Exports for New Wealth: A Big Role for our Metros

By Neal Peirce

July 31, 2010

Can rising exports help us save our economic skin? Are smarter metropolitan-region strategies a part of any necessary game plan?

This is the case the Brookings Institution is making, and it makes some sense. We’re into a season of dire budget squeezes — federal, state and local. There’s a rising chorus of deep worry about fast-rising public debt.

But simply focusing on government cutbacks and shrinkage misses two critical points:

First, there’s no substitute for new wealth that eventually yields the taxes that pays off debts, even massive ones. Second, just stimulating our domestic consumer economy isn’t going to do the trick. The time has come to be looking early and hard beyond our own borders in today’s global economy, focusing on every opportunity for expanded export markets.

And here’s where the Brookings economists see a first wave of exciting new opportunities. Middle class consumption is literally exploding in Brazil, India and China. Last year those countries accounted for 8.4 percent of all middle class consumption in the world; by 2020, Brookings estimates, the figure could well reach 26 percent.

So how does the United States exploit those export opportunities and the millions of new American jobs they might generate?

Already, U.S. exports support 11.8 million jobs nationally — 8.3 percent of the nation’s employment. But these jobs aren’t scattered randomly across the landscape. They’re focused in our metropolitan areas. In fact, the top 100 metros account for 62.3 percent of the manufactured goods we export, and 75 percent of exported services.

And little wonder. Metro areas are naturally our hubs of commerce and innovation — for clear reasons. With their universities, laboratories and venture capital resources, with the ideas and skills of experts in varieties of fields, they generate creative interaction — the seedbed of innovation that leads to new jobs, and most often, higher wages.

Among our top examples: pharmaceutic companies in Northern New Jersey that pay on average $105,213 a year, computer manufacturing in Silicon Valley ($114,053), airplane manufacturing in Seattle ($81,004) and film production in Los Angeles ($94,952). And the rewards spread down the income chain: workers with limited education and skills also tend to earn better in export-oriented firms, Brookings reports in its new study: Export Nation: How U.S. Metros Lead National Export Growth and Boost Competitiveness.

Even before the recession, it’s noted, export sales were growing about four times as rapidly as the overall U.S. economy. Four metros — Houston, New Orleans, Portland (Ore.) and Wichita (Kan.) — actually doubled their exports between 2003 and 2008. “These trends prove U.S. manufacturers can compete globally,” says Jonathan Rothwell, one of the Brookings report authors.

So what’s to hold us back?

The federal government does need to move forward more aggressively on stalled international trade agreements and issues such as the exchange rate of the dollar — keys to fulfilling President Obama’s call to double exports in the next five years.

But Washington can advance the game by connecting, especially through the Commerce Department, the country’s global trade vision to the metros which actually generate our export possibilities.

And for that to work, suggests Brookings’ Bruce Katz, the metros themselves “must make exporting a signature element of their economic planning.”

A leader on that account has been the Seattle region, home to such mega-exporters as Boeing and Microsoft. The Trade Development Alliance of Greater Seattle works on close ties with federal decision-makers and for years has launched major trade and urban study missions to cities around the world.

“Every U.S. metro now needs a strong global strategy, with the federal government helping us to pull jointly, not separately,” says William Stafford, the Trade Alliance’s president.

And while “newer” areas of America’s South and West often seem more trade-oriented, the country’s struggling “Frostbelt” areas can be and are serious export trade winners. Measuring exports as part of a region’s total economy, the top 12 regions include Youngstown and Toledo in Ohio, Indianapolis (Ind). Grand Rapids (Mich.) and Baltimore.

And there may be more, spreading benefits to come. Suniva, an Atlanta-based maker of high-efficiency solar cells, was formed by Ajeet Rohatgi, an Indian-born scientist, at the Georgia Tech. It’s received nearly $1 billion in orders from Indian and European solar module makers.

But now, with a prospective $141 million loan guarantee from the U.S. Energy Department, Suniva is poised to build a 500-worker plant near Saginaw, Mich., one of America’s hardest-hit recession areas. The company is claiming the plant will literally quadruple its exports over the next five years. Talk about new American wealth creation where it can matter the most!

Bottom line: the time seems ripe to connect smarter, aggressive national trade policies with the economic imperatives of metropolitan America. Or as Brookings’ Emilia Istrate puts it: “smart, game-changing policies” that “connect the macro to the metro.”

CNBC Top State for Business: Texas is back on top

By Scott Cohn, CNBC Senior Correspondent

July 14, 2010

They say everything in Texas is big, and that sure goes for its stature in business.

With the biggest point total in the history of our study, Texas posts a big victory as America's Top State for Business 2010.

Texas reclaims the top spot from last year's winner, Virginia, which slips to number two.

Texas was last on top in 2008, and Virginia took the crown in the inaugural year of our study, 2007. That leaves Texas and Virginia dead even in the battle for bragging rights at two wins apiece. Rounding out the top five are number three Colorado, number four North Carolina, and number five Massachusetts, which makes its first appearance among

America's Top States for Business.

Our fourth annual study of America's Top States for Business puts all 50 states to the test, measuring them on 40 different metrics in 10 key categories of competitiveness. We developed these categories back in 2007 with the help of business groups including the National Association of Manufacturers. And we weight the categories based on how frequently states use them as selling points to attract business. That way, we hold the states to their own standards, and tell you how they measure up.

This year's categories and weightings, for a total of 2,500 points, are:

Cost of Doing Business (450 points)

Workforce (350 points)

Quality of Life (350 points)

Economy (314 points)

Transportation & Infrastructure (300 points)

Technology & Innovation (250 points)

Education (175 points)

Business Friendliness (175 points)

Access to Capital (50 points)

Cost of Living (25 points)

We use publicly available data on the metrics in each category to score the states, and then add up those scores to rank America's Top States for Business.

Coming out on top is always an accomplishment, and never more so than this year. The national economy is anemic, and state budget pressures are growing across the country.

In fact, even top-ranked Texas is struggling to make ends meet. The state faces a Texas-sized, $4.6 billion budget shortfall for fiscal 2011, according to the non-partisan Center on Budget and Policy Priorities. That is more than 12% of the state budget.

Add to that a sluggish job market across the country, and even the Top States cannot afford to rest easy.

In number three Colorado for example, unemployment in May was a relatively low 8%. But KUSA-TV reporter Greg Moss in Denver says the unemployment rate does not tell the full story.

"Although ours is way below the national average, it's remained pretty flat. So we're seeing a lot of long-term unemployed," Moss says.

In runner-up Virginia, which has a built-in cushion of technology and government jobs, particularly in the northern part of the state, the employment picture statewide is somewhat shaky.

"The recession of the past two years has hit manufacturing rather hard," says reporter Tom Schaad of WAVY-TV. "Here in Hampton Roads, International Paper in Franklin closed a major mill, putting 1,100 people out of work. That's one example."

What separates the Top States from the rest is their ability to cope with those types of economic stress, offering environments that allow businesses to thrive even in a slowdown.

Texas powers past the tough times on the strength of its economy — top-ranked in our "Economy" category four years in a row. The Texas economy is the 15th largest in the world, according to government figures; larger, for example, than that of all the Scandinavian nations combined. The Lone Star State is home to 64 Fortune 500 companies, more than any other state, in a wide variety of industries. So while the state's last win in 2008 came with oil at a record $145 a barrel — a natural tailwind for the largest industry in Texas — the state managed to do even better this year despite the fact that oil is trading at roughly half that price.

Texas has also managed to avoid the worst of the real estate crisis, according to reporter Ashanti Blaize of KXAS-TV.

"While in other major cities we've seen condo high-rise projects either slowed or come to a screeching halt, in Dallas we've seen an influx of some of those projects," says Blaize.

However, that economic strength has a side effect. Rising commercial rents and high wages hurt the state in the all-important "Cost of Doing Business" category, where it comes in at number 30.

Virginia comes in second overall this year, but the Old Dominion State still has plenty to be proud of. In the "Business Friendliness" category, which measures the states' legal and regulatory climates, Virginia is second only to neighboring Delaware. And Virginia offers a diverse economy, making it chock-full of business opportunities, from imports and exports to government contracts in the state that is home to the Pentagon.

"Hampton Roads has the third largest port in the country. That, along with heavy military presence usually provides for a stable economy," says WAVY-TV's Schaad, who also notes that federal stimulus money, particularly in the area outside Washington, D.C., is keeping overall unemployment well below the national average.

But with pockets of severe joblessness hampering growth—including in tourism-dependent Williamsburg—Virginia dropped four places to number 11 in the "Economy" category. Virginia also lost critical points in the "Education" category, dropping six places to number 13 as class sizes rose and school spending fell.

While Texas and Virginia duke it out for the top spot year after year and Colorado stays consistent at number three, the rest of the rankings are less predictable.

North Carolina, which finished a disappointing ninth in 2009, jumped to number four in 2010. The corporate home of a number of giant financial institutions, including Bank of America and BB&T, North Carolina's business climate benefited from the easing of the financial crisis, according to WCNC-TV's Jeff Campbell in Charlotte.

"There are also lessons the state has learned from the recent crisis, and that's really helping the state diversify towards some other industries like clean energy and tourism," says Campbell.

As a result, North Carolina has seen a surge of investment, pushing the state to number 10 in our "Access to Capital" category, up from number 36 last year. That was enough to propel the Tar Heel State back into the top five overall for the first time since 2007.

Massachusetts never ranked among America's Top States for Business before 2010. Its number five finish this year also marks the first time a northeastern state has finished among the top five.

But the Bay State has always been a contender — it finished number eight overall last year. Massachusetts' greatest strength is its schools. The state boasts the best performing K-12 schools in the country, as well as some of the top universities in the world. The strong education system helps Massachusetts capture near top rankings in "Technology & Innovation" (number three, up from number five last year) and "Access to Capital" (number two for the second year in a row). Even in "Business Friendliness" — not generally considered a hallmark of New England states — Massachusetts finishes a respectable 14th.

This year's most improved state is Pennsylvania, which jumped a whopping 13 places to number 20 overall, from number 33 last year. However, it is unclear whether the

Keystone State truly bettered itself, or if others simply got that much worse.

Pennsylvania's best category was "Economy," where the state improved to number 15 compared to a 37th place ranking in 2009. Yet the state still faces persistent unemployment and a $4.1 billion state budget shortfall.

The biggest drop came in Vermont, which fell seven places overall to number 37. While economic conditions have improved in the Green Mountain State, business costs have gone up and the quality of the workforce has declined according to our study.

Two states drop out of the top five in 2010.

Iowa falls to number six from number four last year, and Utah, a consistent player in previous years, moves into a tie for eighth place with Minnesota.

Our study scores all 50 states, so if there are going to be Top States, it stands to reason that there will also be bottom states. Alaska is America's bottom state for business again this year, hampered by its high cost of living, relatively high cost of doing business, and a weak infrastructure.

After Alaska, there is a big change among the also-rans. Rhode Island drops to number 49 overall, following its 48th place finish in 2009. The Ocean State is among the least friendly to business, and ties with Nevada for the worst overall economy.

Rhode Island's drop is good news for those other islands — Hawaii, which climbs to 48th place overall. No great surprise, the Aloha State is number one for "Quality of Life."

Unfortunately, you get what you pay for. Hawaii ties with California as the most expensive state in which to live, and is second only to New York in the cost of doing business.

Watch CNBC all week for our in-depthcoverage of America's Top States for Business.

Rank	2009 rank	State	Points (out of 2500 possible)
1	2	Texas	1508
2	1	Virginia	1477
3	3	Colorado	1456
4	9	North Carolina	1381
5	8	Massachusetts	1375
6	4	Iowa	1371
7	12	South Dakota	1360
8	6	Minnesota	1359
8	5	Utah	1359
10	10	Georgia	1326
11	7	Kansas	1322
12	16	North Dakota	1282
13	11	Nebraska	1281
14	13	Wyoming	1263
15	16	Washington	1254
16	20	Tennessee	1247
17	14	Missouri	1245
18	18	Arizona	1242
19	21	N. Hampshire	1208
20	33	Pennsylvania	1207
21	15	Indiana	1179
22	24	New Jersey	1171
23	18	Oregon	1170
24	36	New York	1165
25	23	Oklahoma	1164
26	22	Idaho	1162
27	27	Maryland	1151
28	28	Florida	1150
29	26	Wisconsin	1145
30	25	Illinois	1137
31	37	South Carolina	1134
32	31	Arkansas	1085
32	32	California	1085
34	29	Ohio	1077
35	35	Connecticut	1073
36	38	Montana	1069
37	30	Vermont	1043
38	43	New Mexico	1033
39	40	Maine	1021
40	34	Kentucky	1015
41	41	Michigan	1004
42	42	Delaware	1003
43	39	Alabama	995
44	44	Louisiana	953
45	45	Mississippi	878
46	46	West Virginia	873
47	47	Nevada	862
48	49	Hawaii	788
49	48	Rhode Island	775
50	50	Alaska	652

Andy Grove: How America Can Create Jobs

July 6, 2010

By Andy Grove

The former Intel chief says "job-centric" leadership and incentives are needed to expand U.S. domestic employment again.

Recently an acquaintance at the next table in a Palo Alto (Calif.) restaurant introduced me to his companions, three young venture capitalists from China. They explained, with visible excitement, that they were touring promising companies in Silicon Valley. I've lived in the Valley a long time, and usually when I see how the region has become such a draw for global investments, I feel a little proud.

Not this time. I left the restaurant unsettled. Something did not add up. Bay Area unemployment is even higher than the 9.7 percent national average. Clearly, the great Silicon Valley innovation machine hasn't been creating many jobs of late—unless you're counting Asia, where American tech companies have been adding jobs like mad for years.

The underlying problem isn't simply lower Asian costs. It's our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called "Start-Ups, Not Bailouts." His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

What Went Wrong?

Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

I am fortunate to have lived through one such example. In 1968 two well-known technologists and their investor friends anted up $3 million to start Intel (INTC), making memory chips for the computer industry. From the beginning we had to figure out how to make our chips in volume. We had to build factories, hire, train, and retain employees, establish relationships with suppliers, and sort out a million other things before Intel could become a billion-dollar company. Three years later the company went public and grew to be one of the biggest technology companies in the world. By 1980, 10 years after our IPO, about 13,000 people worked for Intel in the U.S.

Not far from Intel's headquarters in Santa Clara, Calif., other companies developed. Tandem Computers went through a similar process, then Sun Microsystems, Cisco (CSCO), Netscape, and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley.

As time passed, wages and health-care costs rose in the U.S. China opened up. American companies discovered that they could have their manufacturing and even their engineering done more cheaply overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

The 10X Factor

Today, manufacturing employment in the U.S. computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975 (figure-B). Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5 million workers—factory employees, engineers, and managers. The largest of these companies is Hon Hai Precision Industry, also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62 billion, larger than Apple (AAPL), Microsoft (MSFT), Dell (DELL), or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard (HPQ), Intel, and Sony (SNE) (figure-C).

Until a recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia (NOK) cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple's products. Apple, meanwhile, has about 25,000 employees in the U.S. That means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods, and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology (STX), and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?

Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs. We may be less aware of this growing inefficiency, however, because our history of creating jobs over the past few decades has been spectacular—masking our greater and greater spending to create each position. Should we wait and not act on the basis of early indicators? I think that would be a tragic mistake, because the only chance we have to reverse the deterioration is if we act early and decisively.

Already the decline has been marked. It may be measured by way of a simple calculation—an estimate of the employment cost-effectiveness of a company. First, take the initial investment plus the investment during a company's IPO. Then divide that by the number of employees working in that company 10 years later. For Intel this worked out to be about $650 per job—$3,600 adjusted for inflation. National Semiconductor (NSM), another chip company, was even more efficient at $2,000 per job. Making the same calculations for a number of Silicon Valley companies shows that the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to a hundred thousand dollars today (figure-A). The obvious reason: Companies simply hire fewer employees as more work is done by outside contractors, usually in Asia.

The job machine breakdown isn't just in computers. Consider alternative energy, an emerging industry where there's plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home energy applications was also pioneered by the U.S. Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels—the key part of the system. All the panels they use come from China. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing (figure-D). Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000—just a few percent of estimated worldwide employment.

There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas.

Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny (figure-E).

That's a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.

The Key to Job Creation

Scaling isn't easy. The investments required are much higher than in the invention phase. And funds need to be committed early, when not much is known about the potential market. Another example from Intel: The investment to build a silicon manufacturing plant in the '70s was a few million dollars. By the early '90s the cost of the factories that would be able to produce the new Pentium chips in volume rose to several billion dollars. The decision to build these plants needed to be made years before we knew whether the Pentium chip would work or whether the market would be interested in it.

Lessons we learned from previous missteps helped us. Some years earlier, when Intel's business consisted of making memory chips, we hesitated to add manufacturing capacity, not being all that sure about the market demand in years to come. Our Japanese competitors didn't hesitate: They built the plants. When the demand for memory chips exploded, the Japanese roared into the U.S. market and Intel began its descent as a memory chip supplier. Despite being steeled by that experience, I still remember how afraid I was as I asked the Intel directors for authorization to spend billions of dollars for factories to produce a product that did not exist at the time for a market we could not size. Fortunately, they gave their O.K. even as they gulped. The bet paid off.

My point isn't that Intel was brilliant. The company was founded at a time when it was easier to scale domestically. For one thing, China wasn't yet open for business. More importantly, the U.S. had not yet forgotten that scaling was crucial to its economic future.

How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—the idea that as long as "knowledge work" stays in the U.S., it doesn't matter what happens to factory jobs. It's not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry.

Wanted: Job-Centric Economics

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems—the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal. The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the '70s and '80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

Consider the "Golden Projects," a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks—used for transactions, communications, and coordination—in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time they contributed to the rapid development of China's information infrastructure and the country's economic growth.

How do we turn such Asian experience into intelligent action here and now? Long term, we need a job-centric economic theory—and job-centric political leadership—to guide our plans and actions. In the meantime, consider some basic thoughts from a onetime factory guy.

Silicon Valley is a community with a strong tradition of engineering, and engineers are a peculiar breed. They are eager to solve whatever problems they encounter. If profit margins are the problem, we go to work on margins, with exquisite focus. Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don't just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.

The story comes to mind of an engineer who was to be executed by guillotine. The guillotine was stuck, and custom required that if the blade didn't drop, the condemned man was set free. Before this could happen, the engineer pointed with excitement to a rusty pulley, and told the executioner to apply some oil there. Off went his head.

We got to our current state as a consequence of many of us taking actions focused on our own companies' next milestones. An example: Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a "China strategy," meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck. We should put away our oil cans. VCs should have a partner in charge of every startup's "U.S. strategy."

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

I fled Hungary as a young man in 1956 to come to the U.S. Growing up in the Soviet bloc, I witnessed first-hand the perils of both government overreach and a stratified population. Most Americans probably aren't aware that there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive. If what I'm suggesting sounds protectionist, so be it.

Every day, that Palo Alto restaurant where I met the Chinese venture capitalists is full of technology executives and entrepreneurs. Many of them are my friends. I understand the technological challenges they face, along with the financial pressure they're under from directors and shareholders. Can we expect them to take on yet another assignment, to work on behalf of a loosely defined community of companies, employees, and employees yet to be hired? To do so is undoubtedly naïve. Yet the imperative for change is real and the choice is simple. If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

The Idea Incubator Goes to Campus

By Bob Tedeschi

June 28, 2010

Douglas P. Hart, a professor of mechanical engineering at the Massachusetts Institute of Technology who sold his last start-up for a tidy $95 million, is already on to his next big thing.

On Tuesday, he expects to lock up $1.5 million in funding for his new start-up, Lantos Technologies. The company has developed a 3-D scanner that it hopes will streamline the current generation of earphones and hearing aids by precisely fitting them to the dimensions of the ear canal, right up to the eardrum.

“We’re hoping people will be able to walk in the store and have their ears scanned like people get their ears pierced today,” he says. “That’ll lower the cost because they don’t have to go to a specialty doctor.”

Unlike other academics often left to their own devices, Professor Hart was able to bring his hearing aid concept closer to reality with $50,000 in backing last year from the Deshpande Center for Technological Innovation, an M.I.T. entity originally funded by two private investors, Jaishree Deshpande and her husband, Gururaj.

“I wouldn’t have known the first thing about doing all of this,” says Professor Hart. “The people from the Deshpande Center led me through.”

By providing academics like Professor Hart a bridge to the business world, M.I.T. is in the vanguard of a movement involving a handful of universities nationwide that work closely with investors to ensure that promising ideas are nurtured and turned into successful start-ups.

At first glance, the centers look like academic versions of business incubators. But universities are getting involved now at a much earlier stage than incubators typically do. Rather than offering seed money to businesses that already have a product and a staff, as incubators usually do, the universities are harvesting great ideas and then trying to find investors and businesspeople interested in developing them further and exploring their commercial viability.

In the jargon of academia, the locations of such matchmaking are known as “proof-of-concept centers,” and they’re among a number of new approaches to commercializing university research in more efficient and purposeful ways — and to preventing good ideas from dying quietly. The first proof-of-concept center, the William J. von Liebig Center, was established in 2001 at the University of California, San Diego.

So far, the von Liebig Center has helped start 26 companies that have created more than 180 jobs and attracted more than $87 million in financing. Among those companies are Mushroom Networks, a developer of online video technology, and, more recently, Biological Dynamics, a maker of early cancer diagnostic technology.

“Many of the great ideas get stuck in labs because scientists don’t have access to the kind of ecosystem” that Deshpande and other proof-of-concept centers offer, says Amy Salzhauer, a founder of Ignition Ventures, an investment firm based in Boston and New York that works with scientists to set up companies. “This is a way to better harvest those ideas.”

While  the von Liebig and the Deshpande centers are the highest-profile successes in this realm, similar entrepreneurial surges are occurring at other schools, like the University of Utah, Georgia Tech, the University of Kansas and the University of Southern California.

It’s an expensive proposition. Not including the cost of the technology itself, it can cost investors roughly $250,000 to determine whether an idea will actually blossom into something that can be sold, Ms. Salzhauer says.

Academics and others have a term for the chasm that usually separates a good idea from people who will invest in it: the “valley of death.” An increasing lack of interest in initial public offerings over the last decade has left even less money for early-stage companies.

But even in such a challenging fund-raising environment, analysts say many universities continue to embrace old-fashioned methods for supporting and promoting potentially lucrative in-house research. Many schools have what are known as “technology transfer” offices that introduce businesses and investors to patented university research and help schools strike licensing deals.

Corporate executives and investors complain that overly rigorous, or simply overwhelmed, tech transfer offices take too long to negotiate licensing agreements. And the offices often try to sell ideas with unproven commercial relevance.

“It’s the way engineering was 50 years ago,” says Mr. Deshpande. “They’d design something, and then hire marketing people to peddle it. You wouldn’t do that now without understanding the customer’s needs.”

A proposal from the Obama administration would experiment with all of this by allocating $12 million among several institutions next year in what proponents hope will be a continuing effort to support and study proof-of-concept centers. If successful, supporters say, universities could spread the model faster.

But the idea represents a shift in thinking about the federal government’s role in stewarding the more than $50 billion it gives to university researchers annually. Until now, that money has been for the discovery, not commercialization, of scientific breakthroughs.

The idea of government-backed proof-of-concept projects has plenty of proponents, including W. Mark Crowell, a University of Virginia executive and past president of the Association of University Technology Managers, and Lesa Mitchell, an executive at the Ewing Marion Kauffman Foundation, which finances entrepreneurship research and programs.

Others believe that the experiment, while worth trying, isn’t likely to yield significant results.

Toby E. Stuart, a Harvard Business School professor who researches social networks and entrepreneurship, noted that virtually every government wants to replicate Silicon Valley’s university-driven system of innovation.

“But you can’t engineer it through policy means,” he says.

He thinks proof-of-concept centers would be more useful at universities other than the likes of M.I.T., Stanford and Harvard, which are already hubs in entrepreneurial clusters.

“But in any significant way, it will happen organically,” he says, “and not through some bureaucratic intervention.”

Indeed, organic progress is on display outside of some of the country’s big tech corridors. At the University of Utah, the Technology Commercialization Office helped arrange early financing and networking resources for 25 companies. The university’s president, Michael K. Young, aligned the office with the business school, and Brian A. Cummings, the office’s executive director, says the new arrangement allows researchers and business students to work together more closely.

Last year, business and bioengineering students who worked with Mr. Cummings’s office drew up a short list of promising research discoveries. One was an idea for a feeding tube that is fitted with a tiny video camera to help surgeons implant it more precisely. Dr. John C. Fang, a professor of medicine, first came up with the idea in 1999.

A team of graduate students then fashioned a business plan around the idea and shopped it to local venture capitalists. Dr. Fang says he expects to secure $1.25 million in financing for it soon.

Mr. Crowell, at the University of Virginia, participates in proof-of-concept review sessions, where academics and investors evaluate ideas. He says several projects that attracted $100,000 seed grants from the Wallace H. Coulter Foundation Translational Research Partnership have generated commercial licensing deals.

Among them is a project called HemoShear, which is developing a device that can decrease the time and cost needed to test new drug compounds.

And in Pittsburgh, a state-financed nonprofit group, Innovation Works, has invested $45 million over the last decade to help the area’s university researchers — and anyone else — prove their ideas and showcase them with investors. The companies have attracted more than $800 million in venture capital and have gone on to create 3,000 local jobs, says Matt Harbaugh, the chief investment officer of Innovation Works.

One company, Bossa Nova Robotics, is made up of Carnegie Mellon robotics researchers who had a commercial hit last year with a pair of toy robots, the Prime-8 gorilla and Penbo, a penguin.

University executives say they sometimes struggle to find motivated entrepreneurial professors. Medical researchers with promising discoveries may plunge into the marketplace out of a sense of service. For others, though, the motivation can be as simple as the sight of a fellow professor in a new sports car — a behavior common enough that it is known in university circles as “the Porsche principle.”

When Professor Hart first thought of the technology for his most successful product to date, an oral scanner, he was focused on pure research, not profit. But he found that he wasn’t entirely immune to a financial lure after learning that old friends at the California Institute of Technology had struck gold with some of their ideas.

“I was a little jealous,” he says. “I thought I’d try it.”

Although he wasn’t sure exactly how to get started, the Deshpande Center had recently opened. Krisztina Holly, then the center’s executive director, sent a request for proposals to faculty members.

After Professor Hart responded, he teamed up with Ms. Holly, who already had experience leading a pair of tech start-ups and had mechanical engineering degrees from M.I.T. After awarding Professor Hart a $250,000 grant, she also encouraged him to participate in a business-plan competition, where he mentioned his idea to a pair of Harvard M.B.A. students, Eric Paley and Micah Rosenbloom.

Professor Hart’s team incorporated the company as Brontes Technologies and tested more than 30 applications of his science, including technology for scanning faces in 3-D for security investigations. During that time, the team learned about the dental industry’s need for digital scanning technologies. So Brontes adapted the technology for use in an oral scanner that could create images of the mouths of patients who needed new crowns on their teeth.

Next came an introduction to Jeffrey Bussgang, a partner at a Boston firm now known as Flybridge Capital Partners. Flybridge and two other firms invested $8 million in Brontes. In 2006, 3M bought the technology for $95 million and late last year it began the national rollout of a $29,900 product called the Lava Chairside Oral Scanner.

(While 3M does not break out the scanners’ financial performance, it said that about 1,000 had been sold and that it employs about 125 people to manufacture and distribute them.)

Mr. Bussgang, who has since invested in four other companies created at the Deshpande Center, says the proof-of-concept model “is a much better use of federal dollars than so many of the other ways the government is trying to prop up industry.”

Ms. Holly is now a vice provost and executive director of the Stevens Institute for Innovation at the University of Southern California, where a program called Ideas Empowered started in May. It has begun seeking proposals from faculty members interested in commercializing their research.

Congress has yet to allocate the proof-of-concept funding, but a House subcommittee held hearings this month on improving “innovation ecosystems” around universities to encourage the commercialization of taxpayer-financed research.

For his part, Professor Hart hopes that all of this will gather even greater momentum.

“The public’s paying for all these wonderful innovations that are just sitting in the drawer,” he says, “because there’s no way for them to make the leap to the commercial world.”

One Top-10 List's Leader Is Another's Also-Ran

By Carl Bialik

May 1, 2010

Is Vancouver the world's best city to live in? Or is it Vienna?

Two different rankings provide two different answers. No U.S. city makes either ranking's Top 20 list, but then American cities are busy competing for such titles as safest, drunkest and worst housing market. Other closely watched lists rate hospitals and schools.

"There is something about lists that just draws people's attention," says Peter Meyers, who oversees rankings for Relocate America, an informational Web site that last week named Huntsville, Ala., the top place to live in the U.S.

While rankings are ubiquitous, so are their flaws. Some suffer from bad or misinterpreted data, or lack of transparency, or arbitrary weightings. Rankings also purport to draw distinctions between top-ranked entities when, statistically speaking, there is very little light between them.

The better rankings take steps to mitigate these problems—and let users produce versions that match their own preferences.

However rankings are designed, they can't overcome data problems. Forbes.com learned this last month when it ranked the 10 worst housing markets in the country, with Milwaukee finishing last and Denver second from the bottom. The list quickly drew scrutiny from Denver Mayor John Hickenlooper, who called Forbes to question the results. "We were in the process of coming out of [the housing downturn]," says Mr. Hickenlooper. "To hear that we're lagging just didn't make sense."

Two weeks later, Forbes retracted the ranking, blaming a misuse of inventory data from real-estate site Zillow.com. Zillow regularly adds vendors to its database, so an increase in listed houses from year to year might reflect more listings on Zillow rather than a real-world rise in homes that aren't selling. "It's not necessarily a complete picture over time of what's happening in those markets," says Stan Humphries, Zillow's chief economist.

After announcing the problems with the ranking, Forbes withdrew both the ranking and the retraction from its Web site. "We couldn't rerank in any meaningful way, so we didn't," Paul Maidment, editor of Forbes Media, said in an email.

How can consumers know when rankings are based on solid data? It helps when the methodology behind the list is disclosed.

The Economist Intelligence Unit, a sister organization to the Economist magazine, is upfront about its methods for ranking the world's cities by livability. Each of 140 cities is rated by local correspondents on dozens of categories on a rather dour scale of intolerable to acceptable. (New York's terrorism risk rates "uncomfortable," while its roads are classified as "tolerable.") These are vetted by staff and compared with objective measures such as publicly available statistics on crime, education and climate. Scores are combined and weighted to give more importance to categories deemed significant by the staff.

Under that system, the EIU rates Vancouver the world's best place to live, with a score of 98 out of 100. Vienna is second with 97.9.

The variations between the EIU's rankings and another high-profile list of most-livable cities illustrate the difficulty consumers can have in trying to glean meaningful information from these reports. Consulting firm Mercer uses some similar criteria to the EIU to rate cities, as well as a few unique categories, such as air pollution and currency-exchange rules. The results have some similarities—both rank Vienna and Vancouver in the top four, but in different order—and some major discrepancies, such as Melbourne, which is third on the EIU list but 18th according to Mercer.

Livable-city rankings can be misleading even when the methods used are transparent. The differences between the first- and second-place cities on these lists are so minute as to be statistically insignificant, yet Vancouver and Vienna get the bragging rights for first-place scores. Even a 56th-place finisher like New York scored 87 points, according to the EIU, which still places it comfortably in the top tier of cities.

"Generally speaking, we can see the figures look right," says Jon Copestake, editor of the EIU survey. "People in New York may argue it's a great city, better than Vancouver."

A recent New York Magazine ranking of top neighborhoods overcame a common drawback of rankings—that outlier results can have disproportionate impact on the overall results.

The magazine's ranking was accompanied by an online tool allowing readers to adjust weightings according to personal priorities and preferences. "We're giving you our expert authority on what makes a great neighborhood, and then we are sacrificing our authority and letting readers make their own call," says Jon Steinberg, a senior editor at New York who worked on the rankings. "We're kind of having it both ways."

"I think it's a brilliant idea," says Mr. Copestake, who says he would like to add the same feature to the Economist's rankings but hasn't found the time or resources to do so. "In a perfect world, the weights would reflect what the mass of people do believe are important."

The United Regions of America

By Stephen C. Fehr

April 23, 2010

The Obama administration wants to change the way politicians fight for jobs by encouraging regions—instead of individual states and cities—to compete for economic development projects.

Accomplishing this sea change in economic thinking will be difficult. The current system of states and cities battling for companies, often outbidding each other with ever-higher tax breaks, is pretty ingrained. President Obama’s hand-picked chairman of the Democratic National Committee, former Virginia Governor Tim Kaine, was one of the best practitioners; Virginia topped Forbes magazine’s “best states for business” every year of his term.

But the administration believes that economic recovery will be led by a collection of regions around the U.S., not necessarily individual states. America’s regions will battle those in other countries for supremacy in the global economy.   

To use one example, northern Ohio and southern Michigan have been walloped by the decline in the U.S. auto industry. So Obama wants the governors of those states and local officials in those regions to forget they are  Buckeyes and Wolverines and work together to reinvent a common regional economy straddling state lines. The federal government will reward regions with financial incentives if they team up; the president recently gave $25 million to a plant in Elyria, Ohio, west of Cleveland, that is producing batteries for electric vehicles built in Michigan. Federal officials say that the northern Ohio-southern Michigan region is poised to repackage itself as a clean-energy center.

Heading the administration’s regional economic development strategy is  John Fernandez,  assistant secretary of commerce and the former mayor of Bloomington, Indiana. At a recent talk with a group of state legislators in Washington, Fernandez argued that the old ways of state and local governments chasing traditional smokestack industries is obsolete. “We need a different framework that is more sustainable,” he says. “At the core of this framework is innovation.”

The catch-phrase circulating around the development community is  “regional innovation clusters.” The term was thought up by Michael Porter of the Harvard Business School, an expert on competitive strategy, and refers to groups of businesses, universities, cities, counties and states joining to create a single job-generating unit. The Raleigh-Durham area of North Carolina knots together communications equipment, information technology and education. Metropolitan Wichita, Kansas, clusters aviation, heavy machinery and oil and gas. The Seattle-Bellevue-Everett area in Washington State unites aviation, defense, fishing products and analytical instruments.“They aren’t towns or cities,” says Fernandez. “They’re regions. They work together because they are stronger that way.”

Obama did not invent regionalism, but he is trying to revive it. Bruce Katz of the Brookings Institution, among others, has been  preaching for more than 15 years about the need for robust “metropolitan economies” characterized by collaboration instead of competition.  The president  launched an Office of Urban Affairs which is working with Fernandez’s agency to develop a national policy to strengthen cities. “Strong cities are the building blocks of strong regions and strong regions are essential for a strong America,” Obama told the nation’s mayors last year.

Stateline asked Fernandez how hard it will be to persuade states, which are used to competing against each other, to think in terms of collaborating regions even when those regions cross state lines. He was realistic about the difficulty of changing the culture, both at his appearance before the group of legislators April 9 in Washington and in a  speech in Chicago in January.

“It’s a new way to keep score,” he says. “In the past, there was only one metric that mattered: the number of jobs created in my town [or state]. If you created a job, it had to be in your backyard to score points.”

“We need a new way to measure success,” he says. “If the city next door creates 1,000 jobs, it doesn’t mean you lost—it means the region won.  Jobs are not the only number. We need to rate our elected officials not just by the jobs they bring in today but by the jobs they make possible tomorrow.”

Maryland Governor Martin O’Malley, Virginia Governor Robert McDonnell and Washington, D.C. Mayor Adrian Fenty are keeping score the old way. The leaders of a region that overlaps three jurisdictions are demonstrating right in Obama’s backyard the difficulty of changing the one metric that matters, especially in an election year: job creation.

Northrop Grumman, the giant defense contractor, is planning to move its corporate headquarters from Los Angeles to the Washington area, and that has touched off a brawl among O’Malley and Fenty, both Democrats, and McDonnell, a Republican. Each jurisdiction wants Northrop Grumman’s high-paying jobs, and has offered the company millions of dollars in tax breaks so executives will choose them. O’Malley and Fenty are seeking re-election later this year; McDonnell was elected in November on a job-creation platform. (According to the Washington Post, Northrop Grumman has eliminated D.C. from contention.)

If the elected officials were truly thinking regionally, they would declare the Washington area the winner of the defense derby and split the costs of incentives. They would offer a site for Northrop Grumman’s 150 employees in a part of the region near public transportation and in a place targeted for redevelopment. Local planners worry that picking a location in the congested Virginia or Maryland suburbs would exacerbate sprawl, the very thing that Obama’s urban affairs office is working against. But old habits die hard.

“We can’t make people collaborate,” Fernandez says. “We can shine a light on it as a framework that works. We can provide incentives. It’s going to be up to the civic leadership at the state and local level. We need help from states to support the idea of regionalism because not everyone does.”