Innovation in Pennsylvania

*Full footnoted version available.

Pennsylvania is faced with a watershed moment that will determine the economic competitiveness of the Commonwealth for decades to come. As our workforce ages and shrinks, our infrastructure ages, and our economy evolves, the way that Pennsylvania incites investment in innovation, entrepreneurship, and workforce development will determine whether Pennsylvania’s economy grows or constricts. Data from Bloomberg indicates that Pennsylvania’s economic contraction within the next six months (by mid-2020) “is anticipated to be the most severe since May 2009 during the tail-end of the Great Recession, figures released this week show.”

At the national level, the disparity between haves and have-nots continues to broaden. The wealthiest areas of the country continue to drive our economic engines, while great portions of the country are losing economic opportunity. Seventy-five percent of all venture capital supports entrepreneurs in only three states: California, Massachusetts, and New York. The case has been made repeatedly that prioritizing small businesses and entrepreneurship represent the best opportunity to create a dynamic and fluid economy. PBS recently covered this by saying “Hiding in plain sight is a vast opportunity to unite our nation and grow our economy. However, few leaders on the national stage even mention the essential American calling of starting a business, and how it could change lives and communities for the better. Few understand that it is the age, not the size, of a business that matters — since new businesses, not small or big businesses, account for nearly all net new job creation in the U.S. Fewer leaders still propose new ideas to spread entrepreneurship broadly and fairly in our country.”

Americans dream about starting businesses and in order for entrepreneurship to take root, it requires public support, which has historically been a primary driver for innovation and entrepreneurship based in CA, MA, and NY. Industry and entrepreneurship is in Pennsylvania’s DNA. There was a time when Pennsylvania was a model for the nation for supporting small businesses and spurring innovation through the creation of the Ben Franklins. Pennsylvania has had strategic plans to boost small business and job creation; we have infrastructure for community and economic development, workforce improvement, and we have bright spots of innovation popping up across the Commonwealth. But fewer Pennsylvanians start businesses than the national average and the Kauffman Early-Stage Entrepreneurship (KESE) Index shows Pennsylvania far behind the nation’s leaders.

In spite of a few bright spots, the data shows that Pennsylvania is rapidly and seriously falling behind comparable states. The Brookings Institute released a paper over the summer entitled Ideas for Pennsylvania Innovation: Examining efforts by competitor states and national leaders, which lays out the challenges faced by the Commonwealth. They include:

• The absence of a comprehensive state innovation strategy grounded in an evidence-based understanding of the state’s industries and innovation status
• Below-average industry R&D that has stagnated in recent years
• Reduced investment in state resources for early stage companies, combined with declining venture capital in the state
• Significant spatial divergence between the largest innovation centers (Philadelphia and Pittsburgh) and the rest of the state

From last year’s study conducted by Pittsburgh-based Fourth Economy, “The following notes are based on a more detailed presentation of data that were developed to inform conversations. They paint a picture of Pennsylvania lagging competitor states and losing ground as a result. A few of the indicators:

• 13th in Milken Index (2018) which is up one spot but
• 19th in the Kauffman Index (2016) — with strong Main Street Entrepreneurship and Moderate
• Growth but limited startup activity.
• 24th for Advanced Industries and define by Brookings (2015) — measure STEM workforce and tech-focussed R&D
• Middle of the pack in State research and development funding
• Above median in Private research and development funding
• 22nd in Science and Engineering Workers
• Our patent activity is growing but lags U.S and several other states
• 44th on New Business Creation and 33rd in Net New Business
• 42nd of 50 in net change for High Tech Employment (Milken)
• State economic development appropriations fell by 72% over the past decade

These factors combined with what many predict as an overall population loss in Pennsylvania should raise a call to action. A new vision for what Pennsylvania’s entrepreneurial and innovation ecosystem and overall economic development network should accomplish is needed.”

This document is a starting point for a comprehensive state innovation strategy grounded in evidence-based understanding of the state’s industries and innovation status. In a nutshell, Pennsylvania’s economic prosperity hinges on placing a number of calculated bets on high growth industries of the future, anchored geographically, leveraging the existing resources of the Commonwealth. This plan iterates upon what has worked for Pennsylvania, cherry picks promising policies from other states, and considers our greatest assets — Pennsylvania’s educational institutions, the industry leaders that are already anchored in PA, and the clusters of innovation that are already blossoming. This strategy should be considered an iterative and working document, which could be made better and which will never be a panacea for all our economic interests. Where there are winners, there are also losers; we do not advocate investment in buggy whips.

Ultimately, the goals of this strategic plan are to do more of what works well in Pennsylvania, focus on a handful of select, high-growth industry clusters, leverage existing assets thoughtfully, account for diversity and economic opportunity for the most Pennsylvanians as possible. Technology allows us to tap into rural resources in ways that we have yet to fully explore. Our goals for this exercise are the same as those outlined in the Brookings Paper:

• Create an evidence-based state innovation strategy
• Strengthen business R&D in the state
• Bolster state investment in early stage financing
• Mitigate significant spatial divergence.

In order to achieve any meaningful movement on innovation in Pennsylvania, we urgently need to create a body responsible for coordinating regional innovation cluster strategies. This body will articulate an overall vision for Pennsylvania as a true Commonwealth of the future, with a workforce that finds opportunities in high growth, high potential industries. This requires a tremendous amount of collaboration and coordination and must be undertaken for the greater good, not for personal gain. Because an innovation strategy will likely require an investment of taxpayer dollars, transparency, a data-driven approach, and articulated ethics/values are critical. The task force will be responsible for making policy and strategy recommendations that are informed by a diverse group of stakeholders, with innovation, entrepreneurship, economic and workforce development as the main aims. This task force will need to review what policies and programs have worked for the Commonwealth, building on our wins, and adding sector cluster strategy to regions, driven by the hard-working Pennsylvanians in each region. These sectors will be informed by research from the World Economic Forum, Kauffman Foundation, Brookings Institute and others about what kinds of innovation industries will dominate the fourth industrial revolution.

Finally, this is not a simple undertaking. Creating opportunity is not for the faint of heart. But this matters, for all Pennsylvanians. About another constricting city, Winston-Salem, Nathan Hatch, president of Wake Forest University, a focal point of Winston-Salem for more than half a century says, “ “Desperation may be too strong a word, but this is not a self-generating place. We have to be very aggressive and creative.” We really have no choice.