Economic Development in the Knowledge Economy: Can Ohio Start its Engines?
- Date: 02/16/2001
- Author: Dr. Luis M. Proenza (President, The University of Akron)
- Location: Cleveland City Club
Thank you, Dick Pogue, for your thoughtful introduction, and thank you, also, for all that you do for Northeast Ohio. We are fortunate to have your leadership.
And thank you ladies and gentlemen for your invitation, which speaks so clearly to the new spirit of regional cooperation in Northeast Ohio; and I am pleased that you have offered me a forum at this, the "citadel of free speech."
Before I begin my formal remarks, let me take a few moments to share a couple of pieces of information, because yesterday was a good-news day.
First, many of you may have seen the newspaper coverage of a new discovery announcing a self-healing polymer - a material that is capable of repairing itself, and that will become relevant later in my discussion.
Second, some of us were in Washington yesterday at The National Press Club, where The University of Akron received news of its largest-ever grant - a $13.7-million award - from the Robert Wood Johnson Foundation for a landmark and pioneering study to be conducted in conjunction with D.A.R.E. America. It is a drug and alcohol abuse prevention program that will reach more than 50,000 students and in so doing, continues The University of Akron's commitment to transformational leadership for the communities that it services. We are proud of that association and pleased to be joining the Robert Wood Johnson Foundation in such a landmark study.
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That we live in interesting times is the understatement of our modern age.
"Seismic rumbles of change," to use Chuck Vest's phrase, are transforming our traditional paradigms of business, education, and government.
Cataclysmic and increasingly more frequent forces throw us into peaks and valleys and sudden twists and turns, as if on a roller coaster, sometimes only to end up where we started.
Indeed, that is just how it has been for me in coming back to Ohio, because 20 years ago I was advising then - Governor of Georgia, Joe Frank Harris, to emulate Ohio, which had just then started its Edison Programs. And now, I find myself telling Ohio Governor Bob Taft to emulate Georgia!
That is how much more Georgia has done than Ohio in the ensuing 20 years . . . and so much so that Georgia, which was hardly known for much more than cotton, peanuts and peaches, last year was first in high tech job creation and fifth in venture capital investment.
We do live in interesting times, yet the prospect of change always seems to raise a sense of excitement and, simultaneously, a sense of risk.
For some, risk becomes anxiety. And quite often, particularly in academic and political circles, anxiety leads to "analysis paralysis."
But remember that risk and anxiety are two quite different conditions.
A simple story will illustrate the point:
The Surgeon General tells us that cigarettes kill more than 150-thousand Americans each year, and automobiles on our highways kill more than 50-thousand people per year. But, nobody seems to be afraid of cigarettes or automobiles.
However, according to the Deputy Director of the National Institutes of Health, everyone is afraid of sharks.
The Navy says that there are about 50 shark attacks worldwide each year.
The National Bureau of Health Statistics does not even keep a record of shark attacks because there are so few. (They know how many people are killed by bee stings, but not shark bites.)
The best guess is that sharks kill two or three people each year in the United States.
But, the fact is that if you went to a crowded beach and shouted "shark," everyone would race out of the water, jump into a car, light up a cigarette, and drive home!
That's the difference between anxiety and risk.
Each of us feels this way about various things and some activities in our society.
How nice it would be if we could put risk and anxiety into perspective, and move to better distinguish the "sharks" in our lives.
Indeed, where reason and calm prevail, there is always optimism, and much that can be accomplished for the common good.
With these thoughts in mind, let me now turn to the topic of economic development in the knowledge economy.
I will tell you how Ohio relates to our national innovation system, that universities are sources of innovation for economic development, and that some states, such as Georgia, have recognized that the role of innovation is so fundamental that they have made higher education the infrastructure of their new economy.
I will tell you, also, about some issues that we have to face here in Ohio, and about some of the things we must do, if Ohio is to regain its place among the leading regions driving economic prosperity in America and, indeed, the world.
In short, I will tell you that it is high time that we start the engines of economic development in Ohio!
It is time, because in the new economy, innovation drives technological change, and new technology, in turn, drives business success and new business creation.
In today's knowledge-based economy, you see, human capital is business capital. And staying close to the source of knowledge creation is not just a good idea; it is a business necessity.
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)That is why Donald Alstadt, the chairman and C.E.O. of the Lord Corporation, has maintained an office at each of 10 or 15 universities -- so that he can be the first to "mine" new knowledge and technology and thus gain a competitive edge for his company.
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)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.
And because of that research, The University of Akron today has the second-largest intellectual property portfolio among public universities in Ohio, and relative to its inputs, the most productive by far, according to a study by McKinsey and Company.
Because of that research, The University of Akron is the only university in Ohio, public or private, to have a science and engineering program ranked among the top five nationally, and the only one so highly ranked that serves an industry, Ohio's second largest industry - the polymer industry, with annual sales worth $22 billion, second only to agriculture and far ahead of any other.
Indeed, The University of Akron and Case Western Reserve University (CWRU), which ranks in the top 10 in polymers, constitute a formidable force of polymer expertise.
And, The University of Akron is proud to serve the polymer industry and the state with this expertise.
Yes, universities are powerful engines that drive economic development, and they do so because they play three major roles:
The first and perhaps the most widely understood economic development role of universities is in workforce development.
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 technology transfer occurs by people moving from one place to another.
And no one knows better than you that, across the nation, workforce development remains the number one issue for business.
The second role that universities play in economic development is the leveraging of new dollars into the economy.
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. Add them up and you get a whopping $7 billion.
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 research and the production of new knowledge.
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, and 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, as such, it is understandable that some states have made higher education the infrastructure of their new economy.
Education is infrastructure, because new knowledge builds new wealth just as surely as new materials build new structures.
How much new wealth? A lot!
Some of you got a glimpse of the power of new knowledge in creating new wealth at a forum on "transitioning into the new economy" last October hosted by Dick Pogue here in Cleveland.
(10/31/00).There, Mike Ruettgers, executive chairman of EMC Corporation, quantified the successive growth in market capitalization that has occurred in the IT industry as new technologies have overtaken older ones.
And in each successive wave, there has been a tenfold increase in wealth creation.
From $80 billion in the mainframe era, to $800 billion in the wave of the personal computer, to what is now rapidly approaching $8 trillion in the current Internet era of the Cisco's, Lucent's, Nokia's and other similar companies.
And already Mr. Ruettgers sees a new emerging opportunity centered on information itself that could reach $80 trillion!
(Mike Ruettgers, "Information Infrastructure: The New Business Accelerator," presented at the workshop on Transitioning into the New Economy, Cleveland, Ohio, October 31, 2000)That's the power of the knowledge economy!
That is the power of innovation!
But, in Ohio, it is a power largely untapped.
Ohio is lagging behind other states.
I have already shared my surprise in noting how Ohio has stood still in the last 20 years and about how much other states have done in that time.
And, Brent Larkin chronicled state-by-state comparisons in a recent Plain Dealer editorial.
(1/7/01).Indeed, all across the state, many of us have commented on the enormous progress being made elsewhere and on how we in Ohio are doing too little, too late, and falling further and further behind the curve of opportunity.
There are encouraging signs, of course, but moving forward is not necessarily progress when the competition is passing you by.
So it is time that we start our engines, and to do so we must address three fundamental issues.
First, I submit that we must move from the artificial and narrow perspectives of city-states to the realities and breadth of regional alliances and opportunities.
To begin with, let us face the distance issue. Contrary to popular opinion, the distance between Akron and Cleveland is the same in both directions!
As Seth Taft has suggested, perhaps we do need a new capital in Independence.
Economies transcend artificial political boundaries and reflect regional concentrations of industrial activity that capture strengths and economies of scale.
However, the best argument for the regional approach that Northeast Ohio is calling for comes from the power of clusters in fostering productivity and innovation, and from the power of clusters in shaping a new way of thinking about our economy.
I have been privileged for many years to work with the Council on Competitiveness in Washington, and I currently serve, together with Sam Gibara of Goodyear, on a steering committee for the Council's Clusters of Innovation Project, which is headed by Michael Porter of Harvard.
As you know, Northeast Ohio has been working on a clusters project for the last several years. But mapping clusters falls short of the full power of clusters thinking. So let me share a couple of points from Professor Porter's work.
(see, e.g., his recent book "On Competition," Harvard University Press, 1998, pp 197- 287)For one thing, most of the clusters mapping that has been done focuses only on individual industries and not on all of their inputs, outputs and interactions. It fails to connect some of those missing links that Dennis Eckart talked about last November at this forum.
Indeed, Porter tells us that "Cluster boundaries rarely conform to standard industrial classification systems, (because such systems) fail to capture many important actors in competition as well as linkages across industries."
(p 204)"Clusters vary in size, breadth, and state of development," and include "· linkages, complementarities, and spillovers of technology, skills, information, marketing, and customer needs that cut across firms and industries."
(p 205)". . . such connections are fundamental to competition, to productivity, and, especially, to the direction and pace of new business formation and innovation. . ."
(p 205)"Clusters (also) constitute a forum . . . among firms, government agencies, and institutions" . . . such as schools, universities, utilities, and trade associations.
(p 204)In other words, "Clusters represent a distinct way of organizing economic data and (of) viewing the economy."
(p 204)One of the important lessons from Porter's work is that in our rush to become high-tech, it is easy to forget that every industry evolves through innovation.
In our rush to become high tech, we think that high technology applies only to companies in information technology and biotechnology. But in that limited sense, the term high tech is both misleading and of questionable relevance.
(p 209)Porter tells us that . . . "All industries can employ high technology, all industries can be knowledge intensive."
(p 209)And he reminds us that, "Traditional clusters," such as metals and polymers, "should not be abandoned but upgraded."
(p 247)And that is the significance of the self-healing polymer discovery that was reported yesterday, because in any industry, it is productivity and innovation that drive economic competitiveness.
(p 210)And that is an important lesson for us in Northeast Ohio.
Second, I submit that we must turn away from a risk adverse subsidy mentality toward one of investment and entrepreneurship.
Any cursory review of legislative language will tell you that this is so, because the state's appropriation for higher education is called a "subsidy."
Yet, nothing could be further from the truth. National figures show that people with a Bachelor's degree earn twice as much as individuals with only a high school diploma.
(M. Milken, Wall Street Journal, September 5, 2000, p A34)And with their higher incomes, college graduates 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 their college education!
That is a nearly two-to-one return on investment, and by anyone's accounting, that is an excellent return on investment!
And beyond those increased tax revenues, there are additional returns of as much as 60 percent per year resulting from the enhanced innovation and productivity of a higher-quality workforce.
And there are yet other economic benefits to be counted - namely the enormous savings from the many costs otherwise associated with the lack of education, including unemployment, welfare, and crime.
Indeed, as Derek Bok, the former president of Harvard University, often said: "If you think education is expensive, try ignorance."
And we have!
The proof is in Ohio's failure to invest in higher education, which has slowly but surely lowered the percentage of educated people - with the obvious consequence of a lowered per capita income and a less-than-competitive economy.
In fact, we have a 250,000-person education deficit, because that is how many new college graduates the state needs to add just to come up to the national average. The report by Paul Gottlieb issued recently gives added weight to what Ohio needs to do.
(The Problem of Brain Drain in Ohio and Northeastern Ohio: What Is It? How Severe is it? What Should We Do?, The Center for Regional Economic Issues, Weatherhead School of Management, Case Western Reserve University, January 2001)Here is how this happened: Thirty years ago, former Governor James Rhodes, together with the Board of Regents, pledged that no Ohio student should ever have to pay more than 30 percent of the cost of a public college education. But Ohio's failure to invest has now pushed the student share of a college education to more than 50 percent, while across the nation, other students pay an average of 20 percent.
Thus, by failing to invest, Ohio has created a huge disincentive for its students and a tremendous disservice to our economic future.
It is time that we learned the value of investment!
It is time, because the technology transfer that you want Dave Auston and Case to make happen here in Cleveland, and which we want to continue in Akron, does not happen without a strong research base and 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 a strong research base, because the number of technologies to be transferred is directly proportional to the size, or horsepower, of the research engine.
McKinsey and Company, as part of the Ohio Growth Project, 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 now just breaking 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, $20 million, has generated patents at nearly three times the rate of the best universities, and has annual revenues already approaching a million dollars.
No, there are no guarantees, but Ohio has been loosing ground precisely because the state has failed to make the needed investments to grow its research capacity at the same rate that other states have been growing theirs!
To move ahead, we not only have to create an entrepreneurial environment, we first have to enhance our research capacity.
With The Ohio State University serving Central Ohio, and Cincinnati now beginning to serve Southern Ohio, shouldn't we now build upon the excellence of The University of Akron and make it the public research university for Northern Ohio?
Its current mix of scientific and engineering disciplines, its documentable strengths, and its recognized commitment to industry, make Akron the only logical candidate.
It is time we learned the value of investment!
Finally, I submit that we must move beyond an attitude of not-so-benign neglect to one of informed and active responsibility!
To sustain a competitive rate of economic growth, nations invest an average 2.4 percent of their GNP, and corporations spend 2.9 percent of annual sales, on research and development. Many states, also, invest heavily in research as a source of economic growth.
Ohio has invested in some research. For example, The Ohio State University alone receives more than $60 million in yearly support for work in agriculture, which is perhaps our state's largest industry.
Similarly, Ohio currently invests $100 million annually, including $23 million for research to support the coal industry, even though the coal industry accounts for a mere four-tenths of one percent of Ohio's gross state product.
By contrast, Ohio's investment to sustain competitiveness in the polymer industry seems paltry.
Ohio last year invested only $1.4 million in support of polymer activities, and that is less than one one-thousandth of one percent of the $22-billion annual value of our polymer industry.
And that is an infinitesimally small investment for an industry that accounts for nearly one fourth of Ohio's manufacturing output.
Rather than benign neglect, this paltry support borders on "criminal negligence"!
Other industries are similarly under-served. With the exception of the Welding Institute in Columbus, for example, there is no dedicated, university-based research and development capacity supporting the metalworking industry.
You know, of course, that Governor Taft recently proposed a $110-million loan to our steel industry. And it is more than warranted.
But we should ask whether the loan would have even been needed, had Ohio established that research capacity in earlier days.
And what of the thousands of other metalworking companies that are crying for innovative technologies to sustain a competitive edge if not for their sheer survival?
It is time to start our economic engines!
The Ohio Growth Project, from the Business Roundtable, and the Ohio Plan from the Board of Regents, are important new proposals made this past year.
But as important as they are, only modest funding has been recommended.
And there are two additional steps that must be taken if we are to succeed, because in neither plan is there an analysis that matches strengths to opportunities, nor one that identifies research gaps, such as those to which I have just referred.
Fortunately, there are bright signs ahead for the polymer industry.
A comprehensive industry association is being formed, Polymer Ohio, Inc., thanks to the leadership of Tom Waltemire at PolyOne and Joe Bergen at Sajar Plastics, among others, including many of my colleagues at The University of Akron.
And with the strong support of NORTECH and of the Ohio Department of Development -- thanks to Bill Sanford, Dorothy Baunach, Pat Valente, Frank Samuels, Norm Chagnon and Jakie Rudolph -- The University of Akron is undertaking several initiatives, many in collaboration with key partners like CWRU and the Battelle Memorial Institute.
Specifically, we intend to double the size of our research capacity, create a Global Polymer Academy, engender an effective commercialization engine for new polymer technologies, and establish, together with industry, a national resource that will advance technological innovation across the spectrum of the industry.
That is matching strength to opportunity; that is an informed and active responsibility for our state's second largest industry - polymers!
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, universities, area business, industry, and government must work in partnership to support clusters of innovation that will ensure an increasingly stronger and larger source of human capital.
Ohio, Start your engines!
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