Innovation State California’s Innovation Economy Brief
2015
Innovation State Brief 2015 Changing California’s Economic Landscape
We will together envision a state that is more vigorous and influential than ever as we define the ideas that will get us there. We’ll do so in a setting designed to turn those ideas into action. -Milken Institute
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A message from the founder Paul Gladfelty Much attention has been given to climate change by California’s elected leadership, and for good reason. The warning signs are on the horizon letting us know that we, as a society, must take action now to protect our future. The same can be said of California’s economic viability as a world innovation leader and economic super power.
We need a strategy; a sustainable economic future that goes beyond 2015, and focuses on what we can achieve in the next decade. To ensure California’s future long-run economic growth, our next generation must have educational opportunities that prepare them for jobs in the Innovation Economy, establish long-run policies that promote the growth in the innovation sector, innovate government in ways that reduce regulatory red tape and provide for greater transparency utilizing open data. Ultimately, we need to create more opportunities for future generations.
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CALIFORNIA’S ECONOMY
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01
California At A Glance
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California Regional Industry Clusters
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How We Can Grow The Economy
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Innovation State Supported Legislation
The BEA reports that from 2011-2014 Texas had a 17.8% growth in GDP. California had a 7.8% growth in GDP.
01 GOVERNMENT SHOULD BE AN ENABLER FOR COMPANIES TO INNOVATE IN CALIFORNIA 5
Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance California’s Innovation Standing within the United States We should rank 1st; overall innovation ranking is 3rd. Knowledge Jobs Rank
State in 1st
Overall Innovation Ranking
3
MA
Information Technology Jobs
11
VA
Manager, Professional and Technical
7
MA
Workforce Education
16
MA
Immigration of Knowledge Workers
29
ND
8
VT
21
NM
26
DE
Fast Growing Firms
2
MA
Initial Public Offerings
2
TX
15
NV
3
UT
22
MA
6
WA
30
VT
High-Tech Jobs
5
MA
Patents
4
WA
Industry Investment in R&D
3
DE
Non-Industry Investment in R&D
12
NM
Clean Energy Economy
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OR
Migration of U.S. Knowledge Workers Manufacturing Value Added
Globalization & Dynamism Foreign Direct Investment
Export of Manufacturing and Services
Digital Economy & Innovation Capacity E-Government Broadband Telecommunications Scientists and Engineers Health IT
SOURCE: ITIF.ORG
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Where should we start? Education Education is the foundation for any society. California has always valued education and has a number of the best universities in the world. However, we cannot continue to run our institutions, business as usual. We need to improve how we educate our future generations to be job ready for the realities of our new economy.
Over the past decade, California’s innovation capacity has declined with an overall ranking of 2nd in 1999, to 3rd in 2014. Not only has our innovation capacity been dwindling, but also California’s economic output. In the 1970’s, California had grown from being the 7th largest economy in the world, to its peak as the 5th largest economy by 1984, now California ranks 7th once again. The factors attributing to California’s slow growth is primarily from macroeconomic conditions from competitive business incentives outside of California. What other states and countries have realized over the past decade, is the incredible economic growth from high-tech jobs and startup companies. There is no doubt that the majority of real economic
growth of new emerging industries, such as 3D printers, drones and even digital cryptocurrencies will emerge. The question remains, “What are we doing to promote this new economy?” California has a greater potential to grow its economy and capture the gain of these new industries if we choose to focus around promoting California’s Innovation Economy. What we need is to have a collective vision on where California is heading and working in a bipartisan manner to develop a strategy so that we can unleash the full potential of the State. Some economic sectors will grow regardless of policy. However, if California policy makers decide to work toward a common goal, we can reignite the true growth potential of the State.
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Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance
County Specialization California’s economy is extremely diverse, from agriculture to information technology; California’s policies should reflect the nature of its economy. White Dashed Areas Los Angeles, Orange County and the San Francisco Bay Area account for 61 percent of California’s Economic Output and houses 19.8 million Californians.
- Agriculture - Wood Products - Aerospace - Distribution & E-Commerce - Business Services - Hospitality & Tourism - Education & Knowledge Creation - Marketing, Design & Publishing - Information Technology - Biopharmaceuticals
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38.8 17.71 (M)
California’s Total Population
(M)
California’s Total Employment
8th 12.85 California’s World GDP Rank
2.2
(M)
Private Sector Jobs Average Income $55,952
(T)
Gross Domestic Product
4.87
(M)
Government Sector Jobs Average Income $62,766
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Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance
Theoretically Speaking What if California had a 10 percent growth from 2011-2014 instead of 7.8 percent?
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$42 BIL
560 THO
Additional GDP
Additional California Jobs
$423 MIL
$770 MIL
Additional Funding for Education
Additional General Fund Budget
Other states and forward thinking cities are taking the initiative to improve their business and economic climates. When was the last time California had a landmark piece of legislation to improve the economy?
What will Los Angeles do?
New York Builds New Tech Campus by Cornell Austin, TX offers over 40+ individual business incentives
California GDP Growth rate from 2011-2014
Texas GDP Growth rate from 2011-2014
New York GDP Growth rate from 2011-2014
7.8%
17.8%
6.8% 11
CALIFORNIA REGIONAL INDUSTRY CLUSTERS
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Success requires continual improvement.
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Improvement takes planning.
WHAT WILL CALIFORNIA’S STORY BE IN THE NEXT 10 YEARS?
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Innovation State Brief 2015 Changing California’s Economic Landscape 02 - California Regional Industry Clusters
California’s Industry Clusters Propelling Economic Growth Industry clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers and associated institutions in a particular field that are present in a region. Numerous benefits arise after industries have established clusters in geographic areas. Clusters arise because they increase the productivity with which companies can compete. The development and upgrading of clusters is an important agenda for governments, companies and other institutions. Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening and reducing the costs of doing business. A little background on industry clusters is useful. It begins with Michael Porter of Harvard Business School, who found that location characteristics play an important role in the success of a region’s industries. Porter emphasized that with a strategic approach, industry clusters could be formed and help other similar firms achieve a competitive advantage by promoting their common interests. Although this strategy has produced
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mixed results, it remains a well established model for economic development and business attraction.
California has 17 major industry clusters that employ more than a quarter of the national labor force in those clusters. In order of highest concentration, clusters include video production, apparel, agriculture services, music recording and biopharmaceuticals.
Given the economic downturn in 2008, two distinct schools of thought have emerged with regard to industry clustering: those who embrace Porter’s thesis, and those who deny clustering and see it as an ineffective model that limits a region’s economic potential. An op-ed published in the Washington Post challenged the effectiveness of industry clustering - “Industry Clusters: The Modern-Day Snake Oil” - as an economic development strategy. The author, Vivek Wadhwa, an executive in residence and adjunct professor for the Pratt School of Engineering at Duke University, cited a Norwegian study that suggested clusters like Raleigh’s Research Triangle Park are “irrelevant for innovation,” arguing that what’s missing are people who have the motivation and ability to start ventures. Basic infrastructure is always needed for regional economic development success, Wadhwa
California’s Industry Clusters noted, but fancy science parks and big industries are just nice to have. As early as the time of Plato’s writing of The Republic in 360 B.C., there were signs of increased productivity through specialization and economic growth through collaboration. Following the op-ed, Porter challenged economic development professionals to analyze what is driving their local economies, and identify the resources giving them a competitive advantage. The old adage “success breeds success” is at the heart of any region’s cluster strategy. In a recent survey, 60 percent of the respondents of a regional area development firm reported that the presence of activities similar to theirs was a consideration when selecting a site. Also, a 2011 Brookings Institution report showed that “strong clusters foster innovation through dense knowledge flows and spillovers; strengthen entrepreneurship by boosting new enterprise formation and startup survival; enhance productivity, income levels and employment growth in industries; and positively influence regional economic performance.” “If you build it, they will come,” really only works in the movies. It’s not enough for economic development organizations to simply create fancy industrial parks and state-ofthe-art buildings and expect new companies to line up at the doorstep. That’s why, in recent years, more and more states and regions have been tailoring training, education and incentive programs that build on existing clusters or foster the development of new ones in order to thrive in the Innovation Economy. For example, in Brevard County, Florida, one of Central Florida’s fastest growing communities, the days of space shuttle launches are over. However, economic development
Cluster Category
National Rank
2013 Employment
Business Services
1
1,340,235
Distribution and Electronic Commerce
1
795,559
Hospitality and Tourism
1
403,062
Education and Knowledge Creation
1
361,507
Marketing, Design, and Publishing
1
230,063
Information Technology and Analytical Instruments
1
228,141
Financial Services
2
200,166
Transportation and Logistics
2
148,975
Food Processing and Agriculture
1
145,271
Video Production and Distribution
1
130,507
Insurance Services
1
124,781
Aerospace Vehicles and Defense
2
89,615
Communications Equipment and Services
1
88,288
Production Technology and Heavy Machinery
4
56,834
Performing Arts
1
53,859
Apparel Manufacturing
1
52,391
Construction Products and Services
3
51,376
Plastics
3
50,339
Printing Services
1
47,077
Metalworking Technology
3
46,905
Medical Devices
1
43,305
Biopharmaceuticals
1
38,285
Water Transportation
3
37,802
10
32,595
Oil and Gas Production and Transportation
4
31,928
Lighting and Electrical Equipment
1
30,500
Furniture Manufacturing
2
28,502
Downstream Metal Products
2
27,179
Agricultural Inputs and Services
1
23,272
Automotive Manufacturing
officials on the Space Coast believe industry clusters will help launch a new economy there. The region has targeted clean energy, defense, life sciences, information technology and aerospace as industry sectors that can produce job growth in each sector ranging from roughly 1,000 to 14,000 new jobs through 2016, with hourly wages between $21 and $30.
This is a prime example of policy makers taking their current industry clusters and consciously deciding to develop a plan to target those clusters. What makes California ahead of this curve is that we can choose to focus on the next industry clusters that will revolutionize California’s economy. There are several emerging industries that California can capture, such as 3D printing and drone technology.
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HOW WE CAN GROW
THE ECONOMY
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The Public Policy Institute of California (PPIC) reported that one of the top three areas that were associated with having a “positive and significant relationship” with economic growth was the structure of corporate tax. California is ranked 46th in corporate tax.
03 SMALL POLICY PIVOTS TODAY CAN DRASTICALLY CHANGE CALIFORNIA’S ECONOMIC FUTURE
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Innovation State Brief 2015 Changing California’s Economic Landscape 03 - How We Can Grow The Economy
3 Thousand Firms Utilize RDC’s
148 Million State Funded R&D
103 Billion Private Industry R&D
Expand and Trade Utilizing California RDC’s Similar to a Cap and Trade where carbon credits are bought and sold to reduce carbon emissions; an Expand and Trade program would allow the sale of unused RDC’s within California.
An Expand and Trade program would allow for the sale of unused RDC’s that have been accumulated by small companies that either don’t have enough sales in California to offset their income tax liability, or that have a net operating loss. This program would essentially create an online market for companies that have R&D to monetize their RDC’s and allow other companies to purchase their credit at a discounted rate to offset their state tax liabilities. Now the question arises, “Why
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would California want to lose more revenue from corporations?” This program would actually create more revenue for California in the
Most companies only utilize 25% of RDC’s because they have a net operating loss.
long-run. A major problem with the current RDC system is that there is no sunset period for these credits, thus California is building an ever larger RDC liability, which exceeds over $13 billion. This is an area that needs to be reviewed by the Legislature. The implementation of this new online market place would be administered by the Franchise Tax Board (FTB). In order to participate in the market, both the seller and buyer will need to meet certain prerequisites. The seller of the credit must be a small company,
defined as under $50 million in EBITDA and have pre-existing RDC’s from the previous year to sell. Both parties must conduct R&D in California and have approval from both the FTB in order to sell and purchase RDC’s. This program is designed to help startups and new companies during the most innovative times in their existence. It would allocate a percentage of the sales of the credit to pay for the expenses of implementing this program for the FTB. Given California’s capacity for R&D as well as our standing for generating a large percentage of global venture
Companies that sell their RDC’s must reinvest at least 50% of the sale back into the company to ensure further R&D.
capital, such a program should have the effect of funding additional startups. Reinvigorating the RDC was developed after spending a year discussing this issue with several industry trade groups, large accounting firms and world renowned think tanks. What we ultimately found was that California RDC’s were antiquated and cumbersome for companies to comply with. The idea of RDC’s is to promote more R&D and the current system needs to be improved. We need to be the catalyst to bring together research based policies with effective leadership.
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Innovation State Brief 2015 Changing California’s Economic Landscape 03 - How We Can Grow The Economy
California has been limiting its economic growth through regulatory burdens and an inhospitable business environment. We can change this perspective and improve the economy.
Research and development (R&D) is the key to innovation and California’s government can propel this innovation by supporting R&D and startups. As we work towards a more prosperous economy in 2016, there are key elements we can improve and create to make California the place for R&D. California needs to prepare for a constantly changing global economy. One primary focus is California’s use of the Research and Development Tax Credit (RDC). Overall, California’s
RDC program has been effective in promoting more R&D. However, with other states and countries increasing their incentives for R&D activities, California is becoming a less competitive state because the overall business incentives are dwindling, and California’s environmental laws are creating ever larger amounts of red tape, slowly degrading California’s business climate. According to the Public Policy Institute of California (PPIC), California is ranked 4th in entrepreneurial energy, and 2nd in innovation capacity. However,
The question is how do we bridge the gap between areas that provide few economic opportunities with those that have an abundance of jobs in a thriving innovation economy? Tech shops allow everyday people access to 3D printers and other equipment at the cost of a gym membership.
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“For every 1% increase in effective RDC rate results in an increase of in-state R&D activity approximately 1.7% in the short-run and 3% in the long-run.”
- San Francisco Federal Reserve
ranked 46th in corporate tax. Given California’s high entrepreneurial rankings, increasing the RDC would leverage California’s strengths, and raise California’s corporate tax rating. To support California’s Innovation Economy, we believe there are several key strategic policies that will start
Research and development extends beyond the high-tech industry and into the agricultural sector.
the beginning of a discussion. First, California needs to send a clear message to the world at large, that it is serious about changing the negative business climate perspective. One way we can send that message is by increasing California RDC’s by 15 percent over a five year period. Second, companies claiming RDC’s
through the FTB should be treated fairly. “FTB disallowed all of our credits without reviewing supporting documentation that we had submitted.” Third, create an Expand and Trade Program to allow the sale of accumulated RDC’s. If California were to implement this strategy it would be a step in the right direction.
Polishing Our Image California’s Pitch
Industry Survey What’s effective?
We need to show the world at large, that California is serious about investing in our state’s future.
An RDC survey conducted by Silicon Valley Leadership Group reported that if companies were able to sell or trade existing credits, it would make California RDC’s more effective.
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SUPPORTED LEGISLATION
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Even a discussion on having unique policies with legislators can have a dramatic impact years to come. Where will the ripples come from in a pond, if we don’t throw a pebble?
04 CALIFORNIA’S GOVERNMENT CAN LEAD THE WAY FOR IMPROVING INTERNAL INNOVATION
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Innovation State Brief 2015 Changing California’s Economic Landscape 04 - Supported Legislation
Past Legislation For Innovation & Jobs 2012 - 2013 AB 2506 / AB 653 - The California Innovation & Jobs Act the Research and Development tax credit by 3 percent a year • Increased for both basic and qualified research over the following five years. the state sales and use tax on the purchasing of manufactur• Eliminated ing equipment (adopted in the Governor’s economic stimulus package). the current iHub program in California and allowed for greater • Codified utilization of state owned properties for startup businesses. credits for companies that collaborate with postsecondary edu• Tax cational institutions for classes that were linked directly to jobs. reform which places greater authority with the Legisla• Regulatory ture to reject regulations before they are fully implemented.
2014 - 2015 AB 1215 / SB 573 a California Chief Data Officer (CDO) who will • Establish create an inventory of all available data for the state. data.ca.gov as the single data repository for all • Establish state agencies, available for both private & public use. data reporting standards in a machine readable • Establish formats including, CSV, XLS, KML, TXT & XML.
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Proposed Solutions
Enacted Solutions
California: The Melting Pot
A Diverse Economy Calls for a Diverse Set of Policies California is one of the most ethnically diverse populations in the world. Our diversity is also one of our strengths. A large and growing segment of this diverse population is the Latino community. In 2013, Innovation State began collaborating with the California Hispanic Chambers of Commerce, along with the prestigious Milken Institute, to craft legislation that would have an immediate and lasting impact on California’s Innovation Economy. Out of that collaboration, legislation was introduced entitled the “California Innovation and Jobs Act.” This legislation called for doubling the state RDC, allow for unused credits to be traded under an “Expand and Trade” program, eliminate sales tax on manufacturing equipment, institutionalize the iHub program for startup companies, and address regulatory reform. The primary roll of the California Innovation & Jobs Act was to bundle a set of economic initiatives targeted at California’s Innovation Economy. Increasing the RDC by 3 percent a year for both basic and qualified research over the next 5 years, allows for corporations to plan appropriately for expanding R&D centers in the state. Eliminating the state sales and use tax on the purchasing of manufacturing equipment would assist in
addressing California’s major decline in manufacturing in the past 20 years. Codifying the current iHub program in California would, among other changes, allow for greater utilization of state owned properties for startup businesses. The state owns hundreds of buildings and properties that are not being productive. The idea is to allow for private interests to utilize these assets at a discounted rate, thus creating tax revenue. The Act would also create tax credits for companies that collaborate with postsecondary educational institutions for classes that were linked directly to jobs. Had this package of ideas passed, in its entirety would mark the first time in many years that California made a bold statement about improving its business climate. Surveys will verify that when interviewing corporate CEO’s there is always the subjective factor in locating or expanding business. Does California want our businesses? Ultimately, this legislation marked the beginning of an ambitious agenda, and set the stage for future discussions, other legislation and ongoing research.
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Innovation State Brief 2015 Changing California’s Economic Landscape 04 - Supported Legislation
California iHubs 16 iHubs for Innovation California has created 16 iHubs to promote more innovative startups throughout the state. - Innovative North
- CleanTech LA
- Sacramento iHub - North Bay iHub
- OCTANE iHub
- SF iHub - San Jose iHub - iGate iHub - East Bay iHub - CalValley iHub
California is home to the largest in-state innovation network in the country, which acknowledges the inherent opportunities available within the State to connect the emerging labor force with existing businesses and entrepreneurial start up companies. In 2012, California Governor Jerry Brown established the Governor’s Office of Business & Economic Development (GO-Biz).
GO-Biz was tasked with leading an initiative to prioritize the commercialization of innovation and technology - iHub San Diego as an economic development strategy - iDEA iHub through the California Innovation Hub (iHub) Program. Sixteen existing - InLand Link iHub - iHub San Joacquin iHubs span the state from Redding to San Diego, and cover some of Califor- CNMI iHub nia’s most vibrant economic sectors from agriculture to life science and from medical technology to biomass. - Coachella iHub
The GO-Biz Innovation and Entrepreneurship Unit has established a wide range of collaborating partners with regional economic development authorities, local governments, private organizations, incubators, venture capital sources and the higher education system to develop infrastructure and support for entrepreneurs to succeed in California. Many organizations are already involved in assisting entrepreneurs within the state. Within the past year, GO-Biz added three new hubs to enhance California’s existing innovation infrastructure. The addition of these new hubs will enable California to focus on three historically strong economic sectors including healthcare, manufacturing and aerospace.
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California Open Data One Portal for All Having a standardized single portal for California public data will unleash a plethora of information for policy makers.
• • http://chhs.data.ca.gov
California State Government has not fully embraced the concept of open data, and to date only a few state agencies have open data portals. In particular, the Health and Human Services Agency, through a grant, created an open data portal that can serve as a model for other state agencies. Within state government is the Government Operations Agency, which has under its jurisdiction the California Department of Technology. It is within the Agency’s purview to create a statewide open data portal with common standards and machine readable format. The state’s current “portal” is closer to a directory with other state agencies than it is an open
http://data.ca.gov
Several California agencies have implemented their own open data portal. Data stored by governmental entities are the building blocks for assessing government spending, creating useful apps and research. https://bythenumbers.sco.ca.gov
data portal, where all publicly available data from various state agencies, departments and bureaus is available. Currently, there does not exist in the State Government a Chief Data Officer (CDO), whose responsibility would be to coordinate with various state agencies and departments to create a data handbook that can be used to implement an open data platform. Hence, the introduction this year of AB 1215 (Ting) and SB 573 (Pan), would require the Governor to appoint a CDO who would create an inventory of all available data in the state, and create a statewide open data portal that is accessible to the public. These bills would also require all
state agencies to appoint a data coordinator to identify and publish all available data sets on the statewide open data portal by January 1, 2022, pursuant to a specified schedule. Creating a statewide open data portal will assist citizens in becoming more engaged in government, as well as third parties creating useful applications which will improve lifestyle just simply by creating an open data platform. Ultimately, it is data that belongs to the public and anyone should be able to access millions of data points. Raw data are simply building blocks to turn into useful information, if it is not accessible, it has no real benefit.
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Innovation State is a 501(c)3 non-profit organization whose primary mission is to assist in developing an economic strategy based on California’s Innovation Economy.
Innovation State 1201 K Street, Suite 750 Sacramento, CA 95814
For a digital copy, scan the QR code below.
Phone 916-447-8300
Email info@innovationstate.org
Fax 916-444-7841
Web innovationstate.org