In the May 10, 2004 Issue:

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NSB Indicates Global Race Tightening for R&D Leadership
2004 S&E Indicators includes chapter of state-level metrics
The U.S. remains the world's leading producer and net exporter of high-technology products, ranking among the global leaders in research and development (R&D) spending. However, ongoing economic and workforce changes make the outlook for the future uncertain, according to Science and Engineering (S&E) Indicators 2004, a biennial report of the National Science Board (NSB) to the President.

S&E Indicators shows, for example, the U.S. now ranks 17th among nations surveyed in the proportion of its 18- to 24-year-olds earning natural S&E degrees. In 1975, the U.S. ranked third.

State indicators are presented in 25 tables across six categories: secondary education, higher education, workforce, financial R&D inputs, R&D outputs, and science and technology in the economy. R&D output is measured by S&E doctorates conferred, academic article output and academic patents. The measures for science and technology in the economy include high-tech employment, high-tech share of all business establishments, and venture capital as a percentage of gross state product.

In a companion piece to Indicators 2004, NSB observes in the available statistics an "emerging and critical problem" for the U.S. S&E labor force. A contributing factor, paradoxically, is the nation's economic success, which leads to an increasing demand for employees trained in S&E fields.

The looming problem lies in current trends that, if left unchecked, show the number of U.S. citizens qualified for S&E jobs will be level "at best," the NSB notes. At the same time, the nation may be unable to rely on foreign citizens to fill the gap, either because of limits to entry or because of intense foreign competition for those skills.

On the economic front, the U.S. and the G-7 nations continue to account for the lion's share of global R&D expenditures, according to Indicators 2004. The U.S. global high-tech market share held steady in the 1990s, and foreign-owned firms' R&D expenditures in the nation continue to exceed the amount U.S. firms spend overseas.

However, a number of countries are positioned to become more prominent in technology development because of their large, ongoing investments in S&E education and R&D. In the 1990s, China and South Korea increased their high-tech market shares enough that their combined share has surpassed that of Japan. And U.S. firms spend more R&D dollars in Asia than Asian firms spend in the U.S. Asia is the only global region where the U.S. shows such a deficit.

Among high-tech exports, the U.S. and Japanese global shares have declined, while the share from other Asian countries, led largely by China and South Korea, has climbed to nearly 30 percent. A growing number of journal articles from East Asia also suggests an increased presence in basic R&D.

For the first time ever, the report provides a state-by-state breakdown of 24 science and technology indicators. S&E Indicators is considered the nation's most authoritative source for national and international S&E trends in education, the labor force, academia and the global marketplace, as well as nationwide and statewide expenditures for R&D. This year's report is available at: http://www.nsf.gov/sbe/srs/seind04/

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VC Stays Course in First Quarter with $4.6B Invested
Venture capital (VC) kept up a steady pace in the first three months of 2004, according to the latest PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™ Survey. Investments in the first quarter of 2004 totaled $4.6 billion going into 618 companies, the data show. The figure is below the $5.2 billion invested in the fourth quarter of 2003, but above the first quarter total of a year ago, $4.2 billion.

Life Sciences companies outpaced other industries for the seventh consecutive quarter, among MoneyTree™ Survey highlights. Investments in the sector totaled $1.3 billion, or 27 percent of all venture capital, and remained near their 12-year high reached in 2003. Biotech, alone, accounted for $943 million, while Medical Devices garnered $325 million.

Software, with 162 companies securing $956 million, was the single largest industry category in Q1 2004. The industry reclaimed the top spot following a two-quarter run as the second-leading industry category behind Biotech. Investments into the Telecommunications Industry showed a slight increase over the prior quarter, with $547 million going to 65 companies.

Detailed information for the first quarter of 2004, as well as some historical data dating back to 1995, is available by region, industry and stage of finance at http://www.pwcmoneytree.com.

SSTI also has compiled a state-by-state listing of the MoneyTree™ Survey results, presenting the number of deals, total amount invested and average deal amount. The table is available at: http://www.ssti.org/Digest/Tables/051004t.htm [Note: The table offers a snapshot of VC data as was initially made available and therefore differs from the data currently available at pwcmoneytree.com, which is continuously updated.]

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High-Tech Tax Credit Bill Renewed with Minor Revisions
Amid criticism from taxpayers, legislators in Hawaii agreed to renew the widely debated bill that extends high-technology tax credit for another five years, without a provision requiring the disclosure of companies that receive the credits, the Honolulu Advertiser recently reported.

Act 221 was first enacted in 2001 to encourage high-tech business in Hawaii and to diversify the state’s economy away from tourism and the military. Based on a survey of businesses that claimed the credits, the state Department of Taxation says the tax credits helped generate at least 600 new jobs in 2002, with an average salary of $46,000.

Hawaii taxpayers grew upset when they learned that credits from the bill were being used to finance one-shot movie deals, the Honolulu Advertiser reports. The bill, which allows for confidentiality of companies involved, investors and the amount of credits claimed, makes it difficult to verify actual benefits of the program. Under the renewed bill, companies will now be required to disclose more information to the Department of Taxation, but not to the public.

Gov. Linda Lingle has said the law is too liberal and allows for businesses not targeted by the act to avoid paying taxes. Others argue the bill is overly generous with credits and fails to produce tangible economic benefits.

The revised act is still among the most generous tax incentives in the nation. The research credit provision provides a refund valued at 20 percent of a company’s qualifying research and development expenses and the investment credit provides a maximum 200 percent return on investments in a tech company.

The full text of Act 221 is available through the Hawaii State Legislature at: http://www.capitol.hawaii.gov/session2001/bills/HB175_cd1_.htm

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New Zealand Switching to Performance-based Funding for University R&D
Competition for state, federal and industrial funding to support university research is increasingly fierce in the U.S. Growing interest in developing academic research capacity, eroding state support for higher education and federal R&D budgets barely keeping pace with inflation, let alone absorbing the growing percentage dedicated to Congressional earmarks, are some of the reasons. Universities or investigators able to claim being the "best" based on some sort of respected ranking could help influence state legislators, reviewers in a federal competition, or decision makers within industrial R&D facilities.

New Zealand is about to launch an alternative, and radical in U.S. terms, approach to allocating federal research support to its universities, the $18 million Performance-based Research Fund (PBRF). Universities that previously received funding allocations according to student enrollment  -- similar to how most U.S. states support higher education -- will now see funding disbursed through PBRF, which grades the quality of research produced within each institution.

Quality of teaching is not included, and the report has stirred controversy over the government’s use of the findings and its comparison to international institutes. Completed in 2003 by the Tertiary Education Commission (TEC), the report is meant to provide incentives to increase the average quality of research, said the Ministry of Education.

Modeled after the United Kingdom's Research Assessment Exercise (REA), which assesses the quality of research in universities and colleges in the UK, the PBRF grades universities with an A, B, C or R, ranging from world class to research inactive. Universities receive grades based on the level in which they reward and encourage the quality of researchers (60 percent), reflect research degree completions (25 percent), and reflect external research income (15 percent).

As with the PBRF in New Zealand, federal research funds also are distributed to universities in the UK in response to the findings of the REA, which takes place every 4-5 years.

Originally set to be released on March 17, the TEC report was held up by a petition to the High Court from the University of Auckland and the Victoria University of Wellington. The universities did not want an international comparison between New Zealand and British universities to appear within the report because they felt a comparison would be both difficult and flawed.

Jonathan Boston, a political scientist from Victoria University, told the universities’ research committee that raw data on research quality for New Zealand would look very bad compared to British universities, the New Zealand Herald reported. Boston helped create the grading system.

The High Court found that TEC breached the universities’ expectations by proposing to publish the comparison without consulting them. In response, TEC removed the section in which New Zealand universities fared poorly in comparison.

Another concern raised by the New Zealand Association of University Staff, the country’s major academic union, is the report's findings could lead to perverse decisions on government support for universities, reports The Chronicle of Higher Education. The association also criticized the system for having a bias toward high-cost subjects over high-quality scores.

Official findings from the PBRF report indicate the University of Auckland placed first, followed by the University of Canterbury, the Victoria University of Wellington and the University of Otago. The Performance Based Research Fund report is available at: http://www2.tec.govt.nz/funding/research/pbrf/pbrf.htmf

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Technology Economy Still in Washington State's Future
Washington State remains poised to capture more benefits from its technology-driven economy, according to the Index of Innovation and Technology released last month by the Washington Technology Center (WTC). As the state's lead organization to support science and technology, WTC publishes the Index to provide the state's decision makers with annual benchmarks for setting policy and  public investments to promote technology-based economic development.

The fourth annual provides analysis of more than 40 statewide measures and 12 regional indicators for evaluating the state’s economic growth with respect to technology industries. Innovation capacity, new company creation, company closings, patent generation, top technology patent areas, patents by industry, federal funds for research and development, and research and development (R&D) expenditures are all assessed.

Young companies and emerging technologies continue to be primary drivers of Washington's potential, the report shows. The state ranks eighth nationally in innovation capacity. Patent generation also continues to be strong, up 10 percent from the previous year across all technology sectors.

For the third consecutive year, Washington led the nation in new company launches -- more than 16 percent above the second-ranked state, Colorado. Along with this ranking comes a high rate of company closures. Twenty percent of Washington businesses are said to cease operations each year, making it the second highest in the nation.

R&D investments are growing in Washington but, relative to other states, not as quickly as anticipated. The report shows R&D expenditures have been continually on the rise, up nearly 227 percent since 1989, from $3.22 billion to $10.52 billion. Since 1997, however, Washington has slipped from eighth nationally to 17th overall in federal R&D funding.

In addition, strains from the recession are still visible in financial markets, the report contends. Since 2002, there has been a continued downturn in the rate of investment to technology sectors. Capital investment is still being made, but not as enthusiastically. Washington remains among the top regions in the country for venture investment, but has slipped from ninth to 10th position among the 11 largest capital markets.

The Washington Index of Innovation and Technology is available on the WTC website at: http://www.watechcenter.org/techindex/index.html

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NBIA Honors Top Incubation Programs
The National Business Incubation Association (NBIA) recently held its 18th International Conference in Atlanta, honoring excellence in business incubation programs, graduates and client companies. NBIA, a nonprofit organization, works to advance incubation and entrepreneurship. This year’s recipients include:

Business incubation programs provide entrepreneurs with expertise, networks and tools needed to become successful. In 2001, North American incubators assisted more than 35,000 start-up companies providing full-time employment for nearly 82,000 workers, according to NBIA. The companies collectively generated earnings of more than $7 billion.

Although they may be new or still developing, other incubators around the country might eventually find themselves on NBIA's award-winning list. St. Louis city officials, for example, are counting on their new Technology Entrepreneur Center to play a role in reviving commerce. Set to open this spring, the center will look to grow new businesses and create jobs in the city.

The center is being financed by a $300,000 donation from Midwest BankCentre, a St. Louis development corporation and other individual donors, the St. Louis Post-Dispatch reported earlier this year. The center also qualifies for Missouri tax credits that could help raise an additional $300,000 this year, supporters say.

Downtown St. Louis will house the new center, which is expected to have capacity for 10-15 businesses. The Post-Dispatch noted that St. Louis has an abundance of mature, technology-based companies, universities, medical centers and other life sciences research facilities to support the development of related small businesses.

Meanwhile, a technology incubator being planned for Allegany County, Md., might someday receive NBIA recognition for its efforts to slow the area's growing brain drain while retaining research jobs. Baltimore's Daily Record reported that the Allegany County of Economic Development will conduct a study to determine what kind of incubator facility, if any, would be most compatible with the county. A business park situated next to Frostburg State University's Allegany Business Center (ABC) is being considered as a possible location.

Bringing in new companies is proving difficult for Allegany County due to a loss in workforce, the Daily Record says. A survey recently conducted by Frostburg State University indicates 82 percent of graduates that have left the area would have stayed had they been able to find employment.

For more information on NBIA's 2004 award winners, visit: http://www.nbia.org/awards_showcase/index.php

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Recent Papers from the Fed Touch on Tech-based ED

Cleveland Fed: "Innovation, Growth, and Economic Policy in an Environment of Change,"
At a time when manufacturing jobs are relenting to the pressures of an expanded service sector, foreign competition and productivity growth, the idea of economic prosperity has a renewed urgency with innovation as the greatest strength and flexibility the greatest asset, argues a new report from the Federal Reserve Bank of Cleveland.

In the 20-page essay portion of its 2003 annual report, Growth and Economic Policy in an Environment of Change, the fourth federal reserve bank district sets forth to answer, “What is the source of economic prosperity?” The report examines innovation's role in economic development, reviewing the theories that have shaped the nation's economic history with an eye on current and future challenges.

The Federal Reserve Bank of Cleveland 2003 Annual Report is available at: http://www.clevelandfed.org/Annual03/index.cfm

Women Entrepreneurship Special Focus of May '04 Minneapolis Fedgazette
Higher levels of confidence, the desire for independence, and the increasing number of female college graduates have lead to a boom in women-owned businesses, according to a series of three articles in the May 2004 Minneapolis fedgazette.

I am Woman, Hear My Business Roar, explores the growth rate of women-owned businesses within the past decade and its effect on the economy. Women today own at least 50 percent stake in approximately 10 million businesses, employing 18 million people, the article states. The geographic standpoint of rural and urban areas having an effect on future entrepreneurship is reviewed as well.

Gender differences in style, motivation and expectations of business are examined in Business is open on Venus. Lifestyle is cited as a major factor for women entrepreneurs. A study cited within the article concludes that women choose to be entrepreneurs for career flexibility and family-friendliness, while men are more concerned with wealth and opportunities.

The final article looks at the institutional and cultural barriers of the past that women entrepreneurs have had to overcome. Running the Gauntlet showcases examples of these hurdles through individual cases of the past and present.

The Spring issue of the fedgazette is available from the Minnesota Federal Reserve Bank at: http://minneapolisfed.org/pubs/fedgaz/04-05/

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2005 National Medal of Technology Up for Grabs
The Department of Commerce is accepting nominations for the 2005 National Medal of Technology awards, the nation’s highest honor awarded by the President to America's leading technological innovators.

The Medal was first awarded in 1985 following its creation in 1980 by Congress. It is given annually to individuals, teams or companies for accomplishments in the innovation, development, commercialization and management of technology, as evidenced by the establishment of new or significantly improved products, processes or services.

Past awards have been made in five main areas: technology product and process; technology management and policy; technology concepts; technology and technological manpower development; and environmental technology.

The deadline for submitting 2005 nominations is July 28, 2004. Nomination forms and guidelines may be downloaded from the National Medal of Technology website at http://www.technology.gov/Medal/Nomination.htm.

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