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The Innovation Economy: Is Ohio Regaining Competitiveness?

  • Date: 04/25/2011
  • Author: Dr. Luis M. Proenza (President, The University of Akron)
  • Location: Keynote Address for “Building the Ohio Innovation Economy” Symposium, sponsored by the U.S. National Academy of Sciences, The University of Akron and NorTech, Cleveland, Ohio
  • Thank you all for joining us for these two days as we seek insights on how best to accelerate the Ohio innovation economy.

    Before I begin, let me let me add my thanks to all who helped bring us this program.

    In particular, I want to thank the National Academies, represented by Mary Good, David Morganthaler and Dr. Charles Wessner. 

    I also am indebted to Dick Pogue, whose leadership on behalf of Northeast Ohio continues to set the pace and the standard for all of us. Also, I appreciate the support of NorTech. Rebecca Bagley, president and CEO, was an integral part of the planning of this symposium, and her staff, particularly Beth Lawson, made all the arrangements for the meeting. Case Western Research University, which joined us in inviting the Academy, has my gratitude, as well.

    I also thank all of the sponsors whose names have been projected continuously onto the screens.

    Please join me in acknowledging the ongoing commitment of all of these individuals and sponsors.

    To say that we live in interesting times is the understatement of our modern age, as America now stands at the nexus of opportunity and necessity.

    Why? Because the primacy that America has long enjoyed around the world is increasingly being challenged by the very same forces of technological innovation that America itself unleashed.

    Thus, this morning I want to provide you some perspectives about these mounting challenges, perspectives that I hope will prove a useful context for thinking about the topics of this symposium:

     

    • First, I will describe what is meant by an “innovation ecosystem;”
    • Second, I will give you some reference points about the size and scope of the innovation economy;
    • And, third, I will outline some of the policy frameworks now developing around the world, at the federal level and in Ohio.

     

    I. The Innovation Ecosystem

    The term “innovation ecosystem” is increasingly used to refer to that system of loosely inter-connected elements, fueled by R&D, that enable a society to make new discoveries, capture their value in the marketplace, enhance productivity and increase the standard of living.

    To be sure, the innovation ecosystem is a complex and interactive one. It is shaped by many factors, including: the quantity and sources of funds available to support research activities; the talent pool and capabilities of the scientists and engineers who conduct research; the settings in which that research is conducted… that is, its "infrastructure" of facilities, institutional cultures and other attributes governed by geographical location and interrelating organizations; and it is shaped by factors which are increasingly global and devoid of boundaries.

    The innovation ecosystem also is shaped by prevailing public attitudes about the importance and usefulness of research in the broader context of societal pressures and economic opportunity – all resulting in a policy environment that is often contradictory and laden with unintended consequences.

    Importantly, the complexity and interactivity of its component elements means that a shortcoming in any piece of the innovation ecosystem is at best inefficient; at worst, it could be a debilitating disconnect that undermines the capacity for commercialization and economic growth.

    As you can see, our national innovation ecosystem is far more complex, nuanced and interactive than debates about these matters tend to be. Therefore, it is our goal at this symposium to highlight ways to optimize the positive interactions, to minimize or eliminate the negative ones and to seek ways in which we can further enhance the innovation process by whatever means we can.

    Why should this concern you? Because, quite simply, it is America's capacity to innovate that determines its capacity for economic growth.

    To appreciate this relationship, one must understand how new knowledge and technologies result in new wealth creation.

    A brief historical review of technological innovation will help us in that regard.

    One thousand years ago, at the start of the last millennium, there were no organized industries.

    One hundred years ago, our dominant industries included hardware, bicycles, and telegraphy; more than half of us were living on farms; and long distance travel was by rail or steamship.

    Today, at the start of the 21st Century, less than 2% of us are still living on farms, long distance travel is by jet aircraft, and our dominant industries involve robotics, biotechnology and wireless telecommunications, with others surely on the rise.

    Research enabled the agricultural and industrial revolutions at the turn of the last century. And during World War II, research essential to the war effort also laid the groundwork for technological leaps in medicine, aviation, energy, electronics-developments that today affect virtually every realm of human endeavor.

    With the development of transistors in 1947, the era of microelectronics began, sowing the first seeds of the Silicon Valley; and from such modest beginnings, we now are immersed in the information age.

    Research related to the space race not only enabled Americans to walk on the moon, but also gave rise to the space industry and enabled new technologies in satellite communications, computer science, robotics and miniaturization.

    And as recently as 1970, a single discovery in molecular biology, recombinant DNA, initiated the new industry of biotechnology; an industry from which we are now seeing dramatic advances in medicine, agriculture and other industries.

    Indeed, new knowledge builds new capacities just as surely as new materials build new structures, and each of these examples demonstrates that our nation's investments in research have built real assets that have yielded very real and large returns on those investments.

    Economists agree that creation of new technological knowledge through research is our most direct economic avenue for acquiring added value.

    When that new knowledge is quantified in a market environment, it creates fuller employment, capital formation, growing profits, and surpluses for reinvestment.

    In other words, it is from research discoveries that new companies are born, that new jobs are created.

    It is from research that the economy expands and new wealth is created.

    II. The Innovation Economy: Size and Scope

    Let us now turn to some data by which we can describe the size and distribution of the innovation economy.

    Global investment in R&D is now more than a trillion dollars - a sizable industry by any standard.1

    The top 10 countries account for almost 80% of that total, and the U.S. alone represents 33% of that, with nearly $400 billion in expenditures.2 I hasten to add, however, that although U.S. R&D spending has increased almost uninterruptedly since 1953, our nation’s share of the world's R&D expenditures has declined as other nations have dramatically increased theirs.3 To understand just how fast this is happening, consider the fact that just 5 years ago, the U.S. share of the world’s R&D investment was 44%, and it is now just 33%.4,5

    This relative decline is happening because over the past decade, for example, China’s R&D investment has grown at an average of 19% per year in inflation-adjusted dollars6; and, in fact, Battelle predicts that this year, China will replace Japan for second place in R&D spending.7 Keep in mind, too, that China’s R&D spending is only a 1.5% share of its gross domestic product, compared to 2.7% in the U.S., and that China’s R&D as a share of its GDP has doubled in the last 10 years and shows no indication of slowing.8

    Of course, U.S. spending on R&D is still far beyond that of its closest competitors, but the gap between our nation and others is narrowing, and the pace of that trend is accelerating.

    Within the U.S., 67% of R&D expenditures ($268 billion) are derived from industry, 26% ($104 billion) from the federal government and 7% ($16 billion) from foundations, states and our own research universities. In terms of traditional R&D terminology, the U.S. performs about $69 billion of the world’s basic research, $89 billion of applied research and $240 billion of development, or 60% of the U.S. total.9

    U.S. colleges and universities perform just over half of the country's basic research, but only a nominal percentage of development.

    It is daunting to note that industry supports less than 5% of university research, a figure that has declined from a high of 7%.10,11 This is not too surprising when you consider that as late as the 1990s, the majority of university leaders were reluctant to be involved in anything related to commercialization; and universities did not accept responsibility for any aspect of economic development. Some even considered any partnership with industry a sort of pact with the devil that would corrupt their more noble purposes in exchange for worldly riches.

    This is one of those major disconnects in our innovation ecosystem that is now being addressed through broad initiatives such as the National Academy of Sciences’ University Industry Demonstration Project, and through more regional, university-based efforts, such as the ones I will describe tomorrow.

    Across the U.S., not only is R&D geographically concentrated, but states also vary significantly in the types of research performed within their borders. For example, in 2007 ten states accounted for 64% of all U.S. R&D expenditures.12 California alone represented 22% of U.S. R&D—triple that of Massachusetts, the next highest state. New Mexico, Massachusetts, and Maryland had the highest R&D-to-GSP ratios in 2006. California ranked seventh in R&D/GSP intensity.13

    Moreover, some states have derived selective advantages by focusing their innovation efforts. For example, Massachusetts, Illinois, California, and Texas account for about two-thirds of the R&D performed by computer and electronics products companies; New Jersey, Ohio, and Pennsylvania are leaders in chemicals, accounting for about 40% of the R&D in that industry.14

    One other asymmetry worth noting is the degree to which the U.S. has an unbalanced R&D portfolio, where nearly 70 cents of every research dollar is directed at biomedical research and only about 30 cents goes to the physical, chemical and other sciences. As a result of recommendations by the President’s Council of Advisor’s in Science and Technology (PCAST), important steps are being taken through the America Competes Acts to redress this imbalance by seeking to markedly increase the funding for the physical and chemical sciences at NSF, NIST and DOE. But movement in that direction likely will be slow as long as the politics of austerity dominate the national dialogue and Congress itself continues to favor anything related to health. Mind you, not that anyone is advocating a decrease of biomedical research support. Rather, since many, if not most, future innovations likely will occur at the interface of biological and physical sciences, a rebalancing of our R&D portfolio is both prudent and necessary.

    III. Innovation Policy: The Economic Purpose of Nations and States

    This discussion of the innovation economy naturally leads to some observations on the speed at which globalization is rapidly transforming science and technology and the policies by which countries are aligning economic development strategies with R&D investments.

    Beginning in the 1970s the more rapid pace by which new discoveries began to be quantified in the asset ledgers of corporations ensured that investment funds increasingly began to track the flows of intellectual property developments around the world – demonstrating the growing interdependencies of the science and technology activities of nations. Indeed, we are witnessing several new ways in which the globalization of markets is affecting both how science is funded and how it is practiced.

    We should recognize that other countries and many cross-national organizations appear to be better attuned to these trends than is the U.S. For example, an international conference sponsored jointly by OECD and CONACYT (Mexico's equivalent of our NSF) focused entirely on public-private partnerships in science and technology to stimulate economic development. The examples discussed there are instructive, and included what the European Union is doing to coordinate R&D programs across its "states", what Israel has done to map its strategic economic needs and research assets, and what several other countries are doing.

    One need only think of Taiwan or Singapore to find yet other vibrant examples of R&D investment strategies well aligned with economic purpose.

    What we see is that other countries are effectively solving policy disjunctions within their national boundaries and that the European Union is integrating its science and technology policies and strategies across its individual "states."

    Indeed, the U.S. can learn from what many countries are doing. The National Academy’s Comparative Innovation program, of which this symposium is a part, is an approach to share the very best approaches wherever in the world they may be employed.

    Although the U.S. federal government has a large and diverse framework for considering R&D policy and funding, most states lack frameworks for considering R&D activities, or for integrating R&D at the state level with programs at the federal level. This is an ongoing problem that stubbornly refuses to be resolved.

    As long ago as 1995, the State-Federal Technology Partnership Task Force chaired by the then-governors of Ohio and Pennsylvania (the Celeste-Thornburg Report, as it was known) called attention to this disjunction and offered policy recommendation to remedy it.15

    PCAST tried to address this gap in the U.S. innovation ecosystem when it focused its 2004 Cleveland meeting on topics related to what different states are doing to better deploy their R&D resources.16 It did so again in 2008 when PCAST addressed public – private partnerships. Still, to this day, I know of no cross-state cooperative R&D strategies among states and there remain only a handful of states that have well-developed S&T strategies aligned with federal programs.

    Of course CRADA's, SBIR's, STTR's and a host of other collaborative programs and tax credits that support R&D and technology transfer have, in the experience of nearly all of these endeavors, done much to promote innovation by building an appropriate infrastructure.

    But new tools are needed, and I hope some of you will bring new suggestions forward.

    IV. Ohio’s Comeback?

    Finally, we come to the big question: Is Ohio on the path to economic resurgence?

    When I came to The University of Akron in 1999, I often noted the irony that twenty years before I had urged the state of Georgia to emulate Ohio and its Edison Programs, while I now found myself encouraging Ohio to emulate Georgia, because that is how much that state had done in the ensuing time, while Ohio lagged behind.

    Indeed, we should remember that a decade ago, our region largely lacked entrepreneurial drive, risk tolerance, innovation supportive investment capital and much in the way of entrepreneurial talent.

    Today, while all of the pieces of the puzzle may not yet be in place, there is little doubt that Ohio is again moving in the right direction and that Northeast Ohio is vigorously engaged in that effort. Indeed, a review of actions taken over the past decade to enhance the Northeast Ohio innovation ecosystem is reason for cautious optimism.

    NorTech had then only just been founded.17 Bill Sanford, then CEO of Steris Corporation, drove this initiative and together with Dorothy Baunach, he helped grow NorTech into an organization that advanced a broad tapestry of industrial strengths and opportunities. Two years later, BioEnterprise spun out with a commitment to grow health care companies and commercialize biomedical technologies in the region.18

    At about the same time, my university led the formation of a much needed industrial organization, Polymer Ohio, and also the Ohio Polymer Strategy Council, to further strengthen that industry and move it toward a global leadership position in technology-driven opportunities. Tom Waltermier was its first chairman, and he then also chaired NorTech before going on to become the first CEO of TeamNeo, our business attraction organization.

    As the decade continued, more and more of these initiatives came on stream. JumpStart was launched in 2004. The Manufacturing Advocacy and Growth Network, or MAGNET, was established to refocus the original CAMP.19

    The list goes on . . .

    In 2004, the efforts of several foundations were brought together under the Fund for Our Economic Future with a goal of boosting the region’s economic competitiveness through grant making, economic research and civic engagement. The Fund launched Advance Northeast Ohio in 2007,20 encouraging collaboration among economic stakeholders in the region and, to date, more than 80 partners across 16 counties have united behind this effort. What is more, the Fund has now carved out a special place for Ohio by becoming one of only three participants across the country in partnership with the Brookings Institution and creating the Northeast Ohio Regional Business Plan – a new and purposeful approach to create economic growth across the region.

    Of course, important steps also took place in state government. Early in the decade, for example, new legislation for the first time allowed faculty to become stakeholders in start-ups derived from their research findings. And in 2002 the Ohio Third Frontier program was established to create new technology-based products, companies, industries and jobs in Ohio. With plans for an initial $1.6 billion investment, it now supports the very elements that drive innovation: applied research and commercialization, entrepreneurial assistance, early-stage capital formation, and expansion of a skilled workforce.

    Equally impressive was the resolve of the electorate, which although still deeply mired in recession in 2010, approved proposals to add an additional $700 million, for a total Third Frontier investment of $2.3 billion through to 2015.21 In this regard, and of relevance to this symposium, the state partnered with the National Academy of Science to gain objective, third-party evaluations of the Third Frontier proposals. Among us this morning is one of its original architects; ladies and gentlemen please recognize Frank Samuel.

    All of these steps show a coalescing of business, education and government interests into an innovation ecosystem determined to compete in the world marketplace.

    But it is not yet enough.

    For example, Ohio still lags other states in the amount of federally funded academic research and perhaps has true distinction in only a handful of areas, such as biomedical research, polymers and advanced materials. At the same time, several industrial clusters are virtually devoid of R&D support.

    Also, at a time when talent development and talent attraction, particularly of entrepreneurial and competitively funded scientists and engineers, is being considered the essential ingredient of economic development, Northeast Ohio has no organization focused on this critical element. This, too, is a significant disconnect.

    Yes, Ohio is now catching up, but some of our domestic competitors have quite a lead and now are running faster, with better-established innovation ecosystems than Ohio. And if my remarks have not yet challenged you enough, let me quote from a 2010 National Academy report that updated one from five years earlier – the Rising Above the Gathering Storm report; I quote . . .

    “During the five years since the Gathering Storm study was published, a new research university was established with a “day-one” endowment of $10 billion, equal to what it took MIT 142 years to accumulate. Next year over 200,000 students will study abroad, a large fraction in the fields of science, engineering, and technology. A new ‘innovation city’ is being constructed, patterned after Silicon Valley, that will house 40,000 people. A multi-year initiative is underway to make the country a global nanotechnology hub including constructing 14 new ‘world-class’ universities.

    “A new facility was opened to collect, store and analyze biological samples and serve as an international hub for biomedical research. A high-level commission with the objective of creating jobs at home has developed a long-term strategy for science and technology patterned after the National Academies study . . . These actions were taken by Saudi Arabia, China, Russia, India, Luxembourg and the United Kingdom, respectively.”22

    So our task over these next two days is to learn from one another, to listen and discover what others outside our region are doing, and to create a ferment of ideas that will generate new economic vitality for our region, state and nation.

    The work before us is not easy.

    We must be committed to innovate on innovation. . . to focus our entire society on innovation.

    As Paul Romer reminds us, "The most important job for economic policy is to create an institutional environment that supports technological change . . . [and to] resist the temptation to impede change when it causes temporary disruption . . . [And that] is not a simple task."23 Because, as we have seen time and again, social and political concerns have had a tendency of slowing or derailing progress.

    Ladies and gentlemen, success in the new economy will belong to those regions that create and nurture the human resources of intellectual capital – the people who create new knowledge and new technologies and quickly translate research discoveries into marketable products and services.

    To succeed, universities, area business, industry and government must work together to support clusters of innovation that will ensure an increasingly stronger and larger source of human capital.

    Let us be cheerful, and plunge ahead!

    Thank you!

     

    1 National Science Board (2010, January), Science and Engineering Indicators 2010, Chapter 4, Arlington, VA (NSB 10-01) http://www.nsf.gov/statistics/seind10/c4/c4h.htm

    2 National Science Board, Ibid

    3 National Science Board, Ibid

    4 National Science Board (2004, January), Science and Engineering Indicators 2004, Arlington, VA Volume 1, pp. O-4, 4-46, 4-47

    5 National Science Board (2010, January), Ibid

    6 National Science Board (2010, January), Ibid

    7 Battelle, HYPERLINK "http://www.rdmag.com" www.rdmag.com, 2011 Global R&D Funding Forecast (December 2010) Advantage Business Media p. 3

    8 National Science Board (2010, January), Ibid

    9 National Science Board (2010, January), Ibid

    10 National Science Board (2008, January), Science and Engineering Indicators 2008, Arlington, VA (NSB 08-01; NSB 08-01A 2008.

    11 National Science Board (2010, January), Science and Engineering Indicators 2010, Chapter 5, Arlington, VA (NSB 10-01) http://www.nsf.gov/statistics/seind10/c5/c5h.htm

    12 National Science Board (2010, January), Chapter 4, Ibid

    13 National Science Board (2010, January), Chapter 4, Ibid

    14 National Science Board (2010, January), Chapter 4, Ibid

    15 1998 Technology 21 Report of the State of Pennsylvania, http://sites.state.pa.us/PA_Exec/DCED/tech21/newframe.htm

    16 Federal State Cooperation: Improving the Likelihood of Success, 2004

    17 NorTech 2011, http://www.nortech.org/our-staff/history

    18 NorTech 2011, Ibid

    19 NorTech 2011, Ibid

    20 Fund for Our Economic Future, (2011 April) Northeast Ohio Regional Business Plan Brookings Institution, p. 1

    21 Third Frontier, Innovation Creating Opportunity. http://www.development.ohio.gov/ohiothirdfrontier/History.htm

    22 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine of the National Academies, (2010) Rising Above The Gathering Storm, Revisited Washington D.C.: National Academies Press. p. 33-34

    23 Paul M. Romer, “Beyond Classical and Keynesian Macroeconomic Policy,” Policy Options, July – August 1994

  • Topic Category: Innovation
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