Achieving the Competitive Edge in the New Economy

NGA Center for Best PracticesOctober 9, 2005

Mary Jo WaitsSenior Fellow

Center for the Future of Arizona

Three Things to Understand

1. The 21st century will be driven by innovation

2. Most of the ingredients that give regions and states an innovative edge are created—not inherited

3. The new century will be a highly competitive one—especially as places realize that key features are “buildable” and thus can be had by nearly any place that puts its mind to it.

The first 100 years of our country’s history were about who could build the biggest, most efficient farm.

The second 100 years were about the race to build efficient factories.

The third 100 years are about ideas.”

Seth Godin, Fast Company, 2001

21st century will be driven by innovation

Stanford economists Paul Romer says ideas are the primary source of economic growth.

“Recipes (new ideas) combine ingredients (resources) in new and different ways to yield more valuable economic results.”

The recipes come from the innovation process.

The Growth Theory New Growth Theory

New Growth Theory

Ingredients

• Intellectual capital

• Human capital

• Financial capital

Recipes

• New ideas

• Entrepreneurs

• Networks

Results

• Productivity

• Prosperity

• Cluster vitality

Stanford Economist Paul Romer’s Perspective

“Recipes” combine resources in new and different ways

• Nanotech: You start with building blocks like nanowires, nanotubes, and nanoparticles. Put together one way, these building blocks make a computer. Put together in a different way, they make a biological sensor.

• Biology is another example. You have a limited number of building blocks, like proteins and DNA. Depending on how you put them together, you end up with a tissue, a worm, or a human being.

Charles Lieber, Harvard Chemistry Professor & co-founder, Nanosys

Big Science : 4 Big O’s

New Business Model

Companies and entrepreneurs moving from “closed innovation” (in-house research capability) to “open innovation” model.

“Many companies are starting to innovate with research discoveries of others.”

Harvard Professor Henry Chesborough, Open Innovation, 2003

• Small-sized research facilities adjacent to top university research centers

• Intel expects to benefit from proximity:

gain early access to promising new technologies

Intel’s “lablets”

Applies to all companies, not just high-tech

• Procter & Gamble names director of external innovation—Goal: 50% of its innovation from outside the company in 5 years

• Why? Inside more than 8,600 scientists advancing the industrial knowledge that enables new offerings; outside are 1.5 million.

• “So why try to invent everything internally?”

Global Business Model

ManilaCosta Rica

Dublin

BangaloreBombayHyderabadChennaiiPune

Israel

BeijingShanghaiShenzhenGuang ZhouHong Kong

MoscowBudapestPrague

Hsinchu

•Washington D.C.

•Boston

•Minneapolis

•Atlanta

•Phoenix

•Seattle

•Austin

•San Diego

•Portland

•Raleigh-Durham

•Denver

•Sacramento

•Salt Lake

Firms tap talent and serve markets globally, from their start.

• Today: 3rd Biotech hub behind San Francisco & Boston

• North Torrey Pines Road: Densely packed 2-mile stretch w/ Scripps Research Institute, Salk Institute for Biomedical Studies, UCSD

• “We can throw a rock and hit UCSD. I can hit a golf ball and hit Scripps. Everything is within walking distance. That means more heads get together and we do a lot of collaboration.” VP at Salk Institute

San Diego: Rise of a BioTech Cluster

The Proximity Edge

For States: New Era is Best of Times and Worst of Times

• The Good News--main Anchors of this century will be “Meds and Eds”

• Big Science transforms universities and other research complexes –loaded with top talent and research dollars - into the most highly prized economic assets

• And these institutions are deeply embedded in American communities and are not easily “outsourced” overseas—making them an excellent bet for prosperity in 21st century

• Bad News—not all states are ready to face the “meds and eds” century • And other states are making Bold Moves to leapfrog ahead

Big Money is being Invested in Meds and Eds

• Palm Beach County, Florida: $200 M for East Coast facility for Scripps Research Institute; state covers operating costs for 7 years ($310 M)

• Kansas City: American Century Funds founder is spending $1 B to build mega-biomedical research complex

• Indiana: Lilly Endowment offers $100 M to recruit “intellectual capital” to state colleges and universities

• California: $3 B for Stem Cell research

What’s Up?Shifting Sources of Wealth

Created Assets• Top universities• Research centers • Talented people • Entrepreneurial

culture• Networks• Vibrant downtowns

Inherited Assets• Geography• Climate• Population

From: To:

Elements of a Knowledge-based Economy

5 tangible elements:• A strong intellectual infrastructure (universities and firms

generating new knowledge and discoveries)• Mechanisms through which knowledge is transferred from

person-to-person / firm-to-firm• Excellent physical infrastructure (high-speed internet)• A highly skilled technical workforce• Good sources of capital

2 intangible elements:• Entrepreneurial culture• Quality of life

Source: National Governors AssociationNational Governors Association

The Power of Strategic Moves

The tale of two regions:

The story of Austin: rise in the physics/computer-based innovation era

The story of San Diego: rise in biology-based innovation

Austin: Going for High Tech Gold

• Three decades ago: Sleepy University/Government Town (per capita income 85% of US average)

• Today one of 20 “Cities of Ideas” (per capita income is 107% of US average)

• Started with Vision: “Poised for Greatness” and focus: IT and quality of life

• Attracts Motorola, AMD in 70s; MCC research consortium; SEMATECH- 13-firm research consortium; many IT- related firms follow

• UT top 10 of engineering graduate schools (1989)

• Multiple startups: Dell and spin offs from UT

San Diego: Going for BioTech Gold

• Geography produces tourist & military town and begets Scripps Institute (1912)

• North Torrey Pines Road: Densely packed 2-mile stretch w/ Scripps Research Institute, Salk Institute for Biomedical Studies, UCSD and others

• Today: 3rd Biotech hub behind San Francisco & Boston

• City gives land to General Atomics to increase HT (1956); designated S&T zone; spawns 60 companies

• City gives land to Salk Institute (1960) Torrey Pines Rd• Leaders get a University (UCSD)—post-grad science focus

(1960); in 1990’s spawns 69 companies • UCSD scientists founded Hybritech; UCSD professor starts

Linkabit becomes Qualcom & Leap Wireless (1968)• Salk Institute spawns 22 companies since 1980’s• Scripps produces 45 companies in similar time• UCSD CONNECT (1995) “meet the researcher”• BIOCOM—informal network• $1 B in private VC (2002); $ 500 M annually NIH• UCSD opens graduate business school (PhD/MBA)

Rise of High Tech Cluster

San Diego Pharmaceuticals / Biotech Cluster

National Leader Nationally Competitive Less Developed

Legal Services

Legal Services

Specialized Support Services

AccountingFirms

AccountingFirms

BanksBanks

Specialized Risk Capital

Venture Capital Firms

Venture Capital Firms

Angel Networks

Angel Networks

UCSDUCSD

Community CollegesCommunity Colleges

SDSUSDSU

Human Capital Providers

Cluster/University/

Government Relationship

Providers

Research

BIOCOMBIOCOM

UCSD CONNECT

UCSD CONNECT

Science and Technology

Council

Science and Technology

Council

Specialty Chemicals

Specialty Chemicals

Inputs Pharmaceuticals and Related Products

Pharmaceutical Products

(Manufacturing)

Pharmaceutical Products

(Manufacturing)

Equipment

Medical Devices

Medical Devices

Laboratory Instruments and Process Equipment

Laboratory Instruments and Process Equipment

Other Products

Consumer Goods

Consumer Goods

ContainersContainers

PackagingPackaging

UCSD Labs and Hospitals

UCSD Labs and Hospitals

SalkSalk

ScrippsScripps

BurnhamBurnham

KimmelKimmel

Private FirmsPrivate Firms

Source: Harvard Institute on Strategy & Competitiveness, Cluster Mapping Project , U. S. County Business Pattern Data; ontheFRONTIER interviews

If you’re competing on innovation, San Diego is a good place to be

New Focus on Place

• Quality of Place draws talent

• Innovation is tied to place

• Entrepreneurship requires a “habitat”

Do Talented People Want to Live in Your State?

“Arugula is how I define cities. I go to a grocery store, and either you can get arugula or you can’t.”

Cindy Crawfordinternational super model

The Calculation for Quality of Place is More Complex

• Natural environment counts for a lot.• But natural features aren’t enough. Places must

have distinctive urban amenities as well.• Choice (in lifestyle) matters in the talent war.• Being a smart, innovative place matters.• It’s not just about physical attributes. Intangibles

such as tolerance and entrepreneurial culture are part of the calculation.

• Speed is a vital amenity.

Waits, Which Way Scottsdale?, 2003

Building Expertise

• Focused Excellence: Georgia Research Alliance, CA Institutes for Science and Innovation

• Talent: Lilly Endowment’s $100 M for “intellectual capital,” Georgia's 100 eminent scholars, USC’s goal of 100 high-profile professors, Science Foundation Ireland recruiting 50 world-class scholars by 2008

• State-sponsored Research Funds: CA, TX, NJ, NY, MI, AZ, OH

It’s not enough to say, capture more NIH research dollars

The Bold StandardCalifornia Creates Its Own Research Fund—Not Once but Three Times

2004-voters approve $3 B over ten years. No state has ever raised that much money for a specific type of research

2000—Creates 4 California Institutes for Science and Innovation at UC –taken together represent a billion-dollar effort to focus research

1996—UC Discovery Grants--$60 M annually from state, UC and industry

Orchestrating Interaction

• UCSD CONNECT “Meet the Researcher”• ASU’s supercomputer; Engineering school

moves to “main street”• Innovation Districts Atlanta’s Technology

Square, Torrey Pines, Research Triangle Park, PA’s Keystone Innovation Zone, St. Louis’s CORTEX 1,000 acres for medical research district

• Partnerships and Networks Georgia Cancer Coalition, St. Louis Coalition for Plant and Life Sciences, BIOCOM

Putting people from Diverse knowledge fields and cultures together

• AZ Biodesign Institute—co-locates 3 O’s

• UC Discovery Grants

• NIH starting to encourage interdisciplinary research

• Silo, Solo is Passé

Arizona’s Strategic Moves

• Three “Big Bets” on an innovation future

Three “Big Bets”

• Big Bet No. 1Target export-oriented, knowledge intensive clusters to build strengths in:– Electronics/Information Technology

– Aerospace

– Software

– Biomedical

– Advanced Business Services

– Optics

Three “Big Bets”

• Big Bet No. 2Prop 301, a sales tax increase which citizens approved in 2000, earmarks $1 billion over 20 years, distributed among the state’s 3 universities

Arizonans recognized that K-12, community colleges, top-tier universities are a critical infrastructure for the 21st century

In 2003, AZ legislature approved $440 million in research facilities at 3 universities—12 new research facilities

Three “Big Bets”

• Big Bet No. 3Genomics – $90M raised in 2002 to jumpstart the bioscience industry with attraction of TGen and IGC

Battelle Biosciences Roadmap to develop 3 areas: – Cancer therapeutics

– Neurological sciences

– Bioengineering

Lots of Ownership

• Biodesign Institute at ASU• BIO5 at University of Arizona• Technopolis – entrepreneurial support• Arizona Board of Regents - metrics for 301 funds• Arizona Biomedical Collaborative—3 universities• Legislature passes Angel Investor tax credit • Maricopa Community College district-- $1.5 M

training for bioscience• Foundations continue to support TGen and top talent• Greater Phoenix Leadership—Bioscience Task Force

Cities connecting to Big Bets

– Phoenix Downtown “Knowledge Anchors”– Scottsdale Los Arcos, Mayo Clinic R&D– Chandler potential Intel and ASU Nano Institute– Tucson’s UA Research Park and new Critical Path

Institute – Flagstaff’s NAU partners with TGen

– More Big Bets– UA/ASU Medical School– Maricopa Partnership for Arts and Culture

Playing a leading role in the Innovation Century will take:

• New Era Thinking: Move from Cheaper Here, Made Here, and Grown Here to: Invented Here. Discovered Here. Started Here.

• Sustained, Resolute Effort: These new ambitious will not be realized unless they serve as a long-term guide for public policy. Top of the public policy list is to build a dynamic combo of first-rate Meds and Eds.

• Exceptional People: There is no substitute for talent—it’s the path to greatness.

• The Collaborative Gene. No more silos. New ideas require collaboration. So does bold public policy.

Strategic, Sustained Effort

“There was no single defining action, no grand program… no solitary lucky break, no wrenching revolution.

Good to great comes about by a cumulative process--step by step, action by action, decision by decision, turn by turn of the flywheel—that adds up to sustained and spectacular results.”

Jim Collins, 2001