Study shows university research benefits regional economy

Some of the benefits of scientific research conducted in universities are obvious. Great laboratory discoveries expand our understanding of the world, cure diseases, and make life better in myriad ways. In a study for the Science Foundation Arizona public-private partnership, a team of scholars from the W. P. Carey School of Business and the Eller College of Management at the University of Arizona have identified another important benefit of university-based research: regional economic development.

Some of the benefits of scientific research conducted in universities are obvious. Great laboratory discoveries expand our understanding of the world, cure diseases, and make life better in myriad ways. A team of scholars from the W. P. Carey School of Business and the Eller College of Management at the University of Arizona have identified another important benefit of university-based research: regional economic development.

In a study for the Science Foundation Arizona public-private partnership, the economists gathered evidence from around the world pointing to a crucial role for investments in research and education in promoting regional growth and prosperity. While the authors say a research-based economic development strategy is not right for every region or state, they contend that Arizona is well-positioned to thrive by adopting this approach. Science Foundation Arizona (SFAz) should be an effective vehicle for this task, they conclude.

"A public private partnership like SFAz is one of the few public investments that achieves multiple goals simultaneously by providing research and development to grow in-state, generating high-value innovations and production, attracting high-value producers, and increasing investments in human capital through enhanced and expanded educational opportunities," states the report, which is entitled, "A Strategic Assessment of the Economic Benefits to Investments in Research in Arizona."

The report's authors — Dennis Hoffman, Kent Hill and Jose Lobo of W. P. Carey School of Business and Alberta Charney and Maile Nadelhoffer of the Eller College of Management — approached the topic from several vantage points.

They reviewed a vast body of scholarly literature on the links between investments in scientific research and economic development. They also conducted original research for this paper. And they explored in depth Science Foundation Ireland — the model for Science Foundation Arizona — as well as other science-based regional development initiatives across the United States. Science Foundation Arizona was started in the spring of 2006 by the three statewide CEO groups — Flagstaff 40, Greater Phoenix Leadership, and Southern Arizona Leadership Council — as a non-profit public/private partnership.

The goal of SFAz is to build world-class science, engineering, and medical infrastructure in Arizona through strategic investments in research. Funded by the state of Arizona and by business groups, SFAz offers grants in a number of areas, including graduate research fellowships, training for K-12 science and math teachers, K-12 science education, targeted research, and seed money for spin-off companies seeking to commercialize discoveries made in universities.

The benefits of research: Follow the money and more

Determining the effects of university research on a regional economy is a complicated task. According to economist Charney, one necessary and fairly obvious first step is to follow the direct effects of money invested in research as it flows through a university and into the local economy. The university pays staff, purchases equipment, hires consultants. Well-documented multiplier effects follow, as they would whenever money is injected into an economy.

Charney cites a 2003 study that estimates that $10 million in research spending in Arizona creates 334.5 jobs, $8.65 million in wages, $452,000 in state revenue, and $13.5 million in sales. But this "follow the money" exercise reveals only part of the picture, according to Charney. University research produces other financial rewards for a region: royalties, start-up companies, new technologies, training of new scientists. And a strong university-based research program can have indirect effects on private firms in a region.

"There is additional research that goes on in the private sector when there is a robust university research program nearby," Charney said. "There are more business start-ups near a university. When people who are technically trained start businesses, the businesses grow faster." Spin-off firms can have a big effect on a regional economy, according to the report, which cites a 2005 study of spin-offs at the University of Utah.

The Utah analysis identified 62 firms that could be traced directly back to the university's research labs. These firms employed nearly 5,000 people and paid $223.2 million in wages. Hoffman takes another approach to gauging the effect of university research. He examines income growth in metropolitan areas around university research centers and compares it to income growth in areas that do not have university research.

He gathered data for small metropolitan areas with university research — such as Ann Arbor, Michigan; Pullman, Washington; and Bloomington, Indiana — as well as areas that are similar in size and but without a research institution. Comparing research and non-research areas in the same states, Hoffman found that income growth was markedly higher in the areas around research centers. "The results reveal that research university cities experience growth trajectories that outstrip that of comparable cities without research universities." Hoffman said.

Can public support make high tech happen?

While the evidence is strong that university research is capable of propelling economic growth, the authors pose some practical questions. Is financial support for scientific research a wise strategy for promoting economic development? If so, will it work in Arizona? Author Hill notes that government programs designed to promote specific industries are a red flag to many economists.

"There are a lot of people who are skeptical of government investments in this sort of thing. They say, 'Why can't we rely on the market?'" Professor William Boyes of the W. P. Carey economics faculty (who was not a member of this research team) underscores this concern. Boyes notes that New Mexico has received huge injections of federally sponsored research dollars over the years but continues to languish.

"R&D investments are crucial for growth, but private agents are best positioned to make decisions about the size and nature of particular R&D investments, and any spending (public or private) in an area is subject to multiplier effects, so to say that so and so activity generates X income simply does notvjustify public spending," he said.

"The question is what is the cost — where is the increased spending coming from? It is not simply manna from heaven. To argue that markets are inefficient in creating knowledge is to deny hundreds of years of history. The real strategy is to reduce government's role, reduce taxes, and let the entrepreneurs go to it."

Hill notes, from an extensive review of literature, that markets may not work at maximum efficiency in the development of knowledge-based industries. Businesses on the cutting edge of technology grow through the creation of knowledge, and knowledge is subject to what economists call "spillovers" — meaning that the fruits of research can be shared easily by others. Thus, the market alone does not provide strong enough incentives for entrepreneurs to invest the vast resources required to create the knowledge that is at the core of new high-technology firms.

Hence, the role for public support for university-based research. "Government doesn't always intervene efficiently, but in this case government can be a catalyst," Hill said. "The economy overall can benefit from strategic public research investments." According to the authors, investments in research and education are especially attractive as a regional development policy because the benefits tend to multiply and stay in a region.

Scientists who want to spin off their research into commercial ventures usually want to be near their labs. Scientists and engineers value face-to-face interactions. The university also turns out the scientists and engineers who represent an invaluable labor pool for knowledge-based firms.

And once an innovative cluster of businesses starts to form — including suppliers and support services, as well as the core technology-based firms — the industry usually puts down deep roots. "Silicon Valley is not going to move," said Hill. "If, say, Intel owned the whole thing, then maybe they could pick up and go somewhere else, but since it is hundreds and hundreds of business units, no one has an incentive to leave the group."

The case for Arizona

Arizona is well-suited to this kind of strategy, according to the authors. High-tech firms tend to locate in a large metropolitan area, and Phoenix certainly qualifies, Hill said. A small town in the midst of the rural South or a Midwestern prairie is not going to be very successful at building a high-tech cluster. "The size of the metropolitan area separates Phoenix from a lot of locations around the country," Hill said.

Arizona also already has some university research institutions already in place, as well as a core of high-technology industry. And the favorable climate is a plus when it comes to the location preferences of knowledge workers and entrepreneurs, the authors note. The report also explores Science Foundation Ireland, an $837 million program started in 2000 to spur the development of biotechnology, information, and communications technologies in Ireland.

The authors note that the Ireland and Arizona economies are roughly the same size and the populations share many characteristics. While Science Foundation Ireland is still a relatively new program, initial results are encouraging, according to the authors. An international review panel found that the initiative has been successful at attracting leading foreign research scientists to Ireland and also at luring back Irish researchers who had gone to work abroad.

Science Foundation Ireland also has received support from Irish businesses, and recent reports suggest that private sector research activity has accelerated, with research and development investments by multinationals up 10 percent. Hoffman said that Science Foundation Ireland is a remarkable effort by the country to advance to a new stage of development after relying on tax incentives to encourage export-driven manufacturing for more than a decade.

"It is a story of an active 'public sector-led' economic development strategy," said Hoffman. "They are realigning their strategy by targeting high margin aspects of multi-national value chains. And positioning Ireland in the 'knowledge creation business' through strategic public research investments is an important component of the strategy." Arizona can take several things from Ireland's experience with research investments, according to Hoffman.

An external review process, similar to the one developed in Ireland, is essential, he said. Likewise, a comprehensive strategy needs to be developed to attract top researchers. And Ireland's approach of aligning its support programs with existing high-technology industry would be wise to emulate. "Arizona needs to carefully examine its existing technology clusters and overall strengths and weaknesses to determine how to structure the expenditures of SFAz," the report states.

Dr. William Harris, director of Science Foundation Ireland from 2000 to 2006, is leading the Science Foundation Arizona initiative. He said the lessons of Ireland can be applied effectively in Arizona, as well as areas elsewhere. "The thing that a lot of people around the world have realized is that economies are really being driven by investments in education and well-educated people in science and engineering," Harris said.

Bottom line:

• Science Foundation Arizona is a public-private partnership formed to promote economic development through investments in university-based science and engineering research. It is modeled, in part, on Science Foundation Ireland, a program designed to reorient Ireland's economy toward advanced technology.
• Economists agree that R&D investments are important for growth but differ as to the role that public sector research investments should play.
• Markets may be inefficient at spurring knowledge-based industry. New knowledge is costly to produce and can be easily used by others who do not make the initial investment, so private incentives may be sub-optimal. Hence, public support is a necessary catalyst for advanced research that can spawn high-technology firms.
• Investments in scientific research can be a smart regional development strategy. High-tech firms tend to cluster and grow once they gain a foothold in a region.
• Arizona has many advantages as a location for research-based industry. It has existing scientific research institutions, a core of high-tech businesses, a large metropolitan area, and a favorable climate.

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