August 6, 2008 - SSTI Weekly Digest

Copyright State Science & Technology Institute 2008. Redistribution to all others interested in tech-based economic development is strongly encouraged. Please cite the State Science & Technology Institute whenever portions are reproduced or redirected.

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This is the TBED community’s not-to-miss event of the year, as once again, more than 300 top TBED practitioners are expected to attend from across the entire U.S.

We closed registration early last year because we ran out of space – don’t let it happen to you in Cleveland! Register your TBED team today! More details are available at http://www.ssticonference.org/.

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New TBED Proposals Win Support in Michigan Legislature
Last month, Gov. Jennifer Granholm announced legislative approval of two TBED priorities unveiled during her State of the State Address, a program supporting in-state entrepreneurs and continued investment in an initiative to train displaced workers.

Gov. Granholm announced last week the launch of Invest Michigan!, a statewide initiative that commits $300 million in pension funds to provide capital assistance to start-up and expanding companies. The money will be divided equally between a Growth Capital Fund targeting venture capital and expansion-stage companies and a Michigan Opportunities Fund targeting potential acquisitions and buyouts, according to the governor’s press office. Investments of $2 million to $7 million are anticipated for the Growth Capital Fund, while officials expect to make about 10 investments ranging from $25 million to $125 million in the Michigan Opportunities Fund, the Detroit Free Press reports. To grow the size of the fund, the state will encourage additional institutional investors, such as in-state foundations, universities and the business community.

Gov. Granholm unveiled a new component of the program for the upcoming year and outlined the progress of the No Worker Left Behind Initiative, which celebrated its first anniversary last month. Lawmakers approved $15 million in fiscal year 2009 for the initiative ($25 million less than the governor’s recommendation), augmenting an existing pool of dedicated federal funds for worker training initiatives. A new green jobs component will direct $6 million for investment in job training within emerging industries of wind, solar, biofuels and geothermal. The program provides financial assistance for training programs or up to two years’ tuition at any Michigan community college or university for training in high-demand occupations. Since its inception last year, 31,000 participants have enrolled in the program and 11,000 have completed training, according to the governor’s office.

The state’s 15 universities will receive an across-the-board increase of 1 percent for operating expenses in FY09. Legislators rejected the governor’s proposed 3 percent increase based on an incentive formula rewarding universities for returns on research and technology commercialization (see the Feb. 13, 2008 issue of the Digest). The slight increase is, however, the first raise in the higher education budget in seven years, according to a Detroit News article. Michigan community colleges will receive a 2.1 percent increase in operating expenses and the Michigan Agricultural Experiment Station (MAES) budget will increase by 1 percent for a total of $34.3 million in FY09. The governor recommended a 3 percent increase for MAES, which encompasses the work of more than 300 scientists in five colleges at Michigan State University.

The FY09 enacted budget includes $65 million under the Michigan Strategic Fund for the 21st Century Jobs Fund and $1.25 million for the business incubator program.

The FY09 general government appropriations act is available at: http://www.legislature.mi.gov/documents/2007-2008/billenrolled/House/pdf/2008-HNB-5816.pdf

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U.S. Venture Capital Investment Stable but Capital Growing Scarce for Earlier-stage Companies
Despite ongoing concern about the lack of venture-backed initial public offerings (IPOs), venture investment held steady at $7.4 billion in the second quarter of 2008, according to the Moneytree Report published by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) based on data provided by Thompson Reuters. Though venture investment dropped slightly from $7.5 billion to $7.4 billion from the first to the second quarter of the year, venture activity remain on track to hit the same level of investment as 2007 by year’s end.

While the overall figures seem encouraging, a much higher percentage of investment is being targeted at late-stage, rather than early-stage, companies and to firms based in Silicon Valley and not the rest of the country. This trend could mean trouble for new capital-seeking companies outside of the Bay Area.

Software companies continue to represent the leading sector for venture investment with $1.25 billion in 219 deals during the second quarter. While biotechnology companies received the second-highest number of deals, the industrial/energy sector took over the second place spot in venture dollars for the first time since the second quarter of 2003. Both deals and dollars dropped in the biotechnology sector, which, along with a similar fall in medical device deals, represents a 14 percent drop in dollars for the life sciences sector. The semiconductor industry also experienced a drop, falling to its lowest level of investment since 2001. Cleantech and Internet-specific companies, however, continue to grow in importance as targets for investment. Two cleantech deals were the largest individual investments of the quarter, together totaling $247 million.

Though national investment held even, companies in the Bay Area raised $2.96 billion in the second quarter. That figure is a 12.1 percent increase over first-quarter investment and a 10.4 percent increase over the same quarter last year. At the same time, investment fell in most other states with a few exceptions, including the District of Columbia, North Carolina, Pennsylvania and Minnesota.

Investment in the Silicon Valley region has benefited from a growing preference for safer, later-stage deals on the part of venture capital firms. Last quarter, the number of dollars invested in companies seeking their first round of capital fell 12 percent. First-round financing made up just 21 percent of total venture investment, the lowest share since 2004. While early-stage investment remained even and expansion-stage investments fell by 15 percent last quarter, later-stage deals rose 14 percent. Silicon Valley is home to many of the more mature companies and has increased its percentage of national venture dollars as investors attempt to avoid the costs and risks of investment in early-stage companies, especially in the current economy.

Fundraising was up in the second quarter, despite the fact that no companies achieved an IPO exit during that time. The news comes on the heels of an already-slow first quarter in which only five venture-backed companies went public. To put this in perspective, 43 companies went public during the first half of 2007. NVCA has declared the lack of IPOs to be a crisis for the capital and start-up community.

A recent survey by KPMG finds that investors do expect that IPO activity will make a recovery, but that this will likely not come until 2010. In the meantime, most investors have increased their projected IPO timelines by 12 months or more. With more late-stage companies holding on before going public, a larger percentage of venture funds are being dedicated to supporting them instead of investing in earlier-stage companies.

Access the Moneytree Report at: https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/08Q2MTPressRelease_FINAL.pdf

For state-by-state profiles of venture capital investment drawn from data provided by PricewaterhouseCoopers and NVC, visit SSTI’s State Venture Capital Dashboard at: http://www.ssti.org/vc

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Florida Legislature Injects Itself into Centers of Excellence Program, Redirects Funding
How should states determine the focus and location of significant investments into academic research? The process can easily become politicized when more than one research institution, sizable metropolitan area or major industry exist in the state. On occasion, geographic and political influences trump more rational factors, resulting in the “peanut butter effect” of dollars and activities being spread evenly across a state or across institutions at the possible detriment to having a meaningful impact.

Similarly, as appears to be the case recently in Florida, the investment recommendations of an independent scientific advisory board can be overruled by legislative action. In Florida's case, the legislature redirected $65 million of funding planned for seven new university-based Centers of Excellence to just two centers, only one of which was recommended by the advisory board in its report to Governor Charlie Crist earlier this year.

Florida legislators recently approved $87 million for the State University System’s Centers of Excellence in FY 2009. Approximately $22 million will be distributed among nine, older centers created in earlier funding cycles. The $65 million balance will support two new centers intended to expand the state's research capacity in the energy and aerospace industries.

Both new centers represent new collaborations between several research institutions and were described as helping to offset the impending employment loss resulting from the end of NASA’s space shuttle program. The move drew criticism, however, from members of the Florida Technology Research and Scholarship Board (FTRSB), which would ordinarily oversee the establishment of new centers instead of the legislature.

Most of the funding will support the Florida Energy Systems Consortium, part of the state’s Energy Diversity Package included in the budget for the 2008-2009 fiscal year (see the June 18, 2008 issue of the SSTI Weekly Digest). The state will invest $50 million in the University of Florida-led project, which will involve all of the state’s universities. UF will receive $15 million of that funding, while four other institutions located across the state will each receive $8.75 million — Florida State University (FSU), the University of South Florida, the University of Central Florida and Florida Atlantic University. The remaining funds will be allocated amongst the state’s other schools. Consortium research will focus on the development of innovative energy systems that could lead to practical alternative energy strategies, improved energy efficiency and expanded economic development for the state.

The Florida Center for Advanced Aero-Propulsion (FCAAP) will receive $14.8 million to enhance the efficiency of commercial and military aircraft. Florida State University will lead the collaboration and receive up to $6 million of the funding. Other participating institutions include Embry-Riddle Aeronautical University, the University of Central Florida and the University of Florida. FSU researchers believe that the center could help produce the next generation of lighter aircraft and spacecraft, which could keep Florida at the forefront of aerospace research and industry following the end of the space shuttle program in 2010.

Aerospace companies currently employ about 83,000 workers in Florida and have an estimated $100 billion impact on the state economy. Earlier this year, a NASA report estimated that as many as 10,000 contractor jobs could be lost at spaceflight centers across the country by the time the shuttle program ceases operation (see the April 23, 2008 issue of the Digest). Kennedy Space Center expects to lose as much as 80 percent of its workforce in the next two to three years. State officials hope that the aero-propulsion center will help boost the state’s aerospace industry, which, in addition to the space shuttle’s looming demise, has an aging aerospace workforce. FCAAP will provide a way to organize the state’s research efforts and train a new generation of aerospace workers. For more information on FCAAP, visit: http://aapl.fsu.edu/FCAAP.html

In May, FTRSB Chair Joseph Lacher voiced his objection to the legislature’s funding of the two centers. FTRSB was established in 2006 to make all decisions regarding the creation of new Centers of Excellence. In April, the board submitted seven new centers to the governor after months of reviewing applications, including the Center for Advance Aero-Propulsion but not the Energy Systems Consortium.

In a letter sent to the board of governors, Lacher asked Gov. Crist to employ a line-item veto on the pertinent sections of the General Appropriations bill and reserve the decision for the board. Alternatively, Lacher suggested that the governor disband the board because it was no longer needed. However, the funding remained in the budget and, as of now, the FTRSB still exists.

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Governors Challenge Youth to Solve Real-world Industry Problem
Armed with professional advice from mentors in scientific fields and free access to sophisticated design and engineering software, teachers and students from Hawaii, Kansas, Minnesota, Oklahoma, Vermont and Virginia will participate in a national competition to solve a real-world engineering challenge defined by the aviation industry.

The idea behind the U.S. Department of Energy’s (DOE) Real World Design Challenge is to create a pipeline of highly qualified workers by preparing high school students for careers in science, technology, engineering and mathematics (STEM) fields based on issues facing high-tech and defense industries.

Ralph Coppola, director of Worldwide Education for Parametric Technology Corporation, said many aerospace and defense companies that work as contractors to national security agencies are concerned the U.S. is not producing enough qualified workers who must be able to work on both the defense and commercial side. A survey conducted with these companies in the Northeast found 54 percent of the workforce is 45 years or older and one-third are eligible for retirement today. At the same time, engineering degrees make up only 5 percent of the total baccalaureate population in the U.S., Coppola said.

U.S. Continues to Trail Behind in STEM Graduates
A coalition of 16 leading business organizations echoed this concern with the release of a report last month assessing three years’ progress in working toward a goal of doubling the number of students earning bachelor’s degrees in STEM fields by 2015. The report by Tapping America’s Potential indicates growing support for the group’s agenda to advance U.S. competitiveness in STEM, but shows little progress toward the goal. In fact, the number of degrees in STEM fields awarded to undergraduate students has only grown by 24,000 since 2005 – a small increase that is not on track to reach the goal of 400,000 over the next seven years, the report finds.

The Real World Design Challenge hopes to reverse this trend by providing high school students with the background and framework for competing more effectively in the global economy. In designing the program, aerospace and defense companies voiced a need for employees having seven to 10 years of experience and the necessary education and skills. Recognizing that this requirement would add another decade to the pipeline, program administrators suggested integrating the real-world experience at the K-12 and undergraduate level.

Engaging Youth in Real-world Situations
Ten states with significant aerospace industry presence were invited to participate in the challenge during the pilot year. So far, six states have confirmed their participation, beginning with an announcement last month from Vermont Gov. Jim Douglas. Next year, the challenge will be open to all U.S. states and territories. Once a school has signed on, the teachers are trained to use software and other tools to apply in teaching design and global engineering. Teachers will then lead teams of 3-7 students who will work on the same design challenge defined by Cessna engineers – an issue currently being addressed in the aviation industry.

Each participating teacher will receive nearly $1 million in engineering software to be used in the challenge. Teachers and students are given access to DOE energy laboratories and may consult with industry experts from the Federal Aviation Administration. Teams will submit their solutions to a review board consisting of experts in government, K-12 education, higher education and industry. The governors of each participating state will announce a winning team within their state in early spring who will then go on to compete in a national challenge in Washington, D.C., which consists of a written submission and oral presentation on a newly defined challenge.

A major goal of the challenge is to teach students to become better innovators, Coppola said. The student teams are built around real industry roles, including a project manager, scientist, engineer, and community relations and marketing specialist. The national presentation will be much like submitting and defending a proposal for a contract or a thesis in which students are challenged and must defend their position, Coppola said.

More information on the Real World Design Challenge, a partnership between the U.S. Department of Energy, the Federal Aviation Administration, Parametric Technology Corporation, Hewlett-Packard Corporation and Flometrics Inc., is available at: http://www.scied.science.doe.gov/RWDC/index.html

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Recent Research
Studies Offer Varied Approaches to Estimate Impact of Offshoring and Global Trade
Opportunities to secure jobs requiring specialized training and more educated workers - the same types of higher wage positions coveted by U.S. tech-based economic development practitioners - increasingly are appearing in other countries as companies look to enter new markets and reduce costs. As a result, offshoring and its effects on an ever-changing U.S. labor force are topics receiving a lot of play during this election cycle.

Offshoring is not being discussed only by politicians, however. What follows is a synthesis of four recent research reports shedding light on different angles or perspectives of the offshoring debate.

In their recent working paper, Runjuan Liu of the University of Alberta and Daniel Trefler of the University of Toronto explore certain cumulative effects of how the exchange of service jobs through China and India are impacting the U.S. labor market. In Much Ado about Nothing: American Jobs and the Rise of Service Outsourcing to China and India, the authors not only attempt to quantify the repercussions of outsourcing U.S. service jobs to these lower-wage countries from the years 1996 to 2005 but examine the service positions that are being insourced to the U.S. from these lower-wage countries.

By capturing both outsourcing and insourcing in regards to China and India, the authors find the net impact is measurably negligible. In fact, the authors estimate that if the economic expansion occurring in China and India from 1996 to 2005 is maintained at the same rates for the next decade, then U.S. workers whose business and technical service jobs are affected by outsourcing/insourcing patterns can be expected to switch jobs 2 percent less often than unaffected workers. In addition, affected workers would be unemployed 0.1 percent less often and would earn 1.5 percent more in wages than others.

In another paper which is less reassuring, Troy Smith and Jan Rivkin of Harvard Business School outline a computer-based exercise they performed earlier this year with 901 Harvard MBA students to assess the level of "offshorability" for nearly 800 occupations. Due to the structure of the experiment, each of the occupations was examined by, on average, more than 20 students. In A Replication Study of Alan's Binder's "How Many U.S. Jobs Might Be Offshorable?", the students' answers collectively estimate between 21 and 42 percent of all current U.S. jobs are potentially susceptible to offshoring. This compares to work by Alan Binder in 2007 that estimates between 22 and 29 percent of U.S. jobs have the potential to be offshored in a decade or two. This estimate is based on Binder's subjective judgments of tasks and work activities associated with each of the myriad occupations comprising the U.S. labor market.

Both the 2008 student exercise and the 2007 Blinder working paper found that jobs requiring more years of educational attainment are actually the jobs more likely to be offshorable. Using the lower bounds of the percentage of working population susceptible to offshoring in both studies, the aggregate amount still comes out to more than 20 million U.S. employees.

Yet another report uses the U.S. trade deficit with China to estimate 2.3 million jobs were lost in the U.S. to China workers from 2001 to 2007. In The China Trade Toll, Robert Scott of the Economic Policy Institute uses trade flows and an input-output model to calculate the number of U.S. employees that could have been sustained if the trade imbalances did not exist.

Scott uses the amounts between import and export levels within various types of manufactured goods to present the number of net jobs created or displaced within certain industries. For example, $78.3 billion more computer and electronic products were exported to the U.S. than were imported to China from 2001 to 2007, which was calculated to displace more than 560,000 U.S. employees nationwide. These computer and electronic products joined other manufactured goods, such as apparel and accessories and fabricated metal products, as experiencing the largest trade imbalances. The report finds Idaho, New Hampshire, South Carolina, Oregon and California led the country for the percent of total state employment reduced by the trade deficits.

Finally, the National Academy of Engineering released a report last week, collecting the findings of a committee brought together in 2006 to investigate the offshoring of engineering. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications also includes papers commissioned by the committee and presentations from a workshop on the topic held by the committee in Washington, D.C. The effects of offshoring are discussed in the report for six specific areas: software development, the automotive sector, pharmaceuticals, computer manufacturing, construction engineering and services, and semiconductor development. The report calls for better data examining the impacts from offshoring, especially as it relates to the engineering workforce and the U.S. system of engineering education.

Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India
is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1142233

Smith and Rivkin's A Replication Study of Alan's Binder's "How Many U.S. Jobs Might Be Offshorable?" can be found at: http://hbswk.hbs.edu/item/5975.html

The China Trade Toll by Robert Scott of the Economic Policy Institute can be seen here:
http://www.epi.org/content.cfm/bp219

The Offshoring of Engineering: Facts, Unknowns, and Potential Implications released by the National Academy of Engineering is available at: http://www.nap.edu/catalog.php?record_id=12067

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