Karen G. Millskmills@mmpgroupinc.com

Council on Foreign Relations

November 28, 2006

How Do You Turn Innovation Into Jobs?

Driving U.S. Competitiveness through Regional Clusters

2

How does innovation translate into jobs?

Basic Research

Invention

InnovationCommercialization

Job Creation & Economic Growth

• R & D

• Marketing/Product Innovation

•Small and Midsize Business

•Clusters

3

Current competitiveness strategy focuses on the inputs

R & D Spending

Science & Math Education

Immigration Policy

Tax Incentives

Trade PolicyIP Protection

Exchange Rates

Inputs Macroeconomic Levers

Economic Ecosystem

s

Fix Healthcar

e

Fix Patent System

Infrastructure fixes

and relies on the market environment to transform the economic ecosystem

4

It creates and loses over 7 million jobs each quarter

Private Sector Gross Job Gains and Losses 1993-2003

6

7

8

9

1019

93

1995

1997

1999

2001

2003

Job Gains

Job Losses

The U.S. is a job machine

Source: Bureau of Labor Statistics, U.S. Department of Labor

Millions

5

Small and medium-sized firms create most new jobs

Source: Michael Porter, Competitiveness Index 2006 and Office of Advocacy, U. S. Small Business Administration

6

Larger enterprises have been losing share of employment

Source: 2003 County Business Patterns

Percent Employment in Enterprises with 500+ Employees

46.5

47.0

47.5

48.0

48.5

49.0

49.5

50.0

50.5

1991 1993 1995 1997 1999 2001 2003 2005

7

The emerging innovation led firms will be the smaller traded companies

U.S. Employment by Firm Size and Type of Cluster

Local 70%

Small 51%

Large 49%

Size of Firm

Type of Cluster

Source: Michael Porter

Traded 30%

Illustrative

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Small and medium sized firms are the key to growth and don’t receive

enough focus

Large FirmsSmall and

Medium sized firms

New Enterprises

• About half total employment

• Need to act globally

– Operate in low cost environment

– Be present where the markets are growing

• About half total employment

– Growing share

• Need critical mass to attract the resources needed to grow

• Hard to help one by one

• Over 500,000 new firms annually

• Account for 20% of job creation

• A high percentage fail

• Only about 3,000 venture backed each year

9

Cluster strength is correlated with prosperity

Source: Ketels, Clusters in the E-10 new Member Countries, Page 36

GDP per Capita 2002 (€)

Number of stars per region 2000

Clusters in E-10 New Member Countries

10

Cluster example—composite technology and Maine’s boat building

industryThe North Star

Alliance

11

Maine Built Boats

12

North Star Alliance: The four pillars

ResearchAnd

Development

MarketDevelopment

Capital andBusiness Support

Workforce Developme

nt

• University of Maine Maine Composite Technology Center

• Branding Maine Built Boats

• Maine Technology Institute

• Venture Capital Access

• Community College

• Apprenticeship Programs

• Connection to workforce boards

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Educational, Research, & Trade Organizations (e.g. Wine Institute,

UC Davis, Culinary Institutes)

Educational, Research, & Trade Organizations (e.g. Wine Institute,

UC Davis, Culinary Institutes)

Growers/VineyardsGrowers/Vineyards

Sources: Michael Porter, California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.

Wineries/ProcessingFacilities

Wineries/ProcessingFacilities

GrapestockGrapestock

Fertilizer, Pesticides, Herbicides

Fertilizer, Pesticides, Herbicides

Grape Harvesting Equipment

Grape Harvesting Equipment

Irrigation TechnologyIrrigation Technology

Winemaking Equipment

Winemaking Equipment

BarrelsBarrels

LabelsLabels

BottlesBottles

Caps and CorksCaps and Corks

Public Relations and Advertising

Public Relations and Advertising

Specialized Publications (e.g., Wine Spectator,

Trade Journal)

Specialized Publications (e.g., Wine Spectator,

Trade Journal)

Food ClusterFood Cluster

Tourism ClusterTourism ClusterCalifornia Agricultural

Cluster

California Agricultural

Cluster

State Government Agencies(e.g., Select Committee on Wine

Production and Economy)

Clusters Example:The California Wine Cluster

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Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations)

Equipment Suppliers

(e.g. Oil Field Chemicals,

Drilling Rigs, Drill Tools)

SpecializedTechnology

Services

(e.g. Drilling Consultants,

Reservoir Services, Laboratory Analysis)

Subcontractors

(e.g. Surveying,Mud Logging,

Maintenance Services)

BusinessServices

(e.g. MIS Services,Technology Licenses,

Risk Management)

OilTrans-

portation

OilTrading

OilRefining

Oil Retail

Marketing

OilWholesaleMarketing

OilDistribution

GasGathering

GasProcessing

GasTrading

GasTransmis-

sion

GasDistribution

GasMarketing

Oil & Natural GasExploration & Development

Oil & Natural Gas Completion &

Production

Upstream Downstream

Oilfield Services/Engineering & Contracting Firms

The Houston Oil and Gas Cluster

Upstream Downstream

Source: Michael Porter

15

FarmsFarms

Energy(electric util, fuel)

Energy(electric util, fuel)

Banking & Finance

Banking & Finance

InsuranceInsurance

ConstructionConstruction

SecuritySecurity

TechnicalAssistanceTechnical

Assistance

Transportation &Shipping

Transportation &Shipping

HatcheriesHatcheries

ProcessingProcessing

ExportExport

Fishing ClusterFishing Cluster

FertilizersFertilizers

PackagingPackaging

Food Processing Equipment

Food Processing Equipment

Freezer ContainersFreezer Containers

Clusters in Developing Countries

The Ecuadorian Shrimp Farming

Cluster

Source: Michael Porter

Norway has 0.1% of the world’s population, represents 1.0% of the world’s economy, yet accounts for 10% of world seaborne transportation

MaritimeEquipmentSuppliers

MaritimeEquipmentSuppliers

ShippingShippingMaritimeServicesMaritimeServices

OffshoreExploration

and OilProduction

OffshoreExploration

and OilProduction

ShipyardsShipyards

Boat buildersBoat builders

Ship equipmentShip equipment

Fixed platformsFixed platforms PipelinesPipelines Processingequipment

Processingequipment

Fisheries and

FishingEquipment

Fisheries and

FishingEquipment

Ship brokers and agents

Ship brokers and agents

Banking andFinance

Banking andFinance

Maritime educationMaritime

education

Underwriters and maritime insurance

Underwriters and maritime insurance

Maritime lawyersMaritime lawyers

Classificationsocieties

Classificationsocieties

MaritimeR&D

MaritimeR&D

MaritimeconsultantsMaritime

consultants

Ship ownersShip owners

MaritimeauthoritiesMaritime

authorities

Source: Michael Porter, Sven Ullring, presented to M.I.T.

The Norwegian Maritime Cluster

17

Viagene1987

Columbia HCA1990

Kingsbury Partners

1993

DigiRad1994

Chomagen1994

Novatrix1994

Gensia1986

Cypros1992

Lipotech1987

Novadex1992

Dura1990

Immune Response

1986

Cortex1986

Gen-Probe 1983

Ligand1987

Birndorf Biotech-

nology 1990

Nanogen 1991

IDEC1985

Corvas1987

Amylin1987

Vical1987

Sequana1992

Applied Genetics

1994

Somafix1992

Gyphen1993

Cyphergen1993

Coxixa1994

Combi-Chem1994

Genesys 1990

Forward Ventures

1990

First Dental Health1995

Pac Rim Bioscience

1985Biovest1986

Clonetics1985

Biosite1988

Medmetric1989

Cytel1987

Pyxis1987

Triangle Phar-maceuticals

1995

Kimmel Cancer Inst.

1990

Urogen1996

HybritechSan Diego

Source: Michael Porter, CONNECT, University of California, San Diego

GenQuest1995

Evolution of ClustersThe Role of Anchor Companies in San Diego Biotech

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Innovation hubs attract new and growing companies

Source: Zuckeretal Human Capital and Biotechnology Enterprises; Page 295 Also, Salter / Martin, The Economic benefits of publicly funded basic research, Jaffe, Real Estate Effects of Academic Research

Scientific Stars and New Biotechnology Enterprises 1990

Example

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Policy Recommendations

Initiatives Authority

• Cluster Development Funds

• Wired Grants

• Alternative Energy R&D and Cluster Funding

• National Entrepreneurship Department / Assistant Secretary

• Innovation Hub Funding

State Governments

Department of Labor

Department of Energy

Commerce / SBA

NSA; Commerce, USDA; White House

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Karen Gordon Mills

Karen Gordon Mills is a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods.

Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics.