Creative Class

Traditionally, the United States has worried about the offshoring of manufacturing jobs. But concern is mounting that as the rest of the world becomes increasingly well-educated and competitive, the desirable and high-paying service jobs previously considered immune to moving overseas are becoming increasingly vulnerable.

In a widely cited 2007 study, economist Alan Blinder estimated that between 22 and 29 percent of U.S. jobs were vulnerable to offshoring as of 2004. In a sobering Wall Street Journal op-ed published earlier this month (via Economist’s View), economists Martin Neal Bailey, Matthew Slaughter, and Laura Tyson provide evidence that the global competition for jobs is heating up considerably. They note that multinationals have long been among the most important economic drivers of the U.S. economy, accounting for an estimated 19 percent of all private jobs, 25 percent of all private wages, and 41 percent of the increase in private labor productivity since 1990. Then they cite a McKinsey study based on personal interviews with senior executives from 26 of America’s largest companies that finds the U.S. faces an unprecedented level of competition to “attract, retain and grow the operations of multinational companies that it’s never faced before.”

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At the heart of effective economic development is regional cooperation. In 2004, the Department of Labor launched WIRED Initiatives across the U.S. to improve regional efforts for talent development and effective economic development strategies. For over a year, leaders from the Wired65 region, an area spanning 26 counties and two states, have been been working to improve the area’s economic competitiveness and quality of life.

For this feature in our Creative Capstones series, we interviewed Debbie Wesslund, program manager for the Wired65 region, about the area’s efforts to launch Kix.com – The Kentucky Indiana Exchange, an interactive community platform to facilitate networks for employment opportunities and discussions about regional challenges.

Creative Class Group (CCG): Tell us about Wired65. What communities make up the region?

Debbie Wesslund: Wired65 is an initiative that brings together civic leaders in a 26-county, bi-state area around the need to support its human capital – or “talent.” This region is anchored by the Louisville, KY MSA and the Elizabethtown, KY MSA. The Ohio River divides the states of Indiana and Kentucky, but the economy reaches across county and state lines, forming a region with a strong sense of place and sharing talent. (more…)

Silicon Valley has always been a safe haven for risk-takers, entrepreneurs, and big thinkers. But, it is also home to one of the most innovative public-private partnerships in the country: Joint Venture Silicon Valley.

As the fourth feature in our series, Creative Capstones, we interviewed Russell Hancock, president of Joint Venture Silicon Valley, to learn more about Silicon Valley, Joint Venture, and the organization’s current initiatives to “build the next (and greener) Silicon Valley.”

Creative Class Group (CCG): Tell us about Silicon Valley. What makes it a special place to live?

Russell Hancock: We’re  a sun-kissed land with countless amenities, but I love Silicon Valley because it is an amazing collection of people. They’re talented, they’re creative, they’re from all over the world, and they are doing innovative things. The culture here is all about risk-taking and there’s a high tolerance for failure, and this has made it possible for innovation to blossom here more than most any other place you might name. You can feel it when you’re here – the buzz and the energy – and it brings out the best in people. In Silicon Valley everything seems possible – inventing a better mousetrap, inventing a new energy future, making a niftier gadget, planning communities that have fabulous urban designs… there’s a sense that if you can’t do it here, you can’t do it anywhere. (more…)

Want an example of how to shift from ownership to rental? Here it is via the Wall Street Journal. It’s a doozie. And it’s a model of what the federal government – instead of propping up the mortgage and home-ownership markets – can and should do more of. The Miami Development Community Corp. is buying up “busted” condo developments and turning them into affordable rentals.

The public-housing agency recently paid $5.7 million for the 35-unit Neptune Beach, one of the many failed condo conversions remaining from the housing boom, in prime South Beach … The Mediterranean-style building, which boasts high-end porcelain floor tiles and Italian kitchen cabinets, will be used as affordable rental housing for employees of nearby stores and restaurants, says Roberto Datorre, the development agency’s president. Renters will pay from $550 to $650 a month. The agency already has snapped up a 16-unit failed condo conversion in North Beach for a little more than $1 million out of foreclosure. Another purchase is in the works. The city of Miami Beach and the state of Florida helped make the deals possible.

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Tyler Cowen asks: “Which are the least bohemian cities?”

“In the United States, I would name San Antonio as the most non-bohemian major city, or maybe El Paso, with Atlanta as a runner-up. Might there be somewhere very non-Bohemian in northern Florida? Does Richard Florida have an index for this somewhere?”

As luck would have it, I do – at least for the United States and Canada that is.

We keep an updated Bohemian Index handy here at the Martin Prosperity Institute. The index charts the concentration of working artists, musicians, writers, designers, and entertainers across metropolitan areas. We measure it as a location quotient, which basically compares regional employment to the national norm, based on data from the U.S. Census Bureau and StatsCan. The table below shows the 10 most and 10 least bohemian large metros – those with more than one million people – in the U.S and Canada.

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It’s commonly thought that even though globalization was shifting manufacturing jobs from America to lower-cost, more efficient, off-shore competitors, the U.S. retained a vast lead in high-end innovation. But are the powerful forces of globalization now leading to the off-shoring of America’s innovation and R&D? New statistics from the National Science Foundation (via Mike Mandel) certainly point in that direction.

Way back in 1990, I wrote a book titled The Breakthrough Illusion with Martin Kenney that argued that the U.S. had developed a powerful capacity for venture capital-backed innovation, but that the actual manufacturing  and production of those innovative new products – and the jobs that flow from that – was increasingly being shifted off-shore.

A couple of years later, I was invited to be part of a Council of Competitiveness group that was looking into the future of American research and innovation. After completing a round of interviews with the R&D directors of leading U.S. and foreign companies and looking into the data, I reported my provisional conclusions saying I was convinced that R&D was becoming much more globalized and that U.S. R&D in particular was being “externalized”  – more and more of it taking place outside the wall of big companies with their own R&D labs. My results were met with stunned silence and disbelief. “The U.S. was still the unquestioned leader in R&D, and had little to fear” was the prevailing attitude.

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We are seeing a strong emphasis, greater than ever before, on the importance of quality of place. A community’s arts and culture offerings are a critical part of its identity and authenticity. For many communities, their local college or university serves as a central hub for cultural creativity.

As the third feature in our series, Creative Capstones, we interviewed Jo Moore, administrator of Presidential Lecture & Performance Series at Texas Tech University, to discuss Lubbock, Texas, and how the university is helping to grow and develop an authentic, unique arts scene on the Western Texas Plains.

Creative Class Group (CCG): Tell us about Lubbock. What makes it a special community?

Jo Moore: In a word, the people are what make Lubbock, Texas, a special place in which to live. I moved to the Lubbock area from Dallas, Texas, 17 years ago. From the reactions of my friends and colleagues, one would have thought I was moving to the desolate, uncultured, wild West. While the glitz of the Dallas cityscape, landscaped beauty of its manicured parks, and culinary significance is not as apparent in Lubbock, a natural raw beauty borne in the energy of the wind and splendor of the sunsets eclipse the manufactured glamour of the metroplex. There is an energy, an elemental quality to this region with its wide open spaces and endless blue sky that is unspoiled by high density living. The beauty of West Texas has to be seen to be believed.

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Where will the next wave of interesting start-ups come from? For the past four decades, that answer has been a no-brainer. Past performance, however, is no guarantee of future results. Based on the competitiveness of companies playing the technology-driven innovation game, one could imagine an entirely different answer to the “next wave” question over the next half-century.

The Information Technology and Innovation Foundation has released a report benchmarking innovation and competitiveness for 36 counties (pdf). While the focus of the report is EU/U.S. differences, I found two items of particular interest: first, while the United States leads the European Union in innovation-based competitiveness, it ranks sixth overall; and the U.S. ranks last in terms of its preparation to capitalize on the next wave.

This past week, I’ve look at the trends in U.S. innovation, commenting on Michael Mandel’s powerful and compelling thesis about the deceleration and interruption of American innovation. With the help of my MPI team, I’ve tracked patent data since 1980, examined patent trends for U.S. resident and foreign, non-resident inventors, and looked at the geographic distribution of patenting.

Overall, the trend in patenting is up – both in absolute numbers and controlling for population. Innovation has increased over the past decade, but not at the breakneck pace of the 1980s and 1990s. There have been two dips in patenting over the past decade – the first in the wake of the tech crisis of 2001 and the second, more recently, concurrent with the onset of the housing and financial bubbles and the subsequent economic crisis.

American innovation has shifted and become more geographically concentrated. Places like Silicon Valley and Seattle have seen a steady increase in innovation while older, industrial centers like Pittsburgh and Detroit have declined significantly. Innovation in large cities like New York and Chicago has stagnated. And American innovation has grown increasingly dependent on non-resident, foreign inventors.

Today, I focus on a broader historical question: How do economic crises affect American innovation? Does innovation slow down or speed up during periods of crisis?

Joseph Schumpeter long ago argued that crises were seedbeds of innovation and entrepreneurship. Innovations developed during crises generate the gales of creative destruction that launch new technologies, remake existing industries, and give birth to entirely new ones – setting in motion new rounds of economic growth. Economists Gerhard Mensch and Christopher Freeman have examined the historical timing of innovations, with Freeman famously arguing that the pace of innovation is actually relatively constant: Innovations bunch up during crises, only to be unleashed as economic conditions are restored.

The graph above is reproduced by economist Alfred Kleinknecht. It shows patent activity from 1750 to 1970. It tracks actual patents granted from 1901 to 2005. There are clear spikes in innovative activity during the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s.

The historical literature also suggests that crises are periods of significant innovation. Joel Mokyr and Naomi Lamoreaux have documented the rise of important innovations like the incandescent light, the steam turbine, and the transformer during the Long Depression. Economic historian Alexander Field finds the 1930s to be the “most technologically progressive” decade of the 20th century.

The chart below, compiled by the MPI’s Patrick Adler based upon a reading of the historical literature, identifies some of the major innovations of the Long Depression and the Great Depression. If the past is any guide, we should expect some acceleration of innovation – and particularly of the dramatic innovation Mandel wants to see – in the coming decade.

The graph below, compiled by my colleague Charlotta Mellander, updates the story, charting patents granted per 10,000 people from the 1890s to 2007. The rate of innovation rose significantly after the Long Depression. It then dipped during the Great Depression before trailing off considerably during the World War II period. American innovation rebounded remarkably in the post-war period before trailing off in the 1970s. Since the early 1980s, however, American innovation has surged to record highs. There have been two dips in innovation in the 2000s. But as of 2006 or 2007, innovation has fallen only slightly from its record pace.

So what’s happened to U.S. innovation? Like virtually every other facet of the economy, it has been – and continues to be – reshaped by globalization. As we saw on Thursday, foreign non-resident inventors have become a key element growing U.S. patenting and a big piece of the American innovation system. Beginning around 1980, non-resident inventors essentially closed the gap with U.S. inventors. By the late 1990s, they had pulled even and were at times outpacing U.S. inventors. This is part and parcel of the globalization of the economy and the fact that the U.S. is the biggest market and most innovative nation on the planet.

This has altered the American system of innovation in a deep and fundamental way – changing it from a system that for the better part of a century was based on producing and commercializing innovations to one that is more attuned to attracting inventors and innovation globally. This shift is also reflected in the changing geography and regional concentration of U.S. innovation – the decline of old, integrated, regional innovations systems in locations like Pittsburgh and Detroit and the rise of new, globally focused clusters like Silicon Valley.

Innovation is no longer an American game – or, for that matter, a game of any one nation. The countries of the world are now all part of a much more global innovation system. Strategically, this shift means from organizing to generate new breakthrough innovations to organizing to absorb innovations coming from many different sources worldwide.

The U.S. is uniquely positioned because of its size, scale, universities, and venture capital system; its sophisticated end-users and customers; and its ability to attract global talent – to harness and reap the benefits of this global system. Its major innovation clusters reinforce this advantage and they will be hard to displace. That said, for the first time, the overall rate of American innovation has come to depend on foreign inventors. Anything that might slow the immigration or inflow of foreign inventors – or redirect their inventions and patents – would undoubtedly damage the rate of American innovation.

The key question for the future is less about the slowdown in innovation and more about which people and places will prosper in this new age of accelerating global innovation.