C2026105_IPUC_Attachment G_Innovation Plan 2021.pdf

OREGON’S

10-YEAR

INNOVATION

PLAN

Performed For:

Oregon Business

Development Department (Business Oregon)

Performed By:

TEConomy Partners, LLC

February 2021

TEConomy Partners, LLC (TEConomy) endeavors at all times to produce work of the highest quality, consistent with our contract commitments. However, because of the research and/or experimental nature of this work, the client undertakes the sole responsibility for the consequence of any use or misuse of, or inability to use, any information or result obtained from TEConomy, and TEConomy, its partners, or employees have no legal liability for the accuracy, adequacy, or efficacy thereof.

FOREWORD

On behalf of Oregon’s Futures Commission, it is a great pleasure to introduce our state’s 10-Year Innovation Plan.

Oregon has made significant strides in its innovation economy since the first plan was created in 2006. The world and our state, however, have changed significantly since then, and the time is ripe for a new Innovation Plan that addresses the challenges of the future while building on the successes of the past. While 2020 was a difficult year, with unprecedented social, economic, environmental, and public health challenges, we strongly believe that imple-mentation of the 10-Year Plan will lead to a brighter future for the State.

Oregon’s unique assets and vibrant innovation economy help define our state’s identity. Our unmatched natural resources help attract and retain top talent and spur related economic activity. We benefit from our proximity to innovation hubs on the West Coast and our access to the Pacific Rim’s fast-growing export markets. In fields such as semiconductor manufacturing and sustainable technologies, our anchor firms and vibrant industry clusters help foster an innovative and entrepreneurial culture. However, while these assets have guided economic growth for decades, access to opportunities in innovation-oriented fields has been unequal. In the next decade, we must focus Oregon’s economy on engaging all of our citizens to cultivate more inventors, entrepreneurs, and leaders of inno-vation-driven enterprises. We believe that economic justice is a fundamental precursor to achieving an equitable outcome for all segments of our population.

The Futures Commission convened in the summer of 2020 to identify opportunities, activities, and resources to help guide inclusive, innovation-based economic prosperity for Oregon over the next 10 years. The Commission, com-prised of 31 members from across the state, represents leaders from industry, academia, philanthropy, and the public sector, along with successful entrepreneurs. Over a period of six months, the Commission met to produce a plan for the creation and support of an innovation-based economy, recognizing that the continued vitality of Oregon’s economy and the state’s high quality of life rests on its ability to encourage innovation. This focus recognizes that innovation not only disproportionately drives the economy and creates quality jobs, but also can yield products that address social and economic issues.

We owe immense thanks and gratitude to all the individuals and organizations throughout the state who took the time to participate in this effort. Through one-on-one interviews, facilitated focus groups, multiple surveys, and other forums for discussion, the planning process successfully incorporated a range of diverse perspectives that augmented our own beliefs. Without the benefit of input from these numerous stakeholders and partners, the attached plan would not be as robust or comprehensive.

As Futures Commission members, we believe that our best days are ahead of us. In order to support Oregon’s re-covery from recent crises and to build a resilient economy, we must strengthen and grow our capacity to foster the formation of innovation-based businesses and support them as they scale-up and generate new, high-wage jobs. By actively implementing the strategies and actions outlined in this plan, we can achieve a brighter tomorrow together.

FUTURES COMMISSION ORGANIZATIONS AND TITLES

Name Organization Title

Matt Abrams The Abrams Group Principal

Marcelino Alvarez Fresh Consulting Chief Product Officer

Larry Bekkedahl Portland General Electric VP Grid Architecture, Integration & System Operations

Ann Bunnenberg White Horse Consulting Chief Executive Officer

Robert Cowen Hatfield Marine Science Center, Oregon State University Director

Piper Crowell Nike Global Director, Digital & Innovation Policy

Chris Cummings Business Oregon Interim Director

Carol Dahl The Lemelson Foundation Executive Director

Bruce Daucsavage Ochoco Lumber Co. General Partner

Su Embree DHM Research Chairperson & Senior Counsel

Scott Goering Battery Ventures Vice President

David Gomberg Oregon State Legislature Representative

Jessica Gomez Rogue Valley Microdevices, Inc. CEO

Kanth Gopalpur Kestrel Advisors Principal

Rita Hansen Onboard Dynamics, Inc. CEO & Co-Founder

Julie Harrelson Cascade Seed Fund Managing Director

Paula Hayes Hue Noir Founder & CEO

Don Hendrickson Oregon Manufacturing Innovation Center Chair, OMIC Board of Governors

David Howitt Meriwether Group Founder & CEO

Danny Jacobs Oregon Health & Science University President

Betsy Johnson Oregon State Legislature Senator

Paul King Ampere Scientific Founder, President, & Chief Executive Officer

Juanita Kurtin OSRAM Opto Semiconductors Director, Materials Research

Jenn Lynch Portland Seed Fund Managing Director

Nagi Naganathan Oregon Institute of Technology President

Skip Newberry Technology Association of Oregon President & CEO

Nitin Rai Elevate Capital Founder & Managing Partner

Sam Tannahill A to Z Wineworks and REX HILL Founder

Irem Tumer Oregon State University Vice President for Research

Pia Wilson-Body Intel Foundation President

Duncan Wyse Oregon Business Council President

Oregon’s 10-Year Innovation Plan was commissioned by the Oregon Business Development Department (Business Oregon). Business Oregon, the state’s economic development agency, invests in Oregon businesses, communities, and people to promote a globally competitive, diverse, and inclusive economy. Business Oregon’s project team included:

Business Oregon engaged TEConomy Partners, LLC (TEConomy) to facilitate and coordinate the Innovation Plan process. TEConomy is a global leader in research, analysis, and strategy for innovation-based economic develop-ment helping nations, states, regions, universities, institutions, and industries blueprint their future and translate knowledge into prosperity. TEConomy staff that were engaged in this effort included:

Executive Summary................................................................................................................................................................................... i

Oregon’s Innovation Plan — An Economic Imperative

Why Creating an Innovation Plan is Critical to Oregon’s Economic Future

Critical Components of a Robust Innovation Ecosystem

Why Focus on Traded Sectors?

Why Focus on Entrepreneurship?

Innovation Plan Methodological Approach

Key Forces Impacting Oregon’s Innovation Ecosystem

Key Challenges Facing Oregon’s Current Innovation Ecosystem

Critical Dependencies to Sustain an Innovation Ecosystem

Global Headwinds Driving the Need for Oregon’s Innovation Plan

Summary

Oregon’s 10-Year Innovation Plan

The Innovation Plan’s Strategic Framework

Strategy 1: Foster Ideation

Strategy 2: Strengthen the Innovation Ecosystem

Strategy 3: Catalyze Access to Risk Capital

Strategy 4: Brand Oregon as The Place for Innovation — Tell Our Story

Implementing the Innovation Plan

Organizing for Success

Timing and Prioritization of Actions

Anticipated Impacts Generated by Oregon’s 10-Year Innovation Plan

Potential Sources of Funding

Summary

Conclusion

Appendix A: Oregon’s History of Innovation and Economic Development

Appendix B: List of Oregon Stakeholders Participating in Innovation Plan

TABLE OF CONTENTS

EXECUTIVE SUMMARY

At a time when Oregon is faced with tremendous uncertainty driven in large part by a global pandemic, but also further complicated by political, natural, and socioeconomic challenges, there is an even greater need to focus on innovation-based economic growth. By coming together around a common issue — innovation — Oregon has an opportunity to improve the livelihoods of its citizens across the state.

Developing a robust, inclusive innovation ecosystem is at the core of Oregon’s ability to achieve broad-based economic vitality. Innovation ecosystems consist of five interconnected elements, each of which plays a vital role in developing new value-added products and services that create strong economic impacts (Figure ES-1).

Oregon’s Innovation Plan is built on the central premise that the continued vitality of Oregon’s economy and the state’s high quality of life rests on its ability to encourage innovation.

Figure ES-1: Interrelated Components of a Robust Innovation Ecosystem

Economic Vitality

Research + Development A vibrant environment for

R&D and innovation, across both universities and in industry.

Entrepreneurship + Business Dynamics

A climate and culture supportive of inclusive innovation and entrepreneurial development.

Commercialization + Deployment Translation of market-driven research into products or processes that create economic value.

Innovation + Risk Capital Financial capital available for commercialization and new product development.

Talent + Human Capital Skilled talent both developing and deploying new technologies and products.

Source: TEConomy Partners, LLC.

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Supporting the elements of a robust, inclusive innovation ecosystem will drive economic development in Oregon in the coming decades.

While it is noted throughout the Innovation Plan that a robust innovation ecosystem will require dedicated efforts, ultimately, driving catalytic change in Oregon’s innovation economy will also require efforts to effectively address three critical dependencies to economic vitality (see Figure ES-2):

that tackles our toughest problems.

Figure ES-2: Critical Dependencies for Innovation Plan Success

A Thriving Talent Base With Inclusive Pathways to Cultivate Human Capital

A Robust R&D Enterprise Capable of Tackling Our Toughest Problems

Pervasive, Affordable, and High-Quality Digital Infrastructure (Broadband)

Source: TEConomy Partners, LLC.

The Futures Commission, a public-private thought leadership group comprised of 31 members representing industry, aca-demia, philanthropy, and government, engaged a wide range of innovation and entrepreneurship expertise over the course of its work with more than 125 stakeholders contributing to this strategic effort. Figure ES-3 illustrates the five-part process that informed the development of Oregon’s Innovation Plan.

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Figure ES-3: Oregon’s Innovation Plan Methodology

2 4

FUTURES COMMISSION

Six total meetings and ongoing participation from thought leaders throughout Oregon, including private industry, philanthropy, academia, and other sectors.

EXTERNAL OUTREACH

Opportunities for individuals from across the state to participate in the planning process through surveys and other processes.

SITUATIONAL ANALYSIS

An analysis of Oregon’s innovation ecosystem based on a thorough review of previous and ongoing qualitative and quantitative research.

SIX FOCUS GROUPS

• Availability of Risk Capital

• Availability of Value-Added

Entrepreneurial Services

• Connectivity of Industry Clusters

• Regional + Geographic Models

• Diversity, Equity, Inclusion Models

• Emerging Market Opportunities

STRATEGY DEVELOPMENT

Synthesizing input to develop a 10-year innovation plan with actionable short-and long-term strategies.

Source: TEConomy Partners, LLC.

It is important to note that Oregon currently has multiple efforts in place to support innovation across the state. Through its historic investments, Oregon’s state leadership has demonstrated an understanding that a vibrant and high-functioning innovation ecosystem is necessary for the state’s economy to reach its full potential.

Even with these investments, however, Oregon faces significant challenges across a number of critical factors:

• The lack of a statewide entrepreneurial culture stymies the innovation ecosystem and represents a limiting factor to Oregon’s ability to scale companies.

of deal flow is robust and “sticky” to the Oregon economy.

• The lack of “buzz” or image regarding Oregon as a desirable location for innovative companies and investment is hindering the development of the ecosystem.

These challenges, however, are not insurmountable and, with a renewed and re-oriented focus toward addressing these barriers, the state’s innovation ecosystem can thrive. In the pages that follow, Oregon’s Innovation Plan lays out a series of recommended bold strategies and concrete actions that if undertaken will help foster greater levels of economic prosperity for all Oregonians in the years to come.

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OREGON’S 10-YEAR INNOVATION PLAN

If Oregon’s economy is going to prosper in the coming decades, it must ensure its competitive position through four means:

• Oregon must have traded sector industries that constantly innovate, not only the products that they make but also the technological processes that they use to make them.

• Oregon must foster a robust entrepreneurial ecosystem that ensures support services are available that address the continuum of needs from early-stage startups to scalable enterprises.

• Oregon must have financial capital markets receptive and prone to investing in innovative firms and entrepre-neurs that are developing and applying cutting-edge technologies to products and processes.

• Oregon must promote itself as a place to start and grow an innovative company.

Oregon’s 10-year innovation vision is captured in the following statement, which is both bold as well as realistic.

In 10 years, Oregon is globally known as a model for a diverse, inclusive, and resilient economy: a place where innovative people solve the greatest challenges of our times to create novel, sustainable products, processes, and companies that drive economic growth.

To achieve this Vision, Oregon, serving as a steward for all its citizens, will support investments and policies through public-private-philanthropic partnerships that:

• Create and promote a diverse and inclusive innovation ecosystem that cultivates inventors, entrepreneurs, and leaders of innovation-driven enterprises.

• Intentionally ensure that historically underserved groups are fully integrated into the innovation ecosystem and have an equal opportunity to lead and prosper.

• Strengthen Oregon’s unique industrial and natural resources.

• Create an unparalleled quality of life by supporting citizens and businesses striving for economic, societal, and environmental resilience.

VISION

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By achieving this 10-year innovation vision, Oregon will help ensure the state’s future economic vitality.

Examples of anticipated economic and societal impacts that will be realized through the successful implementation of this 10-year Innovation Plan can be found in Figure ES-4.

Figure ES-4: Impacts of Innovation-Based Economic Development

Improved Quality of Life

Global Competitiveness

Economic Resilience

Educational Attainment

Access + Opportunity

Orient the economy around better paying jobs with higher growth potential .

Help the state weather future economic, environmental, and social challenges.

Encourage participation among populations presently underserved in the innovation economy.

Inspire future generations of Oregonians to reach their full potential by supporting a culture of education and building capacity at Oregon’s schools, colleges, and universities.

Expand access to the kinds of products, services, and treatments that improve well-being.

Position Oregon as a national and global leader in critical innovation sectors.

Good, High-Paying Jobs

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Strengthening an innovation ecosystem does not happen on its own, but rather through a series of intentional, strategic, and proactive decisions. Oregon’s Innovation Plan has been designed to be driven by public-private partnerships that cap-italize on Oregon’s comparative advantages while ensuring that future investments are focused on building the innovation, knowledge, and capital that will help ensure Oregon’s economic vitality for all people in all places (Figure ES-5).

Figure ES-5: Oregon’s 10-Year Innovation Plan Strategic Framework

For All People...

…in All Places.

Foster Ideation Foster the commercialization and deployment of new prod-ucts demanded by both Oregon’s existing industrial base and emerging markets.

Tell the Story Promote Oregon as a place to start and grow an innovative company.

Strengthen the Ecosystem Develop the requisite entrepreneurial support services to address the con-tinuum of needs from early-stage startups to scalable enterprises.

Catalyze Risk Capital Provide access to resident risk capital at all stages of development.

Source: TEConomy Partners, LLC.

It is proposed that Business Oregon and its strategic partners initiate a set of four strategies and an associated set of 10 actions to leverage and complement existing efforts while seeking to overcome existing innovation/entrepreneur-ial challenges and help catalyze long-term economic growth across the state (Figure ES-6). To guide investments, this Innovation Plan is intended to be both an actionable but amendable document, with a wide range of proposed short- and long-term actions to address gaps in Oregon’s innovation ecosystem.

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Figure ES-6: Oregon’s 10-Year Innovation Plan Roadmap

Strategy 1: Foster Ideation — Catalyze the commercialization and deployment of new products/services within Oregon’s existing traded sectors as well as emerging markets.

Action 1:

Support Centers of Innovation Excellence that leverage Oregon’s existing traded-sector strengths and emerging market opportunities.

Action 2: Leverage and expand sources of nondilutive capital to catalyze the commercialization of new innovations.

Action 3:

Support early-stage innovation within Oregon’s university, college, and other research settings, ensuring opportunities for all people in all places to connect to resources.

Strategy 2: Strengthen the Innovation Ecosystem — Develop a systemic, regionally based entrepreneurial service delivery system.

Action 4:

Create Regional Innovation Hub designations that will fund and incentivize collaboration to build and advance innovation-focused ecosystems, ensuring opportunities for all innovation-based businesses throughout Oregon.

Action 5: Link talent to innovation efforts.

Strategy 3: Catalyze Access to Risk Capital.

Action 6: Foster the further development of Oregon’s risk-capital stack.

Action 7: Incentivize angel investments in Oregon’s innovation-based firms.

Action 8:

As deal flow increases across the state, focus efforts to drive more of the Oregon Growth Account’s investments to Oregon’s businesses.

Strategy 4: Brand Oregon as The Place for Innovation — Tell Our Story.

Action 9:

Develop Oregon’s Innovation Brand and market within the state — the brand should be aligned with and leverage Oregon’s existing strengths.

Action 10:

Develop an external marketing campaign that showcases Oregon’s unique identity and competitive strengths in innovation.

Source: TEConomy Partners, LLC.

The details regarding each strategy and subsequent action are outlined in the narrative that follows.

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Action 1: Support Centers of Innovation Excellence that leverage Oregon’s existing traded-sector strengths and emerging market opportunities.

Centers of Innovation Excellence are created through peer-reviewed competitions based on the capacity to do the following:

• Undertake applied R&D around the identified core innovation platform critical to Oregon’s traded-sector strength or emerging global market opportunity.

• Include industry-led applied research programs that are supported by a broad consortium of private-sector members.

• Partner with higher education institutions, including research universities, smaller colleges and universities, and research organizations in the projects and programs they undertake.

• Provide access to domain experts with market knowledge that can guide products/services through the commercialization continuum and successful market entry, regardless of location.

• Provide nondilutive early stages of risk-capital funding, and also have the ability to take small equity stakes in the startups they help to create.

• Play an important role in building the state’s educated talent base in the multidisciplinary fields required by the innovation platform work by offering new curricula, internships, and work-study opportunities, as well as increasing the pipeline of graduates.

• Help promote inclusive economic growth by intentionally collaborating with relevant and culturally specific organizations to support diverse entrepreneurs, promote talent development, and cultivate innovation-oriented, community-based partnerships.

• Deliver services statewide to meet opportunities wherever they are found.

• Leverage state funds over time with multifold increases in federal and industry support.

Action 2: Leverage and expand sources of nondilutive capital to catalyze the commercialization of new innovations.

• Support funding for the Small Business Innovation Research (SBIR) Support Program.

• Support the University Venture Development Fund (UVDF).

• Strengthen the Commercialization Gap Fund by doing the following:

• Requiring a 1:1 match for future state investments into the fund.

• Opening the fund to university and research endowments as potential partners.

• Requiring the fund to include nondilutive investments.

• Create a Proof-of-Concept Grant Program to be administered through the Centers of Innovation Excellence.

• Create a Traded Sector Matching Grant Program that will match investments by Oregon’s private, traded-sector companies in

Oregon startups.

Action 3: Support early-stage innovation within Oregon’s university, college, and other research settings, ensuring opportunities for all people in all places to connect to resources.

• Support the University Innovation Research Fund (UIRF).

• Create Oregon Corps, leveraging federal National Science Foundation (NSF) funding, to assist faculty and graduate students from across all Oregon universities, colleges, and research institutions in validating the market potential of technologies and launching startup companies.

• Further expand the InventOR Program, which successfully assists college and university students in prototyping novel inventions and honing their entrepreneurial skills by continuing to scale the program by strengthening partnerships with community colleges and additional universities and exploring additional pathways for student inventors and entrepreneurs.

STRATEGY 1: FOSTER IDEATION

Catalyze the commercialization and deployment of new products/services within Oregon’s existing traded sectors as well as emerging markets.

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Action 4: Create Regional Innovation Hub designations that will fund and incentivize collaboration to build and advance innovation-focused ecosystems, ensuring opportunities for all innovation-based businesses throughout Oregon.

The Innovation Hubs will be expected to do the following:

• Build a sufficient scale of talented serial entrepreneurs in the region by providing intensive, in-depth help and assistance to innovative firms.

• Connect entrepreneurial efforts to existing regional industrial base and emerging opportunities, thereby tailoring each effort to leverage the region’s comparative advantages.

• Deliver services throughout the region in coordination with existing efforts, academic assets, and other key stakeholders.

• Consider how best to address the need for physical infrastructure/placemaking to catalyze an entrepreneurial culture within the region.

• Address the need for more robust, value-added inclusive networking throughout each region and across the state.

• Provide linkages/vetting to Centers of Innovation Excellence (Action 1) to ensure the technical domain expertise needs are met for all innovative firms within the region, regardless of the area of technology.

• Provide access/vetting to the risk-capital stack (Action 6) that will be developed to support innovative firms throughout the state.

• Ensure programming is culturally specific and accessible to rural and historically under-resourced populations.

Action 5: Link talent to entrepreneurial efforts.

Support for experiential learning opportunities (internships, co-ops, apprenticeships, etc.) that can help strengthen and retain Oregon’s lo-cally rooted talent (particularly those in science, technology, engineering, and mathematics [STEM] fields) by linking students to interesting, innovative traded-sector companies by doing as follows:

• Providing a marketplace to connect students with entrepreneurial employment opportunities.

• Targeting students across the postsecondary continuum (from associate degrees through postdoctoral degrees) and ensuring that programs seek to engage students presently underserved in the innovation economy, such as women; Black, Indigenous, and People of Color (BIPOC); and those outside of the Willamette Valley.

• Providing matching grants to offset costs of internship/co-op student (it is expected that all students will receive financial compensation).

• Supporting unique programs such as InventOR or regional efforts targeting key traded-sector industry clusters, such as the

Yamhill Carlton School District’s support of the viticulture industry.

STRATEGY 2: STRENGTHEN THE INNOVATION ECOSYSTEM

Develop a systemic, regionally based entrepreneurial service delivery system to help diversify the state’s economy, take advantage of innovation-based opportunities, and drive broader participation among underserved communities.

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Action 6: Foster the further development of Oregon’s risk-capital stack.

• Support additional angel, pre-seed, and seed funds in Oregon managed by resident private fund managers and matched at least 3:1.

• Develop a network of sector-specific risk-capital sources of funding so that as Centers of Innovation Excellence (Action 1) come on-line and develop a pipeline of deal flow, sector-specific funds that align with targeted areas of innovation are available.

• Create a working capital loan program for traded-sector startups with limited access to funding from conventional financing sources due to technical and commercial risk factors associated with the development of new products or services within targeted traded sectors.

Action 7: Incentivize angel investments in Oregon’s promising innovation-based firms.

• Create an angel investment tax credit that provides a qualified investor with an income tax credit equal to 25 percent of an eligible investment in an eligible Oregon company.

• Encourage Angel Networks by providing funding to offset costs of professional fund management, network administration, and due diligence. Leveraging Action 6, it is recommended that angel networks be encouraged to form by providing 3:1 matching grant dollars.

Action 8: As deal flow increases across the state, focus efforts to drive more of the Oregon Growth Account’s invest-ments to Oregon’s businesses.

• Foster access to follow-on venture funding by leveraging the Oregon Growth Account by ensuring that policies and guide-lines are in place that encourage out-of-state capital partners to have a meaningful Oregon connection/presence.

Action 9: Develop Oregon’s Innovation Brand and market within the state — the brand should be aligned with and leverage Oregon’s existing strengths.

• Leverage Oregon’s strengths in marketing and communication, as well as its pre-existing functions for tourism and visitor attraction, to develop a shared statewide brand for innovation and entrepreneurship.

• Encourage ecosystem partners to advance this branding as part of their overall marketing efforts and develop an Innovation

Ecosystem Ambassador program to elevate the voices of champions for innovation and entrepreneurship.

• Generate excitement through in-person events that celebrate innovation and entrepreneurship.

Action 10: Develop an External Marketing Campaign that showcases Oregon’s unique identity and competitive strengths in innovation.

• Update (or create a new) website for Oregon’s Innovation and Entrepreneurship programs and initiatives to encourage online connectivity across the ecosystem.

• Establish a digital marketing campaign to further highlight Oregon’s unique strengths.

• Develop a consistent and active media presence.

STRATEGY 3: CATALYZE ACCESS TO RISK CAPITAL.

STRATEGY 4: BRAND OREGON AS THE PLACE

FOR INNOVATION — TELL OUR STORY.

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By implementing the strategies and actions outlined in this Innovation Plan, Oregon will help ensure that it is working to position the state’s economy for economic growth. Now is the time for Oregon to double down and leverage its existing investments to develop a vibrant and high-functioning innovation ecosystem to ensure that, in 10 years, Oregon is globally known as a model for a diverse, inclusive, and resilient economy: a place where innovative people solve the greatest challenges of our times to create novel, sustainable products, processes, and companies that drive economic growth.

OREGON’S INNOVATION PLAN —

AN ECONOMIC IMPERATIVE

Why Creating an Innovation Plan is Critical to Oregon’s Economic Future

The global economy is facing a dramatic transforma-tion that is driven increasingly by innovation — through both the creation of new industries as well as the application of technology to traditional industries. Com-petition is increasing within this innovation-driven economy, and this intense competition does not occur solely between nations. The competition is felt at far smaller spatial scales — individual states, metropolitan areas, counties, and towns. The United States has become a patchwork of economies — some competing well within the global economy, others failing to adapt and experiencing economic decline. The harsh reality of the 21st century economy is that there are, and will continue to be, winners and losers. The core questions are, of course, what does it take to be a winner and how do we ensure winning equates to widespread prosperity?

Oregon’s Innovation Plan is built on the central premise that the continued vitality of Oregon’s economy and the state’s high quality of life rest on its ability to encourage innovation. At a time when Oregon is faced with tremendous uncer-tainty driven in large part by a global pandemic, but also further complicated by political, natural, and socioeconomic challenges, there is still a need to focus on innovation-based economic growth. By coming together around a common issue — innovation — Oregon has an opportunity to improve the livelihoods of Oregonians across the state.

Entering the 2019-2021 biennium, Oregon’s economy was in a strong position, with growth in local jobs and wages faster than the average state.1 Although 2020 started out much like any other year, the emergence of the coronavirus disease 2019 (COVID-19) quickly re-shaped daily life for much of the world’s population and drove the global econo-my into recession. In Oregon, the number of jobs declined by nearly 144,000 from February 2020 through September, a 7.4 percent decrease.2

As the pandemic continues to wreak havoc on the U.S. economy, a recent examination of sectors and regions expe-riencing the most disparate impacts related to COVID-19 illuminates the importance of innovation-based economic development. In the study, authors from McKinsey find that many small and mid-sized enterprises (SMEs) are on the brink of failure, and investment in innovation — ranging from both research and development (R&D) to venture capital dollars — is at risk.3 Furthermore, the depth and breadth of the digital divide have been exposed, and the crisis has challenged regions with high concentrations of both vulnerable sectors and vulnerable populations.

“This is how you create private sector jobs in a tough economy – by being entrepreneurial and creative”

Hon. Ron Wyden U.S. Senator

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Ultimately, a culture of innovation and support for broad-based economic growth is essential to overcom-ing these challenges. In particular, the authors from McKinsey recommend that state and local governments invest in innovation ecosystems, build resilience through economic diversification, and embrace trends that enhance productivity, such as investments in new skills and technologies.4

As a result, understanding the role of innovation ecosystems in the 21st century, a knowledge-based economy is essential to driving economic growth in the wake of the pandemic. Furthermore, it is critical to understanding how Oregon’s state and local policymak-ers — along with industry, academia, philanthropy, and a wide range of other public, private, and institutional partners — can help Oregon’s economy recover from this global pandemic.

4 Ibid.

“Innovation-based economic development” includes, but is not limited to, a technology, product, process, or innovation that:

• Derives from and supports innovation and research.

• Promotes Oregon’s market capacities and competitive advantages.

• Involves technology-based innovation.

• Facilitates the creation of new products, processes and services that retain and create high-wage jobs.

• Involves the establishment of partnerships between and collaboration with research institutions, the private sector and public entities.

• Endeavors to transfer innovative technologies to the private sector or to commercialize innovative research and development.

Source: Oregon Revised Statutes (ORS)

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CRITICAL COMPONENTS OF A ROBUST INNOVATION ECOSYSTEM

Areas in the U.S. achieving economic development success (including neighboring states) have mature innovation ecosystems in place. These ecosystems may form naturally over time (as occurred in Silicon Valley and Boston); or they may result from dedicated activities of states, regions, and key stakeholders to proactively foster this ecosys-tem (as occurred in the Research Triangle area).

Successful innovation ecosystems are able to catalyze a variety of economic activities, including assessing the potential markets for R&D-driven capabilities and innovations against current products in the marketplace, develop-ing new products by optimizing engineering and design to meet the marketplace’s price points, developing effective management teams to drive business growth, and securing access to financial capital that will fund not only the development of the technology but also the firm through its various maturity stages until it becomes an established company in broader domestic and global markets.

A robust, inclusive innovation ecosystem is at the core of Oregon’s ability to achieve broad-based economic vitality.

Innovation ecosystems consist of five interconnected elements, each of which plays a vital role in developing new value-added products and services that create strong economic impacts (Figure 1).

Figure 1: Interrelated Components of a Robust Innovation Ecosystem

Economic Vitality

Research + Development A vibrant environment for

R&D and innovation, across both universities and in industry.

Entrepreneurship + Business Dynamics

A climate and culture supportive of inclusive innovation and entrepreneurial development.

Commercialization + Deployment Translation of market-driven research into products or processes that create economic value.

Innovation + Risk Capital Financial capital available for commercialization and new product development.

Talent + Human Capital Skilled talent both developing and deploying new technologies and products.

Source: TEConomy Partners, LLC.

To drive innovation-based economic development in Oregon, it is critical to focus on each of these five components’ functionality as well as how these essential facets of the system interact with one another.

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RESEARCH AND DEVELOPMENT (R&D)

Increasing productivity — the goods and services that can be developed in a place given its availability of people, facilities, and resources — is an important part of improving economic growth and quality of life. While there are various paths to increasing productivity, a fundamental driver of this growth is the production of new knowledge through R&D. R&D comprises three parts:

• Basic research refers to the experiments or theoretical work that is undertaken without any application or use in view; the primary purpose is to expand knowledge, not to create or invent something.

• Applied research seeks to solve specific, practical issues affecting individuals or groups such as states or businesses. Solving problems and improving conditions are important goals of applied research.

• Development refers to the conversion of research into new ideas, services, or products in order to improve stan-dards of living. Common elements of the development process include concept formulation, design, product testing, prototyping, and other types of pilot projects.

While basic research is important because it serves as the pipeline for ideation, there must be a focus within both industry and academia on applied R&D, which help generate further economic growth. Focusing on R&D and the early stages of knowledge generation helps fuel the other innovation ecosystem elements.

COMMERCIALIZATION AND DEPLOYMENT

While Oregon’s capacity for conducting R&D in both the private and academic sectors is a noted strength, applying this research into new firms and products is worthy of additional attention.

Many states and regions, including Oregon to a degree, are focusing intentional effort on moving ideas from con-ception to the marketplace. Critical resources to support the commercialization and deployment stage may include connections to domain expertise in specific technologies or subject matters, access to entrepreneurs-in-residence to assess commercial potential and develop strategies to market, and funds and facilities to support proof-of-concept or pilot-scale production and scalability testing.

To make the most of its investments in R&D, it is critical that Oregon address gaps in its innovation ecosystem related to commercialization and deployment. This success must leverage the other components of the innovation ecosystem, including access to risk capital, skilled talent, and a strong business climate.

RISK CAPITAL

Financial backing and support are a requirement for moving an innovative idea from just a thought to a marketable product. Overall, financial capital is a prerequisite for overcoming the “valley of death” and translating economic returns for the company and the economy. Whether it is nondilutive sources at the very earliest stages of commercial-ization funding or funding much further downstream to scale and grow a company, whether it be equity or debt based, financial capital for innovation-oriented firms is vitally necessary to fuel Oregon’s innovative ecosystem.

A variety of capital sources may fit a company’s needs depending on its stage of technology and business devel-opment (Figure 2). In a company’s earliest stages, “sweat equity,” R&D grants, nondilutive capital, and support from friends or family drive initial investment. Notably, investment from friends and family is not typically available to entrepreneurs in under-resourced communities, which may prevent new businesses from launching and growing.

As companies encounter the “valley of death,” they face a gap in funding: they have likely exhausted these previous stages of capital and are not yet mature enough to begin accessing formalized venture capital or traditional debt markets. During this stage, specialized investment funds, convertible debt or forgivable loans, pre-seed and seed funds, or angel investments are critical forms of risk capital to ensure company survivability and sustainability.

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Figure 2: Sources of Capital, Firm Functions, and Business Assistance by Stage of Development

C um ul at iv e

C as h Fl ow Conceive Validate Launch Scale-Up Grow

Ideation

Sales

Business Assistance

Assess Product-

Market Fit

Validate Solutions, Customers & Revenue Model

Business Planning, including marketing and capital needs

Building the Management

Team & Business Structure

Scaling Up Company

Operations

Growing Company, Establishing Brand

Firm Functions

Sources of Capital

Sweat Equity/

R&D Grants “National” funds with local connections and their syndicate partners elsewhere

Beginning of traditional VC Capital Stack sourced locally;

includes loans for working capital

Specialized investment funds, pre-seed and/or angel funds, convertible debt, forgivable loans

Broad Stages of Development

Prototype — service model development

Proof of principle

Pilot projects, test beds, batch runs

Product/Service introduction

Break Even

R&D Grants, nondilutive capital, friends/family

Source: TEConomy Partners, LLC.

TALENT AND HUMAN CAPITAL

Generally, talent refers to people, their intangible skillsets, knowledge, and social attributes, and their ability to contribute positively to a state. While talent in the innovation-oriented economy is typically associated with technology-based skills, the term can mean different things to different audiences, depending on its usage. For example, entrepreneurial and business skills are also a crucial part of talent development. To effectively address the role of talent in an innovation ecosystem, it is essential to incorporate the various types of talent needed, the various stages where this talent is devel-oped, and how this talent is deployed and connected to the regional economy.

Supporting talent and human capital is also an important part of Oregon’s efforts to attract and retain businesses.

For example, a 2019 study on the site-selection needs of corporations finds that skilled labor availability is the number one factor in determining location decisions, considered “very important” or “important” by more than 90 percent of the corporate respondents.5 Meanwhile, labor costs ranked second. The challenge then becomes how states can ensure that the supply of talent is accessible for innovative-small businesses, while workforce opportuni-ties in high-growth, high-paying sectors are open to all.

5 Area Development, “Site Selection: Corporate Executive Survey Results,” Q1 2019.

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ENTREPRENEURSHIP AND BUSINESS DYNAMICS

Creating a business environment where entrepreneurs are willing to accept the risks inherent in new enterprise formation is a constant work in progress. Like all economies, Oregon is heavily dependent on “creative destruction,” the phenomenon where new ideas, technologies, and industries are continually disrupting and replacing those of the past. In economies with fewer entrepreneurs, when jobs, companies, or industries begin to decline, it is less likely that they will be replaced by something better.

In Oregon and throughout the nation, many companies are still struggling with COVID-related repercussions and having difficulty sustaining and scaling operations. Meanwhile, a lack of access to broadband limits many in the state’s ability to launch a business or access customers, service providers, training, networks, and other resources.

For governments, a “business friendly environment” does not exclusively refer to regulations or tax incidence.

Instead, support for infrastructure (especially broadband), talent development, or tactics aimed to address gaps in the innovation ecosystem offers different approaches to encouraging economic growth that benefits businesses.

Taken together, these five components of the innovation ecosystem fuel economic development in the 21st century.

By serving as the base for the “three-legged stool” of economic development, a highly functioning innovation eco-system can play a pivotal role in fueling new enterprise development, supporting existing businesses, and attracting new firms to an area (Figure 3). Strengthening the state’s innovation ecosystem and encouraging economic develop-ment go hand-in-hand.

Figure 3: Innovation Ecosystems as a Foundation for Economic Development

New Enterprise Development Encouraging the creation of new businesses that meet global demand.

Business Retention + Expansion Supporting established businesses with the resources they need to scale and sustain their operations.

New Business Attraction Enticing companies from outside of Oregon to locate in the state as a result of the vibrancy of the innovation ecosystem and its clusters.

Growing Advanced Industry Clusters

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WHY FOCUS ON TRADED SECTORS?

A state’s economy must focus on serving customers and markets beyond the residents and businesses in its commu-nity — otherwise known as traded sector activities — in order to drive an increase in a state’s gross domestic product (GDP), which in turn contributes to a higher quality of life for its citizens. By bringing new dollars into Oregon’s economy, traded-sector firms exhibit a strong multiplier effect: new jobs are created as exporting firms buy from local suppliers and as its workers make purchases from local businesses. Manufacturing firms generally have a multiplier greater than 1.5. In contrast, firms in some traded-sector industries may carry a multiplier more than twice as high, according to an analysis by Tim Bartik of the Upjohn Institute, an expert on economic development policy.6

Business activities that typically focus on meeting the local needs of families and businesses and do not bring new income into a region are often referred to as “shel-tered” or locally serving industries. Examples of sheltered industries include restaurants, retail stores, dry cleaners, and state and local government services. While these sheltered industries are critical to Oregon’s quality of life, they rely on purchases from local residents and businesses as their primary market, and so do not generate new income but instead benefit from a growing economy.

Some business activities fall between the activities of traded sectors and sheltered industries and are termed partially traded industries. One example is healthcare providers, which often serve local residents, and can also attract patients from outside of a region if they are based at a major medical center offering clinical excellence.

Plus, the availability of quality local healthcare providers is one of the critical quality-of-life factors considered by site location consultants and businesses when locating new business investments. Another partially traded sector is business services, which can serve a mix of customers in and outside a region and are critical to providing the professional services needed by new and growing businesses.

Additional research by Upjohn Institute and Bartik finds that targeting economic development initiatives at trad-ed-sector firms with high multiplier effects helps improve their cost effectiveness and efficiency.7 While traditional tools for economic development such as business tax cuts or broad-based tax incentives have a high cost per job, Bartik’s rigorous review of peer-reviewed studies finds that there are many other approaches that offer lower costs.

In addition to targeting traded-sector industries, providing customized business services is among the most cost-ef-fective tools for encouraging economic development. These services, which range from customized job training programs to outreach and extension for manufacturers, can have low costs because they help overcome the market failures that are holding back entrepreneurs and small and medium-sized businesses. These businesses face financ-ing and information barriers and may struggle to receive the right assistance or business advice. Offering assistance at modest costs can have a larger effect on the competitiveness of a smaller business.

Finally, improving the effectiveness of the state’s innovation ecosystem and ancillary economic development activ-ities also contributes to stronger traded-sector industry clusters. These industries sell their goods and services in markets outside of Oregon, bringing wealth back into the state. Traded sector industries vary widely, from software or services to those manufacturing a physical product. It is important that available support services can effectively address the needs of all traded sector companies, regardless of their size, their stage, or their sector. While Business

“Traded sector” means industries in which member firms sell their goods or services into markets for which national or international competition exists.

Source: Oregon ORS

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Oregon traditionally works with businesses across all traded sectors, the state’s targeted industry clusters offer distinct competitive advantages that provide the state with unique opportunities for growth, high-wage job creation, innovation, and statewide prosperity.

WHY FOCUS ON

ENTREPRENEURSHIP?

An essential part of Oregon’s innovation ecosystem is…