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State Job Creation Strategies Part II: Supporting Innovation, Industrial Clusters and Green Job Creation
Nathan Newman on January 25, 2010 - 2:22pm
As we described last week in State Job Creation Strategies Part I: Finding the Money and Investing in Human Capital and Physical Infrastructure, competing globally for jobs starts with policy makers instituting fundamental investments in education, human capital and physical infrastructure that make their state a productive environment for economic innovation.
The next step, as this Dispatch will describe, is helping the private sector leverage opportunities for job creation and technological innovation. Too often, some state leaders treat economic development as merely a bidding war between states to give away the most tax breaks or economic subsidies to big corporate bidders. Not only do most studies show such tax-giveaway approaches to be ineffective -- fundamentals like labor productivity and physical infrastructure are more critical in site selection for most global businesses -- but they end up devoting most state resources to a few large businesses while ignoring investments in start-ups and smaller homegrown firms that are the heart of long-term local prosperity.
Instead, state policymakers should move away from a tax giveaway mentality towards an approach that step-by-step supports an ecology of local investment, technological innovation and mutually-interdependent industries that together encourage ongoing entrepreneurship and firm growth. Elements of such a strategy include:
- State-backed venture capital institutions that can not only supply needed capital for start-up firms, but help leverage additional private investments to expand the capital available for innovative start-ups in a region.
- Leverage technology transfer from universities and government labs to translate basic research into commercial products and the technical assistance that can launch firms builds on that innovation.
- Nurture regional industry partnerships and industrial clusters where firms thrive together based on shared investments in the skills of the regional workforce and strategic support for specialized local firms.
- Encourage green innovation that will yield a range of new jobs in the emerging green sector.
Each of these steps emphasizes building partnerships between government, business, community and labor institutions to make continual learning and innovation an integral part of regional economies.
Table of Contents:
Job Creation Opportunities During a Recession
While policymakers might despair of encouraging new job creation during a recession, the seeds of future innovation and growth are often sown during recessions, as entrepreneurs analyze the failures of the previous boom and launch new ventures.
In fact, well-over half of the Fortune 500 list of top companies and just under half of Inc. magazine's list of top small firms were founded during recessions or bear markets on the stock market, according to a 2009 Kauffman Foundation study. Unemployment often encourages people to found their own firms during recessions, so making sure they have the support to thrive is critical. New immigrants are an especially strong source of such job creation-- thirty-one percent of the engineering and technology companies founded from 1995 to 2005 had an immigrant as a key founder.
Innovation Economics versus Neoliberal Economics: Notably, innovation and entrepreneurship in states seems to have little to do with low taxes or weak regulatory protections for workers and consumers. While the same right-wing economic pundits who supported the bubble economy continue to promote the low tax, weak regulation line for state economic development, the reality is that innovation in states actually requires high state investments and engagement for success.
The Information Technology and Innovation Foundation compiles a State New Economy Index to measure how much states have moved towards generating high-value "knowledge jobs" likely to survive in global competition, built export-oriented manufacturing and services, sustained fast-growing "gazelle" firms and moved their people and firms into the digital economy with a high percentage of jobs in high-innovation technology sectors. States ranking high on the index included high revenue, high state-investment models such as Maryland, Washington, and Massachusetts, which generally had higher growth in state per-capita incomes between 2002 and 2006 than many supposed "low tax" states that often fail to create long-term high-value jobs.
Instead of chasing after "low road" employers looking for weak labor standards -- which such firms can find even more easily overseas -- long-term job creation in the United States is dependent on investing seriously in high-innovation environments.
Kauffman Foundation - The Economic Future Just Happened
Information Technology and Innovation Foundation - 2008 State New Economy Index
Kauffman Foundation - Better, Faster, Cheaper: The New Bootstrap Job Creator"
State Venture Capital Funds
There is a critical role for states to take as funders of innovation, especially at the early stage of firm development when private sources of capital are especially reluctant to step up these days. The National Venture Capital Association reports that venture investing in early-stage businesses is down 71 percent over the last 12 months. This has created a funding “gap” that is preventing the growth of small businesses, and subsequently hurting job creation.
Fortuitously, states for the last decade or so have been creating a wide array of innovative state-backed venture capital funds and supporting early-stage "angel" investments to get firms off the ground, so states increasingly have the tools in place to promote investments in innovation from the earliest stages.
State Venture Funds: Instead of merely handing out tax credits or subsidies with no direct return to the taxpayers, states are increasingly making direct equity investments in local firms-- a tool that not only promises payback to taxpayers if firms become profitable, but also creates greater accountability for the public funds invested.
As of 2008, states had over $2.3 billion invested in state-supported venture capital funds -- see this state-by-state chart of various kinds of state funds, courtesy of the National Association of Seed and Venture Funds (NASVF) . A few examples:
- Indiana Future Fund: The Indianapolis Star has described the Indiana Future Fund as "the life blood of 14 Indiana life sciences companies, and it continues to provide the foundation for Indiana's venture capital growth." The IFF helped bring in more than $160 million to Indiana start-ups from private venture capital firms across the country.
- Start-Up Kentucky uses public funding to provide seed capital investments for high-tech start-ups in the state.
- In Illinois, the Governor this year has proposed tools to help small businesses thrive, such as bolstering start-up and micro-businesses by creating Angel Investment Tax Credits and expanding venture capital funding for seed and early-stage firms.
- Florida has set aside $250 million of its $110 billion pension fund for awards of between $5 million and $20 million to growing later-stage life-science and other tech companies. That money will come from the state-created Florida Growth Fund, a venture capital fund managed by Philadelphia private equity firm Hamilton Lane.
Supporting Angel Investments: Since many traditional venture capital firms now only invest in more established firms, start-up companies at the earliest steps of formation often have few options for finding capital. States increasingly are stepping up to support so-called "Angel capital" - the capital invested by (usually) wealthy individuals in a region’s businesses--as a key part of supporting entrepreneurship. States can help encourage networks for local investors to work together and jointly support start-ups in their states through "Angel Networks":
- The Wisconsin Angel Network, part of the Wisconsin Technology Council, is funded for two years with $300,000 from the Wisconsin Departments of Commerce and Financial Institution and the Wisconsin Technology Council.
- Washington: The WTC Angel Network was formed with a $250,000 grant from the United States Economic Development Administration that was matched by the Washington Technology Center (WTC).
- Pennsylvania: The Pennsylvania Angel Network, a nonprofit organization, was begun with $350,000 from the Pennsylvania Department of Commerce and Economic Development to fund its first two years of operations.
National Governors Association - State Strategies to Promote Angel Investment for Economic Growth
NASVF - U.S. State-Supported Venture Capital Funds
Encourage Technology Transfer and Commercialization
Government funding of basic research has been the wellspring for innovation for years, from the government's creation of the Internet, funding for life sciences at universities, to green technology in recent years.
Federal, state, university, and nonprofit investments in R&D play a crucial role in promoting innovation: for example, in 2006, 77 of the 88 U.S. companies that produced award-winning innovations were beneficiaries of federal funding.
While quite a bit of funding for innovation comes from the federal government, the Information Technology and Innovation Foundation report notes that "The challenge for...states is to continue to find ways to translate these inputs into commercial outputs in their states." They are making progress. Between 1991 and 2004, the number of patent applications filed by United States universities increased from 13.7 applications per institution to 57.8, licensing income increased from $1.96 million per university to $7.06 million, and new university-based start-ups increased from 212 in 1994 to 462 in 2004.
And state governments are increasingly seen as key partners for start-up firms looking to commercialize technology. With venture and angel investors becoming scarcer in the recession, Entrepreneur Magazine has spotlighted universities and government-backed business incubators as a key tool for start-up businesses to find help in getting investments.
Overcoming the "Valley of Death": In a recent report, Excell Partners, a seed-stage venture capital fund with ties to the University of Rochester, noted New York state fares well in attracting billions of federal research dollars for its universities. But the state can do more to capitalize on business opportunities that emerge from the research, by helping firms at the earliest level of development before they are generating revenue, filing patents and assembling management teams. States can help firms at this early development point, what analysts call the “Valley of Death,” as firms move from university spinoff to early-stage revenue-generating company, since venture capitalists only tend to take an interest once revenue starts to be generated.
Dedicated Technology Transfer Investments: By concentrating investment funding on commercialization of university and other basic research technology, states can help turn research into viable business models.
- Pennsylvania’s Ben Franklin Technology Partners, established by the Pennsylvania General Assembly 25 years ago, has served as a statewide resource for technology commercialization for entrepreneurs. Since its inception, it has invested in 3,000 companies in the state, often at their earliest stages of development, where state investments helped them secure additional private angel and venture capital investments. A recent report estimated the institution boosted the state economy by $9.3 billion between 2002 and 2006 and helped create 32,382 "job years" that would not have existed without it.
- Since its creation by the state, the Maryland Technology Development Corporation (TEDCO) has provided direct capital funding of $7.9 million to 132 companies to assist tech transfer from state universities. That initial investment has helped leverage additional funding from angel and venture investors, federal awards and other resources exceeding $298 million for those Maryland companies. For five years, TEDCO was recognized by Entrepreneur magazine as the most active early-stage investor in the nation, beating out all private sector and other institutional funds as the most active early stage funder of entrepreneurs.
- Similarly, by distributing $33 million in economic development funding over the last five years, the Kansas Bioscience Authority (KBA) has helped the state become a national leader in biosciences, creating 1,164 jobs, encouraging $110 million in capital improvements, supporting research worth $44 million and attracted an outside equity investment of $29 million. More than five years ago, the state Legislature enacted the Economic Growth Act, giving the KBA $580 million over 15 years which helped the state attract a $650 million federal lab and helped launch a massive campaign to garner the prestigious National Cancer Institute designation for the Kansas University Cancer Center.
Technical Support for Tech Transfer: Beyond direct financial investments, states can make a difference just by providing technical assistance to entrepreneurs looking for help in launching technology start-ups. For example, the University of Oklahoma Office of Technology Development is working with the private non-profit entrepreneurial consulting and services firm i2e to speed tech transfer and create start-up companies around OU technologies. Florida's Institute for the Commercialization of Public Research received $600,000 this fiscal year to link entrepreneurs with investors and companies to commercialize technologies based on publicly-funded research. However, Florida's refusal to raise new revenues means that lawmakers may fail to revive a $250 million economic development fund that helped the Sunshine State to attract six research institutes before it was eliminated last year through budget cuts.
Business Incubators and Science Parks: Other key support states offer are physical and institutional spaces for entrepreneurs to setup shop until they are ready to be independent. 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 and employ university graduates, thus helping to nurture start-up firms and ideally integrate them into the broader local economy.
A recent study for the U.S. Department of Commerce: Economic Development Administration found that business incubators create up to 20 times more jobs than traditional infrastructure projects, and they do so at a fraction of the cost: $144 to $216 for each incubator-related job, compared with $2,920 to $6,872 for construction-related jobs.
Pennsylvania Economy League - A Continuing Record of Achievement: The Economic Impact of Ben Franklin Technology Partners 2002-2006
U.S. Department of Commerce, Economic Development Administration - Construction Grants Program Impact Assessment Report
Information Technology and Innovation Foundation - 2008 State New Economy Index
Batelle and the Association of University Research Parks - Characteristics and Trends in North American Research Parks
Strengthen Industry Partnerships & Clusters
Beyond supporting individual technology firm start-ups, states are increasingly looking to support interrelated "clusters" of firms that reinforce innovation in a region around specialized industries, much as the car industry grew up in Detroit, the film industry in Los Angeles, finance in New York City, and as a paradigm of the high-tech economy, Silicon Valley became a source of ongoing computer-related innovation.
States can play a critical role in promoting such clusters beyond supporting university research and funding new start-ups by identifying key local assets, facilitating relationships among firms, deepening the talent pool, and encouraging investments that reinforce those cluster needs—a point emphasized by the National Governors Association in their report, Cluster-Based Strategies for Growing State Economies. States need to avoid endorsing the latest technology fad and handing out tax credits without real returns or accountability provisions. Instead, they need to carefully assess their own local strengths and support the specialized industries that can give their regional businesses a unique advantage in the global economy.
Pennsylvania-- an Innovation of Industry Partnerships: As Good Jobs First notes in a recent report, “ Pennsylvania, by virtue of its longstanding programs to foster early-stage companies, its new efforts to integrate its workforce strategy... through training consortia—'Industry Partnerships'—linked with key regional clusters...and to broadly diffuse the adoption of process technologies in manufacturing production" appears to have one of the most balanced approaches in promoting its high-tech economy.
In Pennsylvania, the Strategic Early Warning Network (SEWN), created by the non-profit Steel Vally Authority under a mandate from the State of Pennsylvania back in 1993, created a system that saves firms through early intervention.
- The key is not to wait for a mass layoff notice, but to establish programs that monitor key sources of business information for economic danger signs that can predict plant closures -- and proactively allow states to reach out to firms in trouble and implement response and prevention strategies.
- SEWN works with firms on everything from financial restructuring to dealing with owner succession issues to cost management to promoting new labor-management cooperation to improve productivity.
- Back in early 2008, SWEN targeted a large number of small auto suppliers in the state, employing 23,000 workers in Pennsylvania, who SEWN knew would be facing a crisis with the large scale cutbacks by the Big Three automakers.
Beyond short-term interventions, Pennsylvania has built 90 Industry Partnerships (IPs) to promote longer-term strategic cooperation among regional firms. The IP program has engaged more than 6000 businesses. Main goals have been to connect training and education to the needs of industry sectors, help companies adopt high-performance organizational approaches, and expand opportunities for workers in those industries. The industry partnership program has been supported by $5 million in state funds to identify industry clusters and build the IPs in the first place, plus an additional $15 million for training through the IPs.
Other Efforts in Building Industry Partnerships: The National Fund for Workforce Solutions is a a new collaboration to encourage more public support for industry partnerships across the nation.
- SkillWorks in Boston is a collaborative of local philanthropies, the City of Boston and the Commonwealth of Massachusetts that is working with employers in the regional economy to upgrade the workforce in the region.
- Baltimore Alliance for Careers in Healthcare is designed to map careers for seven area hospitals, provide career coaching to reduce employee turnover and provide entry-level and bridge programs to expand the pipeline of underrepresented populations into the industry.
- Washington State Industry Skill Panels are public/private partnerships of business, labor and education, funded by the state Workforce Board and convened by regional Workforce Development Councils in order to provide workers with better skills, employers with more efficiency and less turnover, and address the educational needs of key industry clusters in the states. Washington has seven active ISPs, including Building Manufacturing and Regional Advanced Manufacturing.
Keystone Research Center - Pennsylvania's Industry Partnership Strategy
Steel Valley Authority (SVA) - Early Warning and Layoff Aversio
Seattle Foundation and SkillUp Washington - Creating Stronger Workforce Partnerships In Manufacturing
National Fund for Workforce Solutions - The Principles of the National Fund for Workforce Solutions and Their Implications for Public Policy
National Governors Association - Cluster-Based Strategies for Growing State Economies
Clean Energy Industry Support
Building a green economy is one of the largest areas of entrepreneurial energy these days and states are designing a wide range of programs to encourage firms in their states to become leaders. Since energy savings are an inherent source of potential revenue, the opportunities are large, but the need for technical, regulatory and financial assistance are also clear. The following are a few of the programs states are promoting in this area, although the Apollo Alliance extensively tracks clean energy programs in the manufacturing sector:
- New York: Green Jobs/Green Homes NY: The passage of Green Jobs/Green Homes NY produced a job creation program that will foster energy savings and revitalization of distressed areas. The program will create an estimated 14,000 jobs and reduce energy costs for about 1 million homes and businesses across the state. Using an innovative revolving loan fund, the program will “provide up to $13,000 for residential homes and $26,000 for businesses to retrofit for increased energy efficiency.”
- Pennsylvania: Building on the state's industry partnerships discussed above, this program will concentrate on upgrading workforce skills by developing industry-recognized credentials, participating in curriculum development at all levels, and helping workers respond to changing industry needs. This will involve multiple partnerships, including a 3 Rivers Clean Energy Partnership, which helps train workers for jobs in the clean energy industry and the Electronics Manufacturing Partnership, which helps firms become more environmentally conscious.
- Washington: Lean and Green Assistance Program: Last year, the Washington Department of Ecology proposed a Lean and Green Assistance Program aimed at improving the environmental performance and provide technical assistance to companies across the state. From 2007 to 2008, three Lean and Environmental pilot project were undertaken, effectively saving businesses over $1.5 million and reducing pollution by more than 800,000 pounds according to the EPA.
- Kansas SB 108 provides for $150 million in bonds to be issued by the state’s development finance authority to fund manufacturing projects through long-term loans to eligible wind and solar energy businesses in amounts not exceeding $5 million per project. Companies’ tax withholdings will be placed in a specially-created state economic revitalization fund during the period of the loan to pay off the principal and interest of the loans.
- Michigan Manufacturing Diversification Program is a loan program backed by the state to help parts of the auto supply chain retool to join the clean energy supply chain, from helping companies eliminate chemicals from processes that clean steel for manufacturing to funding re-purposed factory conveyor belts for solar panel manufacturers.
- Wisconsin: The Clean Energy Business Loan Program uses $55 million in ARRA State Energy Program to fund low-interest loans to businesses that promote major renewable energy production projects, the manufacture of clean energy products, advanced manufacturing of clean energy components, retooled supply chains, and energy efficiency programs at firms.
Job creation is not a single program for state policymakers, but a nexus of commitments, from fundamental investments in education and infrastructure to creating an environment where innovation is supported every step of the way from university research funding to investing in first-stage commercialization to building industry partnerships that can sustain networks of interdependent firms in a sector. The good news is that recessions have often been the birth point for some of the most important current firms in our economy, so the right decisions today could mean decades of economic growth in the future.