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America’s Innovation Economy: What Are the Most Effective Economic Development Strategies

to Meet It?

By: Graham Toft, Ph.D.Senior Fellow,

Director, Center for Economic CompetitivenessHudson Institute

317-549-4185graham@hudson.org

Presentation at Economic Development and Utility Marketing Workshop, American Public Power Association.

Cleveland, OH. July 2004.

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Outline

Whose Pie is Growing? U.S. States

PIE = Pan-national Innovation Economy.

Quick Overview of U.S. Economic Conditions

─ Today’s Sweet Spots

─ Today’s Sour Spots

─ Recovery Headwinds

Some Generalizations About Tomorrow’s Economy

Ideas for Innovation Development.

What Local Economic Developers Must Do Now.

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Whose Pie is Growing? U.S. States.

Growth States 2003 - - Dynamism Sub-driver from Hudson’s State Report Card (positive change in gross state product, business growth, head quartered companies, incubators, capital formation, exports, income per capita, bank deposits, foreign investment)

DE MAMD CAVA COHI UTNY OK

What’s common: Strong technology / innovation base, or aggressively pursuing it.

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PIE = Pan-national Innovation Economy.

“Knowledge is the ingredient that underlies the competitiveness of regions, nations, sectors or firms. It refers to the cumulative stock of information and skills concerned with connecting new ideas with commercial values, developing new products and, therefore, ‘doing business in a new way.’ At its most fundamental level, the knowledge-base of an economy can be defined as:

The capacity and capability to create and innovate new ideas, thoughts, processes and products, and to translate these into economic value and wealth.”

Source: World Competitiveness Index

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PIE = Pan-national Innovation Economy. (cont.)

Some Attributes of PIE

High productivity – low inflation.Rapid technological change.High capital-labor ratios (capital deepening).Deregulation and market liberalization.Global marketplace.Sub-national regionalism.Mobility of:

─ Capital─ Innovations / Ideas─ Business─ People

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PIE = Pan-national Innovation Economy. (cont.)

Some Attributes of PIE (cont.)

Churning─ Business locate, then relocate (some off shore)─ Small Businesses start – Many fail.─ Businesses grow – Businesses decline.─ Job gains – job losses.─ People come – people go.

Theoretical Underpinnings:Joseph Schumpeter: “Gales of creative destruction.” or,

is it “wails” or “sails”Many state and local economic policies and fiscal

strategies have not adapted to PIE

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Quick Overview of Economic Conditions

Today’s “Sweet Spots” Low interest rates Low inflation Strong GDP growth Remarkable productivity Moderating money growth Strong corporate balance sheets Dollar devaluation (more exports)

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Quick Overview of Economic Conditions (cont.)

Today’s “Sour Spots” Slow job growth (3rd year into recovery) Marginal income growth Small rise in interest rates (not enough

cushion for the Fed Reserve yet) Global job shift Risks of new asset bubbles (real estate,

government bonds, high yield debt, technology stocks)

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Quick Overview of Economic Conditions (cont.)

Recovery Headwinds U.S. demand unable to spur global growth

(consumer tapped out – high consumer debt; slow / no income growth).

Extended high oil prices (supply-demand gap real?) Federal deficits (1.5 billion / day); also state deficits Trade deficits (1.5 billion / day) Mounting public debt, squeezing private borrowing Global deflationary threat, or is it cyclical inflation? Dollar collapse? How long will the “goods for bonds” compact with

Asia last?

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Some Generalizations About Tomorrow’s Economy

Great uncertainties today call for discerning the engines of growth for the future

This is the century of: Asia (high savings, emerging middle class, high motivation) The Cell; Nanotechnology; Advanced Materials, Energy and

Food (IT is now a given - - next jump is Internet 2) An Aging Workforce, even in the less developed world (the 50

– 60 year olds are your future!) The emerging “Creative Sector”

Agriculture / Mining / Construction

Manufacturing

Services

The Creative Sector

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Some Generalizations About Tomorrow’s Economy (cont.)

This is the century of: (cont.)

Trade / Global Markets The Entrepreneur

States and localities without an appropriate response to each of these will hurt; most are not prepared.

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Ideas for Innovation Development

Principles:

I say “Ideas”, we are all too new at this to say “best practices”!

It is very, very difficult to pick winners because of the churning nature of the innovation economy - - you are looking to build a “conducive environment” for innovation”

Innovation development calls for a bunch of non-economic conditions as well as economic e.g. quality of life for entrepreneurs, schools that value math and science highly, career technical education that highly links school and workplace.

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Ideas for U.S. States

Don’t tax productive investment. Many states still tax capital investment e.g. business personal property tax

Don’t tax businesses more than their cost to society Encourage collaborative discovery between firms and

universities. Use scarce state dollars to leverage federal and industrial R &

D funds. Develop a long term state energy policy. Seek to uncover sustainable growth polices that protect

environment / quality of life while spurring new investment. Remember the state budget is usually more than 10% of state

GDP. How these monies are used, influences state economic growth.

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Ideas for Regions / Localities

Cultivate an entrepreneurial climate (in schools, in business organizations, in civic institutions [social entrepreneurship].)

Identify, understand and engage your growth companies. Make sure you know how the “creative sector” networks in your

community / region. Foster networking if it is not there (e.g. a local “venture club”).

Know your angel network of potential investors. If not there, nurture it.

Find out if local companies have “orphan technologies”, “orphan business ideas” around which new ventures might start.

Have a very flexible pot of money for your business assistance / incentives. Traditional incentive packages may not work.

Develop an entrepreneur attraction program – some are foot loose!

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Ideas for Regions / Localities (cont.)

Negotiate with your Board as to how to measure success.─ Not just jobs created (may be few to begin with)─ Type of jobs (occupations)─ Wages / income─ Number of business starts; number that stay and grow─ Growth of clusters of related businesses.─ R & D funds brought into the community─ Patents, licensing arrangements, joint ventures.

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What Local Economic Developers Must Do Now? (Don’t Wait!)

If you don’t have an economic development strategy that identifies trends in your innovation economy – get one.

If your current economic development strategy is all to do with “traditional attraction” modify it – add an innovation / entrepreneurial development component.

If you don’t meet at least quarterly with other development professionals in your jurisdiction (career / workforce development, natural resource development, utility planning, community and downtown development, small business development, school planning, university / college development, broadband development, land use and transportation planning) Do it!

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What the Local Economic Developers Must Do Now? (Don’t Wait!) (cont.)

If you don’t have a good way to describe the “talent base” of your jurisdiction, get yourself a skills and educational attainment inventory.

If you don’t know who/where the growth companies are in your jurisdiction, find out!

If you don’t benchmark your economic progress against both the mainstream economy and your “new economy”, begin now

If you only count jobs created as a way to justify your success, give up!