The New Role Models

Which states are the real innovators in economic policy?

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IN 1976, PENNSYLVANIA WON THE economic prize of the decade: a Volkswagen plant predicted to employ 5,000 people and generate 20,000 spin-off jobs. Pennsylvania made available $40 million in loans starting at 1.75% interest, $25 million in road and rail construction, $3 million in training subsidies, and five years of tax abatements. Governor Milton Shapp called it the crowning achievement of his administration.

Ten years later, the Volkswagen plant employs only half the people projected to work there and has generated perhaps 10% of the projected spin-off jobs. The county where the plant is located still has one of the highest unemployment rates in the state. Stung by the meager return on taxpayers' money, state officials no longer bet on large industrial plants. Now, they heap their economic favors on people like Alfred Austen.

In 1983, Austen was a senior research engineer at beleaguered Bethlehem Steel Corp. When Austen heard about a new state program that offered help to entrepreneurs, he leapt at the chance. He founded Innovare Inc., which, among other things, performs contract research on high-tech metals and ceramics. Over the next three years, Austen received $150,000 in research grants, a stream of technical help, and office space in an incubator at more than 50% off market rates. Innovare has the equivalent of six employees today, but it has already moved out of the incubator and could grow rapidly when it begins production of a computer-controlled press, which will enable industry to work with superconducting materials in entirely new ways.

The state program that helped Austen launch Innovare is the Ben Franklin Partnership. Started in 1983, it has funded close to 1,500 projects involving 2,500 companies, helped begin five private seed capital funds, and given grants to 27 incubators.

The entire price tag for the first five years was roughly $90 million -- about the same, after adjusting for inflation, as the subsidy for one Volkswagen plant.

The Volkswagen deal exemplified the primary state economic strategy of the 1970s: smokestack chasing, the attempt to lasso divisions of large companies on the move. The Ben Franklin Partnership exemplifies a new strategy that has emerged in the 1980s: nurturing homegrown companies. The difference between them is the difference between failure and success.

Few issues are the source of as much obfuscation as state economic development. What works? What doesn't work? The answers take on added importance today as Presidential candidates look to their own state programs as inspiration for policies on the national level.

The fallout from broad economic trends -- the depression in the oil industry, for example -- is beyond the control of local officials. But to a surprising extent, the elements necessary to nurture the process of innovation are within the control of state governments. And innovation is the driving force in today's economy.

Over the past 25 years, the microelectronics revolution and the global marketplace it has created have transformed the very ingredients of economic growth. In an economy in which Americans compete with foreign workers paid a few dollars a day, our advantage no longer lies in products that can be manufactured on traditional assembly lines. It lies instead in sophisticated new products and services that depend on advanced technologies and skilled workers.

A quarter-century ago, companies looked for cheap labor, cheap power, and good transportation. Physical infrastructure was the key. Today, companies look for educated workers, excellent universities, entrepreneurial climates, and an attractive quality of life. Good roads and airports are still important, but intellectual infrastructure is the key. "These attributes are not conceived of as natural endowments but as qualities achieved through public policies such as education, organized research, and investment in social overhead capital," writes John O. Wilson, senior vice-president and chief economist for Bank of America Corp.

Some states, such as Massachusetts, have been lucky enough to have the right intellectual infrastructure already in place. Others have had to build almost from scratch. Among the latter, two hemorrhaging industrial states, Pennsylvania and Michigan, have done perhaps the best jobs.

Pennsylvania has focused particularly on creating an entrepreneurial environment, while Michigan has focused more on helping its existing manufacturers remain competitive and improving its capital markets. But beneath these differences lie a number of similarities -- similarities that say a great deal about successful approaches to economic development.

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