California: America's Industrial R&D Powerhouse
SPOTLIGHT ON CALIFORNIA
The Golden State has been at the forefront of private sector innovation in the United States for many years. What factors lie behind its success?
IN 1938, Bill Hewlett and Dave Packard, two electrical engineering graduates from Stanford University, started building audio oscillators in a garage in Palo Alto, California. By 1962, their company, Hewlett-Packard (HP), was listed in Fortune magazine's top 500 US companies by revenue. In 1999, it spun off its measurement-instruments business into Agilent Technologies, which broke the record for the largest initial public offering in Silicon Valley history. HP is now one of the world's leading electronics manufacturers, with revenues of US$126 billion in 2010 and more than 320,000 employees worldwide. HP's iconic story — along with those of Apple, Intel, Yahoo and Google — has influenced nearly every fledgling Californian company hoping to repeat its success. It also highlights one of the state's defining features: its strength in industrial research and development (R&D).
" California is a key marketplace for the exchange of ideas from around the globe. "
Darlene Solomon, Agilent Technologies
According to the US National Science Foundation (NSF), California businesses invested US$64 billion in R&D in 2007 — more than Michigan, Massachusetts and New Jersey combined. Overall, California accounts for 22 percent of all R&D in the United States. A long history of high-tech breakthroughs is just one of the factors that have made the Golden State the industrial R&D powerhouse that it is today. It has a “whole ecosystem of innovation”, says Darlene Solomon, chief technology officer at Agilent Technologies, based in Santa Clara. A January 2011 study commissioned by northern Californian life science trade association BayBio and the California Healthcare Institute (CHI) expands on this further, listing the following factors as having helped the state's biomedical industry to thrive: leading-edge science; experienced venture capital; a diverse, well-educated workforce; a group of serial entrepreneurs; a culture that appreciates risk-takers and that does not penalize failure; healthy scepticism about time-honored institutions; and freedom to ignore boundaries. In addition, California's world-class public and private universities attract billions of dollars in federal research funding and produce thousands of US postdoctoral scientists and engineers each year. The state is also home to national laboratories such as Lawrence Berkeley and Lawrence Livermore. These elements and more apply across industries — from biotechnology to computer technology to renewable energy — and help drive job creation, even in tough economic times.
Clusters of innovation
California boasts a diverse range of industries spread across several major regional clusters, including the San Francisco Bay Area, Sacramento, Los Angeles and San Diego. In northern California, Silicon Valley encompasses a chain of cities south of San Francisco — including Menlo Park, Palo Alto, Sunnyvale and San Jose — but the high-tech companies whose products gave the area its name are actually spread throughout the wider San Francisco Bay Area. The semiconductor research the valley is famous for is now translating into solar energy R&D, which makes use of the silicon and thin-film manufacturing technology perfected there. The city of South San Francisco, home to Genentech, is known for its concentration of biotechnology and pharmaceutical companies.
In southern California, the San Diego area hosts several institutions that have made the city a hub for biomedical research, such as the University of California, San Diego (UCSD), the Scripps Research Institute and the Salk Institute for Biological Studies. “San Diego has grown up over the last 30 years or so as one of the premier areas for doing biotechnology,” says Paul Laikind, chief business officer of the Sanford-Burnham Medical Research Institute. Laikind, based at Sanford-Burnham's headquarters in La Jolla, north-west San Diego, says biotechnology companies in the city are concentrated in a small area. “Because of that, it's a very collaborative entrepreneurial environment,” he explains. A non-profit institute, Sanford-Burnham has taken advantage of San Diego's industrial infrastructure to help commercialise its research: since 1987 it has spun off about a dozen start-up companies. Laikind himself founded four start-up companies in San Diego, all of which went public, before joining Sanford-Burnham in 2009. He says those in the region involved in biotechnology share a desire to achieve results by working together rather than competing with each other: “Our competition is whether we can make a drug that can work or not, which means a lot of collaboration between companies and institutions like ours.”
A further geographical advantage of California is the state's west coast location, which makes it a natural crossroads for international scientists and engineers. “California is a key marketplace for the exchange of ideas from around the globe,” says Agilent's Solomon. “Especially as Asia has taken off, I think California has been positioned [in the market] very well as a point of access and a good cultural fit in terms of that emerging growth.”
Although California's domination in industrial R&D has been achieved largely through the efforts of the private sector, the state does provide generous incentives for businesses to do science. Companies that increase their R&D investment from the previous year get a tax credit equivalent to 15 percent of the difference, says Andrea Jackson, director of state and government affairs for Genentech. “[The California government is] always incentivizing companies to do more R&D,” she says. According to the California Budget Project, which carries out independent fiscal and policy analysis, 2,483 corporations claimed US$1.2 billion in R&D credits in 2008.
In return, companies in California are generous about reinvesting their earnings in R&D. Agilent dedicates around 10 percent of its roughly US$6.5 billion annual revenue to R&D globally, a proportion that Solomon says is above average among its peers. “In some of our businesses, where we're focusing on future growth, we're investing far more than that 10 percent,” she adds.
California also attracts far and away the most venture capital (VC) in the United States — US$11.6 billion in 2010, nearly five times as much as the second ranked state, Massachusetts. Furthermore, California ranks first in the country in number of jobs and revenues for venture-backed companies, according to a 2011 study by global business analysts IHS for the US National Venture Capital Association, with 60 percent of the VC investments in California going to the software, energy, and biotechnology sectors.
Industrial innovation in California is well supported by its academic institutions. Stanford University, a private institution, is based at the heart of Silicon Valley and fosters strong relationships with companies — many of which are based at the Stanford Research Park, founded in 1951 when the university leased some of its land to emerging technology firms. The research park offers several incentives to encourage industry-university interactions: businesses are able to sponsor joint research projects with Stanford faculty and students, invite faculty to join their boards or act as consultants, offer internships to students and use the university's libraries.
SRI International, a non-profit contract research institute, split off from Stanford University in 1970 and now employs more than 2,100 people. The institute has conducted research for over 90 private and non-profit businesses, and also licenses and commercializes the technology it develops with federal funds. Norman Winarsky, SRI's vice president of ventures, says its four spin-off companies that have gone public are now worth US$20 billion.
The University of California (UC) has also forged enduring partnerships and collaborations with industry. The UC system, spread across 10 campuses, is the state's flagship higher education institute and is a powerful engine for job creation, says Steve Kay, dean of the division of biological sciences at UCSD. The university has “generated the pipeline of trained scientists and technologists that has really fed into the high-tech, the biotech, and now, more recently, the clean-tech explosions,” he says. A UCSD study published in February 2011 revealed that the 156 active UCSD-related companies are directly responsible for 18,140 jobs.
The UC system also hosts four Gray Davis Institutes for Science and Innovation, each a collaboration between several campuses, that are purposed with accelerating technology transfer and increasing interactions between the state, UC and industry. They are the Center for Information Technology Research in the Interest of Society (CITRIS), the California Institute for Quantitative Biosciences (QB3), the California NanoSystems Institute (CNSI) and the California Institute for Telecommunications and Information Technology (Calit2).
California industry also provides the most support for local academic R&D in the United States. During the 2009 fiscal year, industry-financed R&D expenditures at Californian universities and colleges totalled US$506 million, according to the NSF.
Funding for higher education, however, has been harder to come by in the wake of the recent economic downturn. The UC system is facing financial challenges as a result of the state budget deficit. For the 2010 fiscal year, UC had a budget shortfall of US$1 billion, which it has tried to make up with faculty furloughs, tuition increases and programme cuts. On a more positive note, certain research avenues are just starting to grow. In 2004, voters in California passed Proposition 71, a US$3 billion bond issue to fund stem-cell research in the state. The California Institute for Regenerative Medicine, a regulatory agency, allocates the funds. In 2010, as a result of those grants, five new stem-cell research facilities were dedicated at UC Davis, UC Los Angeles (UCLA), UC Irvine, Stanford University, and the University of Southern California in Los Angeles. A sixth centre, the Sanford Consortium for Regenerative Medicine, is under construction in San Diego and due to open in 2011 for collaborative stem-cell research between the Salk Institute, Scripps Institute, UCSD and Sanford-Burnham. The hope is that the research will eventually provide new opportunities to spin out companies focused on stem-cell therapies.
California has also been hit hard with unemployment, which now exceeds 12 percent. The biomedical research industry, though, has not shed as many jobs as other high-tech sectors, according to the BayBio/CHI study. The biofuels industry is also one of the fastest growing in terms of job creation, says Gail Maderis, president and chief executive of BayBio.
Agilent's Solomon says there are jobs available, but workers need to be flexible. For new recruits, the company looks for ‘T-shaped’ people — researchers who are highly skilled in one area but who can also communicate horizontally across fields. Winarsky of SRI adds that scientists working on innovative research have good job prospects: “They are high-premium people.”
A question on many people's minds is how the state, strapped for funds, will deal with its budget crisis. Genentech's Jackson says she does not anticipate the corporate R&D tax credit being trimmed back. “So far the legislature has felt a compelling interest to keep those tax credits in place to continue to grow the industry,” she says. Pharmaceutical companies like Genentech take comfort in the fact that their products remain necessary, even in lean times. “We're in a flat growth spell right now, but the industry's pipeline is healthy,” Jackson says. “We anticipate continued job growth in the next decade.” California's history of innovation, from HP's inception to today's efforts in stem-cell research and solar technology, will provide a strong foundation for future growth.