economic development

A Clear and Compelling Vision for Economic Growth

You can tell from the nearly constant attack ads on television during the evening news that we’re in the middle of at least two contentious campaigns this fall here in Maine: one for Governor and one for the 2nd Congressional District, where a Republican Congressman is trying to keep his seat. Both races are very close. However, in all the noise, one thing is startlingly missing: a clean and compelling vision for how to improve Maine’s economic prospects. This is because the choices continue to be framed as less taxes and regulation for business against more rights and benefits for workers.

I recently reread Rob Atkinson and Stephen Ezell’s 2012 book, Innovation Economics, which reminded me that the answer is something completely different from this false paradigm. There are only three ways to get an economy to grow: increase productivity, create new firms or add activities that create new value. You increase productivity by increasing the revenue of each employee: improve processes, add technology to increase output, or add new products and services. Similarly, new firms or activities that create new value boost economic activity overall. Atkinson and Ezell say there are three things that build vibrant, healthy business establishments in globally traded sectors in order to improve economies: business leaders who will take risks, do research and development or create new products, and add new plant and equipment; workforce that supports these changes instead of being afraid of new technology; and government that supports investing in the future.

There are bright lights in many of the communities where I work, where entrepreneurs are taking risks, where business leaders recognize the need to invest in creativity and where civic leaders are adopting innovation and entrepreneurship as guiding principles for their cities, towns and states. Here’s hoping that grassroots change will save the day.

Seize the Day

Summer is fleeting in Maine. One minute, it’s the first warm beach day; the next, it’s what my grandmother called “the Fall-ish change.” We learned quickly to get in as much outdoors time as possible in June, July and August, take every opportunity to eat lobsters, corn-on-the-cob, and blueberry pie, and savor each moment against the reality of winter ahead!

Many involved in economic development, however, don’t recognize how fleeting their opportunities are. But the world around us is changing so fast that by the time we understand what’s happening, the window to act is already closing. Policy windows, especially, can be very narrow. The time leading to a gubernatorial election, for instance, is short, but often the only real chance in eight years to influence an incoming administration. The time when an industry or region is in crisis, and previously antagonistic players are willing to work together is also usually short.

Fear can interfere with the willingness to “Seize the Day.” But we must overcome this fear in order to take advantage of the opportunity. So, I’m taking the afternoon off to go kayaking. What are you doing to do today that you might not be able to do tomorrow?

Maine’s Innovation Progress (or lack thereof)

Our new study, Maine Knowledge Economy: A Snapshot of 2017 shows an increase in the relative importance of the state’s technology sectors, but also a corresponding lack of progress in the state’s economic competitiveness overall. All of the seven targeted technology sectors designated back in 1999 except forestry, exceeded Maine’s economy as a whole over the last decade. As predicted, those sectors with high science and engineering content, even those with a natural resources connection such as agriculture and aquaculture, have thrived.

On the other hand, when compared to the other New England states, this growth is not as robust. Maine continues to lag in the percentage of firms and employment that are “high technology” compared to our neighbors. The percentage of our jobs that are science, technology, engineering or mathematics (STEM), is lower than our neighbors, contributing to our lower per capita income.

Explanations for this lagging growth include the low level of investment in research and development, both at our academic institutions and in our businesses, with resulting lower patenting, venture capital and SBIR awards. While our rate of business formations is reasonably consistent with our neighbors, many of these new businesses in Maine are in non-technology sectors such as real estate, construction and hospitality.

The growth of some of the technology sectors with high employment, such as Information Technology and Engineering Services, is constrained by the lack of qualified workers: the level of working age adults, 25-44, with Bachelor’s degrees is lower in Maine than in the rest of the region, although there is some progress here. Almost 35% of degrees in Maine are in STEM fields, approximately the same as in MA.

Given that Maine has had a strategy to improve many of these indicators dating back over 20 years, the continuation of past trends is discouraging. And, it begs the questions, is it time for a different strategy? Or, is it simply that past public investments are been too low and erratic to be effective.

The answer is probably yes to both questions. Looking at the national landscape (and, indeed, some international models), those states and regions that have improved their competitiveness in the Innovation Economy are largely places that have invested heavily in research and development, entrepreneurial support, access to capital and workforce preparedness. Examples include Washington, Virginia, Maryland, Colorado, Utah, Connecticut, all in the top 10 states according to the 2017 New Economy Index. Laggard states, without significant state investment in innovation, include all but two of the bottom ten states. (Maine is number 36 of 50 on this list, down from rankings in the high 20s for most of the past twenty years.)

However, another critical difference between the successful state initiatives and Maine’s effort is how the money is spent. At some point, Maine policy makers started equating investment in research and development with investment in buildings where research and development occurs. And, because getting bonds approved in the legislature and through the public approval process is easier than identifying new money in the biennial budget, and bond money is constrained in its use to capital investments, over the years one-third of the $715 million of public investment went towards buildings. In contrast, only one percent went to the entrepreneurial support organizations that directly work with startup companies. The only program dedicated to encouraging businesses to patent was completely defunded a number of years ago. In contrast, most other states have significant investments focused on startups, and commercializing the research coming out of their universities.

What would I do? Here’s several thoughts:

1. Continue to fund the Maine Economic Improvement Fund. This is critical to keeping our level of research and development at UMaine high. Expansion would encourage other campuses, notably USM, to do more research, an effort that has been abandoned in recent years. Add $1 million/year to fund earmarked for patenting support statewide, to be provided by UMaine Orono to other schools as well.
2. Dramatically increase the funding available for entrepreneurship programs, up from $100,000 to $750,000. Use this funding to deepen the capacity of existing programs to serve more entrepreneurs across the state.
3. Rework or replace the existing R&D tax credit so that more companies in Maine can take advantage of this incentive. Expand the amounts available (by corresponding decreases in Pine Tree Zone, BETR and BETE programs), to get companies to increase their focus on innovation and bringing new products and services to market.
4. Support Maine Technology Institute at their current level, but use some existing funds for program equivalent of old Maine Patent Program.
5. Help companies scale-up past the startup phase by establishing funding (at MTI or FAME) for businesses to apply for substantial loans for purchase of equipment, training for workers, patenting, and marketing to expand product and service offerings.

Innovation First

Recently, I was emailing with a friend of mine who lives in Cheyenne, WY. We’ve been following an initiative of the Governor of Wyoming for economic development in the state. In December, the recommendations came out. “Rick,” I wrote. “This is great! They included some entrepreneurship strategies.” “I don’t agree,” he wrote back. “There’s nothing on innovation.” At first, I was taken aback. After all, the recommendations were pretty standard stuff. But then, I realized that Rick was 100% completely right.

We tend to focus on entrepreneurship, and sometimes R&D, but rarely on innovation in our public policy recommendations. And, innovation is actually the critical step. It’s the link between ideas and the market. It’s the key piece that allows companies, big and small, old or new, to produce something meaningful for their customers. Without innovation, there’d be no entrepreneurs! So innovation has to come first.

From a policy perspective, what can be done to support innovation? First, we can educate. Everyone can learn to be more innovative. It’s a process. There’s a system. Second, we can incentivize companies to do innovation. One effective tool is R&D tax credits, but likely they need to be redefined to include all innovation activities, not the old style R&D alone. Other tools include grants and loans to support innovation learning and implementation, grants and technical assistance for patenting, and for market research.

Thanks Rick, for the insight.

Innovation and Entrepreneurship go Mainstream

I recently had the occasion to review all the regional and statewide economic development plans, public and private, written for Maine in the last five years. The good news is that all of the plans identified some of the same challenges and opportunities for the state, and many agreed on the broad outlines of work to be done. For instance, nearly everyone now sees the demographic tsunami coming at us in the dual guises of an aging population and decreasing workforce. Another universal theme is the dearth of high-speed internet services, especially in rural areas.

For me, the shock was the also universal call for increased entrepreneurship and innovation. I wasn’t shocked at its inclusion: I’ve been calling for the same thing for literally decades. What was shocking was that these ideas are now mainstream. Unfortunately, the action and implementation plans associated with this goal are still weak and nebulous, leaving a lot to be desired.

Perhaps the reason for this is that it’s difficult to know exactly what to do, especially in rural areas, where entrepreneurs and innovators are far apart, and not particularly visible. I’m hosting a panel at the International Business Innovation Association (iNBIA) conference in late March to learn from people that are implementing programs to support entrepreneurs in innovation hubs in rural areas. As a group, the panelists seem undeterred by rural challenges. Just Do It seems to be their motto – maybe it’s time for Maine to do the same.

Unfortunately, the state budget currently being debated is looking in another direction. The Governor and his staff zeroed out funding for the state’s incubators, a grand savings of $170,000. We’re working on getting this put back or moved over to MTI who has the funds to support entrepreneurship programs. More later!

Needed: A New Approach to Economic Development

Do you think it’s a coincidence that there’s a 1:1 correlation between states that rank in the bottom 50 percentile on the New Economy and states that voted for Trump? I don’t. It makes sense that the populist fervor is coming from places that feel left behind in our decades-long transition to the New Economy. I’m convinced, however, that neither of the current political narratives will turn things around. Neither small government and lower taxes, nor increased distribution of wealth will help.

What’s needed is a third approach—one that focuses on spurring innovation, boosting productivity and improving global competitiveness. We need to ensure that our workforce has the education and skills to have a place at the table – meaning STEM education, retraining AND importing workers from away to shore up places with diminishing populations. And it means a concerted investment in broadband infrastructure and R&D focused on value-added agriculture and aquaculture, and energy production.

For a detailed look at this strategy, visit the website for the Information Technology and Innovation Foundation (ITIF), the leading US Science and tech policy think tank, led by Rob Atkinson. http://www.itif.org.

The worst mistake ever: running economic development like a business

“I’m a smart guy (or gal). I can figure this out.” I heard this all summer as we recruited for the Executive Director of the Maine Center for Entrepreneurial Development. We’re seeing it now in the appointees to President-elect Trump’s cabinet. We’ve seen it for years in economic development, especially the appointment of successful entrepreneurs or venture capitalists to run incubators and other entrepreneurial support programs. The assumption that many people make is that being good in business is the same as being good in government.

I argue that business acumen is necessary, but not sufficient for economic development. The skills sets required to get anything done in government are in fact extremely different from business; Phillip Joyce’s recent commentary in Governing lists the ways:

• In government, we need to be accountable to the public interest. There is no equivalent in business.
• Private sector focuses on profitability, while government is about the achievement of specific outcomes.
• Compromise is fundamental to success in the public sector.
• Government must constantly confront competing values; efficiency isn’t the only one.
• Government has a short time horizon, usually two years (due to the election cycle).
• Government actions take place in public, with scrutiny from the press and the public.

To this list, I would add that the operations of economic development organizations also require a firm grasp of macroeconomics, fiscal and tax policy. Specialized entities like incubators and accelerators also have a well-defined set of best practices. While there is always room for innovation, there is no excuse for starting from scratch, recreating the wheel or whatever metaphor you like. And the lessons learned in a single business or startup may not extend to a broad range of startups.

So, if you want to get something done in a public sector setting, I recommend getting someone with experience in both the public and private sectors. Been there, done that, got the tee shirt.

Innovation and entrepreneurship are core beliefs

I’ll admit it. I’m not a happy camper. I went to bed on election night with the realization that Trump was going to win, and when I woke up in the morning, it wasn’t just a bad dream. You can count me among the 64 million Americans who voted for a different outcome.

But, in my lifetime, I’ve been on the losing side about the same number of times as on the winning side, and somehow the country has survived, although I agree, this one feels different. I saw Senator Elizabeth Warren on television a few days after the election and she made sense to me. She suggested that we work with the President-Elect where his policies support things we think are important, and fight hard when they don’t. Isn’t that what we’ve always done? We all have core beliefs that we don’t compromise on. For me, that starts with basic human rights.

To that, I add the belief that innovation and creativity are the key underlying ingredients to our economy, and that can create prosperity for all of our neighbors, not just the elites. This means that we need to figure out how to make sure that we don’t just applaud new ideas, but also be mindful of how new ideas can leave people behind, and how to help those harmed by “creative destruction.”

Innovation and entrepreneurship aren’t partisan issues usually, but reasonable folks seem to disagree on how governments should best encourage them — invest or stay out of the way seem to be the two choices. The book The Entrepreneurial State, reviewed below, attacks this paradigm straight on, and debunks this myth, recounting in great detail the government investments behind most of the major innovations of our time, including the Internet and the iPhone. However, red tape does seem to be strangling many small businesses, and access to capital is more difficult now than ever before, largely due to banking regulations.

Let’s hope that supporting entrepreneurs is important enough for a bipartisan effort to unleash the economy in rural America, at the same time making transitions easier for those currently employed in jobs that are changing or going away.

The Genie Is Not Going Back in the Bottle

I used to think that innovation was a non-partisan issue. After all, who can argue with economic growth? Turns out, lots of people. Recently, I’ve seen a spate of articles that are saying that it’s innovation that has left so many Americans behind; that productivity gains have been at the expense of the workers. I’m having a hard time wrapping my head around this.

True, a manufacturing plant with a lot of robots needs less manual laborers, and has replaced workers who performed repetitive, predictable jobs with machines. However, new jobs have been created for folks who can program the robots, maintain them, and create new products that weren’t possible before. And, the new jobs pay better, are less hazardous, and are less likely to be mechanized or outsourced.

However, some individuals cannot or have chosen not to make the transition from one job to another. We’re hearing a lot of frustration from this camp in this election cycle, with anger directed outward.

It’s true that all change creates winners and losers. As a country, we’ve sometimes helped individuals and communities affected by change, such as assistance for places affected by military base closures or by foreign competition (e.g. Pittsburgh steel industry). At other times, we invoke Horatio Alger and say, “It’s your problem.”

I don’t think that we’re going to put the genie back in the bottle. Innovation is here to stay. So the challenge in front of us is to provide the opportunity for everyone to participate in the upside, even if that means a lot of retraining and investment.

Are Innovation Districts Remaking or Obsoleting University Research Parks?

When the grandfather of university research parks, the Research Triangle Park (RTP) near Raleigh, NC, is making major changes, you know something is afoot. After nearly 50 years, RTP is changing its approach, modifying its suburban campus’ auto-accessible layout to include a centralized “downtown.” Adding a new 400 acre new development will make RTP more like a city: stores, restaurants, condos and apartments “for a variety of incomes”—and of course, tech companies.

The motivation for this change is the rise of innovation districts across the country that are offering a new vision where anchor institutions like universities, large and small companies and the resources of the broader ecosystem co-exist to produce economic vitality and growth. And, these innovation districts are largely thriving in large metropolitan areas, challenging the suburban office park model.

What’s driving innovation districts? Millennials and Baby Boomers. The demographic shift, driven by aging Baby Boomers and Millennials, is causing population growth in metro areas after decades of flight to the suburbs. Both older workers and the youngest workers want to live, work and play in the same place, have lower car ownership levels and value an environmentally-friendly, low carbon footprint lifestyle.

While the 2015 census estimates seem to suggest that this pattern is slowing, there is no denying that large metro areas in the US are still gaining population as smaller, rural areas are losing. The salient fact is that the metro areas are not gaining simply because they are cities, but because of what they can offer: population densities that mean both larger and more diverse workforces and employment opportunities, cultural and entertainment options, and more transit options that environmentally conscious young people translate into a perceived lower carbon footprint.

Places where researchers, entrepreneurs and large companies employees rub shoulders on a day-to-day basis seem to have built-in opportunities for knowledge spillovers, an essential ingredient for economic growth. While older university research parks sought to create this type of interaction by isolating researchers together in campus-like settings, the new innovation districts feature more “happy collisions” where creativity intersects with diversity, yielding innovation. Places where creativity flourishes because there is a lot of new knowledge and where diversity of thought allows the transfer of ideas from one field to another will experience more innovation, than the older, isolated models of research parks where the collisions happen within the four walls of the individual laboratories. Compare the impressive results of a Bell Labs in suburban New Jersey, or the Xerox Palo Alto Research Center that yielded the essential elements of today’s computing experience, with the open innovation that is happening today in Kendall Square in Cambridge, or in Manhattan or Chicago.

The critical difference is the diversity of the broader innovation district, versus the uniformity prevalent in earlier research settings. Richard Florida, whose work on the Creative Economy first raised the idea of what the “creative class” can bring to a place, has looked systematically at what attributes are coincident with the attraction of venture capital. While you can easily see that there are some attributes that are naturally correlated, his observations strongly suggest the benefits of diversity to entrepreneurship and creativity. For instance, he finds that venture capital is highly correlated to higher education levels, foreign-born residents, the percentage of gay and lesbian residents, and levels of innovation as measured by patents and the location of high-technology industries.”

Steven Johnson also gives us some insights into the role of diversity. He notes that,

“Innovative environments are better at helping their inhabitants explore the adjacent possible, because they expose a wide a diverse sample of spare parts – mechanical or conceptual – and they encourage novel ways of recombining those parts. Environments that block or limit those new combinations – by punishing experimentation, by obscuring certain branches of possibility…will on average, generate and circulate few innovations than environments that encourage exploration.”

Johnson is saying that good ideas often come from areas of inquiry that are next to a known area, for instance, borrowing from shipbuilding to build a better airplane. And, he points out that if an organization or community lacks tolerance for borrowing or for new ideas, then it will be less successful.

Another element is the notion of information spillover – in dense environments, information spills over from one person to another – essentially people learn from one another more in regions where there is more density. More recent research suggests that the spillover effect is strongest within the first one-quarter of a mile, giving even more credence to the importance of geographical proximity.

All of the innovation districts, then, focus on creating dense urban places where people literally rub shoulders, creating “happy accidents” where knowledge is transferred, either formally through partnering and joint venturing, or informally, in an open innovation-style sharing of tacit knowledge. And, it’s the attitude towards this sharing that is important, whether it’s the paranoid, “someone is listening” attitudes common in the Boston area during the 1980s that ultimately resulted in the demise of the minicomputer businesses there, or the highly networked environment that propelled Silicon Valley during the same time period.

Some innovation districts, such as Kendall Square in Cambridge, MA and University City in Philadelphia, are urban versions of university research parks. Both feature one or more universities, plenty of large, innovative companies, as well as a rich entrepreneurial ecosystem, replete with venture capitalists, patent attorneys and other service providers necessary to growing innovative companies.

One big challenge for older, more rural or suburban university research parks is lack of mass transit or other “green” methods of transportation that link the parks back to their campuses and/or to the broader community. The lack of transit is a particular problem for getting younger workers to commit to jobs in these parks, and even the buses run by Google and others between their suburban locations and San Francisco are met with resistance by Millennial employees.

One area of disagreement among researchers is the role of universities and medical centers in innovation districts, the so-called Meds and Eds. Richard Florida, for one, flatly says that venture capital is negatively correlated with “Meds and Eds,” and suggests this is because commercialization of technology is not their primary purpose.

On the other hand, most of the examples of innovation districts cited by Brookings involve significant investment by major universities and university teaching hospitals. Indeed, Meds and Eds seem like great anchors for these districts, because they tend to be very stable, and don’t change location. It’s important, however, that these institutions be dedicated to supporting entrepreneurs both from the community and from their own ranks, and excellent at transferring their technology to the nimble, smaller companies that can successfully commercialize it. Simply building a new development near a university or teaching hospital and calling it a research park or an innovation district misses the point of the importance of the culture, workforce and synergy, not just the real estate. And, these sort of development run the risk of being innovative “in name only.”

Another caution is the risk of gentrification. Where these new districts are being superimposed on existing, lower-income neighborhoods, there is some effort being made to provide job opportunities. Where the partners are “meds and eds,” this is reasonably successful because there are a significant number of jobs in these institutions that do not require a 4-year degree. Workforce programs such as the one in University City, Philadelphia can help. There, the West Philadelphia Skills Initiative works in partnership with major employers to identify “real jobs with real vacancies” and then preparing unemployed West Philadelphians to excel in these jobs, putting them to work in their own community. –

However, caution should be exercised when considering an innovation district as an economic development strategy. Large tracts of land occupied by “meds and eds” may well bring urban vitality and redevelopment, but as nonprofits, likely contribute little to the tax base. Districts where “meds and eds” are tenants, versus owners, however, will contribute more to the property tax base.