a competitive market for Ph.D.’s in S&E

  • A Research Park would create a ideal environment to:
    • Attract S&T industry
    • Capture & Retain Graduate Pool from Universities
slide13
RTP
  • 2,800 hectares in total size
  • 13 kilometers long and 3.2 kilometers wide
  • 450 hectares available for development
  • 2+ million square meters of developed space
  • > $2 BB in capital investment
  • Nearly 140 companies
  • 50% of the employees work for multinational corporations
  • All 100 counties in NC have connections to RTP companies
resident breakdown by size 2006
Resident Breakdown by Size [2006]
  • Employment:
    • 12 largest companies: 30,150.
    • Remaining 124 companies: 7,335.
  • Nearly 42% of companies have < 10 employees
  • Among large organizations, the majority are branch plants of large corporations,
    • most of which do not have headquarters in NC.
fundamentally the park
Fundamentally the Park
  • Represented a “planned approach” to S&T-based economic development
    • Like Austin, San Diego, N.VA; benefited from city and state as well as corporate and university involvement
  • Contrasted to 128 and San Jose
    • More organic and less facilitated
nc recognized early the importance of creating structures to institutionalize change
NC Recognized Early the Importance of Creating Structures to Institutionalize change

NC Board of Science & Technology Helped to Create Initiatives That Have Made NC an International Model

  • e.g. Biopharma / Biotechnology

…and works to to identify the next:

    • Emerging Industries – Nonwoven Textiles
    • Grid Computing
    • Advanced Materials / Manufacturing /Nanotechnology
    • Fuel Cells
north carolina has been successful
North Carolina has been successful
  • It was among the first states in the nation to recognize that knowledge-based economic development creates high-growth companies and well-paying jobs.
  • Over fifty years ago it began making long-term investments
    • in universities and in
    • science and technology as drivers of economic growth.
biotechnology center as a direct example of a bridging institution
Biotechnology Center as a direct example of a Bridging Institution
  • A patient, evolutionary model
    • The State committed initial investments largely to create academic positions and infrastructure at NC universities.
    • Later became economic development organization
  • In 1980, not an industry…
currently in biotech
Currently in Biotech
  • Third leading state in biotechnology
  • 324 Bioscience companies
    • 31 Publicly traded
    • 30 Ag-bio companies – 2nd largest concentration in US (after CA)
    • 45 Based on University technology
  • 80 CRO’s – world’s largest concentration
currently
Currently
  • 48,000 employees
    • 10% average annual employment growth 1996-2006
    • Projected to lead the nation in employment growth in biopharma through 2014
  • Direct Support Industry 28,500 employees
  • $3BB Payroll
    • Average salary $72,000 pa (avg mfg $37,000)
    • $145MM in state income taxes
  • 4x employment multiplier
nc has made significant progress and has been truly innovative
NC has made significant progress and has been truly innovative
  • BioNetwork
    • training, curricula and equipment to develop a world-class workforce
  • Education
    • New Schools, 21c Skills
    • Engaged Universities – not just IP
    • Continuum/seamless models of education
    • Leaderhip in raising standards for students
  • Emphasis on Individual – Training and Workforce Development
rtp growth 1960 2001
RTP Growth (1960-2001)

Number of jobs

Number of firms

recent accolades
Recent Accolades
  • #1 High Tech Region in US (Research Triangle Region) –"Projections 2006 - Daring to Compete: A Region-to-Region Reality Check," Silicon Valley Leadership Group, August 2005
  • #1 Preferred State for Location and Expansion (NC) –Plants Sites and Parks, October 2004
  • #2 Best Place for Business & Careers (Raleigh-Durham) –Forbes, May 5, 2005
  • #3 Hot Cities for Entrepreneurs (Raleigh-Durham) –Entrepreneur Magazine, September, 2005
  • #3 U.S. Metro Area for Biotech/Life Sciences (Raleigh-Durham-CH) Milken Institute, June 2004
  • #5 Most Entrepreneurial City in the United States (Raleigh) –Visa's New Innovation Index, October 2004
next kannapolis research campus
Next – Kannapolis Research Campus
  • $1BB Private & Public Investment
    • Site of Pillowtex
  • 320,000 ft2 Core Laboratory facility, a state-of-the-art contract manufacturing biogenic facility, and Dole Institute
    • Centers for Advanced Fruit and Vegetable Science
    • Institute for Excellence in Nutrition
    • Centers for education and training for biotechnology
    • Institute for Translational Medicine
    • 350-acre campus is expected to total
      • 1 million square feet of offices and laboratory space,
      • 350,000 square feet of retail and commercial space and approximately
      • 700 residential units.
challenges ahead in the next 10 years existing clusters of strength will shift
Challenges ahead: In the Next 10 years, existing clusters of strength will shift
  • BioPharma will commodify
    • Will become like the specialty chemical industry
    • More and More Generics
    • Biologics surpassed Pharma approvals in 2004
    • FDA qualification not enough – Medicare in the driver’s seat
    • Emphasis on Wellness
    • $82BB worth of Blockbusters will lose patent protection in US by 2007
  • Diagnostics – things that tell you what to take – will be the value point
  • The center of mass is moving from Pharma to Life Sciences
are the same as 50 years ago
…are the same as 50 years ago
  • A Vibrant, Globally Competitive Diversified Economy
  • University Involvement in Economic Development
but the latter question is a bit different
But the latter question is a bit different…
  • Was:

“How can the Universities help attract industries to the State?”

  • Now is:

“How can the Universities more broadly contribute directly to economic development?”

in an ecosystem that is now the product of two symmetrical processes

2005 Metropolitan Institute at Virginia Tech

In an Ecosystem that is now the product of two symmetrical processes

Globalization

Regionalization

Increasingly, we must organize to link the response and capacities of naturally occurring economic regions within/across states to global economic conditions.

because we have traditionally focused on capacity building
Because we have traditionally focused on Capacity Building
  • NC has built an enormous capacity for innovation in science and technology.
  • Despite these investments in technology, however, the state ranks only
    • in the middle of US states in terms of the vigor and impact of its high-tech economy.
national position
National Position

NC ranks in the 2nd tier of innovative states

Milken Institute:State Technology and Science Index: Enduring Lessons for the Intangible Economy (2004)

underlying this
Underlying this
  • North Carolina’s ranking reflects the academic rather than applied focus of its investments in Research and Development.
  • North Carolina must become more efficient at converting its innovation capacity into economic outputs.
strong in basic university research
Strong in Basic University Research

University R&D

  • $4 / $1000 of GSP spent in University research
  • ~20% of relative total
  • MA ~$5 / CA ~ $3.50
industrial r d
Industrial R&D

Not as strong in Private Sector R&D

  • $15 / $1000 of GSP spent in University research
  • National Average ~ $19
  • ~80% of Total
  • MA ~$40 / CA ~ $30
as a result in total r d
As a result – in Total R&D

We are slightly below average in total R&D spending

  • $21 / $1000 of GSP spent
  • National Average ~$25
  • MA ~$50 / CA ~ $38

Milken Institute:State Technology and Science Index: Enduring Lessons for the Intangible Economy (2004)

relationship
Relationship

Industry funds and conducts more R&D than all other sectors combined.

Dominance of University R&D anticorrelates with dynamism of technology economy

Inputs are not Outputs:

Universities do the R, companies the D

drives us disproportionately weaker in outcomes
Drives us Disproportionately Weaker in Outcomes
  • Milken 200 “Best Performing Cities” Nov 2004
  • 1 yr + 5 yr Rolling View / Outcomes Only –
    • Job creation;
    • Jobs retention;
    • Wage and salary increases;
    • Economic growth, and
    • business creation & survival
  • RDU 34th among large metros (not 4th), Charlotte 50th (not 30th), Asheville 92nd, Wilmington 117th, G-WS 165th (not 45th).
even in the rtp
Even in the RTP

Our Strength is in inputs; NC is disproportionally weaker in conversion of invention to innovation.

#48 In Gazelles

#22 in Churn

(Outputs)

#1 In Innovation Capacity (Input)

the same trends are in evidence in emerging sectors
The Same Trends are in Evidence in Emerging Sectors

NC/RDU is among the top 10 U.S regions in university-based nanotech research

but rdu is not in the top 10 u s regions for nanotech firm entry
But RDU is Not in the Top 10 U.S. regions for Nanotech Firm Entry

NC/RDU is not among the top 10 U.S regions in nanotech business creation

which suggests to us that
Which suggests to us that …
  • Pure university-based regional economic development policies are not effective enough to "upgrade" localities to a higher tier of innovative activities alone.
  • The presence of a "critical mass" of agglomeration in the area surrounding the university is required in order to expect substantial local economic effects of academic research.
a policy view
A Policy View

From an Economic Perspective, we increasingly view

  • University & Basic Science and Technology Research Systems as a form of Mixed Infrastructure
    • Their primary economic value comes from what they produce downstream
    • Enabled by collaborative bridges to engines in the private sector
reinforced we see the impact of
Reinforced…We See the Impact of…

…Public R&D falls dramatically with Metro Size

  • $300MM in Academic R&D yields:
      • 112 Innovations in Tier 1 avg. pop. 3MM
      • 16 Innovations in Tier 2 avg. pop. 1MM
      • 5 Innovations in Tier 3 avg. pop. 400K
      • 4 Innovations in Tier 4 avg. pop. 200K

The same amount of university research expenditure yields substantially different levels of local innovation activity depending on the concentration of economic activities in the area.

Source: Attila Varga, 2000

exacerbated by the structure of federal university r d investments
Exacerbated by the structure of Federal University R&D investments -
  • The top 200 institutions account for approximately 96% of all R&D expenditures;
  • Top ten institutions account for approximately 17% of all R&D expenditures;
  • Top 20 institutions account for approximately 34% of all R&D expenditures;
  • Institutions ranked between 101 and 200 accounted for approximately 20% of R&D.

(NSF 2004 data, Bardo and Evans 2006)

federal r d expenditure 1970 2002
Federal R&D Expenditure: 1970-2002

NSF 2006 data; Bardo and Evans 2006

academic expenditure of r d nsf 2006
Academic % Expenditure of R&D(NSF 2006)

Academic R&D Expenditure: 1970-2002

Current university expenditures:

Disproportionately

Big “R”

&

Little “d”

Basic Research

Applied Research

Development

(NSF 2006, Bardo and Evans 2006)

nc s second quartile rank in s t economic dynamism
NC’s Second Quartile Rank in S&T Economic Dynamism
  • Our percentage of university research is higher than typical of first tier states
  • While the percentage of industry R&D is lower.
  • Interestingly, Varga’s models confirm this.
    • Varga’s data included two metropolitan areas from North Carolina: Charlotte and Raleigh-Durham.
commercialization activity downstream
Commercialization Activity Downstream
  • Depends upon the local infrastructure of Bridging Institutions
  • And Private Sector Critical Mass
  • Enhanced by development of social capital within a particular geographic region.

+ Redefining the mission of (some of) the Universities in the system to include economic development?

the importance of bridging institutions
The importance of Bridging Institutions

Business R&D plays a very critical role in the economic well-being of a metropolitan region.

The role of university R&D is much less clear… and at best indirect.

…the magnitude of the contribution that universities’ research and technology development activities play [in enhancing regional economic development] is small compared with other factors (Goldstein and Renault, 2004: 744).

clearly
Clearly
  • Differences in public R&D Intensity cannot explain the differences in metro company creation rates
  • Industrial D appears much more important than Public R in explaining regional technology development activity
  • Industry Performs:

89.1% of Technology Development

64.1% of Applied Research

15.5% of Basic Research in US

to underscore in 2004
To Underscore – in 2004

20 Starred Institutions account for ~1/3 of Federal R&D Spending Highlighted States are top quintile in economic growth rate

NSF, 2004 and the Economic Development Administration

Bardo and Evans 2006

yet the national academies specifically recommend to states
Yet the National Academies specifically Recommend to States:

Sustain and strengthen the nation’s traditional commitment to long-term basicresearch that has the potential to be transformational to maintain the flow of new ideas that fuel the economy, provide security, and enhance the quality of life (National Academies, 2006: 7).

  • But empirical data do not necessarily show a clear linear relationship between the volume of R&D and economic prosperity.
yet the national academies specifically recommend to states55
Yet the National Academies specifically Recommend to States:

Sustain and strengthen the nation’s traditional commitment to long-term basicresearch that has the potential to be transformational to maintain the flow of new ideas that fuel the economy, provide security, and enhance the quality of life (National Academies, 2006: 7).

  • So as a state strategy, are the volumes proposed justified on economic development grounds?
    • As we have seen in NC, there is no necessary link between funding basic research and creating innovations.
interestingly
Interestingly
  • It is generally assumed that high levels of R&D will be closely associated with a rapidly growing globally competitive economy
  • North Carolina’s experience is that relationship does not hold as expected.
  • We have made a great deal of investment in a few locations, but outside of these the state continues to reflect traditional economic structures.
basic university research
Basic University Research

University R&D

  • $4 / $1000 of GSP spent in University research
  • ~20% of relative total
  • MA ~$5 / CA ~ $3.50
but trends in k12 workforce prep

http://www.manhattan-institute.org/html/cr_baeo_t2.htm

But Trends in K12 Workforce Prep

North Carolina High Schools graduate 6 of 10 entering 9th grade students

= 63% Graduation Rate, ranked 42nd in the country

http://www.manhattan-institute.org/html/cr_baeo_t2.htm

net tech creation rate
Net Tech Creation Rate

Compared to other states, NC is creating tech companies at a lower than average rate.

which means
Which Means

…we are beginning to think differently about the role of the University and Research Institutions in Building Regional Economies

    • And structure institutional collaborations around them
  • While developing a clearer understanding of our actual competitive regions and the economic structures that are driving those regions.
unc system
UNC System
  • 16 Universities
    • $1BB in Sponsored Research Program
rethinking the organization and mission across a diverse university system
Rethinking the Organization and Mission across a Diverse University System
  • The university’s ability to address economic transformation and development issues must not be based solely on internal university conditions.
    • Policies need to promote creating effective university/regional relationships based upon the specifics of the relationship of the university to its service region
    • Linking distribution of academic programs, R&D support, and facilities to integrated regional economic development plans.
and the recognition in structures that
And the Recognition in Structures that
  • “Knowledge-driven” basic research should not be justified on economic development grounds.
    • though it has very significant long-run implications
  • “Purpose-driven” basic and applied research is most likely to produce economic outcomes in the short- and medium-run,
    • but there still have not been clear policy discussions on the allocation of funding to these types of research.
  • Opportunity is to create systemic linkages between long-term benefit-based research outcomes and more short- and medium-run economically focused institutions.
in one sense we are re examining the bush linear model

Basic

Applied

Pasteur

Edison

Purpose-

Driven

Einstein

Darwin

Knowledge-

Driven

4-Mode R&D Model

Derived with reference from Stokes (1997).

In one sense, we are re-examining the Bush linear Model
keys to this view
Keys to this view
  • A single university will not reasonably be expected to be successful in emphasizing all types of research.
  • Economic development policy must link institutional mission with particular types of research.
  • Clearly defining university missions within a state-level policy framework is the key to linking higher education and economic development.
    • Budgets must reflect this alignment
from a state level public policy agenda
From a State-level Public Policy Agenda
  • Since NC has multiple universities, it is not necessary for any one institution to focus equally on all four quadrants of R&D.
    • Traditional research extensive institutions remain the best venues for knowledge-driven research and purpose-driven basic research.
    • We must begin to examine how other Universities’ can be developed to support – disproportionately – purpose-driven applied research
      • as appropriate to their location and the opportunities within the regions of the state to which they can be linked.
which ultimately will force reconsideration
Which ultimately will force reconsideration

…of the Carnegie Classifications as institutional drivers for regional institutions

    • i.e. “what is our peer?”
    • missions defined by degree programs offered?
      • This is a confusion of taxonomy with mission
  • Conventional “university classifications” are of limited utility in defining how resources and approaches might be used to address economic development needs.
finally a core missing piece
Finally, a Core Missing Piece -
  • The US is unique in the developed world in not having an organized post-secondary training system for the non-college bound.
    • < 0.3% of all workers enter apprenticeships
  • ~30% of new jobs require a college degree, but ~ 90% require some post-secondary vocational training.
balance in post secondary
Balance in Post Secondary?
  • In 2000, for every $1 of public money America spend on post-secondary training,
    • we spent $55 on college student subsidies.
  • Drivind a tendency among community colleges to eliminate remedial and vocational/technical offerings in favor of “college transfer programs.”
state policies must begin to foster an integrated educational system
State Policies must begin to foster an integrated educational system
  • A seamless transition between high schools, community colleges and colleges and universities.
  • We must stop thinking that community colleges offer fundamentally different types of education than universities
    • promoting clarification of mission between the two institutions.
  • To date we have spent a great deal of effort controlling the inputs into higher education instead of focusing on the outputs.
at the emerging core of nc s public policy response
At the emerging core of NC’s public policy response?
  • The development of human capital is a more critical policy issue than R&D.
  • Innovation as a concept is not the same as research.
  • The key to our economic future is innovation coupled with entrepreneurship.
  • Greater attention will need to be paid to research and product or process outcomes, less on simply inputs.
lessons
Lessons
  • Tripartite
    • Government
    • Business / Industry
    • Higher Education
  • Policies must be embedded in Budgets and Structures to Prevail
  • There is no unifying set of development principles for this effort.
  • Gaining a competitive edge is highly idiosyncratic to a region and will depend on the strategy forged in the region itself.
  • Know your assets and play to your strengths
  • Focus on the common good and have bridging institutions
  • Proximity and Location Matter
  • Leadership willing to take risks and face criticism
  • Persistence & Patience
broadly an environment for building globally competitive businesses
Broadly, an environment for Building Globally Competitive Businesses
  • Education and Human capital development
    • Respective capacity to fulfill the technical and business (workforce) requirements.
    • These are particular strengths in NC by design
  • An Economy that prizes Innovation and Entrepreneurship – the conversion of knowledge into economic outcomes
  • Coordination of Resources at the Regional Level
  • Public & Private Collaboration
    • Out of the Box interfaces and Approaches –
future will require a reversal of emphasis
At the state and local level, current policy is overwhelmingly aimed at recruiting businesses.

The dollars spent on these efforts run into the billions of dollars, while the impact is increasingly questioned by analysts.

Some effort is aimed at retaining existing businesses, with limited attention to stoking innovation or growing entrepreneurs.

(Buss 2001; National Council of State Legislatures 2000)

Future will Require a Reversal of Emphasis…

Reversed policy is rooted in a broad effort focused on growing entrepreneurs

Some attention is given to retaining the businesses in a region.

Only a small portion of effort is focused on recruiting, and then only those firms that complement the region’s competitive strategy.

At the state and local level, at least, current policy is exactly the reverse.

In a global economy where competitors are everywhere, the cost of recruiting businesses will be difficult to sustain.