Today, I submitted a public comment to the Economic Development Administration concerning its proposed rules for the Implementation of the Regional Technology and Innovation Hub Program.
My name is Lars Erik Schönander. I am a Policy Technologist at Lincoln Network. I appreciate the opportunity to provide public comment to the U.S. Economic Development Administration (EDA) concerning its proposed rules for the Implementation of the Regional Technology and Innovation Hub Program.[1] Lincoln Network is a think tank with three broad policy goals: strengthening American leadership in innovation, securing the future from technological risks, and leveraging technology and technical talent to solve governance and policy challenges.[2]
Industrial policy is core to the vision of Lincoln Network, which researches and advocates for the development of regional tech hubs around the United States, part of an important national project to restore our country’s innovation, ingenuity, and dynamism after decades of decline. We believe in an American industrial policy that values the contributions of businesses and workers all over the country, not only in “superstar cities,” such as San Francisco and New York. For that reason, I am grateful for the opportunity to contribute my comment to this project.
This program has good intentions, but risks being of only limited effectiveness as the result of factors beyond EDA’s control, including legal, regulatory, and economic barriers. For example, spending on infrastructure with Tech Hub grants could be hobbled by the National Environmental Policy Act (NEPA)’s cost and time constraints on developing infrastructure. The Tech Hubs program also risks suffering from a poor set of metrics and data collecting procedures. If the Tech Hubs program does not develop specific criteria for success, it will be difficult to know whether the program is working as intended.
What are the indicators of a successful future Tech Hub?
Our research on regional industrial development in the U.S. and around the world (in Taiwan, South Korea, and Japan), involving interviews with hundreds of stakeholders over many years, has found that universally, tech hubs succeed when they are treated as fast-moving and multipronged ecosystems, in which no one factor overpowers the others. For success, such factors must include the following:
- An educated and highly skilled workforce;
- The presence of a major research university in the vicinity that supplies a stream of graduates and contributes research;
- Access to research and development resources and government funding that absorb some of the major financial risks taken on by private firms in advanced industries;
- The presence of regional or federal government civil servants who are knowledgeable about specific industries and are able to dole out licenses and funding in a fair and even-handed way;
- An aversion by government policymakers to selecting “national champions” and instead allowing for the market to decide winners and losers;
- The presence of a pre-existing “cluster” of advanced infrastructure, resources such as abundant water (needed for many types of advanced plants), and a reliable surplus of electricity and energy; and
- A superior local quality of life that includes a strong schooling system, strong wages, a reasonable cost of living and tax rates, and low crime that will attract talent and highly skilled labor.
The development of local industrial hubs must go beyond subsidies and tax breaks for corporations, which are a minor boost to industries that require long-term investment and development, stretching into decades, to remain competitive.
This pattern has replicated itself in the prosperity of regional tech hubs in biotech, advanced semiconductors, advanced manufacturing, and other hardware-focused fields that have come to define the revival of American ingenuity. Major successes that mixed the free market with limited and appropriate government involvement, along with the above factors, included the “Research Triangle” in North Carolina (biotech); Chandler, Arizona (semiconductors); and Madison, Wisconsin (healthcare tech), among many other examples.
Are there specific workforce and labor development, business and entrepreneurial development, technology development and maturation, or infrastructure activities that EDA should emphasize through the program?
EDA might consider looking for inspiration to the large-scale industrial policy programs of South Korea and Japan, which aimed to develop advanced technologies (“go up the value chain”). In particular, Japan’s Ministry of International Trade and Industry (MITI), from 1949 to 2001, offers an example of an agency working to promote this type of growth.[3] MITI helped nurture industries such as plastics, automobiles, and electronics by studying the industries and establishing a favorable business environment—including, for example, modified tax depreciation policy and support in buying property. [4] While EDA is merely providing grants to fund specific projects, I strongly recommend that EDA collaborate with other agencies, such as the Environmental Protection Agency (EPA), International Trade Administration (ITA), and Industrial Base Policy Office within the Department of Defense. EDA should consider working with the EPA when grants are focused on infrastructure, to speed up the time it takes to go through environmental review. EDA should also consider working with ITA to help promote the products produced by firms in a consortia associated with a Tech Hub. EDA should collaborate with the Industrial Base Policy Office not only to connect firms with the Department of Defense, but also to identify firms whose products may be threatened by malign foreign influence.
Regarding research and development, EDA should emphasize grants that commercialize technical innovations. As the history of the American semiconductor industry illustrates, while the U.S. has excelled in developing ideas, it has struggled to transform those ideas into commercially viable products.[5] Specifically, the United States has focused on academic research and development funding over firm-level research and development. While this focus helped the United States develop a technical lead in semiconductors, it lost the chance to establish a large ecosystem of firms interested in technical development. Today, while universities are a critical part of America’s innovation system, EDA should focus on helping companies become capable of commercializing and scaling their technical products, under the assumption that helping these companies scale will not only lead to further innovations via the process of “learning-by-doing,” but also help them defend their market share against potential foreign competitors.[6]
Another consideration for EDA when implementing the Tech Hubs program is that programs funded by EDA grants may be delayed by outside factors. For example, if EDA invested in a grant program involving geothermal technology, the project would face up to six NEPA assessments and seven to ten years of construction.[7] It would be impractical for EDA to spend hundreds of millions in dollars in grants for infrastructure, only to then face serious regulatory delays. To avoid this outcome, when giving out grants for infrastructure, EDA should apply for a NEPA waiver system to speed up the time to develop infrastructure so that it has an earlier impact.
Secondly, EDA should emphasize labor development in technical sectors where the U.S. has a shortage of workers and needs. The U.S. does not have a large enough technical labor force to fully staff the semiconductor plants in development.[8] For example, for its plant in Arizona, currently under development, Taiwan Semiconductor Manufacturing Company has found itself needing to hire Taiwanese workers and send them to Arizona.[9] Given that 40 percent of high-skilled semiconductor workers in the U.S. were born abroad, barring a liberalization of America's high-skilled immigration system, there will be shortages in the semiconductor industry and other high-skilled fields.[10]
How should EDA evaluate the extent to which certain technology and innovation sectors are critical to national and economic security? How should EDA take into account whether a consortium would help promote increased geographic diversity of innovation?
Fortunately, EDA does not need to spend substantial effort evaluating whether a technology sector is critical to our national and economic security: The Cybersecurity and Infrastructure Security Agency (CISA) and the Office of Science and Technology Policy (OSTP) within the White House already have lists of such technologies.[11] EDA should borrow from CISA’s and OSTP’s lists. Given that the U.S. suffers from a middle-skill gap, EDA’s list should prioritize technologies that create middle-class jobs and reduce our manufacturing dependency on China, rather than technologies that mostly create jobs for the highly educated.[12]
While it is good that EDA wants to increase regional diversity in technical innovation, I am concerned that this goal could possibly reduce the positive economic outcomes of the program. Historically the largest returns to scale in innovation have occurred when an industry is centralized in a single location, such as Silicon Valley in the 1960s, when the region was the leader in semiconductor production. Decentralizing talent makes it difficult for members of different firms in the same industry to communicate with one another, potentially stifling innovation.
If EDA strongly wants to ensure that the Tech Hubs promote increased geographic diversity, there are a few ways to do so. In the consortium applications, EDA could weigh applications for regions trying to develop new technical expertise more highly than regions where a given industry is already successful. EDA could check if a given Tech Hub, while not possessing a certain industry yet, has key factors that have been underutilized, such as a successful university system and national resources needed for semiconductor manufacturing, (for example, fresh water).
How should EDA measure whether the Tech Hubs program has been successful in achieving these outcomes, and how might EDA capture those data?
There are organization-specific measurements that EDA could track. For participating firms, EDA should track firm-level data, including data on job creation and the economic value of the jobs created. For institutions of higher education, EDA should track whether these institutions over a multi-year period increased their research and development in areas associated with the Tech Hub. Given that institutions such as the Philadelphia Federal Reserve already measure the impact that institutions of higher education have on regional economies, it should be possible to determine whether institutions of higher education that become involved in these consortiums created larger economic spillover effects in their communities, relative to institutions that did not.[13]
Another data point that EDA should track is the types of programs that a given Tech Hub funded, as well as the programs’ economic impact in terms of GDP growth and job creation. Doing so would provide data on what types of programs create well-paying jobs. Finally, EDA should study how much the Tech Hubs program reduces dependence on China and East Asia for critical manufactured goods, such as telecommunications equipment, drones, and semiconductors.
Detailed data tracking will be important if EDA is to avoid the problems facing other place-based economic programs, which have suffered from poor data collection practices and have therefore struggled to measure their own impact. For example, the Government Accountability Office (GAO) has noted the difficulties of analyzing data regarding Opportunity Zones, given the IRS’s method of collecting data on investors who invested in opportunity zones.[14] GAO has also noted that when Congress created Opportunity Zones, it did not designate an agency to collect data on how they performed, making it difficult to evaluate Opportunity Zones’ performance.[15]
A. What are the indicia of successful investments under the Tech Hubs program? What, if any, earlier-in-time proxies are predictive of those indicia?
Indicia of successful investments under the Tech Hubs program could include the following:
- A postsecondary institution getting a reputation for having a talent pipeline in a technical field—for example, semiconductor workers;
- A firm having a trackable and permanent increase in profit due to a EDA grant; and
- An ecosystem of firms surrounding the Tech Hub that focuses on a specific industry.
An early indication of the Tech Hubs program’s success would be positive changes in statistics such as employment rates for prime working-age individuals or median household incomes in the communities hosting the Tech Hubs.[16]
B. What is a realistic time horizon over which to evaluate the economic development, national security, and global competitiveness impacts of Tech Hubs? Which measures are meaningful over which time horizons (e.g., five, ten, fifteen years)?
A realistic timeframe for EDA to track the success of the Tech Hubs program would be within 10 years. This reflects the design of the program: it will take time for the consortiums to be created and then funded, for firms to create and fill positions, and for institutions of higher education to hire for any roles related to the projects for which they may be using Tech Hub funding. Restoring America’s industrial base is a long-term project; it took 30 years for South Korea to industrialize.[17] When evaluating the timeline it will take for Tech Hubs to be effective, one must remember that industrialization is a generational project.
[1] “Request for Information on Implementation of the Regional Technology and Innovation Hub Program,” 88 Fed. Reg. p. 9427 (February 14, 2023), https://www.federalregister.gov/documents/2023/02/14/2023-03022/request-for-information-on-implementation-of-the-regional-technology-and-innovation-hub-program.
[2] See “Lincoln Policy,” Lincoln Network, accessed January 18, 2023, https://lincolnpolicy.org/.
[3] Chalmers A. Johnson, MITI and the Japanese Miracle, (Redwood City: Stanford University Press, 1982).
[4] Ibid., p. 236–237.
[5] Alex Williams and Hassan Khan, “A Brief History of Semiconductors: How The U.S. Cut Costs and Lost the Leading Edge,” Employ America, March 20, 2021, https://www.employamerica.org/researchreports/a-brief-history-of-semiconductors-how-the-us-cut-costs-and-lost-the-leading-edge/.
[6] “Learning-by-doing” refers to the tendency of a firm’s average costs of manufacturing a good to decline as experience grows.
[7] “In America Climate Hawks and Big Oil Alike Cheer Geothermal Energy,” The Economist, March 14, 2023, https://www.economist.com/united-states/2023/03/14/in-america-climate-hawks-and-big-oil-alike-cheer-geothermal-energy.
[8] Shawn Donnan, “America’s $52 Billion Plan to Make Chips at Home Faces a Labor Shortage,” Bloomberg, March 9, 2023, https://www.bloomberg.com/news/features/2023-03-09/worker-shortages-are-hurdle-for-52-billion-us-plan-to-boost-chip-manufacturing.
[9] Chen Cheng-hui, “High-Tech Industry: TSMC Hiring Taiwanese Fluent in English for U.S. Fab,” Taipei News, April 25, 2022, https://www.taipeitimes.com/News/front/archives/2022/04/25/2003777169.
[10] Will Hunt and Remco Zwetsloot, “The Chipmakers: U.S. Strengths and Priorities for the High-End Semiconductor Workforce,” Center for Security and Emerging Technology (September 2020), https://cset.georgetown.edu/publication/the-chipmakers-u-s-strengths-and-priorities-for-the-high-end-semiconductor-workforce/.
[11]“National Critical Functions Set,” Cybersecurity and Infrastructure Security Agency, accessed March 15, 2023, https://www.cisa.gov/national-critical-functions-set;
“Critical and Emerging Technologies List Update,” Fast Track Action Subcommittee on Critical and Emerging Technologies, National Science and Technology Council (February 2022), https://www.whitehouse.gov/wp-content/uploads/2022/02/02-2022-Critical-and-Emerging-Technologies-List-Update.pdf.
[12] Ann Norris, “Stuck in the Middle: Job Market Polarization,” Bureau of Labor Statistics, July 2015, https://www.bls.gov/opub/mlr/2015/beyond-bls/stuck-in-the-middle-job-market-polarization.htm.
[13] “Anchor Economy Dashboard,” Federal Reserve Bank of Philadelphia, accessed March 16, 2023, https://www.philadelphiafed.org/surveys-and-data/community-development-data/anchor-economy-dashboard#about-the-data.
[14] Opportunity Zones: Data on Investment Activity and IRS Challenges Ensuring Taxpayer Compliance, testimony before the Subcommittee on Oversight, Committee on Ways and Means, House of Representatives, 117th Cong. (2021), (statement of Jessica Lucas-Judy, Director, Strategic Issues), https://www.gao.gov/assets/gao-22-105526.pdf.
[15] U.S. Government Accountability Office, GAO-21-30, Opportunity Zones: Improved Oversight Needed to Evaluate Tax Expenditure Performance (2020), https://www.gao.gov/assets/gao-21-30.pdf.
[16] Prime working age is defined as workers aged 25 to 54.
[17] Michael J. Seth "South Korea’s Economic Development, 1948–1996,” Oxford Research Encyclopedia of Asian History, December 19, 2017, https://doi.org/10.1093/acrefore/9780190277727.013.271.
