A Public Policy Perspective on Innovation-Driven Development Strategies: The North Carolina Example

1. A Public Policy Perspective on Innovation-Driven Development Strategies: The North Carolina Example Robert McMahan, Ph.D. State Science and Technology Advisor Exec. Director, NC Office of Science and Technology

2. Since WW2, the Mix of Jobs Has Been Changing This trend in evidence since the end of WW2 Manufacturing is now <10% of total non-farm employment Today ~15% of NC Workforce is engaged in production http://www.frbsf.org/csip/analysisEssay1.pdf

3. At the same time, income disparities have been widening The consensus is that the main cause was technology, which increased the demand for skilled workers relative to their supply, with freer trade reinforcing the effect. http://www.economist.com/world/displaystory.cfm?story_id=7055911

4. In 1950’s North Carolina… Poor Economic Conditions: • Concentration in low-wage primary/crop industries • Tobacco, Cotton • Furniture • Textiles • Low-wage Jobs • 49th in per capita income in the US • “Brain Drain” • Need to diversify & expand economy

5. Archie Davis Led fundraising efforts Early Planning Meeting, c. 1958 Luther Hodges (Governor)and Karl Robbins (private investor) c.1957 George Simpson Director of Research Triangle Committee RTF Board of Directors, 1959 Combined with Strong & Committed Leaders

6. Yielded Creation of RTP • Early 1950s – Idea emerged that the region’s three universities (Duke, NCSU, UNC) could act as magnet to attract companies • 1956 – Research Triangle Committee, Inc. formed to promote the establishment of industrial research laboratories and other facilities • 1956 – Director (George Simpson) appointed to lead the Committee and advertise RTP to research companies throughout the US • 1957 – For-profit company (The Pinelands) formed independent of the Committee; purchased or optioned more than 1,699 hectares of land • 1958– Archie Davis raised nearly $2 million in private donations (not investments!) in 60 days • 1959– Dissolved Pinelands and Formed Research Triangle Foundation of North Carolina, a private, non-profit organization to develop and manage the land; also formed Research Triangle Institute (RTI) • 1959 – Chemstrand Corporation announces its decision to locate in RTP, becoming the park’s first major industrial tenant

7. Key Question asked in 1950’s in NC: In the face of major structural changes in the Economy – How to leverage local strengths and diversify the NC economy? How to bridge the research and Commercial Sectors in an effective way to enhance the economic well-being of the state?

8. Lest we forget - there was resistance… 1956 “Let me see, if I really understand what it is we are talking about here, you want the professors here and all of us to be the prostitutes and you’re going to be the pimp.” ─William Carmichael, representative of the UNC System, to Romeo Guest, developer and contractor 1990 “Looking back now, it seems so obvious that all these groups had a lot to gain by working together. But back then, it wasn’t so obvious . . . What it took was the willingness of public-spirited leaders from various segments of the community to downplay their differences.” ─George Simpson, founding director of the Research Triangle Committee, reflecting on the history of RTP

9. In hindsight, success was attributable to: • Cooperation among the 3 Research Universities in initial discussions that led to the Park • Creation of bridging institutions, e.g. RTI

10. In hindsight, success was attributable to: • Statewide focus of citizens and a “tradition of interaction” • No dominant city at time of formation • Most initiatives were “Statewide” (e.g. Art Museum, Symphony) • Statewide philanthropy efforts • Fed a “Statewide Perspective”

11. Other Factors • State leaders were accustomed to working in small groups that thrived on interaction • Tradition since the Civil War era • And Finally…Luck and Timing • Emerging consensus in 1950’s that technology was linked to economic prosperity • Sputnik in 1957 created urgency • Two tireless Governors: Hodges and Sanford

12. Late 50’s saw the emergence of …a competitive market for Ph.D.’s in S&E • A Research Park would create a ideal environment to: • Attract S&T industry • Capture & Retain Graduate Pool from Universities

13. RTP • 2,800 hectares in total size • 13 kilometers long and 3.2 kilometers wide • 450 hectares available for development • 2+ million square meters of developed space • > $2 BB in capital investment • Nearly 140 companies • 50% of the employees work for multinational corporations • All 100 counties in NC have connections to RTP companies

14. Resident Breakdown by Size [2006] • Employment: • 12 largest companies: 30,150. • Remaining 124 companies: 7,335. • Nearly 42% of companies have < 10 employees • Among large organizations, the majority are branch plants of large corporations, • most of which do not have headquarters in NC.

15. Fundamentally the Park • Represented a “planned approach” to S&T-based economic development • Like Austin, San Diego, N.VA; benefited from city and state as well as corporate and university involvement • Contrasted to 128 and San Jose • More organic and less facilitated

16. NC Recognized Early the Importance of Creating Structures to Institutionalize change NC Board of Science & Technology Helped to Create Initiatives That Have Made NC an International Model • e.g. Biopharma / Biotechnology …and works to to identify the next: • Emerging Industries – Nonwoven Textiles • Grid Computing • Advanced Materials / Manufacturing /Nanotechnology • Fuel Cells

17. North Carolina has been successful • It was among the first states in the nation to recognize that knowledge-based economic development creates high-growth companies and well-paying jobs. • Over fifty years ago it began making long-term investments • in universities and in • science and technology as drivers of economic growth.

18. Biotechnology Center as a direct example of a Bridging Institution • A patient, evolutionary model • The State committed initial investments largely to create academic positions and infrastructure at NC universities. • Later became economic development organization • In 1980, not an industry…

19. Currently in Biotech • Third leading state in biotechnology • 324 Bioscience companies • 31 Publicly traded • 30 Ag-bio companies – 2nd largest concentration in US (after CA) • 45 Based on University technology • 80 CRO’s – world’s largest concentration

20. Currently • 48,000 employees • 10% average annual employment growth 1996-2006 • Projected to lead the nation in employment growth in biopharma through 2014 • Direct Support Industry 28,500 employees • $3BB Payroll • Average salary $72,000 pa (avg mfg $37,000) • $145MM in state income taxes • 4x employment multiplier

21. NC has made significant progress and has been truly innovative • BioNetwork • training, curricula and equipment to develop a world-class workforce • Education • New Schools, 21c Skills • Engaged Universities – not just IP • Continuum/seamless models of education • Leaderhip in raising standards for students • Emphasis on Individual – Training and Workforce Development

22. NC Statewide

23. RTP Growth (1960-2001) Number of jobs Number of firms

24. Recent Accolades • #1 High Tech Region in US (Research Triangle Region) –"Projections 2006 - Daring to Compete: A Region-to-Region Reality Check," Silicon Valley Leadership Group, August 2005 • #1 Preferred State for Location and Expansion (NC) –Plants Sites and Parks, October 2004 • #2 Best Place for Business & Careers (Raleigh-Durham) –Forbes, May 5, 2005 • #3 Hot Cities for Entrepreneurs (Raleigh-Durham) –Entrepreneur Magazine, September, 2005 • #3 U.S. Metro Area for Biotech/Life Sciences (Raleigh-Durham-CH) Milken Institute, June 2004 • #5 Most Entrepreneurial City in the United States (Raleigh) –Visa's New Innovation Index, October 2004

25. Next – Kannapolis Research Campus • $1BB Private & Public Investment • Site of Pillowtex • 320,000 ft2 Core Laboratory facility, a state-of-the-art contract manufacturing biogenic facility, and Dole Institute • Centers for Advanced Fruit and Vegetable Science • Institute for Excellence in Nutrition • Centers for education and training for biotechnology • Institute for Translational Medicine • 350-acre campus is expected to total • 1 million square feet of offices and laboratory space, • 350,000 square feet of retail and commercial space and approximately • 700 residential units.

27. Challenges ahead: In the Next 10 years, existing clusters of strength will shift • BioPharma will commodify • Will become like the specialty chemical industry • More and More Generics • Biologics surpassed Pharma approvals in 2004 • FDA qualification not enough – Medicare in the driver’s seat • Emphasis on Wellness • $82BB worth of Blockbusters will lose patent protection in US by 2007 • Diagnostics – things that tell you what to take – will be the value point • The center of mass is moving from Pharma to Life Sciences

28. Nonetheless, the major issues facing NC today…

29. …are the same as 50 years ago • A Vibrant, Globally Competitive Diversified Economy • University Involvement in Economic Development

30. But the latter question is a bit different… • Was: “How can the Universities help attract industries to the State?” • Now is: “How can the Universities more broadly contribute directly to economic development?”

31. 2005 Metropolitan Institute at Virginia Tech In an Ecosystem that is now the product of two symmetrical processes Globalization Regionalization Increasingly, we must organize to link the response and capacities of naturally occurring economic regions within/across states to global economic conditions.

32. Because we have traditionally focused on Capacity Building • NC has built an enormous capacity for innovation in science and technology. • Despite these investments in technology, however, the state ranks only • in the middle of US states in terms of the vigor and impact of its high-tech economy.

33. National Position NC ranks in the 2nd tier of innovative states Milken Institute:State Technology and Science Index: Enduring Lessons for the Intangible Economy (2004)

34. Underlying this • North Carolina’s ranking reflects the academic rather than applied focus of its investments in Research and Development. • North Carolina must become more efficient at converting its innovation capacity into economic outputs.

35. Strong in Basic University Research University R&D • $4 / $1000 of GSP spent in University research • ~20% of relative total • MA ~$5 / CA ~ $3.50

36. Industrial R&D Not as strong in Private Sector R&D • $15 / $1000 of GSP spent in University research • National Average ~ $19 • ~80% of Total • MA ~$40 / CA ~ $30

37. As a result – in Total R&D We are slightly below average in total R&D spending • $21 / $1000 of GSP spent • National Average ~$25 • MA ~$50 / CA ~ $38 Milken Institute:State Technology and Science Index: Enduring Lessons for the Intangible Economy (2004)

38. Relationship Industry funds and conducts more R&D than all other sectors combined. Dominance of University R&D anticorrelates with dynamism of technology economy Inputs are not Outputs: Universities do the R, companies the D

39. Drives us Disproportionately Weaker in Outcomes • Milken 200 “Best Performing Cities” Nov 2004 • 1 yr + 5 yr Rolling View / Outcomes Only – • Job creation; • Jobs retention; • Wage and salary increases; • Economic growth, and • business creation & survival • RDU 34th among large metros (not 4th), Charlotte 50th (not 30th), Asheville 92nd, Wilmington 117th, G-WS 165th (not 45th).

40. Even in the RTP Our Strength is in inputs; NC is disproportionally weaker in conversion of invention to innovation. #48 In Gazelles #22 in Churn (Outputs) #1 In Innovation Capacity (Input)

41. The Same Trends are in Evidence in Emerging Sectors NC/RDU is among the top 10 U.S regions in university-based nanotech research

42. But RDU is Not in the Top 10 U.S. regions for Nanotech Firm Entry NC/RDU is not among the top 10 U.S regions in nanotech business creation

43. Which suggests to us that … • Pure university-based regional economic development policies are not effective enough to "upgrade" localities to a higher tier of innovative activities alone. • The presence of a "critical mass" of agglomeration in the area surrounding the university is required in order to expect substantial local economic effects of academic research.

44. A Policy View From an Economic Perspective, we increasingly view • University & Basic Science and Technology Research Systems as a form of Mixed Infrastructure • Their primary economic value comes from what they produce downstream • Enabled by collaborative bridges to engines in the private sector

45. Reinforced…We See the Impact of… …Public R&D falls dramatically with Metro Size • $300MM in Academic R&D yields: • 112 Innovations in Tier 1 avg. pop. 3MM • 16 Innovations in Tier 2 avg. pop. 1MM • 5 Innovations in Tier 3 avg. pop. 400K • 4 Innovations in Tier 4 avg. pop. 200K The same amount of university research expenditure yields substantially different levels of local innovation activity depending on the concentration of economic activities in the area. Source: Attila Varga, 2000

46. Exacerbated by the structure of Federal University R&D investments - • The top 200 institutions account for approximately 96% of all R&D expenditures; • Top ten institutions account for approximately 17% of all R&D expenditures; • Top 20 institutions account for approximately 34% of all R&D expenditures; • Institutions ranked between 101 and 200 accounted for approximately 20% of R&D. (NSF 2004 data, Bardo and Evans 2006)

47. Federal R&D Expenditure: 1970-2002 NSF 2006 data; Bardo and Evans 2006

48. Academic % Expenditure of R&D(NSF 2006) Academic R&D Expenditure: 1970-2002 Current university expenditures: Disproportionately Big “R” & Little “d” Basic Research Applied Research Development (NSF 2006, Bardo and Evans 2006)

49. NC’s Second Quartile Rank in S&T Economic Dynamism • Our percentage of university research is higher than typical of first tier states • While the percentage of industry R&D is lower. • Interestingly, Varga’s models confirm this. • Varga’s data included two metropolitan areas from North Carolina: Charlotte and Raleigh-Durham.

50. Commercialization Activity Downstream • Depends upon the local infrastructure of Bridging Institutions • And Private Sector Critical Mass • Enhanced by development of social capital within a particular geographic region. + Redefining the mission of (some of) the Universities in the system to include economic development?