Study says develop local firms to boost jobs
Local officials are happy to hold a news conference followed by a ribbon cutting whenever new companies are lured into the state, but those big gets often turn out to be small potatoes when compared with the small companies that develop locally.
In a study released last week, the Keystone Research Center found that regions pushing for good jobs should grow their own.
Stephen Herzenberg, executive director of the Harrisburg-based research operation, said many people in the Pittsburgh region are well acquainted with the old style of economic development that brought Volkswagen to Westmoreland County to build its Rabbit model. That lasted 10 years.
Then the state provided subsidies to Sony to assemble televisions at the same site. Sony was there about 18 years. Last year it announced it was leaving.
A better model, according to Mr. Herzenberg, is to spend the time and money to help develop new companies.
An example is that of Automated Healthcare, which started here in 1989. The state provided the company with $89,000 to fabricate its first robot to dispense medications. Flash forward two decades, and the company has since been acquired by San Francisco-based McKesson Corp. About 800 people still work for the operation in the region.
Automated Healthcare, which received $437,000 from the state’s Ben Franklin Partnership funds, returned much more over the years, said one of its founders, Rich Lunak. He is now the CEO of Innovation Works, the Hazelwood nonprofit venture capital firm that handles the Ben Franklin funds for the region.
When Mr. Lunak left McKesson in 2005, the company had opened an entire division dedicated to automation in Cranberry, where it has a 125,000-square-foot manufacturing plant and the local payroll was about $70 million.
He said other people who started Automated Healthcare with him or were early leaders there have gone on to found other firms, such as South Side-based Precision Therapeutics, which created tests to manage cancer treatments, and Aethon, a Robinson company that builds robots that deliver supplies in hospitals.
“The impact these companies have is a lot more than direct job benefit,” Mr. Lunak said. “That company uses a lot of local companies that supply parts and do work for it.”
The Keystone Research Center report, “Good Jobs, Strong Industries, a Better Pennsylvania: Towards a 21st Century State Economic Development Policy,” advocates getting away from throwing money at existing companies to lure them to the state. The study found that subsidies paid to companies to relocate or stay in the state cost Pennsylvania $250 million in fiscal 2008-2009.
The report stated that while Pennsylvania has better information available on the money spent for traditional corporate subsidies than many other states, there still are no public disclosure requirements as to whether the money actually creates jobs, let alone what the wages and benefits associated with those jobs are.
“The oldest tool in the [economic development] toolkit is basically giving individual companies a check,” Mr. Herzenberg said.
His conclusion is that Pennsylvania needs better accountability on how the money is spent and that there should be more transparency so residents can see whether money given to companies results in a tangible benefit for the commonwealth.
The state does have some remedies in place, as the recent case of Siemens Energy Inc. illustrated. The German company had been heavily recruited to build a fuel cell plant in Munhall but never occupied the building. Earlier this year, the company returned part of the state incentive because it didn’t produce the jobs promised.
In terms of helping companies get started, which the authors called “grow-your-own programs” the return was quantifiable because the companies were more accountable. A study released in January by Good Jobs First, a national policy resource center in Washington D.C., showed that growing companies locally resulted in net job growth 28 times larger than if a company was induced to move across state lines.
Mr. Herzenberg said in places such as Silicon Valley in California, the Route 128 corridor around Boston or Austin, Texas, growth in those places was fueled by small companies that successfully expanded.
“The real story is growing your own companies,” he said.
One young company growing locally is Bossa Nova Robotics in Oakland, which has developed two robot toys, the Prime-8 Gorilla and Penbo Penguin. It spun out of the Carnegie Mellon University robotics lab in 2005 and has since brought its robots to market, where they have sold beyond the production capacity.
David Palmer, Bossa Nova’s chief operating officer, said the company has raised about $1.5 million and employs about a dozen people, eight full time, and about four contractors.
The company is trying to raise venture capital and has plans to employ about 50 people at the end of the next five years. Innovation Works has provided Bossa Nova with $625,000, or 40 percent of its capital.
Bossa Nova was one of 197 companies that the Pittsburgh Regional Alliance cited last week as an economic development win. Another 20 companies on the list also have been supported by Innovation Works, either through capitalization or a combination of money and management help.
In 2009 Innovation Works put $5.2 million into local companies. Of that, $4.13 million went into 32 companies from which the fund is expecting a return on its investment by taking an ownership stake.
About $1 million went to companies in the form of grants, and $300,000 was used to help 12 small startup companies through the AlphaLab program run by Innovation Works. The nonprofit also provided advice and assistance to 192 local companies.
Mr. Lunak said Innovation Works is, to a certain extent, trying to help along the region’s next Westinghouse Electric, a company that became a major economic generator as an innovator in the region.
“There are lots of local companies that trace their roots to Westinghouse,” he said. “When you have successful companies, they create a ripple effect.”
Ann Belser: abelser@post-gazette.com or 412-263-1699.
Sunday, March 21, 2010
By Ann Belser, Pittsburgh Post-Gazette
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