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July 25, 2007 - SSTI Weekly Digest

In the July 25, 2007 Issue:

Copyright State Science & Technology Institute 2007. 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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Iowa Group Offers Health Care to Self-employed Entrepreneurs
With the rapidly rising cost of health insurance, entrepreneurs frequently find themselves unable to pay their premium in the early stages of business ownership. Often, this means going without health insurance or abandoning plans to launch a new firm. The North Central Iowa Alliance (NCIA) has announced a new initiative to lower this barrier facing new business owners. The Helping Entrepreneurs Launch Program at North Central Iowa (HELP @ NCI) will make health insurance available to qualified entrepreneurs in the region during the first three years of their business' existence.
 
The program will be launched in partnership with the North Iowa Area Community College John Pappajohn Entrepreneurial Center, which will offer a regional feeder system for HELP @ NCI along with its other services for entrepreneurs. Though the program is offered at no cost to participants, business owners will be made aware of the expenses so that they can incorporate health insurance into the business planning.
 
HELP @ NCI will be funded through a $50,000 grant from the Iowa Department of Economic Development and through $15,000 in matching funds raised by NCIA. The alliance expects this funding to provide assistance for 12 or more new business owners per year, at a monthly cost of $350. Entrepreneurs will be able to apply for the programs though local economic development organizations and the North Iowa Area Community College.
 
A survey conducted in 2006 by the National Association for the Self-Employed found that 57 percent of micro-business owners have had to do without health care coverage at some point. Most of those respondents cited cost as their primary reason for not having insurance. An earlier survey revealed that the burden of health care costs can be much higher for entrepreneurs and small businesses. In 2005, small firms spent nearly 20 percent of the gross sales on heath care, while companies with an annual revenue over $500,000 spent only 2.3 percent. The Kaiser Family Foundation reports that insurance premiums for small companies rose an average of 8.8 percent last year, while larger companies with 200 or more employees saw an increase of only 7 percent.

A separate study published last year by Dr. Tami Gurly-Calvez of the U.S. Small Business Administration's Office of Advocacy, entitled Health Insurance Deductibility and Entrepreneurial Survival, reported that the federal income tax health insurance premium deduction for the self-employed played a significant role in improving an entrepreneur's odds of success. This is particularly true for married entrepreneurs. Dr. Gurly-Calvez found that the presence of any deduction for health insurance costs reduced the probability of an exit by more than 10 percent for single filers and by almost 65 percent for married filers. Somewhat surprisingly, the study also reported that larger deductions did more to decrease the exit rate for single entrepreneurs than for married entrepreneurs.
 
Read the press release from the North Central Iowa Alliance at: http://www.northcentraliowa.net/docs/HELP%20press%20release.pdf

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NGA Reports Offer Guide to Innovation
Innovation and technology, two key components of NGA Chair Arizona Gov. Janet Napolitano's Innovation America initiative, were the subject of much discussion during the National Governors Association's (NGA) recently concluded annual meeting. The two components are given even more attention in three new reports released by NGA during the meeting. With the reports' release, NGA has completed its series of publications - seven in all - that were produced as part of Innovation America, an initiative that places science, technology, engineering and mathematics education at its center.

The first publication, A Compact for Postsecondary Education, focuses on how states can better align postsecondary education with their economic needs. Investing in Innovation, the second publication, provides a snapshot of state investment in R&D and offers guidance on how to design successful R&D investments. The final publication, titled Innovation America: A Final Report, summarizes lessons learned over the course of Gov. Napolitano's initiative, paying special attention to the role of governors in establishing best practices.

Investing in Innovation, the focus of this Digest article, was produced by the Pew Center on the States in partnership with NGA. The report builds off of the notion that states must accelerate their efforts to attract jobs, money and a talented workforce, else "risk becoming economic backwaters." Specifically, it says, states must serve host to new idea discoveries, inventions and that "first big break" for these things.

Providing a backdrop for the situations within states, the report indicates the federal government had been responsible for providing most R&D dollars up until a few years ago. The slack left by the government subsequently has been picked up by the private sector, leaving it to the states and industry to work out their investment interests. The result? An increase in investment in R&D funds by states, ultimately to promote their interests in the innovation marketplace, according to the report.

Arizona, California, Indiana and North Dakota are among those states whose recent and substantial R&D investments are profiled in the report. In addition to case studies for these states and various others, the report offers six guidelines the authors say "are uniquely in the hands of governors, legislators and other policy makers" to ensure positive results. The guidelines include:

  • Developing a statewide research and innovation strategy that both puts in place all of the components for innovation and aligns them in ways that provide advantages to in-state companies;
  • Making investments to gain talent, build top-notch research enterprises and compete for federal dollars in areas where the state can be world-class;
  • Encouraging, even mandating, collaboration among universities, the private sector and other institutions;
  • Putting world-class professionals, not "political pals," in key positions;
  • Creating an organization and consistent funding source that facilitates a continuity in R&D partnering and spending; and,
  • Holding recipients of public investments accountable for delivering on promised benefits.

Reports produced during the Innovation America initiative, in general, were aided by a bipartisan task force of governors, chief executive officers and university presidents who offered advice on innovation strategies. All such reports can be found online at http://www.nga.org/center/innovation.

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Incubator RoundUp: Building a Culture of Entrepreneurship
Business incubators, known for the business support services they provide entrepreneurs, have shown themselves through the years to be a valuable resource in the process of starting and growing companies. Office and laboratory space provided at a reduced cost to tenants is just one of the benefits. Many incubators also offer access to university research, mentoring and seed and venture capital in order to encourage entrepreneurship and ensure the success of new high-technology start-up companies.

According to a recent study by the National Business Incubation Association (NBIA), the business incubation industry has grown steadily in recent years, with the number of incubation programs in North America nearly doubling between 1998 and 2006. The study indicates 1,100 business incubation programs were operating in North America in early 2006 - up from 587 in 1998 and 950 in 2001 - and more than half (54 percent) of these programs were mixed-use incubators that accepted a variety of clients. Another 39 percent focused on assisting technology companies. Based on extrapolations from survey data, NBIA estimates that in 2005 alone, North American incubators assisted more than 27,000 start-up companies that provided full-time employment for more than 100,000 workers and generated annual revenue of more than $17 billion.

Over the past few months, several new incubators have emerged -- many in partnership with higher education institutions. The synopses of recent incubator announcements below offer a picture of their developments and the incubation industry as a whole.
 
Following a recent merger with Ann Arbor IT Zone, Ann Arbor SPARK announced plans to develop an entrepreneurial business incubator in downtown Ann Arbor. The Ann Arbor-Ypsilanti SmartZone Local Development Finance Authority is financing the 2,500-square-foot incubator.
 
Ben Franklin Technology Partners of Northwestern Pennsylvania is refurbishing a 35,000-square-foot building that will house start-up companies. The incubator, called Ben Franklin TechVentures, is set to open in September and will include wet lab space, reports the Morning Call.
 
Burlington County College recently opened its $4 million science incubator -- New Jersey’s first incubator for life science businesses at a two-year school. The incubator offers 11 interconnected, 600-square-foot laboratories to house early-stage and start-up scientific companies. The New Jersey Commission on Science and Technology awarded $80,000 to the science incubator and $130,000 for the college’s high technology incubator, which was formed in 1998.
 
State and local officials marked the groundbreaking for the first building at Dayton’s Tech Town campus earlier this month. The Creative Technology Accelerator is a three-story, 45,000-square-foot, multi-tenant office building designed for businesses that are developing and commercializing new technology products. The Institute for Development and Commercialization of Advanced Sensor Technology (IDCAST) is the anchor tenant and recipient of a $28 million grant from the Ohio Third Frontier Commission.
 
A new $6.9 million building located in Lehigh Valley Industrial Park VII will provide space for post-incubator companies. The 44,000-square-foot building will serve companies that have graduated beyond the initial stages of development. Bethlehem city officials hope the building will be home to companies that emerge from collaboration between local universities and entrepreneurs, according to the Morning Call.
 
The Institute for Technology Entrepreneurship and Commercialization at Boston University School of Management and the Boston University Office of Technology Development announced the creation of the Entrepreneurial Research Laboratory (ERL) last month. The ERL is a living laboratory for entrepreneurial sciences that connects new entrepreneurs with students, professors, mentors, businesses, investors and policymakers. The ERL provides incubator space in the Boston University Discovery & Innovation Center.
 
Last month, the Missouri Western State University Science and Technology Incubator was dedicated as the Christopher S. Kit Bond Science and Technology Incubator. Sen. Kit Bond (R-MO) and local leaders worked with the U.S. Department of Commerce Economic Development Administration to secure $2.5 million for the incubator.
 
The University of North Carolina at Chapel Hill (UNC) is in discussions with a developer to build a business incubator near its proposed Carolina North campus, according to an article in the Triangle Business Journal. The proposed Carolina Innovation Center, which could total as much as $25 million, is not limited to life sciences start-ups. UNC must be granted a special use permit by the town of Chapel Hill and, pending that approval, the incubator could be up and running within a year or two, according to the article.
 
A new $2.5 million, 15,000-square-foot business incubator opened last month at the University of Tennessee (UT). The incubator will provide space and assistance to developing and start-up companies with the goal of helping commercialize intellectual property generated from researchers at UT and the nearby Oak Ridge National Laboratory. The incubator is a partnership among UT, Knox County, the Tennessee Valley Authority, the Knoxville Utilities Board, the state of Tennessee and the U.S. Economic Development Administration.
 
Finally, Utah State University announced plans to open a business incubator in Brigham City by next year. The community innovation center carries a $10.7 million price tag and will provide space for classes, conferences and a business resource center. Start-up companies will be given the option of renting space in the building at below-market value.

More information regarding NBIA's 2006 State of the Business Incubation Industry report, including survey methodology, is available by purchasing the report at http://www.nbia.org/store.

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The Economist’s IT Industry Competitive Index Ranks 64 Countries; U.S. on Top
For a country to attain a thriving information technology (IT) sector, an environment that promotes competitiveness, protects innovation, and invests in education and infrastructure must be supported. According to a report released this month by the Economist Intelligence Unit, which created an “IT Industry Competitiveness Index” to measure and compare this environment, the U.S. ranks first among 64 countries from around the world. Authored by Kim Thomas, The Means to Compete: Benchmarking IT Industry Competitiveness used a combination of 25 quantitative and qualitative indicators to produce a score and ranking for each county in the report.
 
Besides the U.S., the countries with overall index scores in the top 10 were Japan, South Korea, the United Kingdom, Australia, Taiwan, Sweden, Denmark, Canada and Switzerland. The assortment of indicators was organized into six distinct categories, each with a specific weighting for the composite index score. These categories included:

  • Overall business environment (10 percent)
  • IT infrastructure (20 percent)
  • Human capital (20 percent)
  • Legal environment (10 percent)
  • R&D environment (25 percent)
  • Support for IT industry development (15 percent)

The value for the IT infrastructure category, for example, was calculated by incorporating data on the number of broadband connections in the country, the number of secure internet servers, the number of desktop and laptop computers, and the market spending on hardware, software, and IT services, all normalized by each county’s population. The R&D environment was computed by utilizing data on government expenditures on R&D, private sector R&D, new domestic patents, and receipts from royalty and license fees.
 
All of the countries included in the report also were ranked within each of the six categories. The U.S. was the only country to rank in the top five across all categories.
 
Besides accounting for a component of a country’s gross domestic product, the IT sector is also a major contributor to productivity growth, the report states. Of the top 22 countries with the highest composite IT Index, all but four are among the world’s top 22 countries in terms of IT labor productivity.
 
The author predicts that the index’s top tier of countries will not change in the near future, but provides two trends that are likely to affect the lower tiers of the index in the coming years. The first is that a number of emerging economies will compete with countries like China and India, offering low-cost IT skills. Mentioned are Malaysia, Brazil and Vietnam, as well as some Eastern European countries that will compete on this front. Second, smaller emerging markets will develop niches in software development and IT services. Similar to many sectors across the global economy, emerging countries will move higher and higher up the value chain, competing not only on a low-cost basis, but also on one based on the creation of innovative products and services.
 
Appendix 1 includes additional information about the methodology, weighting system and data sources for all of the quantitative and qualitative indicators. While this methodology and indicators are targeted for investigating the IT sector at the national level, many of the considerations for the composition of the “IT Industry Competitive Index” may be relevant at the state and regional level as well.
 
The Means to Compete: Benchmarking IT Industry Competitiveness can be found at:
http://www.eiu.com/site_info.asp?info_name=eiu_Business_Software_Alliance_means_to_compete
 
Links to this report and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.

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Recent Research
Should States Support Angel Networks With Public Dollars?
Angel networks are often seen as an effective way to make sense of hodgepodge of individual investors, institutional funds and investment groups that make up the early-stage capital industry. Though many regions suffer from a lack of early-stage capital, this problem is often exacerbated by insufficient knowledge among entrepreneurs about local angel investors and groups and vice versa. Angel networks can fill this void by facilitating communication between local investors and entrepreneurs, thereby increasing the number of opportunities available to both. Several states provide financial support for angel networks, including Wisconsin (Wisconsin Angel Network), Pennsylvania (Pennsylvania Angel Network), Mississippi (Mississippi Angel Network) and Washington (WTC Angel Network). These organizations unite angel investment groups from around their respective states and provide a convenient starting point for new companies seeking early-stage capital.
 
A working paper from Veroniek Collewaert, Sophie Manigart, and Rudy Aernoudt, however, argues that the case for public support of angel networks may not be so cut and dry. In Europe, the popularity of Business Angels Networks (BANs) has surged in recent years. Groups in the United Kingdom, Belgium, Germany, Italy, the Netherlands, and Spain have been established with public funds to connect the investment and entrepreneurial communities. The authors observe that it has often been taken for granted that these organizations require public subsidies to get off the ground, but that after a few years, they will become self-sustaining though the collection of fees, dues and contributions. This, however, is rarely the case. Though many applaud the work done by these groups, few of Europe's publicly supported angel networks have made the transition to financial independence.
 
Collewaert, Maingart and Aernoudt, therefore, sought to test the typical justifications for permanent government support of these networks. Their study evaluates the operations of Belgium's four BANs between 1999 and 2004. The proponents of BANs contend that these networks help overcome certain market failures that impede economic development. They argue that many entrepreneurs suffer from a lack of information about early-stage capital resources which can be overcome through the efforts of BANs. Through quantitative and survey data, the authors confirm this line of reasoning. Many early-stage firms suffer from a lack of information. Futhermore, nothing about these firms suggests that they present less desirable investment opportunities than firms that do have access to angel investors.
 
On the other hand, the authors found that angel investment-backed companies in the study lose money in the short term. During the two-year period following angel investment, most firms in the study failed to create value. Thus Collewaert et al. are hesitant to endorse the idea that angel networks remedy an existing market failure.
 
Still, the authors find that BAN-backed companies have contributed significantly to the Belgian economy through new jobs and taxes during the period of the study. These firms appear to contribute as much to the economy as firms that found angel financing without the aid of angel networks. Also, the researchers found that BANs were an effective way to raise awareness about regional opportunities among entrepreneurs and investors, to provide entrepreneurial education, and to help firms leverage additional funding following the initial investment.
 
Read "An Assessment of Government Funding of Business Angel Networks: A Regional Study" at: http://ideas.repec.org/p/vlg/vlgwps/2007-16.html

Links to this report and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.

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Recent Research
Manufacturing Productivity Varies by Sector; Knowledge Spillovers Bounded by Distance
As community leaders plan the physical development of their regions, some recent research may offer insight into the benefits of encouraging close proximity between firms. A group from Statistics Canada has published a paper exploring the various gains in productivity that manufacturing firms experience due to geographic concentration. In Urban Economies and Productivity, John Baldwin, Desmond Beckstead, W. Mark Brown and David Rigby use longitudinal data from a collection of approximately 20,000 manufacturing establishments across Canada.
 
Baldwin et al. incorporate theories that originated a century ago from the economist Alfred Marshall. According to Marshall, gains in productivity are due not only to the operational activities that occur within a firm, but also to a firm’s physical location. In his work, he identified three explanations how the geographic clustering of firms can increase their performance. First, collocating firms produce a larger pool of skilled labor with specialized skills. Second, information is transferred between firms in close proximity, resulting in knowledge spillovers. Third, clustering encourages the development of upstream industries that may supply components such as materials and equipment.
 
By using information from the Canadian Annual Survey of Manufacturers to produce measures of these factors, the authors found that for the entire collection of manufacturers across sectors, productivity performance is positively influenced by all three of Marshall’s aforementioned factors.
 
The authors then divided the manufacturing firms into five sectors, defined by the circumstances that influence their competitive strategies. These circumstances were: access to natural resources, labor costs, scale economies, product differentiation, and the application of scientific knowledge. They found that the causes of increased productivity varied from sector to sector, with no single factor statistically significant across all five sectors. For example, labor market pooling had a significant effect on productivity for natural resource-based industries, labor-intensive industries, and product-differentiated industries.
 
Additionally, the authors examined the influence of knowledge spillovers within a determined geographical distance. They used the number of manufacturing plants as their measure for the strength of knowledge spillovers and included two variables of this type in their regressions — one for the number of firms within a 10-kilometer radius (about 6.2 miles) and another for the number of firms located 10-50 kilometers from each other. They found that firm productivity increases and is significant when the number of plants from a similar industry within a 10-kilometer radius increases, but sees little impact among firms exceeding 10-kilometer plant density. Thus, they claim, the impact of knowledge spillovers is spatially dependent.
 
Urban Economies and Productivity is part of the Economic Analysis Research Paper Series from Statistics Canada and is available at: http://www.statcan.ca/english/research/11F0027MIE/11F0027MIE2007045.pdf

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