The Heinz Endowments, specifically the Innovation Economy Program, recently commissioned a report on Growing Pennsylvania’s High-Tech Economy.  It took me a while to make it through the whole report (I don’t have tons of free time), but I wanted to share some of it and comment on it briefly.  I’ll do this in two parts.  Today I’ll discuss the findings and how those findings lead to goals for creating effective policies.  Tomorrow I’ll discuss the recommendations that the report included.    The disclaimer, of course, is that I come from the computer/IT side of the “high-tech” world.  The report gives more thought to medical, engineering and scientific jobs then I can.

Here are the findings that make up the executive summary of the report (each point has been summarized by me):

1. Pennsylvania is in the middle of the pack of comparable states on high-tech tax rates.
2. High-tech job creation and loss is driven by events that happen in states rather than companies moving between states.
3. Globalization is responsible for 30 times more high-tech job shifting then domestic out-migration.
4. High-tech companies that are more mature resemble “old economy” companies when negotiating breaks.
5. Pennsylvania has an advantage over comparable states in the amount of existing skill.  These skills however are in medical and engineering rather than math and computers.
6. Tax reductions and exemptions for specific firms “crude tools for economic development.”
7. Pennsylvania has a more balanced approach to high-tech jobs than many states.  The balance comes from not just tax breaks but programs to foster early-stage companies and other programs.

These are the facts and so often we make policies that completely ignore them.  I want to call out numbers 2, 3 and 4.  I think points 2, 3 and 4 together can be used to advocate a strategy of build over buy.  What I mean by this is that Pennsylvania as a whole (and Pittsburgh as a city) should not be attempting to offer Google a bigger tax cut then North Carolina does, they should be trying to make sure the next Google is a Pittsburgh company.  Once a company has reached the size of Google any truly location-independent factory, lab or datacenter that they want to build becomes a counterproductive bidding war between states.  Politicians that want to take credit for creating 600 high-tech jobs offer too much and the city or state loses money.

The better alternative is to build a technology and entrepreneurial community.  Then worry about having favorable enough tax structures to convince people to stay.  Specifically, policy should be organized around creating a community that has the following outcomes:

1. Creates an imbalance of skill so strong that established high-tech companies feel the need to setup shop in the city without getting gigantic tax breaks.   We’re already making some progress on this because of CMU.  For example, the Google Office.
2. Becomes an incubator for the kinds of ideas that launch companies.  This involves getting the entrepreneurial community in Pittsburgh beyond the “tipping point” that Silicon Valley and New York have already passed.  Luring a company to Pittsburgh can be a very costly process.  As number 4 above suggests, this is sometimes more costly than it’s worth.  It is much better to find ways to plant seeds then to find ways to move full-grown trees.  Great forests are grown, not bought.
3. Encourage companies to stay in Pittsburgh.  This is perhaps the biggest correction PA and Pittsburgh need to address.   CMU economist Robert Strauss points out (in a Trib article released about the Heinz study) that the unfair/unusual property taxes and the state capital and franchise taxes (which taxes companies that aren’t making profits), make it difficult for companies to stay in PA.  In fact Dr. Strauss is quoted as saying some companies “are told by their venture capitalists to get out of Pennsylvania.”

Tomorrow I’ll look at the recommendations that the Heinz report contains.  I’ll be looking for them to address these three outcomes.