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Innovation State Brief 2015 Changing California’s Economic Landscape

We will together envision a state that is more vigorous and influential than ever as we define the ideas that will get us there. We’ll do so in a setting designed to turn those ideas into action. -Milken Institute

A message from the founder Paul Gladfelty Much attention has been given to climate change by California’s elected leadership, and for good reason. The warning signs are on the horizon letting us know that we, as a society, must take action now to protect our future. The same can be said of California’s economic viability as a world innovation leader and economic super power.

We need a strategy; a sustainable economic future that goes beyond 2015, and focuses on what we can achieve in the next decade. To ensure California’s future long-run economic growth, our next generation must have educational opportunities that prepare them for jobs in the innovation economy, establish long-run policies that promote the growth in the innovation sector, and to innovate government in ways that reduce regulatory red tape, and provide for greater transparency utilizing open data. Ultimately we need to create more opportunities for future generations.



California At A Glance


California Regional Industry Clusters


How We Can Grow The Economy


Innovation State Supported Legislation

The BEA reports that from 2011-2014 Texas had a 17.8% growth in GDP. California had a 7.8% growth in GDP.


Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance California’s Innovation Standing within the United States We should rank 1st; overall innovation ranking is 3rd. Knowledge Jobs Rank

State in 1st

Overall Innovation Ranking



Information Technology Jobs



Manager, Professional and Technical



Workforce Education



Immigration of Knowledge Workers









Fast Growing Firms



Initial Public Offerings













High-Tech Jobs






Industry Investment in R&D



Non-Industry Investment in R&D



Clean Energy Economy



Migration of U.S. Knowledge Workers Manufacturing Value Added

Globalization & Dynamism Foreign Direct Investment

Export of Manufacturing and Services

Digital Economy & Innovation Capacity E-Government Broadband Telecommunications Scientists and Engineers Health IT


Where should we start? Education. Education is the foundation for any society. California has always valued education and has a number of the best universities in the world. However, we cannot continue to run our institutions, business as usual. We need to improve how we educate our childeren to be job ready for the realities of our new economy.

Over the past decade, California’s innovation capacity has declined with an overall ranking of 2nd in 1999, to 3rd in 2014. Not only has our innovation capacity been dwindling, but also California’s economic output. In the 1970’s, California had grown from being the 7th largest economy in the world, to its peak as the 5th largest economy by 1984, now California ranks 7th once again. The factors attributing to California’s growth has slow down primairly from macroeconomic conditions from the growing competitive business incentives outside of California. What other states and countries have realized over the past decade, is the incredible economic growth from high-tech jobs and startup companies. There is no doubt

that the majority of real economic growth of new emerging industries, such as 3D printers, drones and even digital cryptocurrencies will emerge. The question remains, “What are we doing to promote this new economy?” California has a greater potential to grow its economy and capture the gain of these new industries if we choose to focus around promoting California’s Innovation Economy. What we need is to have a collective vision on where California is heading, and working in a bipartisan manner to develop a strategy so that we can unleash the full potential of the state. Some economic sectors will grow regardless of policy. However, if California policymakers decide to work toward a common goal, we can reignite the true growth potential of the state.

Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance

County Specialization California’s economy is extremely diverse, from agriculture to information technology, California’s policies should reflect the nature of its economy. White Dashed Areas Los Angeles, Orange County and the San Francisco Bay Area account for 61 percent of California’s Economic Output and houses 19.8 million Californians.

- Agriculture - Wood Products - Aerospace - Distribution & E-Commerce - Business Services - Hospitality & Tourism - Education & Knowledge Creation - Marketing, Design & Publishing - Information Technology - Biopharmaceuticals

38.8 17.71 (M)

California’s Total Population


California’s Total Employment

8th 12.85 California’s World GDP Rank


Private Sector Jobs Average Income $55,952


Gross Domestic Product



Government Sector Jobs Average Income $62,766


Innovation State Brief 2015 Changing California’s Economic Landscape 01 - California At A Glance

Theoretically Speaking What if California had a 10 percent growth in from 2011-2014 instead of 7.8 percent?

+123 BIL

1.37 MIL

Additional GDP

Additional California Jobs

+1.4 BIL

+2.3 BIL

Additional Funding for Education

Additional General Fund Budget

Other states and forward thinking cities are taking the initiative to improve their business and economic climates. When was the last time California had a landmark piece of legislation to improve the economy?

What will Los Angeles do?

New York Builds New Tech Campus by Cornell Austin, TX offers over 40+ individual business incentives

California GDP Growth rate from 2011-2014

Texas GDP Growth rate from 2011-2014

New York GDP Growth rate from 2011-2014





Success requires continual improvement.


Improvement takes planning.


Innovation State Brief 2015 Changing California’s Economic Landscape 02 - California Regional Industry Clusters

California’s Industry Clusters Propelling Economic Growth Industry clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers and associated institutions in a particular field that are present in a region. Numerous benefits arise after industries have established clusters in a geographic areas.

Clusters arise because they increase the productivity with which companies can compete. The development and upgrading of clusters is an important agenda for governments, companies and other institutions. Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening and reducing the costs of doing business. A little background on industry clusters is useful. It begins with Michael Porter of Harvard Business School, who found that location characteristics play an important role in the success of a region’s industries. Porter emphasized that with a strategic approach, industry clusters could be formed and help other similar firms achieve a competitive advantage by

promoting their common interests. Although this strategy has produced mixed results, it remains a well established model for economic development and business attraction.

California has five major industry clusters that employ more than a quarter of the national labor force in that cluster. In order of highest concentration, clusters include video production, apparel, agriculture services, music recording and biopharmaceuticals.

Given the economic downturn in 2008, two distinct schools of thought have emerged with regard to industry clustering: those who embrace Porter’s thesis, and those who deny clustering and see it as an ineffective model that limits a region’s economic potential. An op-ed published in the Washington Post challenged the effectiveness of industry clustering - “Industry Clusters: The Modern-Day Snake Oil” - as an economic development strategy. The author, Vivek Wadhwa, an executive in residence and adjunct professor for the Pratt School of Engineering at Duke University, cited a Norwegian study that suggested clusters like Raleigh’s Research Triangle Park are “irrelevant for innovation,” arguing that what’s missing are people who have the motivation and ability to start ventures.

Basic infrastructure is always needed for regional economic development success, Wadhwa noted, but fancy science parks and big industries are just nice to have. As early as the time of Plato’s writing of The Republic in 360 B.C., there were signs of increased productivity through specialization and economic growth through collaboration. Following the op-ed, Porter challenged economic development professionals to analyze what is driving their local economies, and identify the resources giving them a competitive advantage. The old adage “success breeds success” is at the heart of any region’s cluster strategy. In a recent survey, 60 percent of the respondents of a regional area development firm reported that the presence of activities similar to theirs was a consideration when selecting a site. Also, a 2011 Brookings Institution report showed that “strong clusters foster innovation through dense knowledge flows and spillovers; strengthen entrepreneurship by boosting new enterprise formation and startup survival; enhance productivity, income levels and employment growth in industries; and positively influence regional economic performance.” “If you build it, they will come,” really only works in the movies. It’s not enough for economic development organizations to simply create fancy industrial parks and state-ofthe-art buildings and expect new companies to line up at the doorstep. That’s why, in recent years, more and more states and regions have been tailoring training, education and incentive programs that build on existing clusters or foster the development of new ones in order to thrive in the Innovation Economy. For example, in Brevard County, Florida, one of Central Florida’s fastest growing communities, the days of space shuttle launches are over. However, economic development

California’s Industry Clusters Cluster Category

National Rank

2013 Employment

Business Services



Distribution and Electronic Commerce



Hospitality and Tourism



Education and Knowledge Creation



Marketing, Design, and Publishing



Information Technology and Analytical Instruments



Financial Services



Transportation and Logistics



Food Processing and Agriculture



Video Production and Distribution



Insurance Services



Aerospace Vehicles and Defense



Communications Equipment and Services



Production Technology and Heavy Machinery



Performing Arts



Apparel Manufacturing



Construction Products and Services






Printing Services



Metalworking Technology



Medical Devices






Water Transportation





Oil and Gas Production and Transportation



Lighting and Electrical Equipment



Furniture Manufacturing



Downstream Metal Products



Agricultural Inputs and Services



Automotive Manufacturing

officials on the Space Coast believe industry clusters will help launch a new economy there. The region has targeted clean energy, defense, life sciences, information technology and aerospace as industry sectors that can produce job growth in each sector ranging from roughly 1,000 to 14,000 new jobs through 2015, with hourly wages between $21 and $30.

This is a prime example of policymakers taking their current industry clusters and consciously deciding to develop a plan to target those clusters. What makes California ahead of this curve is that we can choose to focus on the next industry clusters that will revolutionize California’s economy. There are several emerging industries that California can capture, such as 3D printing and drone technology.



The Public Policy Institute of California (PPIC) reported that one of the top three areas that were associated with having a “positive and significant relationship” with economic growth was the structure of corporate tax. California is ranked 46th in corporate tax.


Innovation State Brief 2015 Changing California’s Economic Landscape 03 - How We Can Grow The Economy

California has been limiting its economic growth through regulatory burdens and an inhospitable business environment. We can change this perspective and improve the economy.

Research and development (R&D) is the key to innovation and California’s government can propel this innovation by supporting R&D and startups. As we work towards a more prosperous economy in 2015, there are key elements we can improve and create to make California the place for R&D. California needs to prepare for a constantly changing global economy. One primary focus is California’s use of the Research and Development Tax Credit (RDC). Overall, California’s

RDC program has been effective in promoting more R&D. However, with other states and countries increasing their incentives for R&D activities, California is becoming a less competitive state because the overall business incentives are dwindling, and California’s environmental laws are creating ever larger amounts of red tape, slowly degrading California’s business climate. According to the Public Policy Institute of California (PPIC), California is ranked 4th in entrepreneurial energy, and 2nd in innovation capacity. However,

The question is how do we bridge the gap between areas that provide few economic opportunties with those that have an abundance of jobs in a thriving innovation economy? Tech shops allow everyday people access to 3D printers and other equipment at the cost of a gym membership.

“For every 1% increase in effective RDC rate results in an increase of in-state R&D activity approximately 1.7% in the short-run and 3% in the long-run.”

- San Francisco Federal Reserve

ranked 46th in corporate tax. Given California’s high entrepreneurial rankings, increasing the RDC would leverage California’s strengths, and raise California’s corporate tax rating. To support California’s Innovation Economy, we believe there are several key strategic policies that will start

Research and development extends beyond the high-tech industry and into the agricultural sector.

the beginning of a discussion. First, California needs to send a clear message to the world at large, that it is serious about changing the negative business climate perspective. One way we can send that message is by increasing California RDC’s by 15 percent over a five year period. Second, companies claiming

RDC’s through the FTB should be treated fairly. “FTB disallowed all of our credits without reviewing supporting documentation that we had submitted.” Third, create an Expand and Trade Program to allow the sale of accumuated RDC’s. If California were to implement this strategy it would be a step in the right direction.

Polishing Our Image California’s Pitch

Industry Survey What’s effective?

We need to show the world at large, that California is serious about investing in our state’s future.

A RDC survey conducted by Silicon Valley Leadership Group reported that if companies were able to sell or trade existing credits, it would make California RDC’s more effective.

Innovation State Brief 2015 Changing California’s Economic Landscape 03 - How We Can Grow The Economy

3 Thousand Firms Utilize RDC’s

148 Million State Funded R&D

103 Billion Private Industry R&D

Expand and Trade Utilizing California RDC’s Similar to a Cap and Trade where carbon credits are bought and sold to reduce carbon emissions; an Expand and Trade program would allow the sale of unused RDC’s within California.

An Expand and Trade program would allow for the sale of unused RDC’s that have been accumulated by small companies that either don’t have enough sales in California to offset their income tax liability, or that have a net operating loss. This program would essentially create an online market for companies that have R&D to monetize their RDC’s and allow other companies to purchase their credit at a discounted rate to offset their state tax liabilities. Now

the question arises, “Why would California want to lose more revenue from corporations?” Well, in turn, this program would actually create more

Most companies only utilize 25% of RDC’s because they have a net operating loss.

revenue for California in the long-run. A major problem with the current RDC system is that there is no sunset period for these credits, thus California is building an ever larger RDC liability, which exceeds over $13 billion. We recommend a 10 year sunset period to be implemented with this new program to relieve California from this liability. The implementation of this new online market place would be administered by Go-Biz in conjunction with the Franchise Tax Board (FTB). In order

to participate in the market, both the seller and buyer will need to meet certain prerequisites. The seller of the credit must be a small company, defined as under $50 million in EBITDA and have pre-existing RDC’s from the previous year to sell. Both parties must conduct R&D in California and have approval from both the FTB and Go-Biz in order to sell and purchase RDC’s. This program is designed to help startups and new companies during the most innovative times in their existence. This program would

Companies that sell their RDC’s must reinvest at least 50% of the sale back into the company to ensure further R&D. allocate a percentage of the sales of the credit to pay for the expenses of implementing this program for both the FTB and Go-Biz.

Reinvigorating the RDC was developed after spending a year discussing this issue with several industry trade groups, large accounting firms and world renowned think tanks. What we ultimately found was that California RDC’s were antiquated and cumbersome for companies to comply with. The idea of RDC’s is to promote more R&D and the current system needs to be improved. We need to be the catalyst to bring together research based policies with effective leadership.


Even a discussion on having unique policies with legislators can have a dramatic impact years to come. Where will the ripples come from in a pond, if we don’t throw a pebble?


Innovation State Brief 2015 Changing California’s Economic Landscape 04 - Supported Legislation

Past Legislation For Innovation & Jobs 2012 - 2013 AB 2506 / AB 653 - The California Innovation & Jobs Act the Research and Development tax credit by 3 percent a year • Increased for both basic and qualified research over the following five years. the state sales and use tax on the purchasing of manufactur• Eliminated ing equipment (adopted to the Governor’s economic stimulus package). the current iHub program in California and allowed for greater • Codified utilization of state owned properties for startup businesses. credits for companies that collaborate with postsecondary edu• Tax cational institutions for classes that were linked directly to jobs. refrom which places greater authority with the Legisla• Regulatory ture to reject regulations before they are fully implemented.

2014 - 2015 AB 1215 / SB 573 a California Chief Data Officer (CDO) who will • Establish create an inventory of all available data for the state. as the single data repository for all • Establish state agencies, available for both private & public use. • Establish data reporting standards in raw, machine readable

10 Proposed Solutions

2 Working Soltuions

+2 Enacted Solutions

California: The Melting Pot

A Diverse Economy Calls for a Diverse Set of Policies California is one of the most ethnically diverse populations in the world. Our diversity is also one of our strengths. A large and growing segment of this diverse population is the Latino community. In 2013, Innovation State began collaborating with the California Hispanic Chambers of Commerce, along with the prestigious Milken Institute, to craft legislation that would have an immediate and lasting impact on California’s Innovation Economy. Out of that collaboration, legislation was introduced entitled the “California Innovation and Jobs Act.” This legislation called for doubling the state RDC, allow for unused credits to be traded under an “Expand and Trade” program, eliminate sales tax on manufacturing equipment, institutionalize the iHub program for startup companies, and address regulatory reform. The California Innovation & Jobs Act had four primary roles. First, it increases the RDC by 3 percent a year for both basic and qualified research over the next five years. This allowed for corporations to plan appropriately for expanding R&D centers in the state. Second, eliminated the state sales and use tax on the purchasing of manufacturing equipment. With a major decline in manufacturing

throughout the United States in the past 20 years, the majority of states exempted manufacturing equipment sales tax. Third, codifying the current iHub program in California and would, among other changes, allow for greater utilization of state owned properties for startup businesses. The state owns hundreds of thousands of buildings and properties that are not being productive, the idea is to allow for private interests to utilize these assets. Fourth, creating tax credits for companies that collaborate with postsecondary educational institutions for classes that were linked directly to jobs. Besides the obvious economic gains from these policies, it was also a tactic to gain global publicity for the state to indicate that the Legislature had taken a new big approach into bolstering California’s economy. An approach that had been innovative in creating a big economic package. The legislation marked the beginning of an ambitious agenda, and set the stage for future discussions, other legislation and ongoing research.

Innovation State Brief 2015 Changing California’s Economic Landscape 04 - Supported Legislation

California iHubs 16 iHubs for Innovation California has created 16 iHubs to promote more innovative startups throughout the state.

California is home to the largest in-state innovation network in the country. Acknowledging the inherent opportunities available within the State to connect the emerging labor force with existing businesses and entrepreneurial start up companies. In 2012 California’s Governor Jerry Brown, established the Governor’s Office of Business & Economic Development, (GO-Biz). Go-Biz is leading an initiative to prioritize the commercialization of innovation and technology as an economic development strategy through the California Innovation Hub (iHub) Program. Sixteen existing iHubs span the state from Redding to San Diego, and cover some of California’s most vibrant economic sectors from agriculture to life science and from medical technology to biomasses. The GO-Biz Innovation and Entrepreneurship Unit has established a wide range of collaborating partners with regional economic development authorities, local governments, private organizations, incubators, venture capital sources and the higher education system to develop infrastructure and support for entrepreneurs to succeed in California. Many organizations are already involved in assisting entrepreneurs within the state. Recently, GO-Biz released a request for three new hubs to enhance California’s existing innovation infrastructure. The addition of these new hubs will enable California to focus on three historically strong economic sectors including healthcare, manufacturing and aerospace.

California Open Data One Portal for All • 70%


Several California agencies have implemented their own open data portal. Data stored by governmental entities are the building blocks for assessing government spending, creating useful apps and research.

California State Government has not fully embraced the concept of open data, and to date only a few state agencies have open data portals. In particular, the Health and Human Services Agency, through a grant, has created an open data portal that can serve as a model for other state agencies. Within state government is the Government Operations Agency, which has under its jurisdiction the California Department of Technology. It is within the Agency’s purview to create a statewide open data portal with common standards and machine readable format. The state’s current “portal” is closer to a directory to other

state agencies than it is an open data portal, where all publically available data from various state agencies, departments and bureaus is available. Currently, there does not exist in the State Government a Chief Data Officer, whose responsibility would be to coordinate with various state agencies and departments to create a data handbook that can be used to implement an open data platform. Hence, the creation of AB 1215, which would require the Governor to appoint a Chief Data Officer (CDO) who would create an inventory of all available data in the state, and create a statewide open data portal that is accessible to

the public. The bill would also require all state agencies to appoint a data coordinator to identify and publish all available data sets on the statewide open data portal by January 1, 2022, pursuant to a specified schedule. Creating a statewide open data portal will assist citizens in becoming more engaged in government, as well as third parties creating useful applications which will improve lifestyle just simply by creating an open data platform. Utimately, it is data that belongs to the public and anyone should be able access millions of data points. Raw data is simply building blocks to turn into useful information, if it is not accessable, it has no real benefit.

Innovation State is a 501(c)3 non-profit organization whose primary mission is to assist in developing an economic strategy based on California’s Innovation Economy.

Innovation State 1201 K Street, Suite 750 Sacramento, CA 95814

For a digital copy, scan the QR code below.

Phone 916-447-8300


Fax 916-444-7841


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