August 12, 2011

Copying Silicon Valley's Job Engine

By: by Joseph Walker



How do you catch lightning in a bottle? That's what economic development officers are trying to learn from Silicon Valley.

While more than 9% of Americans remain unemployed, the Valley is overflowing with investment dollars helping new companies create high-paying jobs. State officials elsewhere are trying to take a piece of that economic magic and apply it to industries such as medicine, security, energy, and even metals.

The tech formula itself can be boiled down to three ingredients. First, form partnerships betweenuniversity research labs and private businesses to speed commercialization of ideas. Second, raise cash to invest. And, lastly, develop a skilled workforce.

Once those three ingredients are mixed, voila!, you've got a tech city. Economic development programs in Ohio have created more than 68,000 jobs between 2002 and 2010, both directly and indirectly, as the rust belt state diversified beyond industrial manufacturing.

In Tennessee, state officials have taken advantage of federal infrastructure spending to retain Vanderbilt and University of Tennessee grads in the state, and in Maryland, the state legislature recently passed a bill for a $70 million venture fund.

Nonetheless, the process of job creation through government efforts remains an uncertain business. There's no guarantee that incubating tech companies will create jobs for less-skilled workers and reduce overall unemployment. Indeed, for all the noise Silicon Valley makes about innovation, overall unemployment in the San Jose metro area was a stubbornly high 10.5% in June.

For all of the 23 years that Norm Chagnon has worked at the Ohio Department of Development, the state has been trying to transform itself from a symbol of Rust Belt decay to a destination for technology businesses and jobs.

Now executive director of Third Frontier, the state program founded in 2002 for technology-based economic development, Chagnon has overseen $1.05 billion in seed funding to early-stage tech ventures and grants to universities, research institutions, and businesses for research and development.

Third Frontier has directly created 11,402 jobs, and indirectly created 57,453 jobs in supply-chain industries that have expanded to meet increased manufacturing demand, officials say. These jobs carried an average salary of $64,834 at a cost of $60,036 per job created, program officials say. In May, Ohio voters approved a $700 million bond issue to fund Third Frontier through 2016.

Seed investments in early stage companies have helped draw the attention of venture capital firms outside of Ohio, Chagnon said. Nine new VC firms have opened offices in the state since 2006, including the Edison Venture Fund of New Jersey, which has a 60-company, $650 million portfolio and set up shop in Cleveland this year.

"We believe Ohio is underserved by the investment community. Edison has witnessed increasing deal flow of quality companies from the region in the last few years and opened an office to focus on the region," wrote Michael Kopelman, a partner at Edison, in an email.

In the second quarter of 2011, venture capital firms invested $76.43 million in Ohio, ranking it 15th in the nation. This is up from $31 million in the same quarter of 2010, according to data compiled by PricewaterhouseCoopers and the National Venture Capital Association. Not bad, but the state still has a long way to go to reach the $7.51 billion California received.

Despite a spike in unemployment, the recession and financial crisis were good for Tennessee's tech initiatives, said Leslie A. Wisner-Lynch, president and CEO of the Tennessee Technology Development Corporation. "It's highlighted our vulnerability," and forced leaders to examine the state's long-term competitiveness, Wisner-Lynch said.

Tennessee got money from the federal stimulus act of 2009, with the operating budget for the department of economic and community development increasing by almost 21% to $495.3 million from $409.6 million between 2007 and 2010. In May, Governor Bill Haslam announced the formation of INCITE, a $50 million program that connects entrepreneurs with training, advising resources and venture capital funding.

The Tennessee Technology Development Corp. is in the early stages of connecting businesses with university research departments to focus research efforts on, for example, clean energy, Wisner-Lynch said. She hopes the efforts will help keep the technically-skilled students that Tennessee's universities turn out in the state after graduation.

"At the University of Tennessee, over 50% of the engineering graduates leave the state of Tennessee and it may be quite a bit higher at Vanderbilt University," Wisner-Lynch said.

In Maryland, officials have shifted from using tax incentives to lure companies to the state to investing in infrastructure and the "grow your own" approach, said Dr. Martha J. Connolly, a Ph.D. in biomedical engineering and director of Maryland Industrial Partnerships.

The change occurred as the state's biggest employers, Bethlehem Steel and General Motors, cut employment and were supplanted by John Hopkins Hospital and the University of Maryland. Connolly's agency, run out of the University of Maryland, gives matching funds for companies to collaborate with faculty and bring new technologies to the marketplace.

"I used to be a biotech representative for the state of Maryland in the late 1990s and having a conversation about growing your own was very difficult. The whole conversation was about attracting companies to Maryland," Connolly said. It's still difficult to convince lawmakers to adjust their focus and funding to a new model of funding incubators, R&D projects, and skills training, she said.

"State people love to build buildings, put shovels in the ground and cut ribbons. It's a great photo-op," Connolly said. "Getting funding fo r a program like this is much harder because the results are longer-term and require patience."

The long-term approach got a boost this year when the Maryland state legislature passed Governor Martin O'Malley's plan to create a $70 million venture capital fund for small, riskier businesses.

Some of the state's most populous areas have seen a big increase in technology jobs. The counties of Anne Arundel, Howard and Baltimore added 8,620 information technology jobs between 2002 to 2010, a 40.9% increase. Aerospace jobs in those counties were up to 39,608 in 2010, a 45.3% increase from 2002, according to statistics compiled by the Maryland Department of Labor, Licensing and Regulation.

New York
New York's version of Stanford University is the College of Nanoscale Science and Engineering at the University at Albany. Created in 2001, the college has 210 enrolled students, the majority of them doctoral candidates. Beyond awarding degrees, CNSE has cutting-edge research facilities devoted to applying the study of ultra-small matter, typically at the molecular level, to various technologies, including computer chips and medical devices.

More than 2,500 researchers from 200 companies, including Intel, IBM, and Texas Instruments, work on the college's campus, using its research facilities to make technological advancements in their products.

The opportunity to locate company headquarters at the CNSE campus was the main reason why EYP Architecture and Engineering, an architecture firm that works with government and educational clients, remained in Albany, despite offers to move the company to Boston and New York City, said Chief Executive Tom Birdsey.

"It was not about finding the least expensive place to go or the most attractive incentives," Birdsey said. "It was finding a place that would reinforce the culture we want to have in our company, which is knowledge-based. It's important for us to have your headquarters located some place that really epitomizes research in the U.S. and in the world."

With millions in federal and state funded research dollars moving through the college, EYP will also have access to research grants it might not otherwise have had. CNSE has received $7 billion in public and private investments, and has created or retained 12,500 nanotech jobs statewide, with an average salary of $81,000, since 2001, according to the college.

Partnering with CNSE also helps attract talent. "It's an incredible recruiting tool to have," Birdsey said. "People know Albany now, they know what's going on here, and it's much easier to recruit people than it was three or four years ago."

The Albany metropolitan area had 51,689 high-tech jobs as of the first quarter of 2010, a 3.5% increase from the same period in 2005, according to the New York State Department of Labor.

Valley Envy
But can the Silicon Valley model really save cities suffering a jobs crisis? It's uncertain whether Silicon Valley can save itself. As of June 2011, the San Jose metropolitan area, which includes Google's Sunnyvale headquarters, and Facebook's in Palo Alto, had an unemployment rate of 10.5% -- higher than the Cleveland area's 8.3% and the Baltimore area's 7.7%, according to the Bureau of Labor Statistics.

While start-ups contribute to much of the nation's net job growth, most tend to start with a small number of employees and stay small over time, a recent study by the Kauffman Foundation found. Nor is there sure evidence that attracting highly educated workers to a city creates jobs for those less-skilled, said George A. Erickcek, senior regional analyst at the Upjohn Institute for Employment Research, a independent, non-profit think tank.

"Part of the problem is that these very smart people are not very interested in running a business. They're interested in selling it off, making a lot of money, and going on to the next thing," Erickcek said.

"The real situation with employment in urban areas isn't that engineers and scientists can't find jobs," Erickcek said. "It's not well-educated people. It's folks with a two-year degree, a high school degree."

Which isn't to say that the states and cities should stop trying to incubate tech businesses. As Richard Florida, the director and professor of business and creativity at the University of Toronto's Rotman School School of Management, and author of The Rise of the Creative Class, observes:

"Given that the federal government is doing such a terrible job of creating jobs, and the most interesting [initiatives] are coming from the state and, really, the local level, we need a kind of Manhattan Project for jobs and development."