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THE PERFORMANCE OF THE MASSACHUSETTS ECONOMY Scottish Enterprise May 2007 1 Table of Contents 1. INTRODUCTION ................................................................................................................... 3 2. RECENT ECONOMIC PERFORMANCE .............................................................................. 4 3. DRIVERS OF ECONOMIC GROWTH .................................................................................. 7 4. THE STRUCTURE OF THE MASSACHUSETTS ECONOMY TODAY.............................. 10 5. WHAT HAS BEEN DRIVING PRODUCTIVITY AND EMPLOYMENT GROWTH? ............ 12 6. INNOVATION, RESEARCH AND DEVELOPMENT ........................................................... 12 7. EDUCATION AND SKILLS .................................................................................................. 16 8. ENTERPRISE AND ENTREPRENEURIAL ACTIVITY ....................................................... 18 9. BOSTON’S UNIVERSITIES AND ECONOMIC DEVELOPMENT ...................................... 18 10. CONCLUSIONS ................................................................................................................ 20 2 THE PERFORMANCE OF THE MASSACHUSETTS ECONOMY OVERVIEW Massachusetts’ economic performance (measured by GDP per head) outperforms all other OECD countries High levels of productivity and a high employment rate have both contributed to high GDP per head Massachusetts’ employment is concentrated in knowledge intensive, high value sectors Research and development has been a main driver of productivity growth Massachusetts outperforms other OECD countries on a range of R&D measures Massachusetts has a highly skilled workforce, again outperforming other OECD economies The state’s higher education sector plays an important role in the economy by providing skills and attracting government R&D funds and business R&D activities. Massachusetts is not an overly entrepreneurial economy, although does perform well for high growth businesses The interaction between the higher education sector, R&D activity, skilled workforce and knowledge intensive industries, which all depend on and influence each other, explain Massachusetts’ economic performance 1. INTRODUCTION The Massachusetts and Boston city region economies rank highly in a number of benchmark indices and are often cited as examples of successful knowledge economies. The 2005 World Knowledge Competitiveness Index1, which benchmarks the world’s top ‘knowledge regions’, ranks Boston second out of 125, behind only San Jose (interestingly 18 out of the top 20 regions are in the US). Boston’s position is boosted by high productivity and GDP per head, driven in particular according to the report by high levels of R&D expenditure and equity finance (figure 1). Scotland is ranked 83rd. Figure 1: World Knowledge Competitive Index, 2005 Overall ranking (out of 125) Rank Region 1 San Jose, US 2 Boston, US 3 San Francisco, US 4 Hartford, US 5 Seattle, US 8 Stockholm, Sweden 20 Uusimaa, Finland 51 Denmark 55 South East, UK 56 London, UK 83 Scotland Selected sub-factor rankings (out of 125) Boston Scot Private equity investment per 4 32 capita Govt R&D per capita 5 82 Business R&D per capita GDP per capita Investment in primary/secondary education Patent registrations per capita Labour productivity 5 6 8 102 104 79 11 12 106 88 Employment - managers per capita 25 16 Massachusetts is ranked first out of fifty US states in the ‘2007 State New Economy Index’2, which benchmarks US states across a range of knowledge economy indicators (Massachusetts was also first in the 1999 and 2002 indices). The state scores particularly well for the proportion of workers in high value jobs, workforce education and skills, the number of scientists and engineers, high growth businesses and venture capital (figure 2). In OECD rankings3, Boston ranks third out of the top global metro-regions in terms of GDP per head (behind San Francisco and Washington). 1 Robert Huggins Associates http://www.kauffman.org/pdf/2007_State_Index.pdf 3 OECD Territorial Reviews: Competitive Cities in the Global Economy 2 3 Figure 2: The State New Economy Index, 2007 Overall rankings (out of 50) Rank 1 Massachusetts 2 New Jersey 3 Maryland 4 Washington 5 California 6 Connecticut 7 Delaware 8 Virginia 9 Colorado 10 New York State Selected sub-factor ranking (out of 50) Rank Managerial/prof/tech jobs 1 High-tech jobs 1 Workforce education 1 Venture capital 1 Manufacturing value-added 2 Fast growing firms 2 Scientists and engineers 3 IT jobs 4 Exports 4 FDI 5 IPOs 5 2. RECENT ECONOMIC PERFORMANCE Between 1997 and 2005 annual average real GDP growth was 3.7% in Massachusetts, above the US level (3.1%) and Scotland’s (2%). This would place Massachusetts at the bottom of the second quartile of OECD countries (Scotland is in the fourth quartile – figure 3). Compared to other US states, Massachusetts ranks 15th (figure 4). Figure 3 % Average annual GDP growth, 1997-2005, OECD Countries (% ) 8 7 2 1 0 Ireland Luxembourg Hungary Iceland Korea Greece Turkey Poland Mexico Slovak Spain Finland Australia Canada Massachusetts United States New Zealand Sweden UK Norway Netherlands Czech France Portugal Belgium Austria Denmark Scotland Italy Switzerland Germany Japan 6 5 4 3 4 Figure 4 % Annual average GDP growth 1997-2005, US States (%) 7 6 5 4 3 2 0 Arizona Idaho Nevada Florida Oregon California Colorado Virginia New South Dakota Vermont Texas Maryland Utah Massachusetts Georgia New Mexico North Carolina Minnesota Delaware New York US Wyoming Washington Rhode Island Montana Tennessee Alabama North Dakota Arkansas Oklahoma New Jersey Kansas Indiana Wisconsin South Carolina Maine Connecticut Pennsylvania Iowa Illinois Nebraska Hawaii Scotland Mississippi Missouri Ohio Kentucky West Virginia Michigan Alaska Louisiana 1 Over the 1997-2005 period, the Massachusetts’ economy grew by 31%, slightly above the US level (+28%) and significantly above Scotland’s (+17%) (figure 5). Figure 5 Index of GDP growth, 1997-2005 (1997=100) 140 130 120 110 100 90 80 1997 1998 US 1999 2000 2001 Massachusetts 2002 2003 2004 2005 Scotland GDP per head is a better measure of wealth and prosperity than overall GDP as it takes into account population growth. In 2005, Massachusetts’ GDP per head was the 5 th highest of all US states (excluding the District of Columbia) and was 22% above the US average and 61% above Scotland’s (figure 6). If compared to OECD countries, Massachusetts would be ranked 2nd behind Luxembourg4 (figure 7). 4 Note that Luxembourg’s GDP per head is artificially boosted by large in commuting of workers. 5 $ 0 Luxembourg Massachus Norway US Ireland Iceland Switzerland Netherlands Austria Australia Denmark Canada Belgium UK Sweden Scotland Finland Japan Germany France Greece Italy Spain New Zealan Korea Czech Portugal Hungary Slovak Poland Mexico 0 Delaware Alaska Connecticut Wyoming Massachusetts New York New Jersey Virginia Colorado Nevada Minnesota California Maryland Illinois Texas Washington Hawaii New USA Rhode Island Nebraska Georgia North Carolina South Dakota Oregon Pennsylvania Wisconsin Kansas Ohio Tennessee North Dakota Iowa Indiana Florida Missouri Louisiana Michigan Vermont Utah Arizona New Mexico Oklahoma Maine Kentucky Alabama Idaho UK South Carolina Montana Scotland Arkansas West Virginia Mississippi Figure 6 GDP per head 2005, US states ($) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Figure 7 GDP per head OECD countries, 2005 ($, current prices and PPPs) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 GDP per head in Massachusetts grew by 27% between 1997 and 2005, higher than for the US as a whole (+18%) and Scotland (+17%). Annual average growth over the period was 3%, ahead of both the US and Scotland (2% each), placing Massachusetts in the 2 nd quartile of OECD economies (figure 8). 6 Figure 8 Ireland Hungary Poland Luxembourg Greece Korea Slovak Iceland Finland Mass Czech Sweden Spain Canada UK Australia 6 5 4 3 2 1 0 New Scotland US Mexico Austria Norway Netherlands Turkey France Belgium Denmark Portugal Germany Switzerland Italy Japan Annual average growth in GDP per head in OECD Countries, 1997-2005 (%) % GDP growth in Massachusetts is average by OECD and US standards. GDP per head, however, is high by both US and OECD standards. 3. DRIVERS OF ECONOMIC GROWTH Productivity Productivity is a key determinant of long term, sustainable economic growth and measures the output that can be produced with a given set of inputs. Labour productivity is a common indicator with GDP per hour the preferred measure (as it takes into account differences in average working hours across economies). However, GDP per hour data is not available for Massachusetts so GDP per worker data has been used. GDP per worker in Massachusetts in 2005 was 11% higher than the US average, and 43% above the Scottish level. Massachusetts has the second highest productivity levels when compared to OECD countries (figure 9). Figure 9 Productivity - output per worker in OECD countries, 2005 (US$, current prices and PPPs) $ 120,000 100,000 80,000 60,000 40,000 0 Lux Massachus Norway US Ireland Belgium France Australia Finland Italy Netherlands Sweden Denmark UK Canada Austria Iceland Switzerland Scotland Greece Germany Spain Japan New Korea Hungary Czech Portugal Slovak Poland Mexico Turkey 20,000 7 Between 1997 and 2005, annual average productivity growth was 3.4% in Massachusetts, higher than the US (+2.4%) and Scotland (+1.3%). Compared to other OECD countries, Massachusetts had one of the best productivity performances, ahead of all other advanced economies (figure 10). Figure 10 % Annual average growth in productivity (GDP per worker), 1997-2005 (%) 6 5 4 3 2 Poland Slovak Czech Hungary Greece Korea Massachusetts Turkey Ireland Iceland United States Sweden Finland UK Norway Japan 0 Austria Mexico Denmark Canada Australia Netherlands Scotland France New Zealand Luxembourg Belgium Switzerland Germany Portugal Italy Spain 1 Employment Boosting the proportion of the working age population with a job (the employment rate) is the other key determinant of GDP per head growth. Massachusetts’ employment rate in 2005 was 73%, marginally below Scotland’s (73.3%) but above the US average (71.5%). Massachusetts is ranked 17th out of the 50 US states for employment rates and would just be in the top quartile of OECD countries (figure 11). Figure 11 90 80 70 60 50 40 30 20 10 0 Employment rates in OECD countries, 2005 (of working age, %) Iceland Switzerland Denmark Norway New Zealand Sweden Scotland Massachuse UK Canada Australia United State Netherlands Japan Austria Finland Portugal Ireland Germany Czech Spain Korea Luxembourg France Belgium Greece Mexico Slovak Italy Hungary Poland Turkey % 8 Employment in Massachusetts declined in the early 1990s before showing consistent growth up to 2000, when the dot-com bust and resulting downturn in the US economy (and globally) hit Massachusetts harder than average due to the relatively high proportion of IT related jobs. Since 2003, employment has started to rise again. Overall, between 1992 and 2006 job growth in Massachusetts (+16%) has been below in the US average (+25%) but above Scotland’s (+11%) (figure 12). Figure 12 Index of employment growth, 1992-2006 (1992=100) 130 120 110 100 90 USA Massachusetts 06 20 05 20 04 03 20 02 20 20 01 20 00 20 99 98 19 97 19 19 96 19 95 19 94 93 19 19 19 92 80 Scotland Population The population of Massachusetts has grown by 12% over the last 25 years, lower than the rate for US as a whole (+30). Scotland’s population declined slightly (-1.6%) over the same period (figure 13). Since 2000, population growth in Massachusetts has slowed, rising by just 0.5% compared to a 1% rise in Scotland and a 6% rise for the US. Figure 13 Long term population growth, 1981 to 2006 (index, 1981=100) 140 130 120 110 100 90 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 80 Massachusetts USA Scotland 9 There has been recent evidence of a decline in younger age groups in Massachusetts with graduates leaving the State for better job opportunities and a lower cost of living elsewhere. Since 2001 Massachusetts has experienced net out-migration (-84,000 between 2001-05) and the number of 22-34 year olds declined by 2% between 2003 and 2005. Over the same period Scotland has started to experience net in-migration. Overall GDP growth in Massachusetts has been driven by increases in employment and population accompanied by high (and increasing) productivity. High GDP per head in Massachusetts is driven by high levels of productivity and a high employment rate. Scotland’s performance lags Massachusetts due to weaker productivity, employment and population growth. 4. THE STRUCTURE OF THE MASSACHUSETTS ECONOMY TODAY The Massachusetts economy has transformed itself over the last 25 years from one based on textiles, metalworking and other heavy manufacturing to one based on higher value activities. Today the economy is dominated by the service sector which accounts for 84% of the State’s GDP, higher than the US average (79%) and Scotland’s (74%). Looking at industrial structure in more detail, main points to note (figure 14): Manufacturing is more important in Scotland than Massachusetts and the US Real estate and business/professional services are particularly important Massachusetts Financial services are also more important than in the US/Scotland for MassBenchmarks5 has identified a number of important clusters for the Massachusetts economy: Information Technology - computer and communications equipment Health Care/lifesciences - health services, medical equipment and devices, biotechnology and pharmaceuticals Financial Services – including banking and insurance Knowledge Creation - a broad cluster that supports the creation of knowledge based assets and includes higher education, printing and publishing, legal/accounting activities, engineering, management, R&D services and software Traditional Manufacturing - paper, rubber and plastics, fabricated metals, apparel and textiles, industrial machinery, instruments and all other manufacturing industries Arts, tourism and leisure 5 MassBenchmarks is an organisation run by the University of Massachusetts Donahue Institute and the Federal Reserve Bank of Boston that monitors the performance of the Massachusetts economy. 10 Figure 14 GDP by sector, Massachusetts, US (2005) and Scotland (2003) (% of total GDP) Government/health/education Real estate, renting, leasing Professional services Wholesale/retail Other services Financial services Manufacturing Information (software, comms, etc) Construction Transport & storage Agriculture, mining, utils 0 5 Scotland 10 US 15 20 25 Massachusetts Knowledge creation accounts for almost a quarter of Massachusetts jobs, with a further 14% in healthcare/lifesciences (figure 15). Overall, what can be termed as ‘knowledge economy sectors’ account for 46% of all Massachusetts’ jobs. Figure 15 Massachusetts employment by cluster, 2004 (% of total employment) Knowledge creation, 23% All other s ectors , 37% Healthcare, 14% High tech m anu, 3% Financial s ervices , 6% Traditional m anufacturing, 7% Arts , touris m , recreation, 10% 11 The importance of knowledge based, high value businesses to Massachusetts is highlighted by the large number of education, healthcare and financial services businesses among the largest 25 private sector employers in the State (figure 16). Figure 16: Twenty-five Largest Private Sector Employers in Massachusetts in June, 2006 (listed alphabetically) Bank of America Baystate Medical Centre Beth Israel Deaconess Medical Centre Big Y Foods Boston Medical Centre Corporation Boston University Brigham & Women’s Hospital Demoulas Super Markets E.M.C. Corporation Federated Retail Holdings Friendly Ice Cream Corporation General Hospital Corporation Harvard University Home Depot USA Massachusetts Institute of Technology Raytheon Company S & S Credit Company Shaw’s Supermarkets Southcoast Hospitals Group State Street Bank & Trust Company The Children’s Hospital Corporation UMass Memorial Medical Centre United Parcel Service Verizon New England Wal-Mart Associates Massachusetts also scores highest in the 2007 State New Economy Index for its ‘knowledge employment index’, defined as a combination of: the share of the workforce employed in managerial, professional, and technical occupations (ranked 1st out of 50 states) the education level of the workforce (ranked 1st) employment in high value-added manufacturing sectors (ranked 2nd) employment in IT occupations in non-IT sectors (ranked 4th) employment in high-wage traded services (ranked 7th) the average educational attainment of recent immigrants (ranked 15th) The Massachusetts economy is strongly dependent on knowledge intensive, high value sectors and businesses such as education, IT, professional and financial services. This helps explain why Massachusetts has higher productivity levels compared to the US and Scotland. 5. WHAT HAS BEEN DRIVING PRODUCTIVITY AND EMPLOYMENT GROWTH? Four main factors lie behind the strong performance of the Massachusetts economy over recent years: growth of high value, knowledge intensive sectors (as highlighted above) strong R&D and innovation performance its ability to draw on a skilled workforce world-class universities and research institutes that support the skilled workforce base and R&D performance. 6. INNOVATION, RESEARCH AND DEVELOPMENT Innovation, which can be defined as the successful exploitation of new ideas, is one of the main engines of long-term economic growth and structural change. Innovation can occur through investment in R&D, through adopting new technologies from other firms or countries, or through trying different ways of working. Investments in innovation can result in new technologies, products and processes, as well as novel services and means of delivery. One measure of innovation that is readily available and broadly comparable across economies is research and development expenditure. 12 Massachusetts’ R&D performance has been identified by a number of commentators as one of the main factors behind its recent strong economic performance and its position as one of the world’s leading knowledge economies. In 2003 gross expenditure on R&D (GERD)6 in Massachusetts was $15.6 billion, the equivalent to 5.3% of state GDP, the second highest of all US states and double the US figure (2.5%). Scotland’s figure was 1.5%. Massachusetts had a higher level of GERD as a % of GDP than any other OECD country in 2003 (figure 17). Figure 17 % Gross expenditure on R&D expressed as % GDP, OECD countries 2003 6 5 4 0 Massachussets Sweden Finland Japan Iceland US Korea Denmark Germany Austria France Canada Belgium UK Luxembourg Netherlands Norway Scotland Czech Ireland New Zealand Italy Spain Hungary Portugal Greece Slovak Poland Mexico 3 2 1 R&D performers Business enterprise R&D (BERD) in Massachusetts in 2003 was the equivalent to 3.7% of GDP, higher than the US average (1.9%) and any other OECD country. Scotland’s figure was 0.6% (figure 18). Figure 18 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 6 Business enterprise R&D expressed as % GDP, OECD countries 2003 Mass Sweden Finland Japan Korea US Denmark Germany Luxembourg Iceland France Belgium UK Canada Netherlands Norway Australia Ireland Czech Scotland Spain Italy New Hungary Slovak Portugal Greece Poland Mexico % A combination of business, higher education, government and no-profit organisation expenditure 13 Higher education R&D (HERD) expressed as a % GDP was 0.61% in 2003, above the US rate (0.37%). This though was slightly below Scotland’s level (0.64%) (figure 19). Figure 19 Higher education R&D expressed as a % of GDP, OECD countries 2003 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Sweden Canada Finland Scotland Iceland Mass Denmark Netherlands Norway Japan Germany France Belgium UK Italy US New Zealand Spain Portugal Greece Ireland Korea Hungary Czech Poland Mexico Slovak Luxembourg % Government R&D (GOVERD) was the equivalent of 0.48% of GDP in 2003, one of the highest among OECD countries and ahead of the US average (0.33%) and Scotland’s figure (0.3%) (figure 20). Figure 20 % Government R&D expressed as a % of GDP, OECD countries 2003 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.0 Iceland Mass France Germany Finland US Korea New Scotland Hungary Czech Japan Norway Netherla Poland Canada Italy Luxembo Slovak UK Denmark Spain Sweden Portugal Belgium Greece Mexico Ireland 0.1 R&D funders Nearly 40% of all Massachusetts R&D expenditure was government funded (some of which was carried out by the business and HE sector) and the state receives more federal R&D funding per capita than any other leading technology state. In the US as a whole, 30% of R&D expenditure was government funded (Scottish figures were not available, but the figure for the UK was 31%). 14 Government funded R&D in Massachusetts was the equivalent to 2.1% of GDP, the highest of all OECD countries and significantly above the US level (0.8%) (figure 21). This highlights the importance of federal funds to R&D activity in Massachusetts. The number of research institutes and research universities in Massachusetts is a factor here. Defence related R&D accounts for about a third of federal spending, with healthcare (life sciences) accounting for a further quarter. Figure 21 Government funded R&D as % GDP, 2003 % 2.5 2.0 1.5 1.0 Mexico Luxembourg Slovak Greece Spain Poland Ireland Portugal Belgium Czech New Zealand Hungary UK Japan Canada Netherlands Korea Australia Denmark Austria Norway Germany France United States Iceland Sweden Finland 0.0 Massachusetts 0.5 Massachusetts’ R&D performance is impressive, although a number of threats to future R&D activity have been identified7: cost pressures pushing US businesses to locate R&D functions in cheaper locations. federal R&D budgets (outside of life sciences) are tightening and competition from other states is increasing slowing growth in Massachusetts in the number students with science and engineering degrees weakening national incentives for innovation e.g. tax treatment of business R&D. Commercialising R&D In terms of converting R&D into potentially marketable products and services, Massachusetts performs well. Compared to other US states, Massachusetts is ranked 5th out of 50 for patents granted by the US Patent Office per head (7 patents per 10,000 population), with a rate twice the US average (3.5 patents). In 2006, this was equivalent to 4369 patents originating from Massachusetts (although not directly comparable, in 2004 182 patents were granted by the UK patent office to Scottish originators). Massachusetts’ R&D performance is impressive and it outperforms the US and most other OECD countries across a range of measures. Government R&D funding is an important driver here, in large part due to the number of world class research institutes and research universities. These also attract businesses R&D functions to the area so they can locate close to university R&D expertise. The availability of a skilled workforce is also a factor. The ‘Route 128 area’ around Boston is now considered by to be second only to California’s Silicon Valley in reputation for R&D excellence and technology development. 7 New Economy Index 15 7. EDUCATION AND SKILLS A second key driver of economic growth is the skills levels of the Massachusetts workforce. The quantity and quality of skilled labour available in an economy is an important determinant of economic performance and productivity growth. In 2005, Massachusetts had the second highest rate among US states of people aged 25+ who had a bachelor’s degree or higher (37%), considerably above the US average (27%) and Scotland’s level (22%). Massachusetts also outperforms all other OECD countries (figure 22). Figure 22 % Percentage of graduates in the opulation aged 25-64, OECD countries 2004 40 35 30 25 20 15 10 0 Mass US Norway Netherlands Denmark Iceland Canada Korea Australia Japan UK Scotland Sweden Spain Switzerland New Ireland Finland Hungary Poland Germany Mexico France Greece Luxembourg Belgium Portugal Czech Slovak Italy Austria Turkey 5 2005 data for massachusetts Massachusetts ranks 1st in the 2007 State New Economy index for workforce education and 8th for investment in primary and secondary education in the 2005 World Competitive Index. The State also has the second highest rate in the US of annual graduate school enrolments per head and an above average rate of undergraduate enrolments. Massachusetts’ college and university infrastructure contributes to this strong educational performance. Massachusetts has a number of world class universities (e.g. Harvard and MIT) which allows the State to attract high calibre graduate and post-graduate students. Also, evidence suggests graduates often settle down where they attend university. As well as a generally highly educated labour force, the strong focus on engineering at Massachusetts universities has also helped the growth of high tech industries. In 2005, Massachusetts’ HE institutions awarded more engineering degrees per head than any of the other US leading technology states (figure 23). 16 Figure 23 Minnasota Conneticuit North Carolina New Jersey New York Penn Virginia Massachusetts 80 70 60 50 40 30 20 10 0 Illinois Engineering degrees awarded per 100,000 residents, 2005 California % The importance of a high skills base is highlighted by US research that suggests that there is a link between the skills levels of the workforce in metropolitan areas and population/ economic growth. In metropolitan areas where less than 10 percent of adults had at least a bachelor’s degrees in 1980, population grew on average by 13 percent between 1980 and 2000. However, in metropolitan areas where more than 25 percent of adults had at least a bachelor’s degree, the average population growth rate was 45 percent. This raises the question of whether highly skilled workers generate economic growth, or whether highly skilled workers choose to live in high growth areas. The US research suggests that it is the skill levels in metropolitan areas that is the catalyst for high growth, not vice versa 8. Massachusetts has a highly skilled workforce by both US and OECD standards. This has been driven by the output of its HE sector and the availability of high value (and high paid) jobs in knowledge intensive industries that help the State retain and attract skilled workers. In turn, it is the availability of a skilled workforce that has helped these knowledge intensive sectors to grow. The research excellence and R&D outputs of the state’s university sector has also been important here. The interaction between university research and development activities, university contribution to the development of the skills base and the growth in high value, knowledge intensive sectors (which in turn demand R&D outputs and skilled workers) are main factors behind Massachusetts strong economic performance. Other ‘cold state’ cities, such as Detroit, do not tend to have a similar university infrastructure and base of skilled workers so have not been able to build knowledge intensive industries to the same extent as Massachusetts/Boston. 8 Smart Growth: Education, Skilled Workers, & the Future of Cold-Weather Cities http://www.ksg.harvard.edu/taubmancenter/pdfs/skilledcities.pdf 17 8. ENTERPRISE AND ENTREPRENEURIAL ACTIVITY Data suggests that Massachusetts is not an overly entrepreneurial economy. The 2005 Kauffman Index of Entrepreneurial Activity ranks the state 39th out of 50 for entrepreneurial activity (defined as the proportion of adult non-business owners who create a new business each month) – in 2005 there were on average 230 entrepreneurs per 100,000 people starting a new business each month in Massachusetts compared to 290 for the US as a whole. However, Massachusetts does do better in terms of high growth enterprises. The state is ranked 2nd (behind California) in terms of the proportion of businesses that are fast growing (0.075%), defined as those which appear in either the Deloitte Technology Fast 500 Index or the Inc. 500 index9 (figure 24). Figure 24 Fast growing businesses - number of Inc 500 and Tech Fast 500 buisinesses, 2005 120 100 80 60 Inc 500 40 Tech fast 500 20 C ar is N or th Ill in o ol in a a ot in na s M ne tic ui t n C on Pe n k y Yo r N ew Je rs e in ia N ew Vi rg M C al ifo rn ia as sa ch us et ts 0 Firms in the Deloitte Tech Fast 500 list spend a large proportion of their revenue on R&D and experience revenue grow th of at least 200% over a four year period. Those on the Inc. 500 experience revenue grow th of 300% over a three year period. The number of fast growth businesses may be due to the State’s high venture capital activity. Massachusetts’ share of total US venture capital investments was 11% in 2005 10 (against a population share of 2%), second only to California (47%). The New Economy Index ranks Massachusetts first of all US states in terms of venture capital as a percentage of worker earnings. 9. BOSTON’S UNIVERSITIES AND ECONOMIC DEVELOPMENT There are eight research universities (seven of which are private) within a nine mile radius of the centre of Boston. A recent report jointly released by these, Engines of Economic Growth, highlights their contribution to the Greater Boston area (which accounts for about 70% of the Massachusetts population). In 2000 the eight universities had: 118,000 degree students 25,000 non degree students 70,000 continuing professional educational students 51,000 employees. 9 Firms in the Deloitte Tech Fast 500 list spend a large proportion of their revenue on R&D and experience revenue growth of at least 200% over a four year period. Those on the Inc. 500 experience revenue growth of 300% over a three year period. 10 http://web3.streamhoster.com/mtc/index2006.pdf 18 Research & Development Engines of Economic Growth highlights the role of the universities in boosting Greater Boston’s R&D performance. The universities have a number of centres of research excellence and this has helped them attract large amounts of federal R&D funding (as noted above R&D undertaken by higher education in Massachusetts is high compared to other states), providing employment and commercialisation opportunities. As well as being able to attract Federal research grants, Boston’s university R&D strengths have also been important in attracting R&D related FDI (both from within the US and from overseas) to locate close to university/research centres to tap into R&D and intellectual strength. Examples include Cisco, Sun Microsystems, Merck, Pfizer, and AstraZenica. Interestingly, in most cases government funding and incentives were not required to attract these activities. The Engines of Economic Growth report also notes that ‘academic research is especially effective as an engine of economic growth in the Boston area precisely because it takes place not in an ivory tower, but in a complex network of relationships among universities, hospitals, other affiliated institutions, corporations and entrepreneurs’. Commercialisation The report highlighted the commercialisation activity among the eight Greater Boston Universities in 2000 that included: licensing activities - generating $44.5 million income, with 280 licenses granted (as a rough comparison, approximately $15 million in licensing income was generated by Scottish universities in 2001/02, although these figures may not be directly comparable) patents filed - 620 patents were filed with the US Patent Office (104 patent applications were filed by Scottish universities to the UK Patent Office) patents awarded - 264 US patents were awarded by the US Patent Office to the eight universities (the UK Patent Office granted 30 patents to Scottish universities) spin-outs - 41 new businesses were generated (in Scotland, 31 spin-outs with HEI ownership were recorded). Looking at later data, in 2004 the Massachusetts Institute of Technology had the highest number of spin-outs than any other US university (with 20). Business Development The link between the eight universities and wider business growth is also highlighted by the Engines of Economic Growth report. Of the fifty early-stage, Boston-area start-ups that attracted the most outside investment between October 2001 and September 2002, half (including seven of the top ten) had some connection to one or more of the universities. That is, they were engaged in the commercialisation of technologies first developed at one of the universities; were founded by a faculty member or graduate; were started in a university incubator, or had a CEO who had graduated from one of the universities. Together, these 25 companies attracted more than $225 million in early-stage investment in 2001-02. The eight universities also offer business development, support and incubation services (one also provides venture capital) and projects to encourage entrepreneurialism among students e.g. MIT’s “$100K competition” (by 2001 this programme had given birth to sixty companies, attracting more than $175 million in venture capital and employing 1,800 people). University-business links The Engines of Economic Growth report notes that collaboration within universities, between universities, between universities and research centres and between universities and industry has been important in boosting the level and output R&D. The OECD also highlights what it describes as one of the best known models of linkages between universities and companies in the United States – the Massachusetts Institute of Technology (MIT) Industrial Liaison Program. In this model, after paying a membership fee that varies according to business size, companies have unlimited access to specialised information services and seminars, a monthly newsletter that includes details of ongoing research/new inventions, the directory of MIT research activity, faculty visits and expert meetings with businesses that often result in consultancy or research sponsorship. The 19 programme is managed by a panel of Industrial Liaison Officers, each one being responsible for a focused portfolio of businesses. 10. CONCLUSIONS The Massachusetts economy performs better than all other OECD economies on the benchmark GDP per head measure, a common indicator of wealth and prosperity. This is driven by a high level of productivity and a high employment rate. Massachusetts’ R&D and innovation performance has been an important driver of productivity growth. The number of world class research universities and research centres has attracted large sums of government R&D funding, and attracted a number of businesses to locate R&D functions in the State to tap into academic R&D talent. This in turn has helped grow employment in knowledge intensive industries. The State’s skills base has been a further important driver of productivity growth. The university infrastructure has attracted graduate and post graduate students, and the growth of knowledge intensive sectors has provided the job opportunities to attract and retain skilled workers. This skills base has in turn allowed these knowledge intensive industries to grow. The role of Massachusetts’ higher education sector comes through as a recurring theme. As noted its research excellence has attracted government and business R&D activity and it plays a role in skilling the workforce, both of which contribute towards the growth of knowledge intensive industries. It is interesting to compare the performance of Massachusetts with that of Finland. Both score highly on various technology and economic performance indices, with R&D/innovation and skills of the workforce the main drivers. However, each has followed a different model. In Finland, there has been a strong government policy focus on innovation and this drives strong links between business and universities. Government policy has also influenced education and the development of the skills base. Finland’s performance is also heavily influenced by one private sector business (Nokia). In Massachusetts, there has been less direct government influence. The interaction between the skills base (in part a product of universities, which are mostly private sector), research and development excellence (again heavily influenced by universities) and the growth of knowledge intensive sectors has driven economic performance. The government’s indirect role has particularly been around high levels of federal funding of R&D. 20