Research

The effects of university research on local economies

Do university research programs tend to stimulate employment and raise the average level of income in the local area economy? This is the central question behind W. P. Carey School of Business economist Kent Hill's recent paper "University Research and Local Economic Development." Hill finds that university research programs do have local economic impacts, even in today's global economy; however, these impacts vary greatly among universities and, on average, are modest in size.

2006-09-13

Do university research programs tend to stimulate employment and raise the average level of income in the local area economy? This is the central question behind a recent paper "University Research and Local Economic Development," one of a series of papers written for the Productivity and Prosperity Project — a research agenda being pursued by W. P. Carey School of Business faculty.

Local impact in a global economy?

Before W. P. Carey economist Kent Hill could begin to consider the question of the local economic impact of university research, he had to answer another question: Why would we expect to see local effects in the new economy where information is so easily transmitted and people are so mobile?

The first part of the answer, Hill writes, is that there are impediments to the transfer of tacit knowledge. "Some research findings, especially those that are revolutionary and have the potential to create new industries, are difficult to transfer to industry without frequent face-to-face contact between university and industrial scientists."

Cutting-edge research, Hill says, may be very difficult to write down and transmit through global lines of communication. It's the kind of knowledge "embodied in the intellectual capital of the discovering scientist" that has to be shown, not told. And as mobile as the U.S. workforce is, people still generally like to settle down in one place. "Even though U.S. residents are highly mobile, there is still a tendency for graduates with advanced degrees to remain and work in the local area," Hill writes.

That may be because of the relationships that students build in school — relationships that have value in the workplace after graduation — or because graduates have created families that tie them to a particular area. This tendency is even stronger when the city is a large metropolitan area. A large metropolitan area offers greater job opportunities for graduate's spouses as well as a wider variety of appealing lifestyle amenities.

Graduate retention also depends on the graduate's field. "Local markets for medical doctors, for example, have little potential to absorb new graduates ... Producers of goods and services that can be exported out of state, on the other hand, have the potential to absorb large numbers of local graduates."

Do university research programs have local economic impacts? Yes, but. . .

Hill finds that university research programs do have local economic impacts, even in today's global economy. After reviewing case studies, university records of income earned from the licensing of university-owned patents, and econometric evidence, Hill concludes that "The evidence shows conclusively that university research programs have local economic impacts."

But while Hill does find concrete evidence pointing toward the local economic impacts of university research, he writes that those local economic impacts "are highly skewed across universities and, on average, are modest in size."

The specific local economic impacts of university research, Hill finds, depend heavily on a variety of complementary conditions, including the quality of the university's research and graduate programs, a focus on particular areas of research, the degree of agglomeration, the size of the metro area, university policy, and the availability of venture capital. The presence of a university research program, Hill writes, is a necessary but not sufficient condition for the university to have large impacts on jobs and incomes in the local economy.

"University research is most likely to generate large local economic impacts when faculty are on the cutting edge of revolutionary commercial technologies, when graduate programs in science and engineering are top-notch, and when the university is located in a large urban area with an existing concentration of industrial R&D and high-tech production. These conditions are difficult to replicate," writes Hill.

The quality of the university's research programs, Hill says, is an important condition for local economic impacts because "the most compelling reason for technology-based firms to locate near universities is to facilitate tacit knowledge transfer from faculty who are on the leading edge of scientific breakthroughs." And top-notch research programs are most likely the ones that attract cutting-edge scientists.

Another important consideration is the quality of the university's graduate programs. Availability of highly skilled scientists is an important consideration for companies looking to site R&D facilities. But firms are particular about the universities they hire from. Among large firms especially, only the best graduate programs seem to be an attracting factor.

The type of research that a university is doing is also an important determinant of its effect on the local economy. Hill writes that "new industries are more reliant on university research than are mature industries, and research in applied academic fields is more directly relevant to industrial innovation than is research in basic fields." That's why, Hill says, an industry such as biotechnology relies more heavily on university research than an industry such as textiles.

That's not to say, Hill cautions, that basic research is unimportant. "The basic sciences are recognized as being important in influencing the general knowledge and techniques that industrial scientists and engineers bring to their jobs," Hill writes. Surveys of industrial R&D managers indicate that industry is more interested in universities as a source of well-trained researchers than as a source of new industrial technology.

The local presence of a large number of research firms and high-tech producers — what Hill calls agglomeration economies — is another important condition for university research to impact the local economy. Hill says that these clusters are important for three reasons:

they promote the development of markets for specialized suppliers;
they facilitate the matching of jobs and workers; and
they promote informal channels of knowledge transfer.

In fact, Hill cites one study showing that "university research leads to a significant number of local area innovations only when high-tech employment is at least 160,000 workers." The size of the metropolitan area is also an important condition for the relationship between university research and local economic development — not only because graduate students are more likely to stay in the cities where they went to school if those cities are large.

Also, clusters of innovation are more likely to be found in large cities, because knowledge spillovers are facilitated by the diversity of economic activity present in big cities. In fact, Hill writes, "city size has been found to be more important as a siting variable in high-tech studies than low taxes or low wages." Two other important conditional factors are university policies regarding the commercialization of faculty research findings and the presence of venture capitalists.

Hill writes that "Over the past two decades, universities have devoted substantial resources to technology transfer — helping faculty to obtain patents on their research, negotiating licensing agreements, and providing assistance to new firms licensing the technology in the form of incubators, research parks, and in some cases seed capital. While the number of university patents has increased sharply, the financial returns from the licensing of these patents have been modest for most universities."

He notes, however, that universities that are allowed to take equity positions in businesses that license university patents have enjoyed significantly more commercial success than those who cannot. Venture capital can be critical to the start-up of science-based companies. But venture capital may be more mobile than commonly believed, Hill says.

There is evidence that venture capitalists are drawn to an area with universities that have star scientists or highly rated research programs. Using the biotech industry as an example, Hill writes that "The availability of venture capital had no significant effect on the location of new biotech firms once [researchers] had accounted for the geographic distribution of star scientists and highly rated science departments."

The shining stars: Silicon Valley, Route 128, and the biotech industry

Silicon Valley, in Northern California, and Route 128, outside of Boston, are the best examples of the profound effects that university research can have on local economies. But Hill cautions that Silicon Valley and Route 128 are the exception, not the rule. "Silicon Valley and Route 128 are spectacular success stories of how university research findings can create new industries and raise average incomes in the local economy.

But large windfalls from research that accrue either to the university, its faculty, or local businesses are rare events," Hill writes. But that doesn't mean that those two areas of innovation can't offer valuable lessons. Hill says that their success owes first to the local universities. "The conventional wisdom is that the initial reason the industry took root in these particular locations is to be close to researchers and research facilities at Stanford University and the Massachusetts Institute of Technology (MIT)."

While initial industry development in Silicon Valley and Route 128 was due to the university research presence there, the areas continued to grow because of an availability of electrical and computer engineers graduating from nearby schools and because of the self-reinforcing effects of agglomeration.

One of the effects of university research on those local economies has been a significant boost in average incomes. In the Silicon Valley area (Santa Clara County, CA), the average private sector employee earns $69,107 — 87 percent higher than the national average. In the Route 128 area (Middlesex County, MA), the average private sector employee earns $51,274 — 39 percent higher than the national average.

The biotechnology industry is another shining star example of how university research can affect local economic development. "Biotechnology offers the most recent example of an important new industry built directly on basic scientific research in which commercial firms are known to have close ties to university-based scientists," writes Hill. The principal motivator behind this connection was the importance of location in tacit knowledge transfer.

"For 15 years following the discovery [of the basic technique for recombinant DNA], knowledge of how to identify promising gene sequences and even the skills of gene transfer were held by a small group of discovering scientists and their co-workers. Knowledge of the techniques was difficult to transfer because of its complexity and tacitness."

As a result, the most successful biotech firms were those that located where the discovering scientists were located — and, furthermore, those in which "discovering scientists had a financial interest and were actively involved in bench-level scientific collaboration with industry scientists."

How Phoenix ranks

Hill also evaluates Arizona State University and the Phoenix metro area in terms of factors that affect the likely size of local impacts from university research. The potential for significant local impacts from ASU's research and graduate programs is helped by the fact that Phoenix is a major metropolitan area with a climate and nearby amenities that professional workers find attractive. Phoenix also rates highly in areas related to engineering, but not in life science areas.

Hill ranked the 25 largest metropolitan statistical areas in the U.S. in terms of university R&D spending (based on spending among the top 60 colleges and universities). Phoenix did not rank in life science research spending, as Arizona State University (the metro area's only major research university) was not among the top 60 colleges and universities in life science R&D spending.

But Phoenix did rank 12th among the top 25 largest metropolitan areas in terms of engineering R&D spending. To measure the quality of the Phoenix area's university research programs, Hill compared the 25 largest metro areas based on their universities' ranking in the United States' top 40 life science and engineering departments.

ASU did not have any life science programs in the top 40, but did have 3 engineering programs that ranked in the top 40, including materials science, electrical engineering, and mechanical engineering. Phoenix also ranked well in terms of the number of workers employed in engineering (11th of the 25 largest metro areas) but not in terms of the number of workers employed in life science fields (24th of the 25 largest metro areas).

In terms of venture capital, Hill found that Phoenix does not rank highly, bringing in only 0.6 percent of all venture capital disbursed in the U.S. (compared to 2.8 percent for Colorado, a comparably-sized state). However, Hill notes that this impediment to university-led growth can be overcome by building departments and recruiting faculty with a strong national reputation.

Words of caution

Hill concludes his paper with a warning to readers to not overestimate the potential effect of university research on the local economy. "While there is abundant evidence that university research can have important effects on jobs and incomes in the local economy, the size of these local impacts is likely to be modest for most universities.

For university research to significantly affect the local economy requires a coincidence of special conditions that is difficult to create." Hill also warns us that "it is not wise to lose sight of the role universities play as educators of industrial scientists, engineers, and entrepreneurs."

It's important to recall that "most inventive activity is carried out in industry" and that "industrial scientists use old science as much as they use recent scientific discoveries ... From this perspective, the most important contribution universities make to technical advance in industry is in the training of industrial scientists and engineers."

Bottom line

University research might be expected to have local impacts due to the difficulty in transferring tacit knowledge outside local areas, and the tendency of graduates to stay in the city where they went to school.
There is empirical evidence that university research impacts local economies, but that impact may not be very large for most universities.
A number of complementary conditions affect the impact of university research on local economies.
There are strong university-industry ties in the Phoenix area in engineering fields, but not in life science fields.
As most inventive activity is carried out in industry, the most important contribution universities make to technical advance is in the training of industrial scientists and engineers.

Economics Faculty