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The Role of Higher Education in Economic Development

  • Date: 07/07/2002
  • Author: Dr. Luis M. Proenza (President, The University of Akron)
  • Location: City Club of Cleveland
  • Thank you, Roy Church, for your much too kind introduction and for your distinguished leadership of Lorain Community College. Your success has been impressive, and its recognition across the country is richly deserved.

    And thank you ladies and gentlemen for the opportunity to be a part of the City Club's forum on Higher Education.

    Let me also recognize and express our collective appreciation to Chuck Hickman, NOCHE's new Executive Director, and Len Calabrese and Jim Foster of The City Club of Cleveland, who together have brought us these informative sessions on higher education issues in Ohio.

    I wish I could acknowledge all of my colleagues here today who have been so supportive since I came to Ohio three and a half years ago. Let me just mention my colleague Seth Taft; and Seth, I look forward to your questions as always. Also, two members of The University of Akron Board of Trustees are with us today: Dr. Mark Apte, Vice Chairman, and Mrs. Diane Fisher. Thank you for joining me here today.

    At the outset, I want to thank Doug Wilson of Indiana University for first suggesting the context-setting approach that I will use to open my formal remarks.

    *******

    All governors of Ohio, past, present and future, aspire to create a healthy economic climate. They all work diligently to attract major enterprises with the capacity to have a significant impact on the economy of Ohio.

    In a dream, one of these distinguished governors is excited because after great effort of his own, his staff, members of the General Assembly and key business leaders across the state, it appears that a truly major enterprise is about to locate in Ohio.

    GREAT NEWS!


    This clean, non-polluting, high-technology enterprise is part of a global conglomerate with annual worldwide revenues of half a trillion dollars, of which about $200 billion is in the U.S.

    It has proposed an investment in Ohio that is expected to generate $7 billion in annual revenues, just in Ohio, and it will locate facilities in about 175 municipalities across the state for a net capital investment of some $15 billion.

    What is more, it will create about 130,000 jobs for Ohioans, with an unusually high percentage of those jobs requiring at least a bachelor's degree and about 30,000 of those jobs requiring advanced training in science and engineering at the master's or doctoral level.

    In Northeast Ohio alone, the company will have 22 locations, it will create 25,000 jobs and will generate about $2.5 billion in annual revenues.

    For its Ohio operations, this enterprise anticipates that it will have about 675,000 primary customers, with about 15% of them from other states and from countries around the world. Its non-Ohio revenues will be nearly $2 billion, with half of that resulting from contracts and grants from the federal government.

    Already, the company enjoys hundreds of thousands of stockholders in Ohio, with the prospect of a healthy rate of growth in the percentage of individual investors.

    Of course, thousands of Ohio suppliers will benefit from this enterprise, and the net economic impact to Ohio is calculated to begin at about $32 billion per year and to grow annually at the rate of 15% to 25%.

    BIG NEWS INDEED!

    As the dream unfolds, the Director of the Ohio Department of Development rushes into the Governor's office and proclaims excitedly, "We got it! We got it!"

    Everywhere, celebrations break out and there is much excitement and anticipation. Chrome-plated shovels and construction helmets are readied for all of the groundbreaking photo opportunities across the state. The media is ecstatic and showers the Governor and his team with a running stream of praise in its editorial and front pages.

    By November, the Governor is re-elected by a landslide vote and economic growth is above the national average, bringing Ohio, once again, to a position of leadership in our nation.


    Success after success continues to unfold in the dream and then, as morning breaks, the Governor wakes up to find that such an enterprise is already a reality in Ohio -- IT IS CALLED HIGHER EDUCATION!

    Every governor has lived for such an announcement, particularly around election time. And all of us, I am sure, hope that Governor Taft and future governors can have such a wonderful experience during their terms in office.

    However, since the dream I have just related is already a reality, we can and should ask why most of the public and many legislators and business leaders alike seem so woefully in the dark that they fail to support investment in this major economic driver.

    Of course, that is the reason for my talk. And, fortunately, I can tell you that recognition of the role that higher education plays in economic development is growing.

    Here is how Tim Ferguson put it in Forbes magazine: "In Cleveland's heyday, . . . proximity to water or rail mattered a lot. Today, proximity to a university campus matters a lot."
    (Tim Ferguson, Forbes, 5/31/99)

    In his new book, "The Rise of the Creative Class", Richard Florida refers to colleges and universities as " . . . a huge potential source of competitive advantage." And he says that colleges and universities are today " . . . a basic infrastructure component . . .and far more important than traditional infrastructures such as " . . . the canals, railroads and freeway systems of past epochs . . ."
    (p. 292-292)

    States such as Georgia have recognized the fundamental role of higher education so clearly that its former Governor, now U.S. Senator Zell Miller, publicly declared that higher education was the infrastructure of Georgia's new economy.

    As we speak, the state of Texas is facing a $6 billion shortfall, larger than the one we face here in Ohio, and its proposed solution is getting more students into college! Why? Because Texas recognizes that with a college education comes higher earnings, and with higher earnings, the state will collect additional taxes and reap other associated economic benefits that ensure revenues and build long-term prosperity.

    Right here in Ohio, Governor Taft's bold and far-reaching $1.6 billion Third Frontier Project will create Wright Centers of Innovation at our major universities so that advanced research and development can spur Ohio's economy into a new era of comparative and competitive advantage.


    And speaking in Akron yesterday, Cleveland's Mayor Jane Campbell joined Mayor Don Plusquellic in speaking powerfully about the role of our colleges and universities in the economic future of our Northeast Ohio region.

    WOW!!!!!

    So how does higher education contribute to local and regional economic development?

    There are four principal ways:

    First in workforce development -- That is, in the production of human capital;

    Second, as a basic revenue generating industry, with all its related economic "multipliers;"

    Third, as an engine for the creation, distribution and application of knowledge;

    And fourth, the increasingly important role of research universities in intellectual property transfer, in the commercialization of new technology, and in new venture creation.

    Thus, I will tell you how colleges and universities relate to economic development through each of these four roles.

    The FIRST and perhaps the most widely understood economic development role of higher education is in workforce development. Indeed, successful economic development, first and foremost requires successful workforce development, and across the nation it remains the number one issue for business.

    Whether by taking what they have learned in our classrooms and laboratories and applying it in their new jobs, or by moving from one workplace to another after college, people bring what they have learned into the workplace.

    It is estimated that approximately 95 percent of all transfer of knowledge and know-how occurs by people interacting as they move from one place to another.

    In today's knowledge-based economy, you see, human capital is business capital.

    But a high school education is no longer sufficient. Rather, high school is just the first stop on the road to a lifetime of learning.


    The Council on Competitiveness reports that jobs requiring technical skills will grow by 51% in the next decade, and it cautions that - with the exception of the life sciences -- undergraduate science and engineering degree production is expected to remain flat or even to decline.

    Likewise, U.S. graduate enrollments are declining in key technology disciplines and foreign students earn an increasingly larger share of advanced degrees in science and engineering.

    And with the proportion of advanced technical degrees growing abroad, the pool of scientists and engineers is increasing rapidly in other countries and will surely enhance their economic competitiveness.

    So maintaining a steady pace of innovation in the U.S. to stay ahead of global competition will require better-trained workers in all areas, not just manufacturing.

    Workforce development is one thing that all colleges and universities, public or private, two- or four-year, share in common, but in basic skills training, few institutions are more successful than our community and technical colleges.

    Indeed, their success is evident right here in Northeast Ohio, where the accomplishments of such institutions as Tri-C, Lorain, and Stark State are legendary.

    In a recent book, Davis and Wessel show how " . . . the 1100 community (and technical) colleges in the U.S. are creating a pool of workers who have precisely the skills that command good wages in today's economy."
    (Bob Davis and David Wessel, Prosperity: The Coming 20 Year Boom and What it Means to You, Random House, 1999, p. 151)

    Whether it is Tri-C's Corporate College, Lorain's information technology programs, or Stark State's comprehensive focus on the technical jobs that define its catchment area, "Community colleges work," say Davis and Wessel.

    "One of the secrets behind the success of community colleges is their exquisite sensitivity to the local labor market. The best schools constantly revamp their curricula in response to and even in anticipation of, employer demands."
    (Ibid, p. 161)

    Let us remember, however, that our colleges and universities also prepare students for the arts, the humanities, and for all of the health and social service professions that we are increasingly dependent on.


    Thus, the excellence of music at Oberlin, the liberal arts and sciences across the breath of our schools, whether public or private, Akron or Malone, Cleveland State or John Carroll, Walsh or Youngstown -- all colleges and universities are engaged in this enterprise of building the next generation of talented men and women in many important areas valued by our society.

    The SECOND role that higher education plays is as a basic revenue generating industry with all of its related "multipliers" - that is, university revenues from sponsored research, tuition, support service fees and state appropriations, all providing jobs and paying for services in the community.

    Business Week Magazine, for example, estimates that international students constitute the fifth largest export industry in the service sector of our economy.

    And higher education is a growth industry worldwide because the market is increasingly sending a signal to everyone who needs gainful employment: Education pays!

    The recent Census Bureau study shows that people with college degrees are earning progressively more and more compared to those who complete only a high school diploma.

    The differences are notable: Persons with a doctoral degree will average $3.4 million in earnings over their careers; those with master's degrees $2.5 million; those with a bachelor's degree $2.1 million; and those with professional degrees a total of $4.4 million.

    By comparison, those with only a high school education will earn just $1.2 million during their lifetimes of work.

    And therein lies one of the investment values of public higher education, because with their higher incomes, students in Ohio will pay back to the state $1.84 in inflation-adjusted dollars - just in additional taxes - for every dollar the state invests in higher education!

    That is a nearly two-to-one return on investment, and by anyone's accounting, that is an excellent return on investment!

    The comptroller for the state of Texas, for example, has estimated in a recent study that " . . . Every dollar invested in our state‘s higher education system pumps more than five dollars into our Texas economy. It is a remarkable return on our money for Texans today and a vital stake in the future for successful generations of Texans tomorrow." (Carole Keeton Rylander, Texas Comptroller of Public Accounts, Special Report: The Impact of the State Higher Education System on the Texas Economy, December, 2000)


    But there is more, because there are additional returns of as much as 60 percent per year resulting from the enhancements made possible by research and from the productivity gains made possible by a higher-quality workforce.

    And there are yet other social and economic benefits to be counted - including savings from the many costs often associated with the lack of education, including unemployment, welfare, and crime.

    Another way in which higher education pumps dollars into the economy is through research. By competing for federal and corporate dollars, the talented men and women who comprise university faculties bring to their communities monies that would not otherwise be there.

    And we are not talking about small sums: In Ohio, university research leverages nearly $1 billion annually, and other federal research at three national laboratories brings in an additional $6 billion. That is $7 billion total!

    In science and engineering disciplines, entrepreneurial faculty will attract many times the value of their salaries.

    And for every dollar that the state might yet invest in salaries for science and engineering faculty, I can guarantee that they will attract no less than two dollars and, in many cases, as many as 10 additional dollars.

    Now, that's leveraging power!

    The THIRD way in which universities are engines for economic development is through the production of new knowledge.

    Because in addition to workforce development, successful economic development also requires progressive innovations that will improve the competitiveness of existing industries, as well as lead to the creation of new industries.

    Indeed, 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 that new companies are born; that new jobs are created; it is from research that new wealth is created and the economy expands.


    So it is only natural that research should be considered as a fundamental driver for a state's economic development.

    And that is why some states have made higher education the infrastructure of their new economy - because universities excel at the creation of new knowledge, through research.

    And don't just take my word for it, take it from Federal Reserve Board Chairman Alan Greenspan, and I quote: " . . . if we are to remain preeminent in transforming (new) knowledge into economic value, the U.S. system of higher education must remain the world leader in generating scientific and technological breakthroughs and in preparing workers to meet the evolving demands for skilled labor." (Federal Reserve Board Chairman Alan Greenspan, National Governors' Association Annual Meeting, July 11, 2000)

    Indeed, it was knowledge creation and its transfer that enabled the agricultural and industrial revolutions at the turn of the last century. And during World War II, research, including the Northeast Ohio based synthetic rubber initiative, was vital to the Allied war effort.

    Such research laid the groundwork for technological leaps in medicine, aviation, energy, electronics - developments that today affect virtually every realm of our human endeavors.

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

    The research we did related to the Space Race not only resulted in Americans walking on the moon...but also gave rise to the Space Industry and enabled new technologies in satellite communications, computer science, robotics and miniaturization.

    As recently as 1970, a single discovery in molecular biology initiated the new industry of biotechnology, an industry from which we are now seeing dramatic advances in medical science and the introduction of effective new technologies such as the production of human insulin by factories of microorganisms.

    These are just a few examples of research as an engine for economic development.

    Each effectively demonstrates that new knowledge builds new capacities just as surely as materials build new structures. And each demonstrates that our nation's investment in education and research have built very real assets that have yielded very real returns on those investments.


    According to the National Academy of Sciences, science-driven technology has accounted for more than ½ of the growth in the U.S. economy over the past 50 years, and 2/3 of the 80% growth in economic productivity since 1995 can be attributed to information technology alone.

    At The University of Akron, for example, research provided the intellectual property that served to fuel and diversify the industrial base of Akron, transforming it from the rubber capital into the polymer capital of the world, and helping to reinvent our region through its discoveries in polymer research.

    Indeed, whether it is polymer research at Akron, biomedical sciences at Case Western Reserve University, liquid crystal research at Kent State, or process engineering at Cleveland State, to name just a few, Northeast Ohio enjoys a solid footing in new knowledge production.

    Whether by publishing the results or by consulting, college and university faculty enable the discovery and dissemination of new knowledge.

    Yes, universities are powerful engines that drive economic development, and they do so because of their role in new knowledge creation and the innovation that it brings about.

    The FOURTH role of universities in economic development is through intellectual property transfer, such as the licensing of patents, copyrights, process know-how, and the start up of new businesses.

    University technology transfer in the U.S. was first publicly recognized with the Morrill Act of 1862 that created our Land Grant schools, giving them the responsibility of advancing "agriculture and the mechanical arts."

    In the 1920's, many of our great universities, such as Wisconsin and Purdue, established research foundations as they recognized that research discoveries had proprietary value that could be licensed or sold and that they could then use the proceeds to help fuel more research.

    With the emergence of the microelectronics and biotechnology revolutions, Congress was persuaded that much federally funded research was not being effectively utilized because few investors were willing to risk the resources needed to launch major new ventures without that proprietary interest, so that much intellectual property went by the wayside.


    Congress therefore enacted the Bayh-Dole Act, or PL 96-517, in 1980 and granted to recipients of federal funding, such as colleges and universities, title to any discovery based on that funding, adding the responsibility to do everything possible to see that such discoveries found themselves to the public through the private sector.

    The passage of Bayh-Dole brought about a dramatic increase in the patenting and commercialization of intellectual property by colleges and universities. We have seen a more than 10-fold increase in the rate of patenting, from about 250 per year to more than 3,000 patents issued per year to academic institutions. Concomitantly, there are now over 7,500 revenue-generating licenses, and the annual rate of new company formation is now approaching 400.

    The Association of University Technology Managers (AUTM) estimates that in 1999 alone, academic technology transfer added $40 billion and 260,000 new jobs to the U.S. economy!

    Indeed, recent testimony before The President's Council of Advisors on Science and Technology (PCAST), on which I serve, shows that Bayh-Dole has been a resounding success, and intellectual property is fast becoming the property right of greatest economic value over real and personal property rights.

    You see, it is no longer only a company's tangible assets such as equipment, land, and inventory that matter in its valuation by Wall Street.

    A significant portion of company value is now tied to its intangible assets, including human capital and intellectual property, and CEO's now worry that their most valuable assets go down the elevator and out the door every night!

    Please remember that technology transfer does not happen without a strong research base, or in the absence an entrepreneurial environment.

    The game of technology transfer -- which is a contact sport by the way -- presupposes that there is something to transfer!

    Nothing can happen without an exceptionally strong research base, because the number of technologies to be transferred is directly proportional to the size, or horsepower, of the research engine.

    The Association of University Technology Managers has studied the average conversion ratios between the size of research portfolios and the number of intellectual properties produced.


    Specifically, at the best universities, it can be shown that approximately $5 million of research activity is needed to generate one patent. Therefore, it follows that the larger the research portfolio, the better the probability of tech transfer.

    However, there are no guarantees. Just because you have a $200 million research portfolio, there is no guarantee that you will have annual incomes approaching $150 million, as Columbia University now does.

    Even my former university, Purdue, which has been at this game since 1928 and has a $200 million plus research portfolio and tons of patents, is just recently broke above the one-million-dollar level in annual revenues from its technology transfer activities.

    By contrast, The University of Akron, which has a 10-times smaller research portfolio, has generated patents at nearly three times the rate of the best universities, and has annual revenues already approaching a million dollars.

    For Ohio, a conservative economic environment and restrictive legislative environment have slowed the rate of university-based technology transfer.

    It was just two years ago, for example, that the passage of S.B. 286 finally made faculty participation in new ventures based on the fruits of their research permissible under Ohio law.

    As a result, several of our universities, including Akron and Kent State, have begun to form new enterprises, and the process is continuing. Year after year, AUTM has rated Akron as second in the world in patent productivity per dollar of research input, and second in disclosures. Last year, Kent State had a remarkable showing and came in at 4th nationally in start up of new companies per dollar of research spending.

    These, in brief, are the four principal roles of higher education in economic development. Obviously, far more can be said about each of these roles than our time today permits.

    Let me leave you with two final points to consider:

    First, of the more than 3,600 colleges and universities across the nation, ". . .just over 1,900 - more than half of the national total - are located in the urban core."
    (Neal Peirce, "Wake-up Call for Academia." The Washington Post Writers Group, 2002)

    But these urban institutions account for 68% of the economic activity generated by colleges and universities. And, if we include those located in the urban fringe of our cities' suburbs, the total rises to more than 87%. (Neal Peirce, Ibid)


    In other words, nearly 90% of the economic power of our colleges and universities is expressed in our cities and their immediately surrounding areas.

    With 85% of all jobs in Ohio being located in our urban areas, you can see that there is a very close correspondence between the aggregate economy of cities and that of the colleges and universities located there.

    In other words, urban universities are a major economic force in and for our cities.

    Notably, Ohio is perhaps the only state to have actually created and appropriated funds for an Urban University Program - and much of the credit for that belongs to our colleague, David Sweet, President of Youngstown State University.

    Across the nation, whether at Trinity University in Hartford, Mercer University in Macon, or at our own University of Akron, we see opportunities emerging by which university programs are expressed into their communities to help revitalize aging neighborhoods and business districts.

    At The University of Akron, for example, the Knight Foundation is supporting a University Park Alliance in concert with the City of Akron and Summa Health System. We call it "A New Landscape for Living," and it designed to revitalize a 40 to 60 block residential and business area surrounding the University.

    "But a university cannot do it alone," says Richard Florida. " . . . a community must have the capacity to absorb the innovation and technologies (as well as the talent) that a university generates, and also help put in place the broader life style amenities and quality of place sought by the Creative Class."
    (Ibid, p. 292)

    When a community lacks the capacity to absorb the technologies or talent that universities produce, those talents and technologies will migrate elsewhere, just as Michael Fogarty and Paul Gottlieb's research has demonstrated that they do in Northeast Ohio.

    Fortunately, the civic entrepreneurship necessary to address these issues in Ohio is emerging, and efforts are underway through NorTech and other entities to match our strengths with our opportunities.

    Second, as important as higher education already is to Ohio, its economic power remains largely untapped.

    Governor Taft's exciting Third Frontier project, with its $1.6 billion projected investment is the kind of bold action that Ohio has needed and, thanks to Governor Taft's leadership, we soon will see it put into action.


    By matching strengths with opportunities in the Third Frontier Project, Ohio can build a vibrant and progressive economy.

    Bright signs are already visible in relationship to the polymer industry, where a comprehensive industry association and a strategy council have been formed, and where The University of Akron, Case Western and other universities are working together with industry to build a "National Polymer Processing Center" to advance technological innovation for Ohio.

    And across the state, progress also is being made in the biomedical sciences, information technology and fuel cell technologies.

    *****

    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 that create new knowledge and new technologies and quickly translate research discoveries into marketable products and services.

    To succeed, business, industry, and government must increasingly recognize the role of higher education in creating the infrastructure of the knowledge economy.

    As we have seen, our colleges and universities are important partners in that endeavor. They support clusters of innovation and ensure an increasingly stronger and larger source of human capital and of new technologies.

    Wake up Ohio, the dream is a reality!

    Higher education is the infrastructure of our future prosperity.

    Thank you!

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