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Erie Reader: Brookings Institution's Insights on Innovation

Erie plots course for progress as majority of Pennsylvania lags behind

by Ben Speggen

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With the recent injection of investments, it's not hard to be excited about the future of Erie. From the August announcement of Erie Insurance's creation of a $50 million Opportunity Zone Fund to Erie Innovation District's announcement the following day that CapZone (a Connecticut-based investment management company) plans to establish a $10 million venture capital fund, Erie tossed out a hell of a one-two punch in the fight for its economic future. The former came on the first day of the Erie Regional Chamber and Growth Partnership's 2019 two-day Homecoming Conference, while the latter aimed at "identifying, funding, and recruiting industry-specific startups to the Erie community."


Just a few weeks later on the steps of the Erie Community Foundation, a $26 million investment — $5 million apiece invested by the Hamot Health Foundation, Magee Womens Research Institute & Foundation, Penn State Behrend, and UPMC with an additional $6 million coming from the Erie Community Foundation — would fund the expansion of the Pittsburgh-based Magee Womens Research Institute (the first outside of Pittsburgh) at Magee-Womens UPMC Hamot and the creation of a biomedical lab at Behrend. Projections point to the generation of 200 new jobs and $50 million in medical research funding to Erie over the next decade — another great flexing to show the region is hell-bent on moving up a weight class.


So, too, it's not hard to grin when overhearing whispers in crowds gathered for those announcements and others like: "Erie could get used to this!" and "this should be the new normal for us!" and "our future is innovation!"


"At the end of the day, economic growth is, especially for these smaller regions, what affects the day-to-day well-being for citizens," said Robert Maxim, a research associate for the Brookings Institution Metropolitan Policy Program, in a recent interview. "Innovation is the driver for improving livelihoods."


Upton Sinclair declared the word to be "Oil!" in his novel with that one-word title. In the film The Graduate the one word became "plastics." Now, one might say it's "innovation."

But can cities and regions — especially small to mid-sized metros — go it alone?


"Innovation is at the center of dynamics now that are either pulling us apart or allowing places to catch up," says Mark Muro, a senior fellow at Brookings Metro Policy. States have really got to think carefully about whether they are providing enough support to their regions on innovation and technology-based development."


Maxim and Muro co-authored the recent Brookings publication "Ideas for Pennsylvania Innovation: Examining Efforts by Competitor States and National Leaders," a must-read report on how Pennsylvania stacks up against its peer states and innovation trailblazers in the tech-economy.


While news at the local level in Erie has been positive, the story for the Keystone State as a whole, according to Maxim and Muro's analysis, isn't so. With the absence of a statewide, state-driven innovation policy (a key standout point: Pennsylvania's last assessment of its innovation economy was released in 2005, as the report notes), "Pennsylvania's innovation economy has gone flat at the wrong time," the authors argue.


Further, the report finds that Pennsylvania's industry research and development is below-average; state resources for early-state companies has been reduced over time; venture capital investment in the state has continued to decline; and a significant spatial divergence between the largest innovation centers (Philadelphia in the eastern side of the state with Pittsburgh in the west and widening gap in the middle) is gaping.


"Pennsylvania is an absolute microcosm of the broader dynamics in the country right now," Muro says.


In December 2018, Muro, with Brookings' research analyst Jacob Whiton in "Tech is (still) Concentrating in the Bay Area: An Update on America's Winner-Take-Most Economic Phenomenon," found that the density of tech-based jobs and development remain largely located on the coasts. A month earlier, Muro — this time with Brookings' Clara Hendrickson and William Galston — examined the tale of the two emerging Americas in "Countering the Geography of Discontent: Strategies for Left-Behind Places," drawing attention to the broadening fissure between the haves (thriving metros) and the have-nots ("small towns and rural areas struggling under the weight of economic stagnation and social decline").


So in that sense — with Philly hugging one edge of the state and Pittsburgh the other with a whole lot of rural resting in the middle — Pennsylvania is, at least geographically analogously, America.


The good news? "Pennsylvania is not alone in facing these types of challenges," write Maxim and Muro.


The not-so-great news? "Other states are working proactively to overcome their own," they add.


Uh-oh.


In the hopeful news department?


"While Pennsylvania's innovation economy has lagged in recent years, another path exists," they write. "Through a renewed commitment to inclusive innovation-oriented economic development, the commonwealth can chart a new course that bolsters economic growth and improves the living standards of its citizens throughout the state."


If we do nothing?


Maxim and Muro say that thanks to the muscle of Philly and Pittsburgh, Pennsylvania is unlikely to witness sharp decline when stacking up against competitor states when it comes to innovation and tech-based economy; however, a sideways drift will likely continue, with the division between the "superstar" regions, as they note, and the rest of the state becoming deeper.


As it stands, that chasm is profound. Take, for instance, the percentage of Pennsylvania higher education R&D expenditures by metropolitan statistical area. Nearly half (47.3 percent) goes to Philadelphia, one-third to Pittsburgh (30.7), and one-fifth (20.5) to State College. Those in the rest of the state looking for a piece of the pie are left to fight over just a 1.5 percent-sized slice.


The report is teeming with strong examples of what other states, such as Colorado, Massachusetts, Tennessee, New Jersey, and others are doing. All are worthy of serious review, but suffice it to say: If state support was to be more equitable and if future pies were to be made in bigger pans, the economic conditions and output of regions outside the "superstars" would shine more brightly.


In Erie, though, those cooking up economic development aren't waiting idly for a shipment of ingredients from the state.


"In Erie County, local government, higher education, and private business are collectively working to support innovation and build prosperity in our region," says Erie County Executive Kathy Dahlkemper. "It is imperative that state government equitably invests adequate resources to match our efforts here and the efforts of all communities across Pennsylvania. That statewide investment must be based on a comprehensive strategy that recognizes and supports the research that we have completed around key regional industries."


The City of Erie, for example, has put local funding in place to drive innovation.

"I am very proud of the work that Christopher Groner, our director of economic and community development, does to help local businesses," says City of Erie Mayor Joe Schember. "Chris manages $11 million in loan funds for city businesses. He works closely with local banks on projects [offering] a rate two percent lower than bank loans."


Schember also notes Groner's creation of three funds to attract businesses to Erie: The Flagship Fund (which makes grants up to $5,000 to startups), the Commodore Fund (which helps established businesses with grants up to $25,000), and the Façade Improvement Program (which provides grants between $25,000 and $50,000 for downtown businesses).

"The Brookings report is clear in the conviction that Pennsylvania is losing its leadership position in innovation and entrepreneurship," says Ralph Ford, chancellor of Penn State Behrend. "But it also suggests to me that, if there is to be an economic renaissance across our commonwealth, there is a lot of opportunity for the Erie region to contribute to that. As a region, the best way we can do that is by taking responsibility for our own future. I believe we're doing that."


Ford highlights Behrend's Open Laboratory, Knowledge Park, and Innovation Commons as examples.


"Although Penn State Behrend is among those taking the lead in local innovation and entrepreneurship activities, we are certainly not alone," he says. "Many of us are moving as a force in the right direction in encouraging investment from within and outside our region, in working to attract business sectors new to our economy, and in building an ecosystem of support for entrepreneurs and idea-generators."


A big tool in Erie's chest is advanced industries (very simply put: sectors with above-average investment in R&D and a concentration of STEM workers), which Maxim and Muro emphasize in their report. As outlined in "Erie's Advanced Industries," an essay co-authored by Jim Wertz and Perry Wood and published by the Jefferson Educational Society, of the 50 advanced industries identified by Brookings, more than half are present in Erie County.

"Everyone's trying to figure out how to grow the middle class and pull people out of poverty," says Wood, executive director of the Erie County Gaming Revenue Authority. "Increased wages are the answer. Advanced industries pay better. Entry-level jobs with no college education requirement pay twice that of non-advanced industries. Specifically, a high school grad makes on average $28,000 a year compared to $44,000 for an advanced industry job. This is true for college grads as well, making twice that of non-advanced industry employees."


For Pennsylvania to pivot, it will take bipartisan support of the innovation economy. In a day and age when bipartisanship can seem like a damn-near extinct word on the national level, Pennsylvania has a past of strong bipartisan provision when it comes to funding tech.

Take the Ben Franklin Technology Partnership, a "statewide early stage investor that has been cited as a national model for technology-based economic development," as Maxim and Muro put it. Then-Republican Gov. Dick Thornburgh created the "Bens" and his Democratic successor Gov. Robert Casey continued it.


"This bipartisan approach to innovation and technological development has been reflected in other state efforts, such as Republican Gov. Tom Ridge's technology strategy and Democratic Gov. Ed Rendell's TechFormation, which laid out a statewide strategy for advancing technology-based economic development, among others," the authors note.

But funding for the Bens has been on a continued decline over time. But that doesn't mean they're still not working with what they've got, despite the inherent challenges present.

According to Brian Slawin, director and portfolio manager for the Central and Northeast division of Ben Franklin Technology Partners, while angel investors and venture capitalists typically hope for a return on investment of 10 percent for the companies they fund, Ben Franklin yields a 70 percent success rate over a five-year period after working with Pennsylvania companies.


"Our money isn't any greener or more powerful than anyone's," Slawin says. "It's all of the other stuff, the mentoring."


That "other stuff" has led to a four-to-one return on investment over the Bens' decades-long history.


"Can you imagine what that number would be if we had been level funded with where we were a decade ago? We would've created more jobs, more interesting companies, and more cool stuff to do."


"Not investing in that is like not investing in education, or not investing in quality food, or not investing in the health in your city. It's counterproductive in the very least."


What is the state's word on Maxim and Muro's findings?


According to the Pennsylvania Department of Community and Economic Development (DCED), the report "does not tell the full story of innovation in Pennsylvania, and it fails to recognize the federal and private dollars leveraged off of the state's investments," writes Casey Smith, DCED communication director, in an email response to an interview request.

The report does not recognize federal and private dollars other states leverage.

However, there are successes in smaller metros the state highlights.


"It's important to note that cutting edge research, innovation, and entrepreneurship isn't only happening in big cities," Smith writes. "This is evidenced by the many great things happening in all corners of the commonwealth, like the LaunchBox program at Penn State, the Ideas x Innovation Network in Chester County, the Innovation Districts in York and Erie, the powdered metals industry in the Northern Tier, and the entrepreneurial atmosphere of the Northeast and Lehigh Valley."


Smith outlines several other positive points for the state, including Gov. Tom Wolf's PAsmart. Announced in March 2018, the workforce development initiative is aimed at increasing funding support to STEM education, apprenticeships, public-private partnerships, and more.


"The Wolf Administration looks forward to working with the legislature and stakeholders to continue to grow Pennsylvania's technology and innovation sectors in the years ahead," he concludes, after noting that during "difficult budget years, Wolf has continued to fight to ensure line items, such as BFTP would not be cut, while championing for an increase in education funding."


But more work lies ahead if Pennsylvania is to move beyond "middle-of-the pack," as Maxim and Muro note in their report.


"In its first State New Economy Index in 1999, the Information Technology and Innovation Foundation (ITIF) ranked Pennsylvania 23rd out of 50 states," the report notes. Pennsylvania jumped to 21st in 2002, but subsequently flatlined and returned to 23rd in 2017 (the most recent ranking available).


The Milken State Technology and Science Index ranks Pennsylvania slightly higher, 13th overall in 2018, with the high watermark coming in 2012 at 11th.


"Pennsylvania has been unable to break into the top-tier of states," Maxim and Muro report, "and has been trending sideways in recent years," adding, "meanwhile, competitor states that have invested in their innovation ecosystems have now surpassed Pennsylvania."


Whether the commonwealth as a whole charts the course for top-tier status either through the creation of new policy or the re-funding of existing-but-defunded initiatives,


But the real question — which the 66-page report explores the imperative need of answering — remains: "Can medium-sized and smaller cities break out to develop their own regional innovation economies mostly on their own or do they need state support?" Muro poses during the interview. "We have something of a bias towards the second part the first is really important."


"It is much easier and much more effective for localities to break out and create real regional growth when they have the support of the state," Maxim says.


So when it comes to Erie, the region may be working to move up in weight class and punching with more might, but it has a long way to go before it can go toe-to-toe with the likes of Philadelphia and Pittsburgh. With stronger support from the state, the region may have to continue to focus on developing its footwork to be nimble with local support rather than adding bulk and mass.


Ben Speggen can be contacted at bSpeggen@ErieReader. You can follow him on Twitter @BenSpeggen.


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