Aligning Regional Economic Development Plans with Federal Priorities
Summary
Economic development planning shouldn’t be this hard. Our planning system in the United States is highly disjointed, both from the bottom up and from the top down, and this negatively impacts our ability to build functioning, aligned, and specialized innovation ecosystems. Today, there is no single document or directive that outlines America’s economic priorities from an R&D, commercial, or economic development perspective. In addition, the organizations that carry out our economic development planning rarely include deep analysis of innovation ecosystems and opportunities for cluster development in their plans.
The elements of a coherent innovation plan have started to appear in policy publications: for example, the 2022 National Security Strategy document outlines the need for a “modern industrial and innovation strategy,” and the biotechnology executive order, the CHIPS and Science Act, and the National Network for Critical Technology Assessment all send strong signals that a short list of industries, industrial capabilities, and strategic supply chains are critical to our country’s continued prosperity. However, while these signals might be strong, they are not yet clear and not yet strategically framed. The Office of Science and Technology Policy, in consultation with other federal agencies and non-governmental organizations, will bring together a national competitiveness plan from these disparate efforts in the coming months. Today, proponents of innovation would do well to think about the next step of this challenge: once a national competitiveness plan exists, how will it be implemented and who will lead the charge?
Across the country, a network of regional development organizations (RDOs) regularly create and maintain economic development plans (called comprehensive economic development strategies, or CEDS) on a regional basis. At the same time, the federal government’s emphasis on building innovation ecosystems and developing regional innovation clusters has unleashed billions of dollars in funding for cluster-aligned projects. One might assume that these efforts are highly aligned and that CEDS created and maintained by RDOs provide the analysis and foundation for cluster development efforts. In reality, cluster development efforts rarely begin with a CEDS for a few key reasons: (1) CEDS are not aligned with a clear national competitiveness strategy; (2) the RDOs that create CEDS often have limited capacity to assess innovation ecosystems and even more limited resources with which to improve their capacity or conduct their analysis; and (3) existing CEDS are often hard to find (even for community members in the RDO’s district).
Creating a better planning system will require clear, top-down guidance about competitiveness priorities, which is on its way. It will also require more sophisticated, focused, and better supported local economic planning. The U.S. Economic Development Administration (EDA) manages existing processes that allow for certification of RDOs and the regular production of CEDS. Additional guidelines and incentives should be structured into these programs in order to build our national capacity for strategic planning around shared competitiveness priorities and to ensure that regional planning processes incorporate a cohesive national framework. This will allow local cluster development efforts to best capitalize upon their respective comparative advantages, setting up communities for success as they develop plans to build stronger local economies, create better jobs, and promote sustainable growth.
Challenges
Challenge 1: Innovation ecosystem development is a form of economic development activity for which both funding and planning are highly fragmented.
Innovation is a key part of economic development and is driven by young, dynamic firms, leading to higher levels of job creation and productivity gains. As such, the federal government has consistently taken an active role in incentivizing startup creation and growth, especially in high-tech industries. Historically, public sector tools for supporting innovation ecosystem development and startup creation have included grants, grand challenges, prize competitions, tax incentives, and loan assistance, among other mechanisms. In recent years, investments have promoted the growth of high-tech and advanced industry clusters in geographic areas outside of traditional innovation hubs like Silicon Valley in California or Boston’s Route 128 in Massachusetts. For example:
- The EDA’s Build Back Better Regional Challenge (BBBRC) awarded $1 billion to encourage cities and regions to develop regional development plans centered around expansion of industry hubs. The 21 winners supported the development of several high-priority industries by strengthening their underlying production, talent, and capital access capabilities.
- The EDA also administers programs like the Good Jobs Challenge (GJC) and Build to Scale (B2S), which enhance innovation capacity by strengthening local workforces and providing access to catalytic capital. Recently, the GJC awarded $500 million to 32 cities, colleges, and workforce organizations to expand local industry talent hubs, and B2S provided $47 million across 51 grants to a range of universities and accelerators.
- The Department of Energy (DoE)’s Regional Clean Hydrogen Hubs will establish 6 to 10 hubs to produce, process, deliver, store, and use clean hydrogen across a range of industrial applications.
- The Department of Defense (DoD)’s Defense Manufacturing Community Support Program invests in workforce development, skills, R&D, and small business support to aid the defense innovation base in communities across the United States.
Many federal agencies provide funding for innovation ecosystem development activities. In 2018, the DoE spent $10 billion on R&D alone, and the passage of the Inflation Reduction Act (IRA) will add hundreds of billions of grant and loan support for commercialization of green technologies such as solar, wind, hydrogen, and carbon capture and storage. Beyond the DoE, the DoD’s DARPA, the Department of Homeland Security (DHS) Science & Technology Directorate, the National Science Foundation (NSF), and a host of other government agencies distribute billions in innovation funding, which has been recently buttressed by the American Rescue Plan, Inflation Reduction Act, CHIPS and Science Act, and the Infrastructure Investment and Jobs Act. These are all supported by smaller, but critically important, matching investments at the state level.
In short, innovation ecosystem development is economic development, and the federal government understands that. It has a clear national interest in prioritizing the development of certain industries in order to generate positive spillovers, correct market failures, and preserve national competitiveness. State governments and regional bodies have an interest in promoting the economic well-being of specific communities. So why is reconciling these interests across the country so difficult? The answer lies more in game theory than in politics.
Challenge 2: Communities focus their ideas for developing innovation clusters in just a few industries and fail to give enough thought and analysis to their comparative advantage and their role in national competitiveness as they make these choices.
When a region decides to assess its potential to develop an innovation cluster, its leaders must first decide which cluster to develop, turning to the information that is mostly easily accessible to them. This generally includes lagging metrics describing the region’s present-day economy (such as location quotient, industry-level employment, and skills concentration). In many regions of the country that do not already have a strong cluster, these metrics look very similar. It is also data that answers the wrong question. When seeking to build a cluster, regions should not just ask “What are our strengths today?” or “What industries have gotten the most press lately?” Instead, regions should ask “In which growing or emerging industries might our community have a comparative advantage?” Asking the wrong question also leads regions to end up proposing cluster efforts in a few industries (e.g., biotechnology, advanced manufacturing, and semiconductors), rather than picking a goal for cluster development in an industry that is comparatively underserved yet still vitally important (e.g., green tech, water tech, or aerospace). Even a modest concentration of assets in an underserved industry might position a region as a leading hub, and 40% of American regions cannot build identical hubs at the same time.
For example, too many National Science Foundation Engines proposals are centered around semiconductor and microelectronic clusters. Funding to create semiconductor hubs is limited to a small number of places: recently, Commerce Secretary Gina Raimondo announced that the Department of Commerce would spend the $50 billion of CHIPS Act funds to develop at least two semiconductor hubs. However, given the scale and cost of developing semiconductor manufacturing facilities, as well as the required workforce, infrastructure, and other public services investments, only two or three additional hubs will likely be developed. Consequently, the vast majority of the 23 regions and cities that have submitted Engines applications focused on semiconductors and microelectronics will waste time and money while incurring significant opportunity costs chasing clusters that they are ill-suited to build. More importantly, however, this distracts cities and regions from making longer-term plans that they can stick to, which is essential to the long-term investments in infrastructure, education and training, housing, and land permitting, among others, that are needed to promote innovation.
While we have the systems and processes to support a massive push to integrate competitiveness priorities into local development plans, both the system and the organizations it funds have limited bandwidth and even more limited resources. Policymakers must also balance the need for increased attention to national competitiveness with the tradition of local control that is core to the American way. There is no appetite for central planning in the United States, but there is a desperate need for clear, shared priorities that allow each region to determine how their community can best serve a higher, patriotic purpose.
Challenge 3: The organizations responsible for economic planning (RDOs) need to improve their internal capacity to plan for innovation ecosystem development, which will require additional resources.
It is easy to imagine a world in which RDOs take the lead on improving the quality of CEDS planning, and efforts led by the National Association for Development Organizations (NADO) Research Foundation are in place to do just that. In addition to managing an EDA-funded community of practice for RDOs, which includes maintaining resources and conducting webinar trainings, the NADO Research Foundation independently maintains CEDS Central, an excellent repository of best practices. While these resources and their consistent use demonstrate communities’ desires to plan well, they alone have not yet led to the widespread use of CEDS as a means of detailed cluster analysis and planning.
When looking at any one individual RDO, it is easy to see why. RDOs (also called Councils of Governments, Economic Development Districts, Regional Development Districts, or Regional Planning Organizations) have incredibly broad planning responsibilities and limited staffing and resources. The CEDS that they manage reflect these broad remits and often include elements related to broadband access, transportation, aging population services, housing, education, and employment and economic growth. As a result, there is very little capacity to create clear and detailed innovation plans. Of the organizations whose plans NADO listed as exemplary on their CEDS Central site, the average total staff size was 17 with an average of three employees dedicated to economic development. Moreover, no employees were dedicated to innovation ecosystems, entrepreneurship, or cluster development.
In order for RDOs to build their capacity for creating regional cluster development plans, they must train and hire staff with new capabilities. This is nearly impossible for these organizations to do on their own, given their current financial resources and the breadth of demands on their time. Changing that will require dedicated funding for new staff and training, as well as a clear directive to prioritize this work.
Challenge 4: Many regional, local, state, and nongovernmental stakeholders participate in de facto economic planning activities. However, these are not universally integrated with RDO efforts, and transparency is a key barrier.
The innovation funding picture is further complicated by a long tail of regional, local, and state players. There are over 520 RDOs in the United States. However, only 23 RDOs have published digital CEDS, indicating that these critical planning documents are not yet widely produced, or at least not widely shared, by local and regional stakeholders. In addition, there is no publicly accessible central repository of active CEDS. Providing such a resource could facilitate greater community alignment and better understanding of communities’ comparative advantage across the country.
In addition, a wide range of private and social sector bodies participate in innovation planning and regional development. Incubators such as the Boston-based MassVentures provide venture funding but also support technology transfer, mentorship, and small business innovation research (SBIR) support. Industry trade organizations, local chambers of commerce, and large nonprofits lobby for regulatory change, help their constituents navigate government resources, and encourage informal planning. Without meaningful transparency in the CEDS process, these groups will struggle to align their activities with regional plans.
Transparency alone will not fix a highly fragmented system, but it will give groups that are inclined to seek alignment the opportunity to do so. It also allows the opportunity for more federal programs (including EDA’s own innovation programs) to require that applicants speak to alignment with their regional CEDS in more detailed ways during the application process and include alignment with CEDS as an evaluation criterion when applications are reviewed.
Opportunity
R&D is at the core of innovation, and the United States has excelled compared to its peers and competitors. Both the European Union and China have struggled to reach the benchmark level of 2% of gross domestic product (GDP) invested in R&D, giving the United States a huge edge in cutting-edge technologies such as biotechnology, clean tech, and software. However, the decline in public R&D spending, which was over 1% of GDP in the 1970s but is now down to ~0.7%, has significant repercussions for competitiveness in emerging technologies that require significant public investment to overcome developmental hurdles. For example, China was first to launch a quantum encryption satellite, and by 2030 China is projected to have 25% of semiconductor manufacturing capacity, compared to just 10% in the United States.
US dollar (USD) billion in constant purchasing power parity (PPP) prices. Source: OECD R&D statistics, February 2023 (accessed on 21 March 2023).
To be clear, the United States retains a large quantitative and qualitative advantage in R&D and innovation, buttressed by a world-leading university system and large and growing private investments. Gross expenditures are increasing in the United States. However, private sector R&D is largely geared toward commercialization rather than developments in basic science given different incentives and time horizons. Economists have long recognized the market failures in early-stage R&D: private sector firms do not consider the positive social spillovers in investment, leading to suboptimal investment levels. The government is better able to justify the total social impact of investing in innovation.
Increasing the amount of public R&D and ecosystem spending, which includes workforce development and infrastructure, is crucial to accelerating American innovation. The $500 million appropriated in the FY23 omnibus spending bill for EDA’s Regional Technology and Innovation Hubs is a good start, but this is only a fraction of the amount proposed by the CHIPS Act. However, there is bipartisan agreement in favor of regional cluster building, most recently demonstrated by the December 2022 House Subcommittee on Research and Technology hearing on Building Regional Innovation Economies.
In addition to growing the cumulative effectiveness of national innovation spending, regionally based cluster development plans will distribute economic prosperity more equitably. In 2021, the United States invested nearly $350 billion in venture capital dollars. However, nearly $250 billion went to just three states: California, New York, and Massachusetts. While these three states are home to some of the nation’s largest, most productive, and best-educated cities, other regions also have budding clusters and compelling competitive advantages that deserve more financial and human capital. A well-structured innovation roadmap that starts with national priorities, incorporates local advantages, and encourages transparency will help public, private, and nonprofit stakeholders at the regional level develop long-term investment plans. In turn, this will enable a greater number of regions and individuals to reap the economic benefits of innovation, create good jobs, and increase standards of living.
Plan of Action
Recommendation 1: Direct, align, and coordinate innovation ecosystem development activities more clearly at the federal level.
Better coordination of innovation spending starts at the top. Regions, states, and cities would benefit from greater clarity in the direction of U.S. priorities regarding innovation. This is especially true for technologies and sectors that are critical to national competitiveness, require significant upfront R&D, and have large spillover benefits.
- Publish an innovation roadmap every four years at the national level. The White House and key federal departments should work together to publish a comprehensive innovation roadmap every four years, shortly after the beginning of a President’s term. To enable the rapid development of the national roadmap, presidential campaigns should make place-based innovation policy a core part of their campaign and transition team structures. This document should be refreshed every year in conjunction with major events, such as the State of the Union and the publication of the National Security Strategy. At a minimum, the OSTP should include such a roadmap within their Quadrennial Science and Technology Review (Sec. 10613).
- Fund continuous assessment of critical technology areas and their needs. The NSF should continue its funding for efforts like the National Network for Critical Technology Assessment to ensure that our understanding of the specific needs within these industries remains current and technically relevant.
- The White House or Office of Management and Budget should regularly convene innovation ecosystems and cluster development program managers across the federal government. Ensuring that federal programs work together to facilitate local alignment and engagement with CEDS can help serve an ongoing alignment function. It can also prevent local fragmentation caused by funding of competing or misaligned efforts across agencies.
- Key stakeholders should include the National Economic Council, Domestic Policy Council, and the National Security Council. The Departments of Commerce and Treasury and the Small Business Administration should also have major roles. In addition, other agencies should be involved in specific components of the innovation plan (such as the Departments of Labor and Education for workforce development).
Recommendation 2: Direct RDOs to include detailed innovation and cluster planning in the CEDS process. The EDA should update CEDS Content Guidelines to require that plans address opportunities to build innovation ecosystems and develop local clusters, as they have to require that plans include resilience measures. These plans should include:
- A clear description of a selected area of cluster emphasis and a data-informed rationale for making that choice.
- An overall strategic direction.
- An asset capacity assessment relative to the selected cluster.
- A high-level operational plan that outlines major initiatives.
- A description of active coalition members and their roles.
- A framework for evaluating progress, including key metrics.
Recommendation 3: Give RDOs the resources needed to include detailed innovation and cluster planning in the CEDS process. Congress should authorize annual funds to support the placement of senior innovation and cluster leaders in RDOs as Regional Competitiveness Officers (RECOs). This program should be administered by the EDA or its designee and be modeled on the Economic Recovery Corps fellowships. This will build staff capacity to help coordinate the development of regional strategies that cut across state and city lines such that innovation planning becomes a regular facet of economic development policy.
- This funding should be prioritized in regions that applied to the Build Back Better Regional Challenge or the Good Jobs Challenge but did not win an award.
- RECOs should be responsible for leading community efforts to create plans for innovation ecosystem and cluster support and facilitate broad engagement in community efforts to seek federal grants to implement these plans.
The EDA should provide innovation ecosystems and cluster research training through its existing community of practice for RDOs to invest in developing innovation strategies as a component of their CEDS process.
Recommendation 4: Facilitate local alignment through greater CEDS transparency and require that federally funded cluster development initiatives to ask applicants to demonstrate alignment with their regional CEDS as they apply.
- The EDA should coordinate with RDOs to create and maintain a publicly accessible national database of CEDS and their accompanying innovation strategies. This will facilitate greater transparency and coordination among regional players working to identify ideas already in the market and coordinate resources appropriately. The database can also serve a critical transparency function and answer currently unanswerable questions like “How many U.S. regions are working to build biotech or semiconductor clusters?”
- Federal cluster development programs across all agencies should require applicants to articulate their alignment with their regional CEDS. Staff and external reviewers should be instructed to consider the degree of alignment as a key criterion for all regional cluster-based programs.
- Regions, states, and cities should ground their economic development in transparent and publicly available CEDS goals and strategies. Smaller entities and political designations that offer planning grants, support grants, and other resources could integrate alignment with the CEDS into their criteria for assessment.
Conclusion
The approach proposed here will facilitate the development of a coordinated national approach to innovation policy. Adopting this approach will help regions make better investments in their industry clusters, help private sector investors more productively channel funding into strategically vital areas, and accelerate the growth of high-quality jobs. Strengthening innovation planning will benefit all Americans by accelerating economic development, expanding local economic clusters, and generating middle-class employment that builds communities.
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