The Foundations of Growth: Harris Students Investigate the Power of Innovation

A great disparity in regional economic growth spans the United States. While a select few cities like San Francisco and Boston attract a talented workforce and continue to grow, others like Jacksonville and Las Vegas stagnate, struggling to achieve the same level of economic vitality.

Why do some cities thrive while others fail to grow? That question was tackled in Regional Innovation Strategies (RIS), a Harris Public Policy class led by lecturer Thomas Day, a Senior Consultant at Intueor Consulting. The class examined metropolitan areas with success stories of economic growth, like Silicon Valley, and attempted to apply the lessons of these areas to the task of growing the economies of struggling regions across the U.S.

To analyze differences in economic growth among major metropolitan areas, the class focused on GDP per capita. Day explains that by focusing on that metric, the class was able to observe the vitality and well-being of a region, rather than economic growth or decline, which may be related to other factors, such as changes in population.

With GDP per capita as a base measurement, the class examined the economic development of cities across the United States for the past several decades. In addition to the overall economic output, the class also considered various factors often connected to economic growth, including workforce talent and acquisition, venture capital investment, research and development (including that done by governments and universities), and policy incentives to attract companies.

What Day and the students noticed was that since the financial crisis in 2007, the cities that have grown the quickest are often those that have substantial technological infrastructure along with research and development. Day notes that these are “cities that have built more sustainable regional economies” by investing in research and technology. As might be expected, the cities that rank in the top ten for growth in GDP per capita since 2007, according to the Federal Bank of St. Louis, include San Jose, Pittsburgh, Austin (Tx.), San Antonio, Portland, Seattle, Nashville, San Francisco, Los Angeles, and Boston.

According to Day, government is essential for developing the technological infrastructure to grow a region’s economy. For instance, after World War II, the federal government, particularly the Department of Defense, started funding research institutions across the nation. While much of this funding was meant for defense and security purposes, it also produced the technological infrastructure and knowledge that led to major companies, including Hewlett-Packard, in the Bay Area. Today, the Bay Area is still reaping the economic benefits of that research, development, and infrastructure.

When technology is first developing, investing in research and development has a high potential of failing. “Often, private industry doesn’t want to take these investments because it is too risky,” explains Day. However, when the government takes on those risks, they are able to develop and fund research institutions that create the infrastructure needed to advance technology. Once that infrastructure is in place, private industry can move in and develop the economy of a region. 

The idea of research and development as key to driving economic growth is relevant to other methods government and private entities use to encourage the economy. Although an increase in venture capital is springing up across the nation while accelerators and incubators create spaces for entrepreneurship, the presence of key research and development is necessary for the success of all of these. Venture capital, accelerators, and incubators “will not realize the economic growth they are designed for until they gain federal help for research, patenting, and technology transfer,” Day argues. 

What really sets cities apart is not what people tend to expect. “Levels of entrepreneurship are not connected with GDP per capita growth,” notes Day. “What is correlated are research dollars, patent generation, and STEM workforce.”

Simultaneously, Day’s research has made him skeptical of the idea that cities should rely on tax incentives to draw in companies and grow economies. He cites a study from the W.E. Upjohn Institute for Employment Research that points out the large amount of money cities, states, and regions dump into incentives to encourage large companies to enter their areas and the potential wastefulness of those incentives.

He points to the example of Amazon’s second headquarters (HQ2) as an example of why metropolitans should not focus on incentives. After cities across the United States offered huge incentives such as tax breaks and credits to lure in the tech giant, Amazon chose to split HQ2 between locations near New York City and Washington D.C. Even after Amazon decided to leave New York as a location for HQ2 due to public pushback on the incentives, the corporation has still decided to open new offices in New York in the near future. Despite billions of dollars of potential incentives from cities across the United States, Amazon has opted to develop offices in cities that already have well-established research, talent, knowledge, and technological infrastructure. 

With the model of research, development, and innovation as the foundation for economic growth, the students of RIS researched cities across the United States. They focused on trade clusters, which are specific industries that grow within particular areas or regions. These clusters develop around various aspects of the trade, such as the knowledge and skill in the workforce, available infrastructure and logistics specific to the trade, and other available resources needed by the industry. Because of the presence of these factors in a region, competing companies will grow in that area. Students in RIS would research and analyze the interrelatedness of education, research, trade clusters, and the economy of a region. Two students to do this research that finalized in the form of research projects were Ellie Price and AJ Calhoun.

Ellie Price, MPP Class of 2020, focused on her hometown of Rochester, New York. In her research, Price notes that two perceptions of Rochester dominate. On the one hand, “people recite a dismal story about all the jobs being gone.” Price cites the fall of major companies, including Kodak, which had employment drop in the area from nearly 60,000 to around 6,000 people, as well as Xerox and Bausch & Lamb, both of which had major layoffs in the last thirty years.

On the other hand, much of the talent, knowledge, and research around the trade cluster of optics, photonics, and imaging (OPI) – of which Kodak was a major player – remain in the area. Although the OPI trade cluster is not the largest economic force in the local economy, Price sees it as the economic driver of Rochester’s future. 

Price’s belief is due to the uniqueness of OPI to Rochester and its far-reaching role in so many industries. Whether it is taking casual photos, transmitting energy and information through photons (photonics) in datacenters, or using lasers for precision work in manufacturing, it is clear that optics, photonics, and imaging have a place. “Manufacturing advances will allow photonics and optics to be used widely and cheaply for everyday purposes” says Price. “From autonomous vehicles to medical imaging, there is a wide range of industrial applications waiting for silicon photonics manufacturing to reach high-volume, low-cost production at scale.”

The OPI cluster demonstrates its strength in Rochester through a history of research, development, and innovation. The area’s top five patent types are related to OPI and the field is responsible for over 8,000 patents. At the same time, millions in government funds have been granted to invest in quantum photonics. Additionally, the American Institute for Manufacturing Integrated Photonics has a testing lab in Rochester, and the Luminate Accelerator supports the growth of OPI companies. 

Moreover, Rochester’s educational institutions are primed to support the OPI cluster in place. The area hosts two major research institutions, the University of Rochester and the Rochester Institute of Technology. With the knowledge, technology, research, and education to support it, Price maintains that the OPI cluster has the potential to become a driving force of Rochester’s future.

The key to the future of OPI’s growth as an economic engine is for a locally-backed company to become visibly successful. “This will provide returns to investors right here in the region and encourage continued investment,” explains Price. She notes while there have been significant local efforts to increase the supply of venture capital available to support OPI and other local startups, the money remains difficult to raise. If a local company were to become highly successful, it could generate additional supply of capital for later-stage companies born in Rochester to stay and grow in the area.

AJ Calhoun, also MPP Class of 2020, focused on Charlotte, North Carolina. He cites the lack of social mobility as a pressing issue: “It seems that if you are born poor, you are going to die poor.” As a result, his interest in the future development of Charlotte is not just to attract new talent, but also to train the existing population in manufacturing, technology, and logistics jobs.

As with Rochester, the future economic development of Charlotte depends on connecting current and potential areas for research and development with educational institutions and trade clusters. In his research, Calhoun identifies the transition of three major clusters in the Charlotte as key to the future of the city—banking, energy, and textiles.

The financial industry has a strong presence in Charlotte, N.C. The area hosts the headquarters of Bank of America and Truist Financial, as well as a regional operations center for Wells Fargo. Recently, several financial technology (fintech) companies such as LendingTree and Parking Passport have also moved into the area, making Charlotte a prime location for future innovation around fintech.

In addition to the financial industry, energy is also an important economic driver in the region. Based in Charlotte, Duke Energy has grown to provide electricity and natural gas to millions across the Midwest and Southeast. Calhoun sees the future of this cluster in shifting to sustainability, a process that has already begun with Envision, a project designed to cut the use of energy by businesses in the area.

Finally, Charlotte remains one of strongest textile manufacturing areas in the nation despite the fact that textile jobs over the past twenty years have been decreasing. In his research, Calhoun found that beyond textiles, the Charlotte area has nearly 3,000 manufacturers in a variety of areas from optoelectronics to biomedical technology. In 2017 the manufacturing cluster made up approximately 31% of the region’s economy. With a rich history and lasting knowledge around manufacturing in Charlotte, the city has an opportunity to develop its role in advanced manufacturing. 

On top of new businesses in the area, other entities are pushing along the transition into fintech, sustainability, and advanced manufacturing, including incubators. QC Fintech is providing space for innovation around financial technology, and the Joule Accelerator is creating opportunities for sustainability start-ups to gain training.

Perhaps most importantly is how the University of North Carolina at Charlotte (UNCC) has worked to align its programs and research with the area’s trade clusters. With the help of funding from the federal government for research and development, UNCC has programs in data analytics and cybersecurity, which support fintech; advanced manufacturing and precision metrology, further developing the manufacturing cluster; and energy production and infrastructure in connection to the energy cluster. Calhoun believes that UNCC is on the verge of gaining major grants in its future, which will significantly increase its role in research that could push the region forward.

Venture capital investments still have room to grow. While some venture capital firms are present in Charlotte, they often support companies in later stages rather than the beginning seed stage. Calhoun believes that if the region is to grow through its innovation, the area must find a way to increase support of start-ups in their nascent stages. 

Although Charlotte already has much working in favor of the transitions to fintech, sustainability, and advanced manufacturing, Calhoun believes the way to push Charlotte into the future is through collaboration of these different entities. 

“Alignment is key,” says Calhoun. "We need to get policy makers on the same page as accelerators and on the same page as research institutions. There is only so much that each of these can do without the others. We need to figure out who is going to conduct the train.”

If there is one takeaway for public actors in the future from this research done by the class Regional Innovation Strategies, it is that government at all levels should invest in and develop research institutions. The technology and innovation that grow from these institutions will be the fuel for the entrepreneurship that will drive local economies.