Bacon's Rebellion

James A. Bacon

Innovation Factories

Should Virginia back its traditional R&D power- houses or fund universities in its major metro areas? Bob Sharak asks the tough questions.

Last fall, gubernatorial candidate Mark R. Warner articulated a bold goal for Virginia: to nudge three of its academic institutions into the ranks of the nation’s top 50 research universities by 2010. With Virginia Tech pegged 51st in the country by the National Science Foundation, the University of Virginia 58th, and Virginia Commonwealth University 106th, the target seemed ambitious but achievable as long as the state was willing to increase its financial support.

Since then, Governor Warner has refined his thinking. Rather than focusing on elevating entire universities, he proposed in May setting a goal of getting 30 departmental-level programs ranked in the top 10 nationally. Such a shift would allow the state to build on centers of excellence found not only in the Big Three but at William and Mary, George Mason University, Old Dominion University and other institutions.

The issue may seem somewhat academic in a year of budget crisis: The Commonwealth is cutting its support for higher education, and university administrators have every reason to fear slipping in the national rankings. But inevitably the economy will rebound, revenues will revive and politicians will feel free to spend again. Given the widespread conviction that Virginia needs to build world-class R&D institutions to fully participate in technology-led economic growth, the money spigots will open again eventually.

Before that day comes, however, Bob Sharak wants to change the terms of the debate. What is the proper goal of investing public dollars in academic R&D, he asks: enhancing the prestige of state universities or stimulating economic growth?

Sharak, director of special projects for the Hampton Roads Partnership, recently presented a paper to the Partnership board strongly favoring a policy that put economic development considerations foremost. Universities, he argued, are prestige-seeking institutions driven by the desire to upgrade the quality of faculty, students and facilities. Their interests are not the same as those of the Commonwealth as a whole. The state invests in its R&D institutions in the hope of spinning off new businesses that create jobs and wealth for the broader community.

Further, Sharak contended, a dollar of R&D conducted in a smaller metro community such as Blacksburg or Charlottesville does not have the same economic impact as a dollar of R&D in a major metropolitan area. Virginia’s urban centers – Northern Virginia, Hampton Roads and Richmond -- possess more of the resources, particularly managerial and technical talent -- required to transfer technology from the lab to the marketplace. “You have to ask yourself,” Sharak told me, “which areas have the best shot at spinning off R&D” into commercial enterprises?

“For what purpose do we want two top-40 research institutions?[1] If the purpose is to have two elite research institutions, so that we may say we’re ‘competitive’ with the best, the concept of allocating scarce resources to UVa and Tech so that those institutions can reach even higher levels may have merit,” he writes. “However, if the ultimate goal of R&D investment is economic development, such an investment probably will fall short of what is anticipated – and needed -- to spur the Commonwealth to higher growth.”

Sharak makes a fascinating case. I highlight his paper here not because I endorse all of his conclusions – a full analysis would consider factors that he does not address – but because he is asking good questions and sparking a debate that is long overdue.

Virginia has long made a commitment to bolstering R&D activity in its universities. But the effort has been hampered by fragmented and uncoordinated authority over technology initiatives. No commonly accepted criteria have emerged for allocating state resources.

In theory, the Secretary of Technology is supposed to take the lead in developing the state’s technology policy. In his strategic plan for technology, published last month, Secretary of Technology George Newstrom set a goal of extracting more R&D support from the federal government, but gave no hint as to which institutions would be favored. Newstrom also enumerated goals for Virginia’s Center for Innovative Technology, the state agency in charge of promoting research and technology development: identifying university centers of excellence, making universities’ intellectual property more accessible to the private sector, and increasing the number of technology start-ups.

CIT may have the in-house expertise to highlight top programs, but it has minimal funding to invest. The big bucks for universities are funneled through the State Council for Higher Education in Virginia, which resides within the secretariat of Education. Gov. Warner has convened a task force on the future of higher education in Virginia, overseen by Secretary of Education Belle Wheelan, which has set a goal of identifying key R&D-related issues to be discussed at a higher education summit next year.

Meanwhile, Michael Schewel, the secretary of Commerce and Trade, is writing a strategic plan for economic development, which includes a directive from the governor to support technology business in the state. Presumably, elements of that plan will touch upon the commercialization of technology from Virginia’s universities. Last but not least, the Commonwealth Technology Research Fund, which uses state funds as matching dollars to attract corporate and federal research grants, reports to the secretariat of Finance.

Remarkably, Warner’s cabinet secretaries are so collegial -- so determined not to engage in turf battles and empire building -- that no one has stepped forward to address the big picture. While each cabinet secretary diligently addresses the narrowly defined issues confronting them, it doesn’t seem to be anybody’s job to ask the outside-the-box questions that Sharak is asking.

The conventional wisdom holds that universities are crucial for technology-based economic development, Sharak says, but the presence of a top-rated university is no guarantee that technology will be commercialized locally. By way of example, he points to Cornell University, the 15th-ranked research university in the country, which has stimulated little tech development in the Finger Lakes region of New York. He also proffers the University of Iowa, No. 38, which has yet to make Iowa a hotbed of technology.

Neither university, Sharak noted, is located in a major metropolitan area possessing a sufficient quantity of capital, executive talent, professional services and other assets to translate technological innovations into viable businesses. Quoting a study by CHI Research in his paper, he writes, “Patent citations show that companies in physical proximity to research universities use the latter’s research. In the process, they develop specialized linkages that foster the R&D commercialization process leading to competitive results.” The greater the number of companies in close proximity to a university, the greater the odds that technology will make it into the commercial realm.

Similarly, citing the work of Federal Reserve economist Michael J. Orlando, Sharak argues that university R&D is most likely to “spill over” into commercial economy within a 50-mile radius of where the research takes place. Given this evidence, he extrapolates, “a strategy of further concentrating R&D assets in Virginia’s two top research institutions, both located outside the state’s major metropolitan areas, will probably not have a significant positive impact on the economy in Northern Virginia, Richmond or Hampton Roads, which together represent 67 percent of the state’s population.”

Of course, Virginia Tech and UVa can point to a significant number of technology start-ups that have taken root in Blacksburg and Charlottesville. Indeed, the Corporate Research Center in Blacksburg is widely hailed as one of the most successful research parks in the country

Sharak doesn’t dispute the beneficial impact of Virginia Tech and UVa on their surrounding communities. But he contends that, all other things being equal, economic spin-offs from academic R&D are greater if a university is located in a larger metropolitan area. According to Cleveland State University research, if a metropolitan region and a non-metro region have universities of equal perceived quality, the metro region can be expected to show a five-year employment growth rate nearly 3.2 percentage points higher than the non-metro area, not to mention slightly greater increases in per capita incomes.

The bottom line: Larger metro areas are more efficient in converting knowledge into employment growth. Quoting again from the Cleveland State study, Sharak notes, “Metro areas have larger markets for goods and services, more specialized labor pools, and more extensive and sophisticated transportation and telecommunications networks than non-metro areas. These competitive advantages make metro areas the engines of U.S. economic growth and global competitiveness.”

Though provocative, Sharak’s arguments are far from conclusive. Virginia Tech and UVa can muster respectable counter arguments. In the academic arena, success perpetuates success. Prestigious institutions with respected research programs enjoy an enormous advantage in recruiting top faculty and graduate students. Research leaders have tremendous advantages such as established corporate relationships, far-flung networks of alumni, and rich endowments that allow them to supplement chintzy state faculty salaries.

If your goal is attracting research grants, says Len Peters, vice provost of research at Virginia Tech, "What you do is invest in quality people. It's like betting on a horse. You're much better off betting on a horse with a good pedigree. ... It takes decades to build a quality faculty. If you're looking at building institutions, you have to realize that the gestation period is a matter of decades."

In other words, investing state resources in Virginia's leading institutions arguably will yield immediate returns in the form of increased research activity. The benefit from investing in less illustrious institutions will take years if not decades to materialize.

Also, Sharak’s logic can be turned against him. Just as it’s true that metro areas overall are better at converting R&D into commercial activity than non-metro areas, some metropolitan regions are better than others as well. For example, the Johns Hopkins University located in Baltimore is the leading research university in the country, but Baltimore has yet to build a reputation as a world-class center of biomedical corporations.

Among Virginia metro areas, as my Bacon’s Rebellion colleague Doug Koelemay has reminded me, Northern Virginia is the best suited to converting R&D innovations into new businesses. The region has abundant venture capital, a broad array of specialized professional services, and a deep labor pool of executive and technical talent experienced in managing start-up ventures. According to the Progressive Policy Institute’s “New Economy Index,” the Washington metro area ranks 6th among the 50 largest metro areas in the U.S. By contrast, Richmond ranks a mediocre 26th, and Hampton Roads ranks a downright depressing 46th.

Applying Sharak’s criteria, the state should shovel money into George Mason University in Fairfax – as Northern Virginia business leaders have advocated -- but write off Hampton Roads’ universities as long shot investments.

Gov. Warner’s philosophy of identifying and building upon the top research programs within universities is probably the proper focus. Such an approach is more likely to reward centers of excellence such as marine science at William and Mary, complex modeling and simulation at Old Dominion and materials science at Norfolk State, even if Hampton Roads has yet to develop a track record as an entrepreneurial hotbed.

A balanced approach to building Virginia’s academic R&D institutions would take into account a variety of factors:

·         Where do the current centers of R&D excellence reside? Which programs have the greatest potential to attract more R&D funding and generate technologies with promising market potential?

·         What resources are in place to commercialize that technology locally? Does the capital and expertise exist to build a local business, or will the intellectual property most likely be snapped up by a company in another state?

·         Is there an intersection between the academic R&D and an existing industry cluster, such as Virginia’s Tech’s wireless research and Northern Virginia’s wireless industry? If so, the odds increase that technology will be successfully transferred within the state.

Inevitably, the allocation of state resources will be influenced by political considerations. Virginia Tech and UVa can tap the loyalties of powerful alumni networks, including many members of the General Assembly. Similarly, GMU, VCU and ODU exert considerable sway over legislators in Northern Virginia, Hampton Roads and Richmond, which collectively command a majority in both houses of the legislature.

Whatever the final outcome, Sharak has raised issues with momentous import for Virginia’s future, and he has elevated the debate to a higher, more demanding level of analysis. Let us hope that logic and dispassion prevail.

-- Sept. 30, 2002