Sunday, January 19, 2003

Wanted: Innovation

A technology leader turned into a laggard - 'We got complacent,' governor says

By James McNair
The Cincinnati Enquirer


As Ohio celebrates its bicentennial, The Cincinnati Enquirer will examine where the Buckeye State is headed and analyze the key topics that confront the state. Watch for these reports throughout 2003.

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In Ohio's heyday of industrial innovation, new technology streamed out of labs in rapid-fire succession.

From 1886 to 1923, Ohioans developed the airplane, adding machine, bottle-making machine, commercial offset printing press, automobile tire, automatic traffic signal and vacuum cleaner, creating billion-dollar global markets and jobs for generations of Ohioans.

But ask industry and political leaders to name the state's technological breakthroughs of the past 20 years and the result will be a break in the conversation.

In its bicentennial year, a premier innovator and risk-taker of the early 20th century has become a fading star.

The state is quietly devolving into a labor pool for distant manufacturers. It is no longer a wellspring of leading-edge technology and entrepreneurship. The impact on Ohioans: Income has fallen behind the rest of the country, and there is too little money to create or expand companies.

"We got complacent in the glory days," Gov. Bob Taft said in an interview. "Then the world changed. We're in a world marketplace and faced with fierce competition. It affects every state in the country, but Ohio being a manufacturing state, it affected us more."

It's not a good sign.

Although Ohio remains the nation's third-biggest manufacturing state and has 25 Fortune 500 corporations, more of its companies are closing, being acquired or moving away. The state's industrial landscape is increasingly dotted with parts assembly plants and retail warehouses. And although 95 percent of Ohioans have jobs, their paychecks are 95 percent of the national average.

"The picture's not all that great," said Richard Stoff, president of the Ohio Business Roundtable, a nonpartisan group of CEOs of Ohio's 80 biggest companies. "We think the future is very much going to be shaped by our ability to bring new technology into the market."

In 1984, Gov. Richard Celeste created Edison Technology Centers around the state to assure the competitiveness and growth of the state's economy. The program links industry with state colleges and government to form partnerships that will strengthen Ohio's technological innovation and industrial competitiveness.
The seven centers below specialize in a particular technology:
TechSolve: Cincinnati. Specialty: Manufacturing.
Ohio's IT Alliance: Dayton. Specialty: Information technology.
Edison Materials Technology Center: Kettering. Specialty: Metals, ceramics, composites and polymers.
Edison BioTechnology Centers: Cincinnati, Columbus and Cleveland. Specialty: Biotech.
Edison Welding Institute: Columbus. Specialty: Materials joining.
EISC: Toledo. Specialty: Manufacturing.
CAMP: Cleveland. Specialty: Manufacturing.
Source: Ohio Department of Development
Top recent projects funded by Ohio
How Ohio's economy is changing
Mr. Taft made the same point in his Jan. 13 inaugural address and will drive it home again Wednesday in his State of the State speech: Ohio must transform its economy if it is to prosper in its third century of statehood.

During the Cincinnati Republican's first four years in office, the state launched a number of programs to foster and fund technology research, but few companies of any heft.

The governor knows Ohio must take an even bolder step. At some point soon, perhaps this year, legislators and voters will decide the fate of the granddaddy of them all: Mr. Taft's $1.6 billion Third Frontier program to spur the development and commercialization of new technologies over a 10-year period.

The question is whether it will be enough to reverse the forces behind Ohio's economic decline. Considering these trends, it could be a daunting task:

Ohio's share of the U.S. population and gross national product has ebbed to the 4 percent mark since 1980. However, its share of patents issued has plunged from 5.8 percent in 1980 to 3.7 percent in 2001.

Ohio accounted for 2.9 percent of U.S. research and development outlays in 2000, 11th among the states, according to the National Science Foundation. When these statistics were first compiled in 1987, Ohio had a 3.9 percent share and sat in ninth place.

Twenty states received more venture capital than Ohio in 2001, including Missouri, Oregon and Arizona. Ohio collected only 0.6 percent of the U.S. venture capital pool, half what it did in 1980.

Even with a stable of 25 Fortune 500 companies, Ohio received only 1.5 percent of all money raised on Wall Street in 2001 - nothing from initial public offerings. Virginia, New Jersey and North Carolina have passed Ohio, which had 3.7 percent of the U.S. debt and equity pie in 1980.

Ohio, ranked sixth in new employer formation in 1981, is now 12th.

Per capita income in Ohio, at $28,816 in 2001, was 94.6 percent of the national average. That's down from 100.2 percent in 1970. Ohio is ranked 24th in that measure, trailing such smaller states as Wyoming and Nebraska. Fast-moving Texas, Georgia and Oregon are in its rear-view mirror.

Public officials, business leaders and academic researchers agree that the state needs to make up for lost ground. They also agree that it won't be easy.

Among their reasons: Ohio's image as a Rust Belt state, its perception as a risk-averse business culture, the absence of a strong champion for innovation, a less-educated population and regional colleges fighting for fewer and fewer state dollars.

Ohio's economic policy, critics add, focuses on projects rather than strategy. Innovators, investors, universities and the state often clash, which means smart ideas do not convert into substantive business activity.

"Our fundamental assets in this state far exceed the assets of many other states," said Bruce Johnson, director of the Ohio Department of Development and a former state senator from Columbus. "We have a wonderfully diverse economy. But the next wave of growth is high tech, and our history, in some ways, prohibits us from grasping that entirely."

Ohio at `critical juncture'

Ohio has a strong technology base. It's just that Ohio technology doesn't conform to the popular perception of technology - computers, microchips, software and multimedia devices. The Buckeye State is more about manufacturing, chemistry and such niches as aircraft engines and automated teller machines. It's about such very recognizable companies as Goodyear, Owens Corning, GE Aircraft Engines and LexisNexis.

"There's a lot happening that doesn't make the front pages, things that draw upon the old industrial base, but go into new areas of application," said Bo Carlsson, professor of industrial economics at Case Western Reserve University in Cleveland.

Indeed, Mr. Taft wants to make advanced manufacturing the linchpin for greater technological innovation. With the shakeout in the computer and telecommunication industries, Ohio is chugging along while tech-heavy states continue to suffer aftershocks.

"The economy is so diversified, and we play such a role in so many major industries that our strengths don't show up in any industries. Diversity is a strength," said Frank Samuel, the governor's science and technology adviser.

Ohio's reliance on older, traditional manufacturing, however, has made the state complacent in product innovation, according to a 273-page report written for the state last year by Battelle, an internationally prominent research institute in Columbus.

"Ohio is at a critical juncture in its development," the report begins.

Technology, it said, offers Ohio a path to "faster business growth, higher wages and a larger multiplier effect for the economy. Ohio really has but one choice - either embrace and adapt to a technology-driven world or be left behind."

While the state struggles to find its way, such corporate cornerstones LTV, Mead, TRW and Rubbermaid are dropping out of the lineup of companies with Ohio headquarters. The demise of Cleveland's giant steel-maker LTV and the acquisition of defense tech company TRW by Lockheed Martin in 2002 cut the state's Fortune 500 companies from 27 to 25.

These industrial behemoths have been replaced by retail, service and financial companies, which offer fewer jobs and, traditionally, smaller salaries. That's not a terrible phenomenon, but it speaks of the state's inability to propagate large companies in the booming information technology realm.

Of the 100 biggest public companies in Ohio, only six fall into the computer, electronics, telecommunications or biotechnology segments. The largest is Dayton-based NCR, a 118-year-old company that has struggled recently: Its revenue has fallen every year since 1994.

Among privately owned companies, the biggest is a Columbus firm, SARCOM Inc., which provides tech services to clients.

"There's a tremendous amount of activity out there and we have a strong overall economy," Mr. Taft said, "but there are some very disturbing trend lines.

"We've got a long-term structural challenge. And if we don't address it, our personal income levels and overall wealth are going to slide, and we won't have opportunities to keep our kids in the state when they graduate from college."

No one expects Ohio to rival California, Massachusetts or Texas as some sort of Silicon Midwest.

Still, it pains proud Ohioans to see the state skid so far in innovation, entrepreneurship and attraction of capital.

The Corporation for Enterprise Development, a non-profit economic policy group in Washington, D.C., gave Ohio an "F" in entrepreneurial energy and a "D" in business vitality in 2002.

On the Milken Institute's State Technology and Science Index, which ranked states on 73 measures of comparison last year, Ohio wound up 27th.

And although Ohio is 11th on the National Science Foundation's R&D spending list, it ranks 18th when R&D spending is divided by gross state product.

The ratings are hardly startling for those toiling in Ohio's tech world.

Robert Herbold, who left a job as a Procter & Gamble senior vice president of advertising and information services to join Microsoft in Redmond, Wash., in 1994, knows first-hand of Ohio's obstacles. After a short-lived retirement, Mr. Herbold is serving a one-year stint as chief operating officer of the world's biggest software company.

"The best chance for Ohio to become a technology center is for some brilliant Ohioan to come up with an incredible piece of high-tech innovation that spawns a great company and hundreds of other small companies that support that great company," said Mr. Herbold, a University of Cincinnati graduate and Case Western trustee.

"Without that, it is an uphill battle for any state like Ohio that doesn't already have a high-tech base of significant size. Also, the cold winters, humid summers, below-average education level and heavy industrial image pose further challenges."

There is also the matter of finding work for Ohio's young engineers and tech-entrepreneurs of tomorrow.

Of the 190 Ohio State University students graduating in 2001 with at least a bachelor's degree in computer or electrical engineering, 60 percent took jobs out of state. (The University of Cincinnati doesn't track its engineering grads.)

"Most of the engineering kids I talk to say if they could find the right job, they'd rather stay in Ohio," said Jim Williams, dean of the OSU College of Engineering and a former general manager at GEAE in Evendale. "My first impression of those leaving the state is that they're not able to find work here."

Investors ignoring state

If the receipt of venture capital serves as a crystal ball for the future of Ohio's private sector, the state could face further stagnation.

In 1980, Ohio ranked 12th in venture capital receipts - money invested in startup companies - according to Thomson Venture Economics, a Newark, N.J., market research firm.

Come 1990, Ohio was down to No. 20. In 2001, it was 21st.

Over the same 21-year span, Virginia soared from the venture capital basement to the No. 9 spot. With nearly $1 billion in receipts, Virginia drew four times the money given to Ohio ventures in 2001.

"It is the venture capitalists, wherever they are, who are the bird dogs of innovation, particularly in the technology arena," said Jeffry Timmons, a professor in the entrepreneurship program at Babson College in Wellesley, Mass. "The states who are most successful at attracting venture capital are going to be more likely to have more robust economies and more innovative companies in their midst. And they're going to attract talent."

The innovations cooked up in Ohio's manufacturing-oriented labs appeal to a narrower set of investors.

"Those types of investments, while valid, don't typically hold the potential of the latest and greatest software package," said Kirk Walden, head of venture capital research at PricewaterhouseCoopers in Austin, Texas. "They would be overshadowed by the money flowing into the technology area."

Michael Fox, a Butler County commissioner who spent 22 years in the Ohio General Assembly, said the state is due for a cultural makeover.

"Ohio likes to go with the tried and true. But in a new economy, the tried and true can be the tried and old - and irrelevant," said Mr. Fox, a Fairfield Township Republican. "The California culture is more attuned to risk. They accept the notion that you pursue a lot of ideas. Some are going to fail, but others are going to carry you forward."

Ohio has begun to adopt that frame of mind. A storm of efforts - public and private, regional and statewide - has produced a network of investors, business incubators, technology transfer centers, research centers, promotional groups and professionals - lawyers and accountants - gearing their practice for entrepreneurs. Ohio ventures are receiving money, and products are being launched.

Mr. Taft wants to capitalize on that momentum.

Last February, he announced his Third Frontier program, which would throw $1.6 billion into making Ohio a technology player over 10 years. If legislators make room for it in Ohio's penny-pinched budget, the program would earmark $500 million for globally competitive research centers and $600 million for state-run technology funds. It would also require voter approval of a $500 million bond issue for university research programs.

"I believe Gov. Taft is on the right path," said Mr. Stoff of the Ohio Business Roundtable. "When you look at major technology initiatives nationally, Third Frontier is very competitive and will certainly put us in the game. The challenge, of course, is that as we pump $1.6 billion in state support, so too are other states."

But getting legislators to sink a fortune into technology programs when Ohio has a $100 million fiscal deficit - and a potential $4 billion gap in the next two-year budget - won't be easy. Third Frontier banked the first $100 million in 2002. Former Ohio Senate President Richard Finan said the program faces big hurdles in 2003.

"I think it's 50-50," said Mr. Finan, an Evendale resident who returned this month to practicing law full time. "I think it'll probably be a vote of the people not only to raise $500 million in debt, but also to raise the state's debt cap."

Searching for solutions

The state's best-known technology effort, its Thomas Edison Program, began in 1984 and consists of seven technology-development centers. There, industry, university and federal researchers collaborate on advances in areas such as manufacturing, polymers and materials, and biotechnology. In the 2000-2001 fiscal year, Ohio's $18.7 million Edison commitment drew $32.9 million from industry and $21.7 million in federal money.

The Edison program's efforts are best illustrated by what it did for Steris Corp., a suburban Cleveland company that makes medical products to prevent infection and contamination. As a startup, Steris received a $43,000 Edison grant in 1986 to launch its first product. Today, the company is pushing $1 billion in annual revenue and has about 4,500 employees. Some 700 of them work in Ohio.

Beyond its colleges, Ohio boasts a number of technology-assistance organizations, research institutions and federal labs that provide a skeletal system for innovation. Cleveland Clinic, Wright-Patterson Air Force Base, the NASA Glenn Center, Ohio's IT Alliance and the Science and Technology Campus created by Ohio State University are all part of that framework. The backbone would be Battelle, a non-profit research center founded in Columbus in 1929.

Receiving 50 to 100 patents a year on everything from biotechnology to bioterrorism-detection machines, Battelle racks up about $1 billion a year in revenue from contract research and patent licenses.

Battelle played a big role in the development of the Xerox copier machine and optical compact-disk information storage technology. Although its 8,000 employees are spread out in more than 100 U.S. and European labs, everything must go through Battelle's 2,327-person research campus in Columbus.

Steve Millett is Battelle's "thought leader." He says Ohio doesn't get enough credit for its high-tech work in materials, process controls and fuel cells. Comparing the Ohio of today to its gloried past, he said, puts the state at a further disadvantage.

"Ohio is high tech. It's not high gloss," Mr. Millett said. "We tend to manufacture and put things into products that aren't readily visible. It's sort of a hidden value-added."

Nevertheless, Mr. Millett is concerned about the state's struggle to generate new technology for the commercial hopper. Battelle's 273-page report to the state put it more bluntly:

"The fact that the Ohio technology sector is disproportionately composed of older, more established firms, as well as firms that are not designing, developing and making new products in Ohio," it said, "indicates a relative lack of innovation and entrepreneurialism, crucial components of a dynamic, fast-paced technology sector."


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