From Site Selection magazine, January 2012
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States Reinvent the Future
Through Industrial R&D
he early years of the 21st century have been characterized by dramatic industrial shifts affecting the prosperity of our communities worldwide. While these shifts have generated some debate about the future of manufacturing in the United States, consider this. According to the National Association of Manufacturers (NAM), the U.S. remains the "world's largest manufacturing economy, producing 22 percent of the world's manufactured products" and manufacturing contributes "more than $1.6 trillion to the U.S. economy annually." Indeed, the competitiveness of our nation's manufacturing base is ever-so important and, in fact, is the very key to the economic recovery of our states and communities.
Fortunately, manufacturers across the U.S. are investing in their capacity to be competitive, recession notwithstanding. From January 2008 to November 2011, nearly 750 new R&D facility projects were announced — the majority of which appear to be advanced manufacturing-related — according to data tracked by Conway Data. (Looking back since January 2008 is particularly instructive as economists point to December 2007 as the start of the recession.) These projects reflect reported plans of $15.5 billion in new investment. From aerospace, automotive and alternative energy to computer systems and software, biotechnology, and pharmaceuticals, the portfolio for R&D investment is a diverse one. These announced projects also reveal diversity in terms of location: 44 states had at least one announced R&D project during this time period. With this said, certain states have shown dynamic leadership in terms of supporting and growing the industrial R&D sector.
Michigan, Ohio, Pennsylvania, Indiana, and North Carolina led the nation in R&D facility project announcements from 2008 to 2011. These states were also in the top 10 for the reported investment and job creation plans associated with these projects. Why have these states become the states of choice for new and expanded R&D activity in recent years? To help answer this question, it helps to highlight some key features in each state's supportive infrastructure.
"Access to talent is the most important factor in being an R&D state," said Michael Finney, CEO of the Michigan Economic Development Corporation (MEDC). Finney cited Michigan's deep bench of engineering talent as its number one asset for R&D, noting that all 15 of the state's public universities offer engineering programs. The state houses two of the nation's top engineering schools at the University of Michigan and Michigan State University. As a result, Michigan is producing new engineers by the thousands. According to the National Center for Education Statistics, the state ranked fifth in the nation in 2008-2009 for its graduates with a bachelor's degree in engineering (4,689).
A critical mass of engineers, coupled with the "very transferable" capabilities these individuals are equipped with, has enabled Michigan to become a hotbed for R&D activity in a variety of industry sectors, noted Finney. Recent R&D announcements include Nexteer Automotive ($413 million), MPI Research ($330 million), the Toyota Technical Center ($187 million), General Electric Co. ($100 million), and ConAgra Foods ($73 million).1
While Michigan is seeing R&D activity in diverse sectors, the automotive sector continues to be a significant contributor. The Big 3 domestic automakers remain key economic players for Michigan in manufacturing as well as R&D. In addition, Michigan has been successful in locating R&D facilities for the foreign-based automakers who have built U.S. plants in recent years. Finney pointed to the U.S. Environmental Protection Agency's National Vehicle and Fuel Emissions Laboratory in Ann Arbor as the main draw. The fact that all products launched in the U.S. have to pass emissions testing through this facility has motivated a number of these automakers to plant their R&D facilities nearby.
In 2006, Michigan's three largest research universities (Michigan State University, University of Michigan, and Wayne State University) joined forces to create the University Research Corridor to foster invention, innovation, and technology transfer. This is not the first time these universities have partnered — for example, in 1999, they created the state's Life Sciences Corridor. Together, these partners draw in nearly $2 billion in federal academic research dollars and engage in significant industry sponsored research partnerships. In 2011, they were joined by three other leading research universities to launch the "Michigan Corporate Relations Network," a statewide university network to foster business growth, attraction, and development. These efforts — supported with $1.8 million from the MEDC and Michigan Strategic Fund Board — will focus on generating university projects with companies.
The state is also channeling other funding to support its lead strategy — that is, to grow industry from within. For example, in 2012, it will invest another $6 million in incubator development. Over the years, Michigan has invested millions of dollars toward such activities. According to Finney, many of the state's efforts to foster technology-led growth began in the early 2000s when Governor Rick Snyder served as chairman of MEDC.
He described this as a "line in the sand" when the state decided that "we have to be more than a state that assembles automobiles."
Another major component of Michigan's tool box is its SmartZoneSM Network, launched by MEDC in 2000 to foster a dynamic collaboration among universities, industry, and government to commercialize technologies. Today, Michigan has 15 SmartZones across the state, including several that house technology accelerators, incubators and support services for start-up ventures. Michigan's Pre-Seed Capital Fund is designed to aid SmartZone companies in developing technologies in advanced manufacturing and certain other sectors.
Ohio's support of R&D dates back to the mid-1980s and includes a combination of historic and recently created programs, according to the Ohio Department of Development's Chief of Business Services Division David Zak and Norman Chagnon, Ph.D., deputy chief of the Office of Technology Investments and executive director of Ohio Third Frontier. They cited the economic downturn (and "rust belt" image) affecting Midwestern states as the catalyst for Ohio's efforts, prompting the state to create the Ohio Thomas Edison Program on the heels of Pennsylvania's Ben Franklin Technology Partners. Chagnon describes the Edison program as "all about advanced manufacturing" to leverage an already prominent manufacturing base and resulting in seven Edison Technology Centers created to foster R&D in this sector.
Applied research has long been a part of the university culture in Ohio. The Ohio State University, Ohio University, Case Western University, The University of Cincinnati, Kent State University and The University of Akron are just some examples of universities engaged in industrial R&D.
Today, efforts focus on open innovation where companies look outside themselves for strategic partnerships in advancing research, noted Chagnon. He pointed to 2002 as the year when Ohio created the Ohio Third Frontier program, a $1.6-billion program which includes $700 million for research and commercialization activities, to foster such collaboration. In addition to providing continued support for the Edison centers, according to Chagnon, the state has funded 13 Wright Centers of Innovation (at $15 to 30 million each) and invested $60 million at the Cleveland Clinic to create the Global Cardiac Innovation Center. All Wright Centers are closely aligned or embedded within universities or medical centers. In May 2010, voters approved an additional $700 million in bond initiative to continue support for the program for another four years.
Chagnon described Ohio as providing pipeline support from laboratory to marketplace. Through its Technology Investment Tax Credit, Ohio investors may reduce their state taxes by 25 to 30 percent on the amount they invest in qualified, technology-based Ohio companies. To qualify, companies are vetted by a committee to determine eligibility. Through Invest Ohio, individuals holding their investment in a company for two years may qualify for a 10 percent credit off personal income taxes. In addition, the state's Targeted Industry Attraction Grant program provides grants directly to companies for R&D after they receive a third-party validation of the technology potential by an expert consultant. For companies in business for three or more years, funding is available through the Innovation Ohio Loan Fund.
According to Zak, Ohio has also tied other incentive programs to R&D goals where dollars are awarded for projects which meet the requirement for industry research collaboration. In addition, through the Industrial Research and Development Center program, the state provides funding to cover up to 15 percent of the costs of the project (up to $5 million) if the company is willing to include an R&D center (meeting certain criteria) as part of its project.
The state has also made some significant changes to its tax structure, noted Zak. For example, Ohio eliminated personal property tax on machinery and equipment and certain other categories, and replaced this with a commercial activities tax on sales inside Ohio for companies earning beyond $1 million in sales. In addition, the traditional job creation tax credit is now based on new payroll rather than new jobs created. Ohio was reported to have the third lowest tax rate on new investment in the country according to a 2011 study by Ernst & Young.
Tom Palisin, acting deputy secretary of technology investment for the Pennsylvania Department of Community and Development, pointed to the state's 10 percent R&D tax credit as a major factor for the Commonwealth's success. Last year, 500 companies participated in the program. The program received a boost in 2011 when Governor Tom Corbett increased the cap on available credits from $40 to $55 million, shared Palisin. While R&D tax credits are now employed in several states, Pennsylvania also enables companies to sell unused credits for cash in a secondary market to help start-up and early stage manufacturers. According to Palisin's office, sold unused tax credits generated a total of $34.4 million in new capital from 2003 to February 2010.
The Commonwealth's higher education infrastructure is another major factor. The U.S. Department of Education reported Pennsylvania to have 257 degree-granting institutions in 2009-2010, the third highest among states in the U.S. In addition to the Pennsylvania State System of Higher Education (with 14 universities) and The Pennsylvania State University (with 20 campuses), Palisin pointed to private universities — such as Carnegie Mellon, Drexel, Lehigh, and Temple, to name a few — as being significant players in the state's R&D landscape in terms of work-force development as well as federally funded and industry sponsored research. The state ranked fourth in the nation for its number of engineering graduates (with a four-year degree) in 2008-2009.2
"We have a very strong advanced manufacturing sector," said Palisin, noting that R&D is a natural component of this sector. He cited the Ben Franklin Technology Partners (BTFP), created in 1983, as a key resource for developing a diverse sector over the years. Through BFTP, the state provides early stage and established companies with funding, business and technical expertise, and connections to expert resources. Palisin estimated that the BFTP received approximately $24 million from the state for the past 10 years. The partnership includes four regional headquarters centers and 10 satellite offices. BFTP makes direct investments in technology companies — which are selected after a vetting process that fosters confidence for other investors — and serves as an investor in select seed and early-stage state venture funds and angel investor groups.
Another asset Palisin identified as important to advanced manufacturing R&D is the state's Industrial Resource Centers (IRCs) which deploy technologies to hundreds of manufacturers each year. The IRCs are part of the national Manufacturing Extension Partnership supported by the U.S. National Institute of Standards and Technology and state government.
According to Secretary of Commerce and CEO of the Indiana Economic Development Corporation (IEDC) Dan Hasler, the Hoosier State's success can be largely tied to a pro-business environment fostered by Governor Mitch Daniels in the last seven years — one characterized by lower taxes (corporate income and property), a quick and predictable regulatory environment, and fiscal stability. While the state offers incentives, they are performance-based and provided to the company after the jobs are created or investments made, shared Hasler, noting how the state is achieving economic wins while maintaining its AAA bond rating.
In terms of R&D in particular, Hasler said the Hoosier State has attracted advanced manufacturing not because "it is cheaper to operate" but because they can "park themselves nearby a ready source of engineering talent." He pointed to major research universities such as Indiana University, Purdue University, and the University of Notre Dame as critical assets. Indiana is home to 21 technology parks adjacent to university branches initiated by IEDC or local government which create a bridge between industry and university, shared Hasler. He noted how this has fostered significant industry-sponsored research on campus.
Hasler also highlighted Ivy Tech Community College of Indiana — which specializes in providing two-year certification programs in advanced manufacturing and is the largest private training institution in the state — as a critical factor. "It's pretty hard to be in Indiana and more than an hour away from a school providing engineers … or, an Ivy Tech simulated training facility," he said.
Hasler attributed the success in R&D to the state's support of specific industry clusters rather than R&D specifically. Pointing to life sciences as an example, he noted how central Indiana is not only home to Eli Lilly but also to a number of smaller and mid-sized firms that are connected in customer-supplier relationships within a strong cluster, something recognized recently by The Wall Street Journal. Attracting and fostering R&D becomes a natural component of the cluster, he explained. As one example, he shared how a significant portion of the world's manufacturing for the orthopedics industry in Indiana has fostered R&D in medical devices and other areas. Some recent announcements in R&D include Abengoa Bioenergy of Indiana LLC ($169 million), Energy Inc. ($100 million), American Institute of Toxicology ($74 million), Elona Biotechnologies ($26 million) and Biomet Inc. ($26 million).1
Dale Carroll, deputy secretary of the North Carolina Department of Commerce, pointed to the state's strong manufacturing heritage and access to talent as key assets for fostering R&D. "Our work-force delivery system is a real strength for us," he said, explaining how companies benefit from the state's "three-legged stool" approach. With the University of North Carolina (UNC) system (16 institutions) serving as one leg, private colleges such as Duke and the state's community colleges serve as the other two legs. Customized technical training is rooted deep in North Carolina's toolbox, shared Carroll, noting it has become the pattern for others to follow.
Another key asset is what Carroll called the "global significance of the Research Triangle Park (RTP)." Created more than 50 years ago, he referred to RTP as a model for how to create engagement with universities through strategically developing parks nearby. RTP provides direct access to Duke, UNC Chapel Hill, and North Carolina State University. North Carolina has developed variations of RTP over years — Millenium Campus at Western Carolina University, Gateway University Research Park at UNC Charlotte, and Centennial Campus at North Carolina State University in Raleigh are examples. Another difference maker, according to Carroll, is UNC's system level attention toward R&D. In addition to employing a vice president focused on technology commercialization at its administrative headquarters in Chapel Hill, technology commercialization officers are also employed at some of the larger UNC member institutions.
An Ecosystem for R&D: Key Ingredients
It is clear that these states are seeking to reinvent their future by making R&D a priority. While each state's approach differs, following are some commonalities in their respective ecosystems.
1) They provide companies with significant access to talent, especially engineers. All five of these states ranked among the nation's top 12 for graduates with a four-year degree in engineering in 2008-2009.2 They also each have a strong two-year college infrastructure for producing R&D technicians.
2) They have engaged universities successfully as a lead partner for fostering collaborative research with industry, for commercializing technologies, and for fostering entrepreneurship — and have made substantial investments to support such activities within or in close geographic proximity to the universities or their branches.
3) They have worked to significantly increase access to capital for business development. And, when offering incentives, they are performance-based.
4) They have focused on developing a pro-business environment, one which makes it easy for existing and future businesses to operate. Tax reforms, regulatory changes, and process improvements are examples of efforts some have employed. Each state also has some form of a certified site program to help companies easily identify sites ready for development.
5) They have shown highly proactive economic development leadership at the governor, legislative, and state agency levels. Also, they have been generally consistent with their efforts (and associated funding) for several years — and, in some cases, decades, regardless of changes in administration.
Joy Wilkins is a Senior Fellow at The Fanning Institute at the University of Georgia.
Sources: 1 - Conway Data; 2 - National Center for Education Statistics