Blog: Jason Molesworth

Here's a straightforward question that a typical Jeopardy champion would likely struggle to answer:  "What university has the largest R&D budget in the United States?"  Any guesses?  M.I.T., Stanford, Harvard? – Answer: Johns Hopkins University in Baltimore, Maryland.  

This factoid is a little distorted though, as it's heavily influenced by the fact that Johns Hopkins hosts the Applied Physics Laboratory, which essentially serves as the federal government's anchor applied physics research center.  Here's a tougher question:  "If you strip out funding for the applied physics research center at Johns Hopkins, what university would lead the country in terms of its annual R&D budget?" – Answer: University of Michigan.

With an annual R&D budget that exceeds a billion dollars per year, and a world class research talent pool, U of M is producing innovative basic, translational, and applied research that few universities in the world can begin to compete with. U of M isn't alone either, with Michigan State, Eastern Michigan, Wayne State, and Oakland University all conducting material levels of R&D across a wide range of fields of study.

An interesting question then is, why when asked about academic R&D do most people immediately think of "the coasts"?  M.I.T. springs to most people's minds, as do Stanford, Cal Tech and Berkley.  This starts looking like a branding challenge, where a major gap exists in people's minds between the perceived and actual scale of innovative R&D that's taking place in the state of Michigan.

R&D is also clearly not an academic effort alone.  Michigan firms in the automotive, life sciences, alternative energy, advanced manufacturing, and healthcare I.T. sectors (to name a few) are producing an impressive pipeline of innovative R&D efforts.

The key question facing Michigan policy makers, businesses, and all around general advocates is: "How can we leverage the impressive R&D capabilities and resources in the state to build a firm foundation for future economic and employment growth"?  While this is a pretty straightforward question, the answers are a little more complex.  In my opinion, some of the most important solutions should include:

 -- Clearly defining R&D, and particularly the commercialization of market-viable R&D, as a state priority and a clear source of competitive advantage.
 -- Actively increasing the scale of funds available within the state for early and mid-stage firms to effectively commercialize innovative R&D, particularly from private investment sources (See my previous post regarding the importance of increasing access to capital in Michigan.)
 -- Developing a national branding strategy that specifically articulates the measurable advantages Michigan possesses from an R&D perspective
 -- Conducting a targeted recruitment campaign that seeks to attract entrepreneurs with applied innovation experience and success to the state
 -- Focusing on strengthening the R&D and innovation enablement "Ecosystem" across the state in a truly systematic manner, and
 -- Perhaps most importantly, evolving our mindset as a state to realize that innovation, entrepreneurship, and responsiveness to rapidly changing market opportunities is the key to the state's future prospects

None of these ideas are particularly new or innovative, but they're important to continually articulate and position, as our future success will largely depend on our ability to successfully innovate and leverage the state's impressive R&D capabilities.  The good news is that Michigan already has one of the most progressive and comprehensive approaches to public-private partnership-led innovation enablement and economic development in the country.  Significant progress remains to be made, however, in translating the state's R&D strengths into economically viable firms capable of driving broad-based prosperity and job creation.  We've got the right assets to compete; now we need to execute the vision and continue to evolve the necessary skill sets to realize sustainable success.

Let's face it, even though we often don't like some of the outcomes, international trade and competition is here to stay...  It's what allows us to buy blueberries in February, great coffee at your local coffee shop, and a range of products far cheaper than we would be able to produce them domestically.  What many people miss in the exchange, however, is that it's also what makes it possible for Microsoft and Intel to be driving computing on 90%+ of the desktops in the world and for GM, Ford, and Chrysler to be selling nearly as many vehicles overseas as they do in the U.S. (and in many cases, more...).  So, the question isn't so much one of getting rid of international trade, it's learning how to be successful in a context where competition is now regional and international in nature. Michigan's future economic prospects are going to largely be shaped by our ability to embrace competition, identify where we have structural talent, cost, and quality advantages, and continually evolve our capabilities. 

This reality is going to require something of a mindset shift for many of us in Michigan.  It's no longer going to be enough to ask ourselves if we're performing better than we did last year, but instead, we're going to have to understand how we're performing relative to our competitors.  To do so effectively, we're going to have to look externally and work to continually innovate.  When we talk about looking externally, it's not simply comparing ourselves to other midwestern markets.

Instead, we're going to need to understand what's going on in places like Brazil, Mexico, Korea, Japan, Germany, the Czech Republic, Russia, China, India, etc...  Many Michiganders know this to be true, but we all need to embrace this reality and understand that those are the rules of the game, and they're not likely to change in the future. While the need to compete in regional and international markets is clear, so are a couple of significant negative impacts.  The first is that the dynamic and volatile nature of international trade can result in some very real pain for people caught in a non-competitive industry.  As firms struggle to survive, jobs are lost and families and individuals suffer.  As a result, programs that offer transitional training and job placement assistance are critical in today's more turbulent employment markets.  We all also have to be pretty flexible in terms of learning new skills and even be willing to relocate if the local employment opportunities don't match our skills or career aspirations.  We also need to make sure to have some savings in the bank to help us make it through temporary, and sometimes extended, periods of displacement. 

Secondly, competition needs to be fair.  For countries that don't comply with international environmental, labor, monetary, and trade standards, Washington should use all the power at its disposal to attempt to level the playing field.  Where their efforts fall short, U.S.-based firms are going to have to become even more productive to overcome the structural disadvantages of an uneven competitive landscape. There's a lot going on here, but the bottom line is that our future depends on our ability to continually "improve our game" and evolve as our competitors develop new capabilities.  We've got the talent, the work ethic, and the resources to continue being successful and innovative.  We need to make sure, though, that we expand our sense of who we're competing against, why, and what we need to do to remain leaders for generations to come.

Just as plants need water and sunlight to survive, new businesses need investment capital to grow and thrive.  Needed capital can come from a wide range of sources, including: the entrepreneur(s) themselves, friends and family, angel investors, SBA loans, etc.  Regardless of the source, virtually all early-stage firms need funding to pay for legal, strategic planning, marketing, technology, and product development assistance, to name but a few critical functions.

Here lies the dilemma for entrepreneurs in the state of Michigan… While there is a tremendous amount of talent and innovative thought leadership in the state, Michigan entrepreneurs often struggle to access early stage capital to commercialize their business ideas.  The causes of this "Capital Gap" are many, including, but not limited to:

 -- The lack of regional or national banks headquartered in the state (a real surprise for a state the size of Michigan)
 -- A general risk aversion among Michigan investors regarding early-stage or alternative investment opportunities
 -- A comparatively low level of angel, venture capital, and private equity industry presence (also an unfortunate byproduct  of general investment-related risk aversion in the state)
    
The resulting sub-optimal level of investment capital for early-stage businesses represents a real risk for the state, as it limits the ability of innovative entrepreneurs to realize their business visions and create jobs over time.  There are, however, a number of both private and governmental groups who are actively working to address these gaps.  Groups like Detroit Venture Partners are playing a prominent role in increasing the visibility and market potential of Michigan-based start-ups.  Government groups like the Michigan Economic Development Corporation (MEDC) and the 15 SmartZone organizations across the state also represent one of the most progressive public-sector eco-systems for entrepreneurial enablement in the country.  Accelerate Michigan is another program that promotes entrepreneurial innovation in the state and is doing a great job of getting promising early stage businesses funded to open shop.

While progress is clearly being made, the needs and importance of this issue are significant.  Small businesses are the most important engine for economic and employment growth over time, and they are truly the key to our future economic prospects.  As a result, Michiganders with the resources to contribute to investing in early stage firms should seriously consider doing so.  Not only do such investments often yield very attractive risk-adjusted returns, particularly if allocated and diversified by knowledgeable managers, but they also have the potential to play an important role in the state's economic future.  For people interested in this issue, I'd recommend that you look into the Michigan Angel Fund, Great Lakes Angels, and the Grand Angels.  Alternatively, any of the state's SmartZones would be happy to forward you to groups that can bring you up to speed on opportunities to play a role in this important area.