The Endless Frontier Act Could Foster Technology Job Growth Across the United States
The $100 billion initiative is the comprehensive technology-based economic development strategy the country needs.
After years, even decades, of neglect, the United States may finally be starting to take economic growth policy seriously. The Endless Frontier Act (S. 3832), a bipartisan bill designed to scale up government investment in new science and technology research, was introduced in Congress in May 2020. Not only does the legislation seek to invest $100 billion in American science and technology research over the next five years; it also directs major changes in the structure of federal support for technology-based economic development (TBED). Expansion of the latter is decades overdue, and could, if implemented correctly, lead to sustainable technology-based economic growth in the many regions of the country that are currently struggling.
The legislation greatly expands the National Science Foundation, which has a current annual budget of $8 billion, and gives the agency a new name: the National Science and Technology Foundation. A Technology Directorate within the new NSTF will advance technology in 10 critical focus areas, including artificial intelligence, materials science, and engineering. In addition, the Department of Commerce would receive $10 billion over five years to establish “regional technology hubs.”
The $100 billion of funding should be enough to start reversing a multidecade decline in US competitiveness that has resulted in 44 consecutive years of manufacturing trade deficits and the lack of real (inflation-adjusted) income growth over the past two decades for the typical American family. Moreover, the act’s objective of establishing regional innovation-oriented hubs is a welcome attempt to geographically expand the innovation economy—and the higher paying jobs it generates. Currently, as the bill notes, “more than 90 percent of the Nation’s innovation sector employment growth in the last 15 years was generated in just 5 major cities.”
To be truly successful, however, the new measure must include a “master recipe” or conceptual model of the major technical, organizational, and institutional elements necessary to create an effective innovation hub. Modern technology evolves through a series of research and development phases, production steps, and marketing efforts—all of which require some degree of public input. Each set of suppliers—representing different tiers in the high-tech supply chain—requires special technology, capital, labor, and infrastructure assets. These resources, in turn, are applied at different phases of the development life cycle—each with its own needs for public technical infrastructure support.
Thus, the proposed legislation should identify the full set of institutions that will support both a technology’s evolution and its subsequent production and commercialization, as well as a policy mechanism for evaluating and analyzing those roles. The range and complexity of these assets is varied, and therefore must be systematically analyzed in terms of the policy tools that should be incorporated in the legislation.
WHY THE NATION NEEDS A NATIONAL INNOVATION POLICY
Technology plays a dominant role in increasing productivity growth. Economists have estimated the rate of return from R&D to be 2.5 to 4 times the estimated rate of return on physical capital. Further, advances in technology have been the single greatest source of permanent productivity growth over the past 40 years. And yet the federal government has proven incapable in recent decades of implementing policies that would directly target such economic development. In contrast, leading technology-based economies, such as Germany and most of Northern Europe, and emerging economies in Asia, such as China and South Korea, have a much more committed central government role.
Failure to increase investment incentives for technology development and utilization has resulted in the annual growth rate of gross domestic product—the broadest measure of goods and services produced by the nation’s economy—declining steadily over the past 60 years—from an annual average rate of 4.5% in the 1960s to 2.1% so far in the past 20 years. Real median household income is basically unchanged over the past two decades. Underscoring the seriousness of this failure, the McKinsey Global Institute estimates that the declining rate of US population growth will require an 80% increase in the rate of productivity growth over the next 50 years just to keep pace with the average growth of GDP from the past 50 years.
More importantly, if politicians are serious about raising the incomes of American workers, Bureau of Labor Statistics analyses show that “high-tech” workers earn 70-92% more than the average for all workers.
Given the ability of tech-based growth to raise incomes, a critical question is how much and what kind of support is the government providing to the high-tech sector? The answer is not enough, which is why the Endless Frontier Act is so important.
The one significant current federal program directly related to the development of a technology-based economy is Manufacturing USA., which coordinates the funding of 14 manufacturing institutes on behalf of the Departments of Defense, Energy, and Commerce. In the four years since Congress authorized the program, the institutes have received overall commitments of more than $3 billion, including $1 billion in federal funds matched by over $2 billion in nonfederal investments.
A few individual states are partially filling the investment gaps that occur further on in the R&D cycle and in subsequent production scale-up. One well-established example is Pennsylvania’s Ben Franklin Technology Partners (BFTP), which has made over 3,500 investments in Pennsylvania companies since its founding in 1983. An evaluation of BFTP by the Pennsylvania Economy League and KLIOS Consulting estimated that since 1989 the organization has contributed over $23 billion to the state economy, helped create 51,000 jobs in its client firms, and generated a 3.6-to-1 return on investment.
BFTP’s overall role is to provide companies with capital, technical assistance, and networking connections within a regional economic environment. It makes direct investments in both start-ups and established companies seeking to commercialize new technologies. Often BFTP has been one of the first institutional investors in a company, providing critical risk capital and technical assistance that enable young start-ups to reach an inflection point in their development at which they are able to access conventional sources of financing, scale up production, and acquire needed skilled workers. BFTP’s experts also provide technical assistance in the areas of product development, marketing, fundraising, accounting, operations, and human resources—assets that are essential to reach and successfully pursue commercialization.
In terms of a comprehensive TBED policy infrastructure, the University of California’s Office of Innovation and Entrepreneurship stands out with 49 entrepreneurship education programs, 33 incubators and accelerators, and 15 programs that support start-ups and early-phase proof-of-concept research.
However, though most states now have TBED initiatives and are struggling to expand them, the majority are too small and incomplete to match Pennsylvania’s comprehensive infrastructure support. Even the few states with sufficient resources to achieve minimum scale and scope of TBED investment lack the needed strategic and policy tools that only the federal government can provide.
CONSTRUCTING THE POLICY PORTFOLIO
Managing a successful technology-based economic development strategy is a dynamic process. As Microsoft’s chief executive officer, Satya Nadella, puts it: “There’s no such thing as a perpetual-motion machine. At some point, the concept or the idea that made you successful is going to run out of gas. So, you need new capability to go after new concepts. The only thing that’s going to enable you to keep building new capabilities and trying out new concepts long before they are conventional wisdom is culture.” Creating that culture throughout a particular region requires a policy framework that guides decision-making over the entire technology life cycle and also anticipates the long investment lead times necessary for timely commercialization of new technologies.
All regional stakeholders across the entire technology life cycle—from research to development to commercialization—must be involved for that framework to succeed. Three policy goals are key to successful TBED efforts:
- establish a limited number of technology targets on which the regional innovation cluster can focus scarce resources.
- facilitate adaptation to the increasingly rapid pace of technological change through coordinated and cooperative strategic planning, conduct of R&D, and assistance in scaling up to commercial production levels , and
- provide financial, education, and business infrastructures to enable the research, production, financial, and education assets necessary to achieve the first two policy goals.
BUILDING AN INNOVATION ECOSYSTEM
“Science” has traditionally been viewed as having little direct connection to industrial innovations other than to provide the basis for technology development. Historically, universities dominated scientific research, and industry, in turn, commercialized the results. This separation proved workable as long as scientific knowledge was simple enough to be diffused by indirect means; that is, when most university research was simply published, with little direct interaction with those who subsequently developed technologies based on it. Growing scientific complexity in recent decades, however, has complicated the transition from basic research to the early-phase development of technology. More time and resources are required—something that private companies, acting alone, struggle to provide. The difficulty of this transition, often referred to as crossing “the valley of death,” has led university researchers increasingly to participate in the proof-of-concept phase of technology research and development. This requirement to broaden the university role in the R&D cycle has been one of the major motivations behind the creation of innovation clusters, where government labs, corporations, and other sources of technical knowledge are located in close proximity.
Bringing together universities, government laboratories, and companies into “innovation clusters” transforms a region’s ability to deal with growing technological complexity. Working within a hub, these groups cooperatively conduct early-phase technology research, share production scale-up facilities, and provide targeted education and training infrastructures to support the creation of a large skilled labor pool that individual companies can draw on as their needs change.
For example, the challenges in the emerging field of nanoelectronics led IBM to become a major investor and participant in New York’s Center of Excellence in Nanoelectronics and Nanotechnology, located at the State University of New York at Albany. Founded in 2001, the center is partnering with other electronics companies (Intel, Micron, AMD, Texas Instruments, and Freescale Semiconductor, among others), as well as with smaller companies that are often suppliers to IBM, and, importantly, with several universities. The New York state government is a major financial supporter, and the federal government is directly involved in the research. This investment would be unlikely to happen without this extensive public-private cooperation.
Entrepreneurship centers connect start-ups to sources of technical and “soft” business skills while providing the networking assistance needed to start and manage high-tech businesses. As entrepreneurship centers have adapted and changed to meet the needs of their local communities, they have expanded the services they offer. In spite of relatively small budgets, these centers provide several significant types of nonmonetary assistance, including research assets and mentors, often through affiliations with larger high-tech companies.
Technology incubators provide physical space for early-phase technology research and create links to resources within higher education institutions, thereby shortening the time needed to achieve significant employment, sales, and exports. Equally important, participation in incubators can provide start-ups with networking opportunities for next-round financing.
Large high-tech companies are beginning to use incubators to diversify their technology portfolios so that they may, ultimately, enter new markets. An example is a $300 million tech incubator founded by United Technologies’ Pratt & Whitney division. The company provided space in New York City for about 200 engineers, designers, and others to develop new manufacturing concepts and to address problems affecting areas of manufacturing beyond Pratt & Whitney’s corporate focus on the aircraft industry.
An educated workforce is critical to the development of a technology-based economy, but many regions in the United States, especially rural ones, lack the colleges and universities needed to provide such education either at the beginning or over the course of a career. The Urban Institute estimates that as many as 41 million American adults live in higher education “deserts,” defined as areas where either there are no colleges or universities within 25 miles or there is a single community college as the only broad-access public educational institution. This lack of broad technical and skilled labor training prevents technology-based companies from locating in such areas and entrepreneurs from starting new businesses there, underscoring the need for a upgraded geographically pervasive education infrastructure.
In addition, though the digital content of virtually all jobs has been growing, occupations in the middle and lower end of the skill spectrum have shown the greatest increases. A Brookings Institution study finds that “nearly 60 percent of the task content of low-digital occupations appears susceptible to automation, compared to only around 30 percent of the tasks in high-digital jobs.” Thus, in addition to meeting the immediate needs of specific job categories associated with the current technological focus of the target industries, such programs should target the kinds of jobs that are less susceptible to automation.
PROVISION OF RISK CAPITAL
Getting young firms to a point where they can access risk capital in a timely manner continues to be a policy challenge for TBED planners. Traditional venture capital (VC) firms are increasingly less likely to fund high-tech start-ups in their earliest phases of development. The growing complexity of modern technology, along with the consequent longer gestation periods needed before reaching the commercial prototype phase of development, has shifted the VC focus to companies that already have prototype products to test.
In addition, VC investments are increasingly concentrated in clusters, where the synergistic effects of high-tech firm colocation and innovation infrastructure raise the probability of success. Yet nearly half of VC investments in recent years, according to Bonvillian and Singer, have occurred in Silicon Valley. Three other regions with concentrations of high-tech infrastructure—the New York metro area, Los Angeles/Orange County, and New England—accounted for another third of national VC investment. All other regions received modest amounts at best. These trends, which have been fairly consistent since the 1960s, can be reversed only with coordinated regional planning and federal funding to leverage TBED investment.
Technical infrastructure is essential to successful private high-tech investment. A study sponsored by the National Institute of Standards and Technology and conducted by RTI International estimated that the total investment risk facing companies developing advanced materials could be reduced by almost half with improved infrastructure. The analysis projects potential economic benefits from an improved materials innovation infrastructure of between $123 billion and $270 billion per year.
Most states are limited geographically in where they can direct technology-based economic development due to the lack of adequate communications—in particular, high-speed internet and inadequate research universities and technically oriented community colleges. For example, although the state of Washington has achieved high rates of TBED in its central western half (one of the nation’s most technology-intensive regional innovation clusters), other parts of the state have limited TBED infrastructure and have consequently experienced lower rates of private-sector investment. The result is pronounced with the state’s 39 counties having per capita incomes ranging from $16,700 to $39,200. Such income inequality is unfortunately typical of most states.
TACKING UP THE SLACK
Regional technology-based growth strategies are becoming an increasingly prominent strategy across the global economy. At a time when many nations are expanding their TBED investments, the United States lacks a comprehensive national strategy to guide and fund such efforts. Individual states have neither the scope nor the financial and technical resources to take up the slack entirely on their own. The Endless Frontier Act is a good first step toward rectifying the situation.