Published January 16, 2006

'Innovation-driven economies the new focus

Should the Blue Ridge Region focus less on industry sectors and more on becoming "innovation-driven"?

Leading national thinkers suggest that innovation is vital to a region's prosperity, in a world where industries have become less and less stable.

"Today, it is widely understood that innovation is a means by which to overcome the seemingly unending tide of structural economic transitions that occur as various industrial sectors become obsolete or fundamentally change their products and processes," according to Walter Plosila, a consultant with the Columbus, Ohio-based technology firm Battelle, in the winter 2005 issue of Economic Development America.

Plosila says there are three key ingredients for innovation-driven economies:

* Capital: community wealth and appropriate funding sources.

* Talent: an adaptive workforce and entrepreneurs.

* Technology: facilitated collaborations to stimulate product innovation.

The Business Journal spoke with stakeholders throughout the region for their assessment of our strengths and weaknesses in these areas.

Does the region possess enough local capital to fund local entrepreneurs? One might be surprised. According to a March 2004 article by Sarah Low, with the Center for the Study of Rural America, "some rural regions are remarkably rich."

She points out that "household financial well-being" is often overlooked as an important resource base for regional growth. "Most analysts look to the annual flow of income as the most appropriate measure of economic well-being," she writes, "but income is only the tip of the iceberg."

Larry Heaton, president of three-year-old Franklin Community Bank in Rocky Mount, illustrates Low's point. He sums up Franklin County's community wealth in two words: real estate. "Real estate is one of the principal drivers of this economy," he says. He cites the emergence of $275,000 to $450,000 homes in the Boones Mill area, along with the practice of "flipping" homes (rapid speculative buying and selling).

The economic results are tangible. Heaton says that from June 2004 to June 2005, statewide bank deposits grew about five percent; in Franklin County, the rate was ten percent.

Real estate "is the engine that has allowed wealth to be created. Our bank is an example of that." The bank in turn makes loans for new business start-ups (primarily in the service sector), construction, industrial equipment, inventory and business expansions.

Greg Feldmann is president of FNB Roanoke Valley, part of FNB corporation, a banking company covering an area from Wythe County to Bedford County. He is also former managing director of a local venture capital fund. He describes the continuum of funding sources available in the Blue Ridge Region:

* Personal networks: Family and friends, personal savings, home equity-these sources are generally tapped for smaller, "lifestyle" businesses.

* Angel investors: "There is some void in this because there is not a big pool of people."

* Venture capital: "We are at the beginnings of some venture activity; however, the amount of capital is still pretty thin and cannot fund many companies." He adds that FNB invested in the Radford-based venture capital fund NewVa Capital Partners.

* Public equity: Because there are no investment banks here per se, he says, entrepreneurs need to leave the region to find an investment bank with relevant industry knowledge.

* Debt markets: "We've got lots of great banking representation," he says regarding short-term and intermediate financing (up to seven years).

Feldmann describes a seismic economic shift currently taking place. "[There] is a real public policy challenge for the transition from a [traditional] manufacturing to a knowledge-based economy. There is a shift from companies that had inventory and accounts receivable to companies whose only inventory is a stack of CDs-basically no inventory that can be liquidated."

The question becomes, "How do we bank knowledge companies? When it comes to [financing] intellectual property, someone like me can't tell the future value." In other words, there is a financing disconnect: banks are structurally unable to serve these companies because it is too risky, he says.

Bill Guzek agrees. "Technology is still something new to the area. It's still easier to get money for a machine shop or something in manufacturing." Guzek is owner of IPT Consulting and a board member of the Region 2000 Tech Council. Funding is also "a chicken and egg thing. If we had more entrepreneurs looking for deals, we'd probably have more angel investors." Indeed, says Battelle's Plosila, "The problem small- and mid-sized regions face is not simply a lack of venture capital . . . but a paucity of risk equity capital needed prior to [mainstream venture capital]."

Gordie Ziegler, executive director of the NewVa Corridor Technology Council (NCTC), says that although the NewVa region has an informal network of angel investors, he would like to see a more formal organization that "could make group decisions and group investments. They could share resources such as due diligence, instead of acting on their own."

Plosila notes that regional initiatives across the U.S. are focusing on retaining local college graduates (e.g., through internship programs), developing a core of "serial entrepreneurs" and linking K-12 education to post-high school training programs.

The Western Virginia Workforce Development Board is currently focused on the last point, says board president Doloris Vest. The board is working on a new labor "demand plan," to be completed in February, which will identify occupations for which labor will be most in demand, and identify gaps between available skills and jobs. "This is the first formal step to matching the available labor force with available jobs. "Right now the trades occupations in this area are unbelievable. They are screaming for more bodies," she says.

This is borne out by a 2005 study of Workforce Investment Area III (the Roanoke area), conducted by Chmura Economics & Analytics, which found that over the next eight years, construction trades will have the third-highest educational gap, following health services and education.

"The trades have been neglected as a career path over the last 20 to 25 years," says Vest. "Everybody needs post-secondary education, but not all of us need to go to college. We need for parents, students, guidance counselors and teachers to think: 'We want a future for this student-not necessarily a degree.'"

However, degrees continue to be important. According to Christine Chmura, chief economist at Chmura Economics & Analytics, there appears to be a correlation between a region's percentage of bachelor degree holders and new business starts. "Regions with those with bachelor's degrees or higher grow faster," she says.

Chmura is concerned with primary school attainment as well. She is concerned that the U.S. may be about to lose its educational edge, citing studies showing that American eighth-graders are scoring lower in math than those in some less developed countries. She points out that these middle schoolers "will be underpinning [economic] growth in four to eight years." Interestingly, Craig County and Salem City eighth- graders were among the top 10 school divisions in passing science in 2002; likewise Floyd County was in the top 10 that year for computer technology.

Meanwhile, Danny Inge, executive director of the Region 2000 Workforce Investment Board, is grappling with another type of workplace issue. "Four years ago, the gap was jobs; now the gap is [probably] people," he says. "We are at full employment for skilled workers who can pass a drug test. We have employers telling us they can't expand." In addition, he says another 5,000 new jobs are projected for the area.

In response, workforce development initiatives are focusing on expanding the current school-to-work pipeline, championed by nuclear companies like BWXT and Areva, into other career ladders that will benefit small and medium-size companies. He describes a possible career path as: high school graduate or GED certificant to Region 2000 Career Center programs to Central Virginia Community College (which often includes practical skill training) to employment by participating companies (in some cases the Board pays 50 percent of on-the-job training).

As to the problem of full employment, Inge says, "[It] is not a bad deal. It gives us the opportunity to bring others into the workplace," for example disadvantaged workers, such as older and handicapped workers. Laid-off workers from the Southside region are also commuting to Region 2000 from as far away as Danville.

Is underemployment an issue in the Blue Ridge Region? Sean Moore, research associate with the Center for the Study of Rural America, computed the skill surplus for the Blacksburg, Roanoke and Lynchburg MSAs between 1990 and 2000.

Moore found only a slight shortage of high-skill workers, suggesting that these labor markets are somewhat in balance. His observation: "I think the real issue for [the Blue Ridge Region] is understanding what exactly [its] assets are, what the markets for these assets are, and how the two can be brought together."

"It's well known that small businesses´┐Żare the drivers of innovation in this country; perhaps their size makes them more nimble, flexible and willing to take more risk," says Niro Rasanayagam, director of the Region 2000 Small Business Development Centre. She cites October 2005 SBA statistics, saying, "Small businesses produce 13 to 14 times more patents per employee than large patenting firms. In addition, small businesses are employers of 41 percent of high tech workers (such as scientists, engineers, and computer workers)."

Roanoke appears to be making some inroads in entrepreneurship. Another 2005 SBA report, which includes a listing of key measures and rankings of entrepreneurship across the U.S., ranked the Roanoke MSA 45 out of 394 MSAs in terms of annual growth in numbers of new start-ups.

Additionally, Chmura provided figures showing that Roanoke ranked 41 out of 372 MSAs nationwide, in percentage employment growth between October 2004 and 2005. Regions need mechanisms to connect industry with higher education, in order to develop and capture technology, says Plosila. A good example of this is Region 2000's new Center for Advanced Engineering and Research (CAER). A joint venture between the regional economic development and technology councils, the center will work with Virginia Tech and other universities to bring research and development opportunities to local companies. Guzek is the CAER project director.

Another Region 2000 initiative is its participation in Virginia Economic Bridge (VEB) programs. VEB is a nonprofit organization that facilitates business relationships between companies in the Blue Ridge Region and other parts of the state. On Jan. 18, electronics and manufacturing companies from Region 2000 will be introduced to Northern Virginia counterparts in a showcase event to be held in Tysons Corner.

Other types of collaboration are under way in NewVa. NCTC's Ziegler describes the organization's active support of industry peer groups, including manufacturing, software and CIOs. The NCTC has recently focused its efforts on the Corporate Research Center (CRC) in Blacksburg, holding a forum for a budding aerospace industry peer group. "There are over 100 [start-up] companies at the CRC," he says, "and a lot of them don't know their neighbors. We are going to continue to have events [there] that will allow people in similar industries to meet."

Continuing the theme of collaboration, Rich Sorensen, dean of Virginia Tech's Pamplin College of Business, says that as the Roanoke economy slowly transitions from a traditional manufacturing model to a knowledge economy, "it has to jump onto technology research, especially in conjunction with Virginia Tech. It has taken longer for people to realize that collaboration is necessary. I'm surprised it's not stronger than it is."

Super-regional collaboration is growing as well, says Low of the Center for the Study of Rural America. "We're finding more and more neighboring MSAs are partnering with each other."

(Deborah Nason is a contributing editor to the Journal. She lives in Roanoke County.)

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