Mr. Berglund said he found it interesting that only three people in the room said their states had regional innovation cluster programs when asked by SBA Administrator Karen Mills—compared to 32 to that she counted. “Actually, I think the difference is entirely a definitional one,” he said. “That is a large part of what needs to be clarified as we move forward in the coming weeks and months on clusters.”
He explained that this featured three states with very explicit, targeted cluster development initiatives. Other states, he said, would say they are providing support for elements that would contribute to developing robust clusters.
Mr. Berglund noted that the first speaker, Doug Parks of the Michigan Economic Development Corp., the state’s investment promotion agency, heads “really one of the most creative economic development organizations in the country.” The presentation by the next speaker, University of Texas at Dallas President David Daniel, is “particularly appropriate and important at a time when higher education is being cut in so many states around the country,” he said. The final speaker, Rebecca Bagley, works at the development agency for northeast Ohio. Prior to that, she had responsibility for development in Pennsylvania.
Three years ago, recalled Mr. Parks, senior vice-president of business development for the Michigan Economic Development Corp., he was asked by
Michigan Governor Jennifer Granholm to help identify opportunities to diversify the state’s economy. “Earlier today, Under Secretary Johnson talked about the mantra for engineering being design under constraints,” Mr. Parks noted. “Well my job was design under crisis.” Michigan had the nation’s highest unemployment rate, losing close to 1 million manufacturing jobs. It is seven times more reliant on the auto industry than any other state.
The state decided to look for opportunities both external and internal to the auto industry, Mr. Parks explained. State officials spent a lot of time studying industrial acceleration and clustering models around the world, Mr. Parks said. They were especially intrigued by Sweden’s success with a model known as the “triple helix.”27 After identifying opportunities, teams were formed for each sector and Governor Granholm mentioned the strategy in her 2008 State of the State address.
To develop their cluster strategy, state officials began by identifying Michigan’s strengths and areas “where we can compete and win,” Mr. Parks explained. One core asset is manufacturing, thanks to the auto industry. “We are very good at manufacturing across most sectors,” he said. Michigan also has R&D to support manufacturing. Eighty percent of R&D in autos in the United States is within 50 miles of the Renaissance Center in downtown Detroit. Michigan also has natural resources and the Great Lakes.
Michigan has targeted six industrial clusters, Mr. Parks explained. They are advanced energy storage, solar power, wind turbine manufacturing, bio-energy, advanced materials and manufacturing, and defense. Each leverages state strengths. While Michigan doesn’t have as much sunlight as Western states for solar power, advantages include its immense manufacturing expertise and local materials companies such as Saginaw-based Hemlock Semiconductor, the world’s leading supplier of polycrystalline silicon. Wind projects envisioned for the Great Lakes give Michigan an added edge in wind-turbine manufacturing. The auto industry makes Michigan a logical place to make lithium-ion batteries.
After deciding on clusters, the MEDC formed cross-functional teams to develop roadmaps in each sector. Teams included people from universities, industry, venture capital, and other fields to help identify market opportunities and necessary value chains.
The MEDC also created some tools, Mr. Parks said. For example, Michigan has a $1 billion incentive program to catalyze a new industry in batteries. The MEDC used companies in which it invested to help recruit suppliers and support industries needed for a complete cluster. As it goes along, the state is monitoring
27 Triple Helix in the study of knowledge-based innovation systems refers to interaction among universities, industry, and government. The Triple Helix concept has been championed by Henry Etzowitz. See Triple Helix: A New Model of Innovation, Stockholm: SNS Press, 2005 (in Swedish), and The Triple Helix: University-Industry-Government Innovation in Action, London: Routledge, 2008.
clusters efforts to see which should be expanded and which should be discontinued because they aren’t bearing fruit.
Michigan is continuing its aggressive investments even though the state’s budget deficit has surpassed $1 billion, Mr. Parks noted. The MEDC needed metrics and “discernible return-on-investment numbers that would help us convince legislators that this was a valuable and viable investment,” he said.
The state’s investment incentives include:
• Centers of Energy Excellence. The state has awarded $43 million so far to two centers, for advanced batteries and for bio-fuels. The funds are matched by the private sector, universities, and national laboratories. Among the criteria for centers are that they have the potential for high economic impact and can draw significant federal dollars. Partners include A123, Mascoma, Volvo, Mistra, and Smurfit Kappa.28
• Anchor Tax Credits. These tax credits are aimed at encouraging high-technology supply chains in Michigan. Anchor companies get rebates based on personal income tax generated by employees and investments, as long as they are within 10 minutes of the company or an existing industrial site nearby.
• Advanced Battery Credits. These total $1 billion. Portions of business taxes are refunded to companies manufacturing battery cells, battery backs, and advanced batter engineering.
• Photovoltaic Tax Credit. Companies investing in manufacturing facilities related to photovoltaic technology, systems, or energy can get a credit equal to 25 percent of the investment.
• Technology Collaboration Tax Credit. This credit encourages strategic innovation partnerships with emerging-technology companies. Companies get tax credits by investing in smaller companies that employ 50 people or fewer and under $10 million in revenue. Companies investing at least $350,000 can get 30 percent back.
To receive grant money for centers of excellence, companies must partner with a Michigan university or a federal laboratory. In February, the state authorized new funds for a center of excellence for low-cost carbon-fiber materials involving Dow Corning and Oak Ridge National Laboratories.
Michigan’s “centers of excellence” are modeled after those in Sweden, Mr. Parks said. Such centers have an anchor company supported by universities and the Swedish government. Mr. Parks said state officials were impressed by a collaborative effort at a pulp and paper mill located north of the Arctic Circle that converts a chemical waste known as “black liquor” into bio-fuels. “What we
28 An additional $30 million was authorized by PA 144, signed November 13, 2009, for new centers of energy excellence. To get funding, centers must get 50 percent of funds matched by the federal government and be affiliated with a national laboratory or institution of higher learning.
thought was compelling was that they brought together federal agencies, the end users, and the value chain,” he recalled. “All of those resources were focused on solving that problem, which the Swedes thought could provide 10 to 15 percent of their bio-fuel requirements.”
Through this research, the state “got the idea that if we invest in the private sector, and have the private sector pose the problem, that might be the best way for us to catalyze some of these new industries,” he said.
Tax credits have proven to be powerful tools. The anchor credits “are literally cash to the companies,” Mr. Parks explained. This cash offsets investment requirements, whether they are for factories, capital equipment, or processes. The $1 billion in refundable tax credits for batteries were competitively bid out. For companies establishing Michigan plants, the credits come on top of federal dollars made available through the Recovery Act for electric vehicle batteries. The Recovery Act required companies to cover 50 percent of project costs. Tax credits for the solar industry, meanwhile, have generated investments by companies like Dow, Hemlock, and United Solar, who have used the credits for investments.
The advanced battery initiative is by far the biggest, drawing $5.2 billion in private investment. Among the companies taking advantage of federal and state incentives to build battery plants are A123, General Motors, Johnson Controls/Saft, LG Chem, and XTreme Power.
The investment came to Michigan “not because we needed it,” Mr. Parks said. “We won, we think, because we made the right business case” and because next-generation power trains for electric vehicles are being developed by carmakers in Detroit. Most of these battery activities started happening six months
before the federal government released its investment incentives, Mr. Parks said, “so our companies were ready.”
To build its supply chain, Michigan also is recruiting partners from outside Michigan. For example, Mr. Parks noted, the MEDC helped arrange a joint-venture between Dow Chemical and the Missouri affiliate of South Korean lithium-ion battery maker Kokam Co.29 All told, the energy-storage industry is expected to create at least 8,000 direct jobs, and according to economic impact studies, will create 20 to 40,000 jobs over the next five years.”
Mr. Parks says such results have enabled him to demonstrate to state legislators the “return on investment” for the battery program. He also noted that Michigan has been successful in convincing a number of other Asian companies who have dominated the lithium-ion battery industry for consumer electronics to invest in the state. “They are moving here because they see Michigan and the Midwest as the place where batteries are going to happen,” he said. Also helping reinforce political support is that most of the groundbreakings on the new plants will occur this year. “It will be week-by-week groundbreakings as the new companies open up and start to hire folks,” he said.
The next steps are to continue to recruit the value chain and Michigan
29 A joint venture between Dow Chemical Co. and Townsend Kokam LLC received a $161 million DoE grant to develop and make a new generation of batteries for electric vehicles in Midland, Michigan. Kokam America is the U.S. affiliate of South Korean lithium-ion battery maker Kokam Co. Ltd. Townsend Ventures LLC has a financial stake in Kokam.
manufacturers to other manufacturing opportunities. In the car battery industry, for example, there is talk about overcapacity. But that is true for batteries for electric cars, Mr. Parks said. Much of that capacity can be used to supply growing demand for advanced energy-storage systems by utilities and the military. The state has just approved a new credit to the Dow Kokam facility, for example, which already expects to sell out its capacity by the end of the year.
The MEDC also is trying to gear its new clusters to address “critical national needs.” Mr. Parks said Michigan officials were introduced to that concept three years ago when they met with Marc Stanley of NIST. At the time, MEDC was putting together its cluster-development program under the “design under crisis” concept. “We thought, wouldn’t it be good if we identified Michigan strengths that also helped resolve critical national needs?” he said.
Advanced storage, lightweight materials, and bio-products all fall into this critical national need category. The approach is helping traditional Michigan auto suppliers find opportunities in industries such as defense, aerospace, and equipment for renewable energy such as solar and wind.30 For example, the MEDC is introducing Michigan suppliers to TACOM,31 the U.S. Army’s weapons depot in the Detroit area. The state also is developing a relationship with Oak Ridge National Laboratory, which now has an office in Michigan to help companies gain access to lab resources and understand military opportunities.
Dr. Daniel, the president of the University of Texas at Dallas, told the story of how he had helped convince the Texas legislature to pump $500 million into research universities in the state. “You don’t move $500 million into resources for universities without setting a firm basis for the value proposition,” he explained.
The spark plug was a white paper Dr. Daniel released in May 2008.32 The paper elicited favorable editorials in the Dallas Morning News and other newspapers. “Senators got behind it, ideas bubbled up, and this got to be the top priority of the Dallas Chamber of Commerce,” he said.
30 For detailed information on activities in non-auto manufacturing industries, see the Michigan Economic Development Corporation Web site, called “Michigan Advantage,” <http://www.michiganadvantage.org>.
31 The U.S. Army TACOM Life Cycle Management Command, headquartered in Warren, Michigan, is “one of the Army’s largest weapon systems research, development, and sustainment organizations.” See <http://www.tacom.army.mil/main/index.html>.
32 David E. Daniel, “Thoughts on Creating More Tier One Universities in Texas,” White Paper, May 30, 2008, <http://www.utdallas.edu/president/documents/thoughts-on-creating.pdf>.
Texas’s economy was strong when he first proposed the plan, Dr. Daniel said, so one of the first questions he addressed was why the state needed to spend more money on research universities when the state was doing fine without them. He explained why the state had to think out its future.
To illustrate his point, he showed a slide of the nation’s most populous cities in 1920. While New York and Chicago remain high on today’s list, the others in the top six do not: Philadelphia, Detroit, Cleveland, and St. Louis. What changed? In the 1920s, a city’s most important economic assets included good ports, rail hubs, and natural resources for manufacturing, Dr. Daniel observed. In the 21st century, the keys to prosperity are to be places where creativity, discovery, and entrepreneurship converge. Contrary to Thomas Friedman’s argument that “the world is flat,”33 Dr. Daniel says he subscribes to the Richard Florida thesis that “the world is spiky,”34 in other words that place matters.
There are a few places in the world where a disproportionate amount of discovery occurs. He displayed a map showing that scientific citations and patents are highly concentrated in a few cities on the east and west coasts of the United States, in Western Europe, and in Japan. “One finds pretty quickly the convergence between great universities and great business sectors,” he said.
Dr. Daniel pointed to data from the Association of American Universities (AAU), which represents 60 of America’s most productive research universities. While they represent just 1.5 percent of the nation’s more than 4,000 colleges and universities, Dr. Daniel noted, they garner 57 percent of all federal R&D dollars for universities. They are home to 81 percent of scholars who are National Academies members, and since 1901, 70 percent of U.S. Nobel Prize winners were affiliated with AAU institutions. While they have only 6 percent of U.S. undergraduates, 63 percent of National Merit Scholars “go to this club of exceptional universities.”
Dr. Daniel then showed charts indicating how Texas compares to other populous states. “The Texas legislators were especially galled by the fact that California has three times more AAU universities than did Texas, and in fact we underperform relative to the rest of the nation,” Dr. Daniel said.
With a population of 24.3 million, Texas is the second-largest state, behind only California. But it has only three major research universities—the University of Texas at Austin, Rice, and Texas A&M. That compares to nine in California, seven in New York, and four in Pennsylvania, America’s sixth most populous state. Texas has 1.2 research universities per 10 million people, ranking ahead of only Florida. That is half the national average, and one-third the ratio for New York and Pennsylvania.
33 Thomas L. Friedman, The World is Flat: A Brief History of the 21st Century, New York: Farrar, Straus and Giroux, 2005.
34 See Richard Florida, “The World is Spiky,” Atlantic Monthly, October 2004. See also Richard Florida, The Rise of the Creative Class, New York: Basic Books, 2002.
Major research universities near the state’s most dynamic cities would be great economic engines, Dr. Daniel contended. “Imagine what Texas would be if we had three more powerhouse universities—particularly if you co-locate them in the right places, such as Dallas-Ft. Worth and Houston,” he remarked. These are two of the six most economically productive cities in America.
He pointed out that Dallas-Ft. Worth is the only one of America’s 10 most economically productive cities without an AAU-member university. New York City and Los Angeles both have four. Boston has three, and Chicago, San Francisco, and Washington, D.C., have two each. “This got the blood pressure going with the many leaders in Dallas, and frankly it worked,” he said.
To illustrate the impact a major research university can have on a city, Dr. Daniel cited a Bank of Boston economic study of the Massachusetts Institute of Technology. In 2004 alone, MIT produced 133 patents, launched 20 companies, spent $1.2 billion in sponsored research, and had operating expenditures of $2 billion.35 But the real impact came from entrepreneurs. Dr. Daniel cited 1994 data showing MIT alumni by then had “founded more than 4,000 companies employing 1.1 million people and generating $232 billion in sales worldwide.”36
35 Source: MIT Web site (2004 data).
36 Source: “MIT: The Impact of Innovation,” Boston: Bank of Boston, 1997.
Those sales, Dr. Daniel noted, were roughly equivalent to the $85 billion in gross economic output of the Dallas-Ft. Worth metropolitan area in 2005. “In other words, one great research university can have the economic impact of one great city,” he said.
A similar impact can be seen in Austin, home of UT-Austin, a top research university. “Austin used to be a nice, sleepy, hippy capital of Texas when I went to school there,” Dr. Daniel recalled. “It went from 90,000 people to over 1 million people now.” Austin now is one of the most interesting places in the nation in terms of creativity and innovation, he added. A similar transformation has occurred in Pittsburgh, home to AAU members Carnegie Mellon and the University of Pittsburgh. In 2008, BusinessWeek magazine included Pittsburgh among “The Best Cities for Riding out a Recession.” That is because it “made the transition from manufacturing to a center of creativity,” he said.
With its oil tycoons, Texas does not lack for start-up capital, Dr. Daniel said. Yet it far underperforms other major population centers in venture-capital investments in new-technology companies, which account for 21 percent of U.S. GDP and job growth that is eight times greater than the U.S. economy as a whole. “These are the fuel for growth,” he noted. “To create wealth we used to build factories and smokestacks. But today we invest in brains.” Texas, with 8 percent of the U.S. population, gets only 4.5 percent of venture capital investment, he noted.
Massachusetts, with 2 percent of the population, gets 11 percent, and California gets 50 percent with 12 percent of the population.
An examination of where venture capital goes in Texas again highlights the importance of research universities. Austin, with 7 percent of the Texas population, gets 51 percent of venture capital investment. That is more than Dallas-Ft. Worth, Houston, and San Antonio combined. Dallas-Ft. Worth and Houston alone account for two-thirds of the state’s population, and each would rank among the world’s 20 biggest economies if they were countries, Dr. Daniel said. What’s more, he said, Dallas-Ft. Worth is second only to Silicon Valley in technology workers, due to the presence of Texas Instruments, major telecom companies, and the defense-related industries. “There is a massive technology-delivery machinery in Texas, but not a massive technology innovation center,” he said.
The shortage of great opportunities in dynamic technology clusters is leading to an exodus of some of the state’s brightest young talent, Dr. Daniels warned. While 3,700 U.S. high school students went to Texas to study at doctorate-granting universities in the fall of 2007, some 11,500 Texas high school graduates went to such universities in other states. That adds up to a “brain drain” of 7,800 high school students. “We are packing up and sending off the equivalent of the freshman class of UT-Austin to other states, including Michigan,” Dr. Daniel said. “Name one organization that wants to ship its best and brightest young people somewhere else.” He said his own daughter studied at UC-Berkeley. “Guess where she lives now? San Francisco,” he said. “Losing talent to other states is clearly not a good thing for Texas. It’s because we have only two large, AAU-level universities.”
In sum, Dr. Daniel said, the shortage of elite research universities is costing the state. Texas is missing out on jobs that could be generated through venture capital. “Texas is exporting tax dollars to other states to fuel research at their universities. As a result, they are getting the federal R&D and venture capital,” he said. “And on top of that, they are taking our best and brightest young people.”
This argument succeeded in persuading legislators. In June 2009, the governor signed Texas House Bill 51. The bill established the Texas Research Incentive Program, which allocates $50 million in matching gifts for endowed faculty chairs, graduate student fellowships, and research support. “The idea is not to anoint any one university to receive this money, but to allow them to compete for this money,” Dr. Daniel said. UT-Dallas received $17.3 million in private gifts and another $15 million in state matching funds.
The bill also established the National Research University Fund. It provides a $500 million endowment to support emerging research universities that meet certain criteria, such as quality students and faculty, research productivity, and infrastructure investment. The endowment was set up because leaders “realized that legislatures come and go,” he said. The goal is to grow that endowment over the next 10 or 15 years, then use the income it generates as recurring money.
In terms of next steps, Dr. Daniel said two priorities are to hold onto the
university’s gains and to sustain the matching gifts program. The university is now aggressively recruiting faculty to fill new chairs. As a result, master’s level student applications for next year are up 45 percent and doctoral applications are up 70 percent. Research at UT-Dallas, publications, and spin-offs are rising sharply, he said. And more companies are interested in locating close to campus.
The best sign that the initiative has staying power, Dr. Daniel said, is that in a recent legislative hearing, the chairman of the education committee showed the same slides Dr. Daniel used in his presentation and said, “We have to stick with this.”
One of her goals as President and Chief Executive Officer of NorTech, Ms. Bagley said, is to restore the Northeast Ohio area to the 1920 ranking, mentioned in Dr. Daniel’s presentation, as one of the nation’s five most vibrant regions.
“NorTech is a nonprofit Technology-Based Economic Development (TBED) organization serving 21 counties in Northeast Ohio. As a catalyst for growing Northeast Ohio’s emerging technology industries, NorTech is leading efforts to develop regional innovation clusters that create jobs, attract capital, and have a long-term, positive economic impact.”37 NorTech’s regional footprint contains 42 percent of Ohio’s population and covers a diversity of urban and rural areas.
NorTech is funded by regional foundations and chambers of commerce in Northeast Ohio, “so the business community as well as the foundation community has a large investment in TBED,” Ms. Bagley said. In addition, NorTech receives federal funding from the Small Business Administration and Economic Development Administration for specific cluster building initiatives in advanced energy and flexible electronics.
The State of Ohio provides funding to support the growth of emerging technology industries via the Ohio Third Frontier program, which has become for the cornerstone of the state’s TBED strategy. The state is in the process of investing $1.6 billion over 10 years in cluster-building initiatives. In May 2010, citizens will vote on a proposal to authorize $700 million for four more years.38
NorTech also collaborates with partners such as JumpStart Inc., a venture development organization that provides assistance and investments to entrepreneurs and early-stage businesses, and the Manufacturing Advocacy and Growth Network (MAGNET), which helps manufacturers adopt best practices and new technologies.
38 This proposal to extend Ohio’s Third Frontier was passed in May 2010 with 62 percent of the vote.
Ms. Bagley joined NorTech in July 2009 after managing various technology investment programs for the Commonwealth of Pennsylvania. “We are institutionalizing some of those methodologies that were used in Pennsylvania and applying them in Ohio,” she said.
When developing regional clusters, it is important that different partners have a common strategy, Ms. Bagley said. Developing roadmaps for selected sectors is one way to achieve that common strategy. NorTech’s strategy is to “engage the full community in the roadmap process,” she explained. In order to identify promising clusters, NorTech first assesses Northeast Ohio’s assets and competitive strengths in the global market. It also identifies the strategic steps needed to build a cluster, and who is responsible for achieving the action items. “Sometimes it is NorTech’s responsibility, but other times it will be the responsibility of industry, universities, or other economic development organizations,” she said. Above all, she said, “there must be a clear vision and somebody to ‘quarterback’ or lead that regional vision.”
Government engagement is also critical to NorTech’s cluster building efforts. Ohio has been investing in clusters for the past seven years in areas like advanced energy, bioscience, and electronics. Now, the region must become more competitive by attracting federal funding to accelerate growth of innovation and technology, Ms. Bagley said. NorTech hired a consulting firm to do “deep dive” assessment of federal funding opportunities for advanced energy, innovation and entrepreneurship, business incubators, and regional manufacturers in transition. Ms. Bagley described these areas as “critically important” issues in the Great Lakes region. From the assessment, NorTech has developed a coordinated regional federal funding strategy and action plan among partner organizations in Northeast Ohio to be more proactive in attracting federal funding to the region.
Currently, NorTech is focused on two industries in Northeast Ohio—advanced energy and flexible electronics.
For the advanced energy industry, NorTech is developing road maps in four sectors: energy storage, smart grid, transportation electrification, and biomass/waste-to-energy. This is perhaps the biggest effort in the NorTech Energy Enterprise advanced energy initiative, Ms. Bagley said. NorTech’s role is to act as a “center of gravity” in Northeast Ohio, defining the vision and regional strategy, hosting educational events, convening cluster organizations, tracking performance, and connecting companies with funding opportunities. NorTech also manages several advanced energy projects. They include attracting resources and talent, recruiting collaborators, producing market research, and grant writing. Such tasks “involve multiple collaborators and could not get done without somebody facilitating them,” she said.
One project is an advanced energy incubator in Warren, Ohio, “an auto-distressed area where the local economy lost tons of jobs,” she said. “They really need something to help transform that economy.” With the help of Congressman Tim Ryan (D-OH), the state raised capital to launch an advanced energy
incubator, called the TechBelt Energy Innovation Center. Community partners are helping to develop the business plan and required technologies. “It is a community process being led by NorTech,” Ms. Bagley said. “Once it is developed and launched, our role will be complete, and the community will manage and facilitate the incubator.”
Northeast Ohio has over 400 companies in the advanced-energy industry, she noted, and there are 10 energy sectors in which the region believes it has strengths. A lot of the companies are able to utilize the region’s supply chain and manufacturing capacity. One of her jobs in Pennsylvania, Ms. Bagley noted, was to manage the manufacturing strategy for the state. “So I understand the importance of connecting innovation to manufacturing and how those two areas work together.”
NorTech is developing its database to create stronger metrics to measure cluster performance. Ms. Bagley said that the goal is to show how many companies were introduced to potential customers, how many deals were negotiated, and how many jobs were created as a result of NorTech’s work. “If you can start to put connections like that together with clusters, you can show how this very difficult-to-measure activity results in real impact,” she said.
NorTech also is focused on developing an emerging flexible electronics cluster in Northeast Ohio. The term refers to electronic devices such as displays, solar cells, batteries, and sensors that bend and fold. The initiative is called FlexMattersSM. Ms. Bagley noted that Northeast Ohio has a unique capability in liquid crystal displays and electronics that can be printed on flexible polymers. The University of Akron has expertise in polymers, and Kent State University has the Liquid Crystal Institute, which developed the first LCD wristwatch in the 1970s.
NorTech’s FlexMatters program will soon complete a roadmap for Northeast Ohio’s flexible electronics industry. The roadmap will access the global markets and applications for flexible electronics combined with Northeast Ohio’s industry strengths. “This will help us establish a vision for what the region can achieve in this industry,” said Ms. Bagley. She continued, “The roadmap will provide specific action items for building the cluster, which include continuing to grow our industry and research capacity, as well as retaining the manufacturing processes that make sense for Northeast Ohio.”
In the past, Ms. Bagley noted, Kent State University produced the first liquid crystal technology breakthroughs, but the resulting manufacturing activity migrated elsewhere in the world. “The region cannot make that same mistake again” she noted. “Our goal is to keep the manufacturing of flexible electronics devices in Northeast Ohio to create jobs and economic impact for our region.”