While U.S. universities have played an important role as drivers of local innovation for well over a century, state governments have emerged as major promoters of innovation much more recently. While some modern state economic development efforts can be traced back to the early Twentieth Century, the focus on strategies for innovation-based development has grown in recent years.1 First-generation industrial promotion programs frequently included a science or research dimension, but in most cases, placed primary emphasis on buttressing and retaining existing industrial sectors and recruiting major companies from other states.2 Today, there is a growing emphasis on the growth of local innovation ecosystems and the role they can play in revitalizing older manufacturing sectors, helping new industries arise out of the established
1State-driven economic development efforts are traceable back to the early federal period. In 1791, the New Jersey Legislature authorized the incorporation of Alexander Hamilton’s Society for Establishing Useful Manufactures as an institution for industrial development, extending to it a state tax exemption, the power to condemn property for its own use and legal control over much of the water supply of Northern New Jersey. Peter K. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, Madison: The University of Wisconsin Press, 1988, p. 15. The Erie Canal was built largely as a result of the efforts of New York Governor, DeWitt Clinton who persuaded the New York legislature to approve and support the project. Evan Cornug, The Birth of Empire: DeWitt Clinton and the American Experience, 1769- 1828, Oxford: Oxford University Press, 2000, p. 8. Enactment of Right to Work Laws prohibiting the closed union shop began in the South in the 1940s, spreading to Great Plains and Mountain states, reducing labor costs as an inducement to attract manufacturing firms from states with a high percentage of unionized workers. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, op. cit., pp. 165-167.
2For a review of the relevant policy landscape up to the mid 1990s, see Kevin T. Leicht and J. Craig Jenkins, “Three Strategies of State Economic Development: Entrepreneurial, Industrial Recruitment, and Deregulation Policies in the American States,” Economic Development Quarterly 8(3):256-269, August 1994. The authors find “evidence of three general approaches: (1) an entrepreneurial approach focusing on new firm and technology development; (2) an industrial recruitment strategy emphasizing financial incentives for the relocation or expansion of existing enterprises; and (3) a deregulation approach that minimizes governmental control over private enterprise.”
TABLE 4-1 Large Recruitment Incentives
Company Year Site State
Incentive (Millions of Dollars)
Boeing 2003 Everett WA 1, 984
AMD 2006 Malta NY 1,118
ThyssenKrupp 2007 Mt. Vernon AL 734
Scripps 2003 Palm Beach FL 567
IBM 2000 East Fishkill NY 533
Volkswagen 2008 Chattanooga TN 450
Kia 2006 West Point GA 353
Toyota 2006 Blue Springs MS 292
Nissan 2000 Canton MS 290
Sematech 2007 Albany NY 269
Dell 2004 Winston-Salem NC 242
Hyundai 2002 Montgomery AL 234
Ford 2006 Detroit MI 220
Toyota 2003 San Antonio TX 218
manufacturing base, and in recruiting out-of-state firms with knowledge-based incentives rather than (or in addition to) traditional fiscal and infrastructure incentives.3
FROM INDUSTRIAL RECRUITMENT TO SCIENCE-BASED DEVELOPMENT
Industrial Recruitment
The modern practice of systematic promotion of local industry began in the first decades of the Twentieth Century, when southern states sought to attract companies by offering tax incentives, capital, and subsidized plant and industrial sites4. The practice of industrial recruitment eventually spread to the rest of the country and evolved from “smaller deals with manageable incentive amounts in the 1950s and 1960s to fiercely competitive megadeals involving hundreds of
3For a review of the growth and scope of contemporary innovation-based economic development policies by U.S. cities, regions and states, see David B. Audretsch and Mary L. Walshok, Creating Competitiveness, Entrepreneurship and Innovation Policies for Growth, Northampton, MA: Edward Elgar, 2013.
4In 1971, the New Jersey legislature incorporated Alexander Hamilton’s private firm, the Society for Establishing Useful Manufactures, to promote industrial development. The society received a state tax exemption, control over much of the water supply of northern New Jersey and the power to condemn property for its own use. Eisinger, The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States, op. cit., p. 15.
millions in corporate tax breaks and cash giveaways from the 1980s onward.”5 A recent survey of the biggest incentive deals in the United States between 1999 and 2011 revealed thirteen transactions in which states paid companies incentives in excess of $200 million and in one case, nearly $2 billion.6
The so-called recruitment incentives aimed at attracting businesses led contemporary media to characterize them as “blind smokestack chasing” or
“buffalo hunts” and a zero-sum “economic war between the states.”7 Companies have found that they can force states into bidding wars over locational decisions to extract the maximum concessions with respect to incentives.8 In 2004, Dell agreed to build a factory in North Carolina’s Piedmont Triad, after the state—
that prided itself on the lack of corporate incentives on its books—agreed to a
$242 million package of tax incentives over a 15 year period. A local observer commented that
Dell has turned the art of negotiating economic development into a science by taking the same approach to incentives that it does to the rest of its business, steadily ratcheting up the stakes. More than a decade ago, Round Rock, Texas offered Dell a 60-year package of tax refunds that eventually drew the company's headquarters out of Austin... six years after its deal with Round Rock, Dell wrangled a 40- year, $166 million package of grants and tax breaks from Nashville, Tenn… few communities or their elected officials are willing to call a company's bluff when jobs are at stake.9
While academic criticism of competition between states to attract companies through incentives is not altogether misplaced, it overlooks the fact that some state recruitment efforts have attracted innovative companies that have put down local roots, undertaken extensive local investments (including training programs and major contributions to local universities) and which have had very positive long-term local economic impacts.10 Perhaps the most salient example
5Nichola Lowe, “Southern Industrialization Revisited: Industrial Recruitment as a Strategic Tool for Local Economic Development,” in The Way Forward: Building a Globally Competitive South, Chapel Hill: Global Research Institute, 2011.
6Kenneth P. Thomas, Investment Incentives and the Global Competition for Capital, Basingstoke:
Palgrave MacMillan, 2011, p. 99.
7Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly 18(2):114, 2004.
8“As Companies Seek Tax Deals, Governments Pay High Price,” New York Times December 1, 2012; “State Should Stay Out of Investing In Plants,” The Times Union June 9, 2012.
9“Some Believe Incentives are Wasted on Big Business—More Bang for the Buck Might Come from Helping Smaller Businesses, Which Could Create More Jobs,” Greensboro News & Record, November 30, 2004.
10For a balanced examination of the debate over the value and effectiveness of incentives as a development tool, see Jonathan Q. Morgan, “Using Economic Development Incentives: for Better or for Worse,” Popular Government Winter 2009.
of a successful recruitment initiative involving knowledge-based industries is the creation of North Carolina’s Research Triangle Park, described in the Annex to this report. Another example is Texas’ victory in the 1987-88 competition between states to secure the SEMATECH consortium, in which Texas prevailed because of the presence of the University of Texas at Austin and the state’s commitment to enhance the university’s microelectronics infrastructure.11 More recently, New York has successfully implemented a university-based
recruitment strategy that has led to the creation of a semiconductor
manufacturing cluster in the region around Albany, including, ironically, the transfer of SEMATECH headquarters from Texas to New York.12
The Emergence of State Science Economic Development Policies During the 1960s, formal state advisory bodies were set up with the support of the Commerce Department’s State Technical Services Program (STS), which was cancelled by the Nixon Administration. In 1977, Congress authorized the National Science foundation to set up the State Science, Engineering, and Technology (SSET) program to support the development of science and technology strategic plans by the states. As a result of these programs, by the end of the 1970s, most U.S. states had some form of science and technology advisory organization associated with their government. These entities offered planning and advice to governors, but in general did not engage industry or state economic development bureaucracies.13
During the 1970s, the U.S. was buffeted by rising energy costs, inflation, and intensifying international competition. A severe economic
slowdown in the early 1980s hit traditional manufacturing industries particularly hard, and the term “rust belt” came into popular use in reference to large areas of the industrialized Midwest, Northeast, and Upper South. The erosion of U.S.
manufacturing is observable in high technology industries as well as traditional sectors. The U.S. trade balance has shifted from surplus to deficit since 2001, with an $81 billion deficit in 2010. With this decline, the U.S. has lost research and development activity associated with manufacturing to other countries. Job losses in the advanced manufacturing sector are of particular concern because
11“The university was cited by SEMATECH as a main reason they chose Texas over 11 states that competed for the high tech prize.” “UT Officials Elated at SEMATECH Decision,” The Dallas Morning News, January 11, 1988; “SEMATECH Research Contract Approved by UT Regents—
University to Study Semiconductor Manufacturing,” Austin American-Statesman February 10, 1989;
“State Board OKs $38 Million in Bonds for Project by UT,” Houston Chronicle February 17, 1988.
12See Chapter 7.
13Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly 18(2):115, 2004.
high technology workers earn 50 to 100 percent more than the average of workers in all other fields.14
With the decline of manufacturing during and after the 1970s, U.S.
states began to rethink their development strategies and the focus on the entrepreneurial dynamism evident in areas such as Silicon Valley, Route 128, and North Carolina’s Research Triangle. Texas revolutionized incentives competition in the early 1980s by recruiting the research consortia Microelectronics and Computer Technology Corporation (MCC) and SEMATECH using not only traditional lures like tax abatements and
infrastructure improvements but also endowed university chairs and access to talent pools. In a major reappraisal a number of states,
realized they had not been engaging their universities in economic development; even fewer had thought of talent not as a mere
commodity but as a discriminating vehicle for the future growth of state and regional economies …unlike the many previous chases for auto, steel, brewery, and other durable manufacturing branch facilities, this competition began a change in direction for state economic
development to one involving talent, technology, and capital, not one just focused on traditional real estate issues of financing bricks and mortar.15
The 1980s saw a profusion of advanced technology programs at the state level, which featured aspects such as university-industry government R&D projects, promotion of start-ups using policy tools such as incubators and venture capital pools, and the provision of vocational and technical education and training. Cooperative research centers or “centers of excellence” were established pursuant to new state initiatives, including Ohio’s Thomas Edison Program and New York’s Centers for Advanced Technology programs.16 At present, all fifty U.S. states incorporate science and technology programs in their economic development strategies.17
The recession of 2008-09 hit state budgets hard, and by 2010, 44 states had budget deficits.18 However, a number of states that had committed to long-
14President’s Council of Advisors on Science and Technology, Report to the President on Ensuring American Leadership in Advanced Manufacturing, June 2011, pp. i, 9.
15Walter H. Plosila, “State Science and Technology-Based Economic Development Policy: History, Trends and Developments and Future Directions,” Economic Development Quarterly, 18(2)115-116, 2004.
16Irwin Feller, “Evaluating State Advanced Technology Programs,” Evaluation Review 12(3):233, 1988.
17Susan E. Cozzens, et al, “Distributional Effects of Science and Technology-Based Economic Development Strategies at State Level in United States,” Science and Public Policy February 2005, p. 32.
National Research Council, Building the Arkansas Innovation Economy: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012, p. 59.
term efforts to promoting innovation have sustained funding through the period 2008-13. Ohio voters approved an additional $700 million for the state’s Third Frontier innovation institute in 2010.19 New York has sustained financial support for its nanotechnology initiative in the years since the 2008 financial crisis, including a $400 million contribution to SUNY Albany’s College of Nanoscale Science and Engineering in 2011.20 A recent study of Arkansas’ innovation initiative reported in 2012 that the state’s knowledge-based economy initiatives focused on research have received $61.2 million in state funding from 2008 through 2011 and leveraged on additional $191.8 million in non-state support.”21
Academic Recruitment
Traditional state industrial recruitment methods, such as the offer of tax abatements, infrastructure concessions, and financial assistance to companies, are increasingly being augmented—if not displaced altogether—by knowledge- based measures, including training programs, upgrading of university research infrastructure, buildout of broadband networks, and establishment of medical research centers. Perhaps most significantly, an intensive competition has developed between universities for science and engineering faculty members conducting cutting-edge research. The most sought-after faculty members are often holders of “endowed chairs,” positions backed by donor funds that generate an income stream that compensates the faculty member and provides for research support. The offer of an endowed chair position can be a compelling inducement to attract sought after researchers as well as their post-doctoral fellows, who are young people in their most productive years. “What is generally agreed upon is that endowed chairs represent an important tool in building a research hub capable of attracting big federal grants, commercializing technology, and spawning start-up companies.”22
Following the lead of Virginia and Ohio, the state of Georgia launched a formal program in 1992 to attract top flight research faculty to the state with the creation of the Georgia Research Alliance, a consortium of six universities, business leaders, and government officials.23 The Alliance implemented the Eminent Scholars program, creating endowed chairs at universities in the state funded initially at about $750,000 a piece, to be matched by the host institution.
The Eminent Scholars program targeted entrepreneurial faculty, in particular many of whom had already founded companies or who were looking to commercialize ideas they had already developed. By 2010, not quite two
19“Third Frontier Win was Big, Not Easy,” Dayton Daily News May 6, 2010.
20Presentation by Pradeep Haldar, CNSE, Vice President, Troy, New York, April 3, 2013.
21Battelle Technology Partnership Practice, Arkansas’s Knowledge Economy Initiatives: Analysis of Progress and Recommendations for the Future, November 2012, p. ES-2.
22“Universities Need to Court Top-Tier Researchers,” The Plain Dealer March 31, 2002.
23See Maryann P. Feldman, Lauren Lanahan and Iryna Lendel, Experiments in the Laboratories of Democracy: State Scientific Capacity Building, Economic Development Quarterly, forthcoming.
decades after the launch of this program, the Georgia Research Alliance had attracted 60 of the country’s eminent researchers who had secured $2.6 billion in federal and state research grants, created at least 150 start-up companies, 5,000 high tech jobs, and generated discoveries with potential applications benefitting 100 local companies.24 In one dramatic episode, the Medical College of Georgia in Augusta “raided” Yale “pretty heavily,” attracting nine scientists specializing in molecular biology, including Dr. Howard Rasmussen, an extremely highly- regarded cell-signaling scholar.25 A 2013 state audit of the Eminent Scholars Program concluded that in 2012, Eminent Scholars and their research teams attracted about $270 million to non-state funding for research, supporting around 1,400 jobs at the state’s universities.26
The Eminent Scholars concept is being replicated in other states.27 In 2002, the legislature of South Carolina passed the Endowed Chairs Act, funding an initiative to attract top-quality academic researchers.28 Ohio has used a similar program authorizing the state Board of Regents to endow faculty chairs, and additional funds have been made available from revenue land issues to fund endowed chairs.29
THE MICHIGAN BATTERY INITIATIVE
Michigan’s efforts to diversify its economy through the establishment of industrial clusters have been led by the Michigan Economic Development Corporation (MEDC), a state economic development corporation. At the onset of the global financial crisis in 2008, Michigan Governor Jennifer Granholm tasked MEDC with devising a strategy to diversify the state’s economy beyond the auto industry.30 MEDC devoted a substantial effort to the study of industrial
24Georgia’s Technology Scholars Get a Tip of the Hat from Miller,” The Atlanta Journal- Constitution April 15, 1998; “Research Group Supportive of UGA Scientists,” Atlanta Banner- Herald September 26, 2010.
25“Augusta College Builds Program by Raiding Yale,” The Atlanta Journal-Constitution, May 6, 1993.
26Of the total reported, about $108 million was attributable to the scholars themselves and the other
$162 million a result of the work of the scholar’s research teams and centers. Of the $108 million associated with the scholars themselves, $46.3 million, or 43 percent, was associated with the work of 6 scholars out of the total 64. Georgia Department of Audits and Accounts, Performance Audit Division, Georgia Research Alliance: Requested Information on State-Funded Activities, January 2013, p. 17.
27“Initiative Seeks Top Researchers: $143 Million Goes to Universities for Cutting Edge Solutions,”
The Plain Dealer May 21, 2008.
28Presentation of David McNamara, South Carolina Research Authority, “Building the South Carolina Innovation Ecosystem,” National Research Council, Growing Innovation Clusters for American Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, D.C.: The National Academies Press, 2011, p. 15.
29“Universities Need to Court top-Tier Researchers,” Cleveland The Plain Dealer March 31, 2002.
30At that time, Michigan had the nation’s highest unemployment rate, losing nearly 1 million manufacturing jobs as the crisis unfolded. Doug Parks, “Battery Initiative in Michigan,” in National
acceleration and clustering models around the world, and was particularly impressed with Sweden’s application of the so-called “triple-helix” model.31 MEDC developed a cluster strategy based on Michigan’s intrinsic strengths, which included a highly developed manufacturing sector, natural resources such as the Great Lakes. The state targeted six thematic areas for cluster
development, which were advanced energy storage, solar power, wind turbine manufacturing, bio-energy, defense, and advanced materials and manufacturing.
Having identified thematic clusters MEDC set up cross-functional teams to develop roadmaps for each sector, with each team comprised of representatives from universities, industry, venture capital and other fields. The state deployed an array of incentives to support the clusters, including tax credits and the establishment of “Centers of Energy Excellence.”32 Michigan sustained aggressive investments in the cluster effort despite a budget deficit exceeding $1 billion.33
Advanced energy storage is closely associated with the future of Michigan’s auto industry. Electric-powered and hybrid motor vehicles are
Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2012.
31The triple helix model assigns an enhanced role to universities in government/industry/university innovation collaboration. “The common objective is to realize an innovative environment consisting of university spin-off firms, tri-lateral initiatives for knowledge-based economic development, and strategic alliances among firms (large and small, operating in different areas, and with different levels of technology), government laboratories, and academic research groups. These arrangements are often encouraged, but not controlled, by government, whether through new "rules of the game,"
direct or indirect financial assistance, or through the Bayh Dole Act in the U.S.A” or the creation of new policy actors. Etkowitz, Henry and Loet Leydesdorff, “The Dynamics of Innovation: From National Systems and ‘Mode 2’ to a Triple Helix of University-Industry-Government Relations,”
Research Policy pp. 109, 112, 2000.
32The Centers of Energy Excellence program awarded state grant funds to partnerships between companies, on the one hand, and universities or federal laboratories, on the other hand. The university is engaged either with supply chain issues or a specific technology. State funds are matched by the private sector, universities, and federal laboratories. The centers of excellence are modeled after those in Sweden, which feature an anchor company supported by universities and the Swedish government. MEDC was particularly impressed with a Swedish collaboration at a pulp and paper mill north of the Arctic Circle that developed technology to convert a chemical waste, “black liquor,” into biofuels. A MEDC official commented that “what we thought was compelling was that they brought together federal agencies, end users, and the value chain. All of those resources were focused on solving the problem, which the Swedes thought could provide 10 to 15 percent of their biofuel requirements.” Doug Parks, “Battery Initiative in Michigan,” in National Research Council, Clustering for 21st Century Prosperity: Summary of a Symposium, op. cit.
33“Anchor Tax Credits” provided rebates based on personal income tax, paid by employees and investments, and were designed to encourage high technology supply chains in Michigan.
“Advanced Battery Credits” of $1 billion refunded business taxes, paid by companies manufacturing battery cells and battery packs and engaged in advanced battery engineering. “Photovoltaic Tax Credits” gave companies investing in manufacturing plants for photovoltaic technology, systems or energy a credit equal to 25 percent of the investment. Technology Collaboration Tax Credits”
encouraged strategic innovation collaborations involving small companies. Firms receive credits for investing in companies employing 50 or fewer people and under $10 million in revenue. Ibid. 104- 105