1. Catalyzing Innovation in the Commonwealth of Virginia Prepared for the Virginia Economic Development Partnership June 2008

2. Project Process: Logical Analytical Tasks Virginia Industry Cluster Analysis Economic and Innovation Foundations Benchmarking of Virginia High-Growth Potential Technologies for Virginia Best Practices from Successful Technology Investment Programs Strategic Inferences for Virginia’s Economic Development

3. Virginia Industry Cluster Analysis Like most states, Virginia’s economy is dominated by service industries: Education & Government Retail Trade Construction & Real Estate Tourism General & Business Services. Several technology and knowledge-based sectors stand out for their high levels of employment: Life Sciences & Medicine (336,535 workers) Research & Engineering Services (161,633 workers) IT Services (140,016 workers)

4. Virginia Industry Cluster Analysis Several technology and knowledge-based sectors also have high levels of employment concentration in Virginia (compared to the national average): IT Services (2.69) Research & Engineering Services (1.96) Aerospace, Defense, & National Security (1.76) Telecommunications (1.32) Clusters that have experienced high employment growth rates in recent years (2003-2005) include: Research & Engineering Services (26.6%) Construction & Real Estate (12.4%) Transportation & Logistics (8.1%) Tourism (6.7%) Business Services (6.5%)

5. Employment By Cluster State-Level Analysis The largest employer clusters are the labor-heavy service sectors, such as Education & Government, Retail Trade, Tourism, and Construction & Real Estate. Virginia has high levels of employment (>100,000 workers) in several key technology sectors, including Life Sciences & Medicine, Research & Engineering, and IT Services. The top 6 clusters account for over 60% of Virginia’s total employment in 2005. # of Employees in 2005

6. Employment Concentration Ratio By Cluster State-Level Analysis Several technology clusters are highly concentrated in Virginia, including IT Services, Research & Engineering, Aerospace-Defense- National Security, and Telecommunications. A few traditional industries are also concentrated in Virginia, although their overall employment levels are quite low: Wood & Furniture, Auto. & Transport. Mfg., and Textiles & Apparel. The Employment Concentration Ratio is the industry cluster’s share of total employment in the state versus its share in the country. Clusters with a ratio greater than 1.0 are more concentrated in Virginia than in the United States. U.S. Average Employment Concentration Ratio in 2005

7. U.S. Average Annual Pay By Cluster State-Level Analysis Wages in technology and knowledge-based clusters far exceed the average annual pay for the nation and for Virginia. Not surprisingly, less skilled jobs in the service sectors have pay levels that are below the national average. US Average $39,004 VA Average $40,513 U.S. Average Annual Pay in 2005

8. Virginia Industry Cluster Analysis 0.86 0.64 0.30 0.51 0.68 Valley Southwestern VASouthside VAHampton Roads Northern VA Central VA Industry cluster data and trends were analyzed across six regions in Virginia.

9. Regional Cluster Analysis Common employment trends across all regions: Retail Trade, Tourism, and Construction & Real Estate are major employment-generating sectors across every region. (typical throughout the U.S.). Life Sciences & Medicine also dominates in employment, ranking in the top 3 clusters for every region except Northern Virginia. This is driven by its service component (the Health & Medical Services sub-cluster). Business Services and General Services rank in the top tier of clusters for employment across every region, but do not have especially high employment concentrations.

10. Regional Cluster Analysis Significant variations across state’s regions: Northern Virginia and Hampton Roads : Technology and knowledge-based clusters – Research & Engineering, IT Services, Aerospace/Defense/National Security. Southwestern/Southside : Natural resource-based clusters such as Materials & Chemicals and Energy & Environment. Rural Regions : Traditional industries such as Wood & Furniture (Southwestern, Southside, Valley), Paper (Southside, Valley), and Textiles & Apparel (Southwestern, Southside, Valley). But overall employment is relatively low. Central region : Financial Services (strong in both employment and employment concentration).

11. Benchmarking Virginia’s Innovation Foundations Summary Results WeaknessAverageStrength Financial Resources Human Resources Innovation Resources Innovation Economy Outcomes VC investment ($) SBIR awards ($) STTR awards ($) Small business loans ($) Industrial R&D expenditures ($) Academic R&D expenditures ($) Federal R&D performance ($) Patents Labor force growth Real GSP growth Advanced S&E degrees S&E degrees NAEP Science & Math Scores Exports ($) Entrepreneurs Business Start-Ups R&D to GSP ($ ratio) Tech Fast 500 companies Academic R&D productivity

12. Innovation Resources Patents per Capita VA ranked last among the benchmark states for per capita patents awarded in 2006.

13. Innovation Economy Outcomes Entrepreneurs Per Capita Compared to other benchmark states, VA had the 2 nd lowest level of entrepreneurs per capita in 2005.

14. Innovation Economy Outcomes R&D Share of GSP In 2004, VA ranked 6 th among benchmark states for R&D as a share of GSP, slightly below the national average.

15. High Growth Potential Technologies for VA High Growth Potential Technologies Virginia’s Economic Base Industry Transforming Technologies Virginia’s Existing R&D Assets Unique Factors to Virginia Suitable for Targeted Policy Interventions Resources for R&D and technology development are limited. Determining where scarce resources should be deployed is a critically important task. Screening Criteria:

16. Industry ClusterIndustry Sub-Clusters Current Industry Base Growth Potential Existing R&D Assets Other Factors National Security and Aerospace Aerospace National Security Agriculture and Food Agriculture and Processed Food Biomedical and Health Care Health Care Biomedical Sciences Chemicals and Materials Chemicals Materials Energy and Environment Energy Environment Information and Communications IT Services Telecom Electronics Transportation and Logistics Technology Industry Selection

17. High Growth Potential Technologies Technology-Based Industry ClusterHigh Growth Potential Technologies Biomedical Sciences and Health Care Point of Care Diagnostics Computational Technologies Information Technology Services Health IT Cybersecurity Chemicals and Materials Nanomaterials Biopolymers Clean Energy and Environment Fuel Cells and Distributed Hydrogen Carbon Capture and Storage Transportation and Logistics Radio Frequency Identification “Smart” Roads

18. Biomedical Sciences and Health Care

19. Information Technology Asset Map

20. Materials and Chemicals Asset Map

21. Energy and Environment Asset Map

22. Transportation and Logistics Asset Map

23. Case Studies Enhancing Research Excellence at Universities Georgia Research Alliance University of Texas Eminent Scholars Program Ohio Third Frontier (Wright Mega-Centers) Enhancing Collaboration Across Sectors/Disciplines NY Centers for Advanced Technology MD Industrial Partnerships Program CA Industry-University Coop. Research Program NC Research Triangle Enhancing Entrepreneurship and Access to Capital MD Venture Fund GA Advanced Technology Development Fund PA Ben Franklin Technology Partners

24. Lessons Learned Highlight collaboration as a central component of all programs. Utilize industry and technology experts as key players in decision-making. Seek to leverage multiple sources of funding. Incorporate key economic development objectives and milestones. Introduce and maintain strong systems of accountability. Include flexibility to allow for corrections and to support longevity. Measure innovation progress.

25. Summary Assessment Global and national economic realities challenge forward- looking states to expand industries driven by technology and innovation. Many of Virginia’s high-tech industries serve the Federal market. While important, this narrow focus limits the state’s diversity and overall ability to provide high value jobs. Virginia possesses important assets and initiatives related to innovation, but the Commonwealth has not reached its potential. An initiative to stimulate innovation and catalyze collaboration among industries, universities, laboratories, etc., can transform Virginia into a model innovation economy.

26. Enhancing Research Excellence at Universities Engaging Private Sector Collaboration Across Sectors And Disciplines Nurturing Entrepreneurship and Access to Capital Making Smart Technology Choices Catalyzing Innovation Strategic Focuses for Virginia

27. Recommended Approach for Virginia Overall Strategic Goal: Virginia will become a Model Innovation Economy - Crafted and directed by business, government and university communities Implementation Mechanism: Virginia Innovation Alliance (VIA) - Public/Private Partnership - A structure to power collaboration - Catalyzes Virginia’s assets, addresses liabilities - Introduces a seamless innovation value chain

28. VIA Governance and Funding Governance: Governing board (15-20) with a majority industry leaders. Membership from government, universities, research labs, etc. Advisory committees for technology platforms. Small management unit. Budget: Source & level to be decided Stable and sustained multi-year funding. Initial core funding from the Commonwealth, with major support from industry. To be successful it will require matching funds.

29. Monitoring Innovation Progress Overall Progress in the Commonwealth: Scorecard or index to measure performance of Virginia’s innovation enterprise. Research outputs (patents, citations, outside funding, etc.). Economic results (startups, VC funding, spinoffs, employment concentration, sector growth, etc). Performance of specific VIA programs: Metrics to monitor program performance. R&D and economic outcomes. Participants will be required to report on progress.

30. Action Plan: →Develop program structure, governance, and participants →Identify prototype market for public/private collaboration Target: TBD Next Steps Private Sector Review Administration Review Stakeholder Review Completed 11 CEOs →Presented Overview →CEOs were supportive Review with Stakeholders: →Economic Developers →Universities →Legislators Target: September 2008 In ProgressCompleted Reviewed with: →Secretary of Commerce →Secretary of Finance →Secretary of Technology →Secretary of Education →Governor Outline Action Plan In Progress