INCENTIVES CONDUCIVE TO DEVELOPMENT AND APPLICATIONS IN ADVANCED

MANUFACTURING AND TECHNOLOGY INDUSTRIES

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To encourage companies to relocate or grow within their borders, states have traditionally used tax and economic incentives to overcome perceived quality-of-life disadvantages and/or the negative impacts of archaic and punitive tax codes. However, many traditional incentive

programs are no better adapted to technology companies than the tax codes they are designed to supplement. Until fairly recently, most such programs were aimed at subsidizing capital-

intensive, high-employment manufacturers—the recruitment targets of a half-century ago. Technology companies whose assets are more intellectual than physical rarely qualified for loan programs that required hard collateral or for job-creation credits that favored large manufacturing workforces.

Key business climate factors that need to be taken into consideration in building a technology- driven state economy include the following:

• Costs of doing business, including tax structure, regulatory climate, predictability and stability of public sector policy, and access to and responsiveness of economic development incentives.

• Technology infrastructure, including computing and communications infrastructure; real estate infrastructure, such as research parks, incubators and accelerators, wet labs, multi- tenant space, and pilot plants; and access to specialized research facilities.

• A high quality of life, including costs of housing, recreation, arts and culture, outdoor activities, and downtown amenities. This area is becoming increasingly more important for attracting and retaining managerial and technical talent.

• General business leadership.

Ohio has recently undertaken a review of its economic development tool kit and is in the process of making significant changes that will have a positive impact on the business climate. In addi- tion, Ohio has been a leading technology-infrastructure state with the development of the Super- computer Center, OARnet, and other means to link libraries, schools, and higher education institutions through high-speed broadband access.

Ohio’s history is one of strong regional policy. The impetus for actions and solutions generally takes place at the local level, with state government responding and reacting to it. Given the current economic situation, Ohio needs a stronger state leadership role and set of actions around strategic investments. In the past, the implication has been that projects equal strategies and vision; it is obvious that they do not.

Building state economies around technology-intensive firms requires a comprehensive approach, including encouraging the forming of new firms, the retention and expansion of existing firms, and selective recruitment of firms from outside the state. Strategy Two discusses ways in which Ohio can increase the birthrate and reduce the death rate of new firms. The other three strategies address the retention and expansion of existing firms, including increasing their access to

research and technology within the state’s higher education and private research organizations, encouraging greater applications of technology to their production lines and processes, and helping existing firms in Ohio in other ways to stay and expand.

These strategies can also help the state in its recruitment initiatives. Unfocused recruitment efforts, where states pursue any and all types of investments, may have made sense to industrially underdeveloped states after World War II. Increasingly, however, states are recognizing that their recruitment efforts need to be much more strategic, focusing on such opportunities as

• Attracting key component manufacturers and others that help “fill in” gaps in the supplier chain of firms around key industry strengths in Ohio. Filling in gaps helps existing firms stay and expand. Increasingly these “suppliers” are going to be value-added firms more intensively using and developing technology. Attracting such firms to Ohio helps build the technology location quotient of the state’s economic base. In addition, having programs such as the Centers of Innovation, the Ohio Innovation Fund, and others outlined in these strategies can be used to attract these technology-savvy suppliers to Ohio and improve the technology level of existing firms at the same time.

• Attracting key “anchor” or “mega” projects to Ohio. One effective way to further build Ohio’s base in certain key core research and technology strengths is to attract key private sector investments to Ohio, either as stand-alone R&D and applications facilities of individual firms or consortia of key industry players, e.g., MCC and SEMATEC. Actions such as the Centers of Innovation will be key to both attracting and competing to obtain such major private-sector investments, the resulting facilities, consortia, and joint ventures to Ohio. Historically, Ohio has not fared well in this regard; and these strategies and actions, if promptly implemented, can help change this.

• Attracting technology entrepreneurs to Ohio. Increasingly, collaborative efforts of the state’s higher education institutions and economic development organizations are focusing on attracting star Eminent Scholars to Ohio who bring with them either their spin-off firms or firms interested in undertaking sponsored research and development. Ohio’s success in this regard in recent years is one way to “jump start” efforts to create entrepreneurial role models that can serve as examples for other faculty and entrepreneurs.

Starting-up, retaining and expanding, and selective recruiting are all approaches ODOD and its counterpart regional and local economic-development organizations can focus efforts on in the years ahead.

Tactics

The following tactics should be pursued to create a business climate in Ohio supportive of the creation, growth, and retention of advanced manufacturing and technology enterprises:

• Initiate a comprehensive set of approaches to build the state’s economic base through start- ups, business retention and expansion, and selective recruitment based on the state’s core technology competency areas, existing industry strengths, and opportunities presented by implementation of the actions in this report.

• Review and restructure the state’s tax code to benefit emerging and growing advanced manufacturing and technology firms. Using tax incentives to encourage corporate invest- ment is a traditional technique of economic development. However, most tax incentives were designed initially to assist traditional durable manufacturers and to encourage job creation. Today, tax policies need to be re-examined and revised to reflect new

biotechnology, information technology, and advanced manufacturing industries where future wealth is likely to be created.

• Create public incentives and investments that encourage private developers and real estate markets to adequately respond to the need to build the technology infrastructure of shared facilities, multitenant accelerators for life science firms, and other specialized facilities for advanced manufacturing and other technology firms.

• Ohio must aggressively develop and create an image as the applied innovation state. Others will not gravitate to the “brand” without adequate, consistent marketing and promotion over a multiyear period.

Actions for Strategy Three

• Action One: Energize industry-led technology councils/organizations to increase scale and intensity of networking and firm involvement.

• Action Two: Make changes in the state’s tax incentives and laws to encourage technology infusion and applications into existing and new businesses in the state by a comprehensive review of its technology impact.

• Action Three: Ensure that Ohio’s public and private sectors are providing adequate technology infrastructure.

• Action Four: Revamp the state’s economic development tool kit of incentives and programs and form the Innovation Ohio Fund to represent a direct targeted program to support these efforts.

• Action Five: Initiate a focused and selective Ohio technology branding and image campaign. Action One: Energize industry-led technology councils/organizations to increase scale and intensity of networking and firm involvement.

Ohio must engage its advanced manufacturing and technology-driven industries more fully in state and regional efforts to reposition the state’s economy. Interviews with company leaders throughout the state showed limited knowledge and awareness of state programs and incentives. In addition, most company executives appear to be somewhat disengaged from local and regional technology-development efforts. While state

government can mobilize resources only in a limited fashion, it can encourage and

incentivize regions and local economic- development groups to broaden their networks and encourage more inclusive, broad-based industry involvement around advanced manufacturing and technology. Whereas most other states and regions have active dues-paying, membership-driven, technology trade and business associations, Ohio appears to have more anointed

technology organizations, not trade and business associations. Experience throughout the country suggests that states and regions that are effective in building technology- driven economies have active and broad technology membership organizations and extensive scale and intensity of networking not generally found in Ohio today.

The State of Ohio should consider several different options or approaches to establish trade and business associations:

New Jersey Technology Council

The New Jersey Technology Council provides business support, networking opportunities, infor- mation, advocacy, and recognition of technology companies and their leaders. Founded in 1996, NJTC's more than 1,200 member companies work together to support their own enterprises while advancing New Jersey's status as a leading tech- nology center in the United States. Company growth is fostered through

• Access to financing sources

• Programs on successful management and marketing strategies

• Frequent networking opportunities

• Recognition of technology business innovators and leaders

• Collection and dissemination of industry-specific information

• An employee recruitment network.

In 2000, after discovering that only 10 percent of the venture capital raised in New Jersey was invested in New Jersey companies, NJTC was instrumental in forming a new venture fund, com- bining private, state, and federal resources. The seed investment fund is used to help New Jersey start-up technology businesses get off the ground.

• Provide “seed” funds to regional technology groups and organizations that establish membership-owned and -driven organizations with extensive scale of networking. • Serve as a catalyst or facilitator to help form a statewide technology business council. • Consider encouraging formation of statewide sector-advocate organizations around the

state’s core competency areas (several have been or are being formed, e.g, polymers). In any case, active networking organizations, both at regional and statewide levels, will be necessary to help drive, support, and implement this strategy and to build an entrepreneurial culture driven by the advanced manufacturing and technology industries.

Regional technology organizations in Ohio are addressing issues, gaps, and programs around entrepreneurship, research and technology commercialization, workforce, quality of life, and e-business. Regions have developed new seed and other capital funds as in Columbus; formed entrepreneurship mechanisms as in Cleveland; addressed workforce issues such as the Tech- nology High School in Cincinnati; focused on technology infrastructure such as SciTech, the OSU Research Park; and built technology coalitions such as around food in Toledo. They have more limited experience in focusing on core technology competencies and flushing out fully developed regional technology strategies, tending toward identification of projects and programs. In addition, Battelle recommends that a review of the instruments available to local governments for supporting local technology infrastructure development be undertaken to determine whether changes are needed so that local governments are able to adequately fund and support the development of their local technology infrastructure.

Resources Required: Most technology councils need budgets of around $400,000 to $700,000, of which membership dues account for generally 20 to 30 percent of the total. Additional state funds are not required to address this action.

Time Frame: Mid-term.

Lead Organization: Ohio Department of Development with regional organizations.

Action Two: Make changes in the state’s tax incentives and laws to encourage technology infusion and applications into existing and new businesses in the state by a comprehensive review of its technology impact.

Ohio has a number of provisions in its tax code to encourage capital investments, research and development spending (on hold), and other incentives for economic development. To Battelle’s knowledge, the state has never undertaken (as have a number of other states) a comprehensive review of all its tax laws and their administration to determine whether the playing field is level between traditional manufacturing and advanced manufacturing and technology businesses, and to examine whether the needs of technology-driven firms are adequately addressed by the tax code. All state tax codes represent a state’s history. Ensuring that a state’s tax structure is built for future industries requires a concerted effort of reviewing such issues as sales and use tax treatment of research and development, supplies, and laboratory equipment; exemptions regard- ing personal and real estate; corporate and other tax code provisions regarding treatment of equity; and the salability and transferability of tax credits by young firms with limited tax liabilities. These are just some of the tax issues that need to be addressed as Ohio builds a more technology-driven economy.

A variety of business leaders have proposed initiatives such as:

• Information technology credits to firms that purchase computer and communications equipment; credits or exemptions for firms investing in technology or smart zones;

expanding or modifying the Manufacturer’s Investment Tax Credit to include investments in core technology areas; modification to the job-creation tax credits to consider payroll as the measure instead of number of jobs; modifications to the 412 Business Development Grant to be used for financing of leasehold improvements; changes in the incumbent worker training program to target advanced manufacturing and technology firms; and targeting industrial development bonds to distressed areas and core technologies.

Several tax modifications and changes, some administrative and others legislative, have already been identified, and many have been implemented, such as the following:

• Modifications of the job-creation tax credits relating to the minimum number of jobs; modifications to tax increment financing to enable areawide projects that will assist in

forming research parks and telecommunications infrastructure investments; and a raise of the cap on individual investments and an increase of market valuation of firms for the target technology-investment tax credit.

Some general guidelines as changes are considered for the state tax code:

• Find ways to focus or provide incentives for firm investments in R&D in core competency areas, and encourage Ohio firms to increase their design, development, and testing of new products in the state.

• Revamp tax credit programs to target efforts on advanced manufacturing and technology sectors and collaboration in R&D.

• Develop creative finance vehicles (as Pennsylvania has done with its Technology Investment Authority) to address needs of technology and advanced

manufacturing firms.

• Further develop ways to encourage entrepreneurship and equity-capital investments in new enterprises. • Market and increase awareness of existing tax

incentives and state programs that address these areas.

Currently, both tax incentives and the state’s economic

development tool kit tend to focus on fixed-asset financing and may need to be adjusted to address other forms of capital formation; provide incentives to encourage firms to develop, design, and use technology in their businesses; encourage collaboration with other firms and higher education institutions; and encourage venture capital and start-up financing. A comprehensive overall review would catalyze the modernization of Ohio’s tax code.

Pennsylvania Technology Investment Authority

PTIA was created to provide a resource that could be tapped to fund a variety of technology projects. PTIA includes three components:

• PTIA makes direct investments in for- profit technology companies. These investments can be structured as sub- ordinated loans or structured to provide an equity-type return.

• PTIA provides funding to universities for applied research projects. Funds can be used for developing technology, tech- nology transfer, and product develop- ment and design.

• PTIA’s e-Commerce Fund is designed to accelerate the use of Internet-based technologies by both businesses and communities. PTIA makes grants to for- profit businesses and community-based organizations.

Resources Required: A technology tax code review should cost no more than $250,000, with donated services of legal, accounting, and other firms. The fiscal impact costs of actual changes in the tax code will not be known until this review is completed.

Time Frame: Short-term.

Lead Organization: Ohio Department of Development in cooperation with Ohio Department of Taxation.

Action Three: Ensure that Ohio’s public and private sectors are providing adequate technology infrastructure.

The State of Ohio needs to examine several areas as it tries to help catalyze actions around new enterprises in advanced manufacturing and technology. Among the gaps identified in this analysis are the following: • Lack of adequate accelerator—private, multi-

tenant life science wet-lab space (modern day equivalent of industrial spec space) and other types of specialized accelerators. Connecticut has established an ROI investment program for “leasehold improvement” space.

• A lack of research parks in the state’s major metropolitan regions. Ohio’s research parks have been late to develop in comparison to other states and have not received the focused attention and commitment to ensure success. One exception is Columbus’s recent focus on SciTech, OSU’s Research Park.

• Shortage of shared user research facilities near

or close to universities, such as the MicroMD Laboratory in the science park near OSU, which can be shared by faculty and industry. Such facilities can include demonstration and pilot plants.

• Continued investment in fiber-optic communications and computing systems linking the state’s industries, education institutions, and others. High-speed communications capability and new cutting-edge applications by all Centers of Innovation will require the state to continue to invest and provide access to data. Collaboration across institutions and with industry can be increased by improving access to remote sites, adding computing power for visualization and video applications, and making related investments. High-definition digital video and data links will allow Ohio researchers to work together across the state, permitting unprecedented synergy through real networking. The Ohio Board of Regents has been a leader in creating the Ohio Supercomputer Center and other shared service organiza- tions such as OhioLINK, OARnet, the EnterpriseOhio Network, and the Ohio Learning Network. They provide a model for building the next stage of investments in the state’s communications and computing infrastructure. These investments need to include initiatives that provide the means by which individuals and small businesses can gain access to

Connecticut BioScience Facilities Fund

Connecticut’s $40 million BioScience Facilities Fund provides financing to biotechnology companies for the devel- opment or expansion of wet-lab and related space. The Fund, which is administered by Connecticut Innovations, has provided direct loan financing for tenant wet-lab improvements, structured a loan loss reserve fund to enable developers to acquire private financing, and provided innovative equity/direct loan financing packages. The BioScience Facilities Fund has financed more than 225,000 square feet of laboratory space since its creation in 1998. Lab space in Connecticut has increased more than 60 percent to nearly 500,000 square feet between 1998 and 2000.

high-speed data and other e-commerce services, possibly through a group buying program for small businesses, funded through tax credits or creative use of state bond and utility firm penalties.

In addition, Battelle recommends that a review of the instruments available to local governments for supporting local technology infrastructure development be undertaken to determine whether changes are needed so that local governments are able to adequately fund and support the development of their local technology infrastructure.

Resources Required: $20 million annually for these types of enabling infrastructure invest-