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Nathan Newman on November 5, 2007 - 9:41am
In an increasingly global economy, states struggle over what policies can encourage the growth of high-value local jobs and high-technology industries that can compete.
If one thing is clear, the often desperate bidding by states to offer tax subsidies to businesses to relocate to their state is a failure, as we emphasized in our piece last year, Reforming Failed Tax Subsidies. Not only do states usually not get the economic results promised, it's ultimately a zero-sum game played against other states, and, because any new jobs are not built on a broader economic foundation, such policies usually deliver at best short-term job creation that disappears almost as soon as the tax bribes peter out.
Far more effective are state investments directly in local job creation, especially when it's aimed at nurturing local industry startups that can become the anchors of long-term economic growth. As this Stateside Dispatch will outline, when these investments are combined with nurturing technology transfer from local universities and strengthening the community investments that tie together industrial "clusters" of firms, the results can encourage the kind of long-term, high-value jobs needed in our communities to compete in the global economy.
How States Invest in Technology Startups
States are increasingly unwilling to wait for volatile global investment markets to spot local opportunities for growing new businesses. Instead, as of 2006 all but six states now have state venture capital funds putting $5.8 billion annually into in-state business ventures, according to National Association of Seed and Venture Funds (NASVF).
The great advantage of such direct investments is that, instead of just raiding the state treasury to give away corporate welfare, states can use such venture funds to create a financial stake in firms, then return equity to the taxpayers if businesses they invest in succeed. Such investments also can cement those firms in a web of local relationships that encourage broader spin-off effects for the local economy.
These state venture funds come in a variety of forms, usually some combination of state investments, university involvement and cooperation with private firms.
- The Maryland Venture Fund (MVF) has been one of the largest such funds, existing for ten years and investing over $48 million in more than 175 companies, usually at the startup phase when seed money was most crucial. The state has gotten back every dime it invested in the fund and it continues to invest in businesses with average salaries of $70,000.
- More recently, the Indiana Future Fund was created by pulling together money from university foundations, local bio life-sciences companies and state pension funds for six venture capital firms in Indiana for investments. Just the $20 million invested by the state so far has leveraged $73 million in out-of-state funding.
- Building on the model of a statewide venture fund created a few years ago, Ohio is now seeing a number of new funds: the NEO Venture Capital Fund in Northeast Ohio was recently created as a partnership of a number of local philanthropies to help draw in local and state funds with the goal of $375 million in local venture investments. The Central Ohio Entrepreneurial Signature Program (also known as Tech-Start), with an initial $15 million in funding from the state's Third Frontier Program, has already leveraged additional funds from local governments and businesses to create a $22.5 million three-year initiative.
States also are tapping their state pension funds as a source for venture capital. The New Jersey Division of Investment recently announced the New Jersey Directed Investment Fund, which will join pension fund investment with private-equity partners to support New Jersey-based firms and companies willing to expand state operations.
Highlighting the gains from such pension investments, a new study on the California Public Employees' Retirement System (CALPERS), the nation's largest pension fund, found the fund's in-state investments had fed an estimated $15.1 billion in in-state economic activity in 2006 and created 124,000 jobs, more jobs than the construction or motion picture industries.
Encouraging Technology Transfer from Universities
Such state venture funds are part of the policy program of encouraging university research to spin-off into business startups and jobs in surrounding communities. As a National Science Foundation study recently emphasized, even smaller universities are playing a vital role in local job creation. Technology transfer licenses have doubled in the last 10 years and universities had $1.6 billion in income from licenses to corporations and startups in 2005.
These local university ties can create businesses loyal to the local economy far more effectively than the typical tax giveaways. One example cited in a recent Business Week article was Ohio's University of Akron licensing nanofiber research to MemPro Ceramics, a relationship that has created new economic opportunities that could be worth billions of dollars -- and led the company to move its headquarters to Akron.
States are using a number of tools to encourage technology transfer on a more regular basis, from creating dedicated tech transfer investment vehicles to encouraging university research parks to special tax credits related to technology transfer:
Dedicated Technology Transfer Investments: The Maryland Technology Development Corporation (TEDCO), was established by the Maryland General Assembly in 1998 to provide seed capital and business assistance specifically to encourage technology transfer from research universities and federal laboratories to local startups. The program has been so successful that TEDCO was recognized as the most active early/seed stage investor in the nation in the July 2007 issue of Entrepreneur Magazine.
Florida has been investing directly in attracting new biotech research organizations. Having lured the Scripps Research Institute to the state four years ago with $510-million in public funding, a cluster of new research outfits, from SRI International to Germany's Max Planck Society have come to Florida based on additional incentives from the state's Innovation Incentive Fund.
Arizona has appropriated $135 million for five years of funding for the Science Foundation Arizona, which is aimed at leveraging state technology resources to spur innovation and new high-technology jobs. One example is supporting a project between Arizona State University and BP Petroleum to explore a renewable energy source made from containers full of bacteria.
Other regional groups, such as the Midwest Research Universities Network, help universities share best practices on working with venture funds to develop local technology transfer.
University Research Parks: 300,000 workers in North America are employed at a university research park and generate an additional 2.57 jobs in the broader economy, according to a report by the Association of University Research Parks.
These research parks encourage businesses to take advantage of university research assets an employ university graduates, even as the parks help nurture startup firms and, ideally, integrate them into the broader local economy.
Tax Credits for Technology Transfer: While many state tax credits end up being little more than corporate tax avoidance schemes, Oregon just introduced a creative new approach-- a 60% income tax credit for donations to state university programs that commercialize university research. A number of businesses have given donations to state universities based on the program. The kicker for the state's taxpayers is that any credits that result in income for the universities through royalties and licenses will be repaid to the state, feeding an "evergreen" endowment to fund future tax credits, thereby limiting the long-term expense of the tax break to state taxpayers.
Strengthening Industrial Clusters
Beyond supporting individual technology firm startups, states are increasingly looking to support interrelated "clusters" of firms that reinforce innovation in a region around particular specialized industries, much as the car industry grew up in Detroit, the film industry in Los Angeles, finance in New York City, and, as the paradigm of the high-tech economy, Silicon Valley became a source of ongoing computer-related innovation.
As the National Governors Association outlined in a recent report, Cluster-Based Strategies for Growing State Economies, states can play a critical role in promoting such clusters beyond supporting university research and funding new startups, including:
- Identifying existing local assets that can be reinforced
- Facilitating relationships among firms through consortia and other networking organizations
- Deepening the skill and talent pool of local regions
- Encouraging investments to align with emerging industrial clusters
Life Sciences Clusters: Currently, a number of states and regions are working to encourage life science clusters. Massachusetts Gov. Deval Patrick has proposed a ten-year $1 billion Massachusetts Life Sciences Initiative to fund research, create nation's largest stem-cell bank and expand credits for life-sciences companies to build on the medical research assets of the Boston region, while the University of Minnesota and Mayo Clinic are working to build on their assets to encourage more local business spin-offs
Unfortunately, states can also undermine existing sectors with bad state policy. Michigan, which is now only of one of five states that bans development of new embryonic stem cell lines, is losing jobs and businesses to other states. As one advocate of a ballot initiative to lift the ban argues, "Universities in states with less restrictive laws on stem cell research have begun courting some of Michigan's brightest scientists."
Clean Tech and Alternative Fuels Clusters: Many states are also seeking to encourage networks of firms in the clean energy field. Many in Silicon Valley hope to create new hubs of "clean tech" research, supported both by state energy policy and local business networks like the Silicon Leadership Group. As mentioned earlier, in a more focused approach, Science Foundation Arizona has created a joint project with Arizona State University and BP Petroleum to explore a renewable energy source made from containers full of bacteria. Other states are looking to become centers of biofuel technology startups.
States do need to avoid the danger of simultaneously piling onto the latest technology fad rather than carefully assessing their own local strengths and supporting the specialized industries that can give their regional businesses a unique advantage in the global economy.
Investing in Community and People
Ultimately, beyond investments in technology or businesses, the glue that sustains economic growth in a state or region is creating communities that are attractive to the creative minds that drive technological innovation. As an example, the non-profit CFED's 2007 Development Report Card For The States highlights the whole variety of tools needed by states for long-term economic strength and innovation: skilled workforces, entrepreneurs, high standards of living, technology development, world class infrastructure, and excellent public services.
Similarly, economist Richard Florida has highlighted in his research how creating livable urban spaces is the key to attracting the knowledge workers, what Florida calls the "creative class," who sustain innovation clusters and help drive economic growth.
Infrastructure - Trains, Bridges and Internet Services: One key factor is building world-class transit and telecommunication support for local businesses, a factor often overlooked by conservative politicians who think starving public treasuries is the key to growth. Unfortunately, as the Urban Land Institute has detailed, 83% of the nation's transportation infrastructure is not capable of meeting the nation's needs over the next 10 years. States that allow congestion to fester may see many firms and trained workers abandoning them for communities that create more livable space s.
Often cited for its improved urban design, Denver saw creation of a downtown light-rail system as a key to strengthening its economic advantage as an attractive city to live. Denver Mayor John Hickenlooper in 2006 created the Task Force on Creative Spaces to examine land use and other legislative policies that would strengthen Denver's economic advantage.
High-speed broadband is another key area for economic competition between regions. In fact, a US Commerce Department study released last year found that job growth is going disproportionately to communities with strong broadband deployment. Public funds and regulatory commitments to universal broadband access are therefore an additional key to building industrial clusters that thrive.
Education: Investing in a high-tech university does a state little good if its existing residents don't make it to college. In Arizona, for example, for all the state's investments in high tech business es, many in the state worry that only 66% of College Board test takers went on to college, compared to much higher rates in other states. Strong state investments from pre-K through community college are needed to ultimately create the skilled workforce for strong innovative technology clusters.
Strengthening Regional Cooperation: Finally, states need to have local jurisdictions working together for mutual gains from growth, not playing a zero-sum game of wasting development dollars luring businesses to move a few miles. Good Jobs First in a series of reports, most recently on Minnesota and Michigan, have highlighted how development dollars get wasted as usually wealthier suburbs concentrate development dollars not on new job creation but on raiding jobs from urban centers.
A number of efforts have been launched to encourage more cooperation in regional growth strategies.
- In Northeast Ohio, the Fund for Our Economic Future was created by more than 100 foundations, organizations and individuals to work with state and local governments to overcome fragmented economic development in favor of more shared strategies for growth.
- With $250,000 in federal grant help, the Golden Capital Network will establish eight regional networks of "angel investors" to support startups. "A lot of economic development activity is city versus city, or it is county versus county. This is a better approach," said Sandy Baruah, U.S. assistant secretary of commerce, as he awarded the grant.
- After bouts of destructive regional revenue loss as municipalities competed in business tax giveaways, Arizona this year enacted HB 2515 to stop towns in Maricopa and Pinal counties from offering tax subsidies to move jobs from other locatations in the region.
Too often, we hear economic development reduced to slashing revenues for critical public services or just offering big firms expensive tax breaks. Instead, we need to focus on the fundamentals of building an economy where home-grown companies can thrive and innovate.
Establishing regional structures that support cooperation is all part of the integrated strategies needed for building innovative economies in our states. Each element, from state investment in startups to encouraging technology transfers to nurturing industrial clusters, highlights the need for intelligent, active government action in the process of building twenty-first century economies that can compete in the global race for innovation.