Private Sector Innovation? Think South Carolina, Not Silicon Valley

In the U.S. innovation is synonymous with Silicon Valley, not South   Carolina, and is driven by the private sector, not the government. The South Carolina Research Authority (SCRA) confounds both perceptions. It is an independent, not-for-profit public entity that is run as a private organization. It focuses on providing R&D services to public and private clients in sectors ranging from national security and automotive to biotechnology and healthcare. It also provides venture funding for startups in these areas. In just 30 years, an initial infusion of US$0.5 million and 1,400 acres of land has yielded US$15.3 billion of impact on South Carolina’s economy, attracting investment from all over the world.

South Carolina was one of two states founded to supply Barbados plantations with Native American slaves. Its first settlers were the second and third sons of British aristocratic families who saw opportunities for reinvention. In Britain, their first-born brothers were sole heirs; in South Carolina, they could become rich in their own right — a reinvention endeavor that continues to this day.

From its early seventeenth-century founding until the dawn of the twenty-first century, South Carolina has gone through many distinct periods. For more than 100 years, it was a rice-, indigo-, and subsequently cotton-based cash-crop economy. Between the Civil War and the 1940s, it remade itself into a textile economy. By the 1950s, driven by Japan’s ascendance in textile manufacturing, the state repositioned itself as a non-textile manufacturing base. The strategy banked on its relatively well-educated and cheap labor force and the state’s “right-to-work” laws.

Beginning in the 1970s, driven by cheap labor competition from China,Mexico, and India,South   Carolina began to diversify its economy. Manufacturing continued to play an important role, with the state attracting international companies such as Michelin, Bridgestone, BMW, and Bosch. At the same time, the service and trade industries also began to play important roles. The impact of the state’s economic diversification is borne out by its employment data. According to figures from the U.S. Bureau of Labor Statistics, manufacturing in 1970 accounted for 28.9% of all jobs in South   Carolina. By 1997, this number had declined to 17.3%. Conversely, employment in the services and trade sectors rose from 31.0% of total employment in 1970 (16.2% from services and 14.8% from trade) to 47.1% (24.7% from services and 22.4% from trade) in 1997.

Beginning in the 1970s, driven by cheap labor competition from China,Mexico, and India,South   Carolina began to diversify its economy.

SCRA is at the center of this transformation. In 1983,South Carolina’s Legislature chartered SCRA with the goal of advancing the state’s knowledge economy by using an initial cash infusion of US$0.5 million and 1,400 undeveloped acres. SCRA’s first project was a U.S. Navy-funded, on-demand, parts-manufacturing system. To complement SCRA’s efforts, former Governor David M. Beasley established the South Carolina Technology Advisory Council in 1997. This council, which comprised mostly businesses, aimed, among other things, to induce multinationals — which had already found a suitable home in South Carolina for assembly and manufacture — to see the state as a great place to establish their R&D facilities.

Structure, Impact and Opportunities

Today, SCRA continues to lead the way. The organization has won two of the most prestigious Stevie American Business Awards. In 2012, its CEO Bill Mahoney was named Executive of the Year, and in 2013, SCRA was named the Non-Profit Company of the Year. SCRA currently manages more than 100 domestic and international programs worth more than US$2 billion in contract value and has a US$15.3 billion cumulative economic impact in South Carolina — US$1.45 billion of this in 2012 alone. To pull off this impressive feat, SCRA has accomplished at least three things successfully: It operates independently of South Carolina’s government, focuses on three technology-related core activities that have strong economic development potential for South Carolina, and has expanded its global reach in recent years.

The first key element of SCRA’s success lies in the fact that it was set up to be an independent not-for-profit entity managed under private sector principles. Its various boards draw from a stakeholder pool comprising business leaders, researchers, and public officials. South Carolina’s legislators had the foresight in SCRA’s founding statute to strictly limit their role. As Mahoney notes, “[What] it [gives] is not direction. It is advice.” This governance structure effectively walls off SCRA’s day-to-day economic development activities from the political interventionism that often impedes the functioning of state-led economic development agencies. Self-funding further strengthens this firewall; SCRA has received no additional tax appropriations beyond its initial US$0.5 million funding since its founding. Its independence also positions it to pursue growth opportunities swiftly, as there is no mass of bureaucratic red tape to slow action.

The second key element of SCRA’s success is its focus around three core technology-related activities that recognize important market shifts: the federal government’s growing fiscal need for low-cost, high-yield innovative technologies; the growing trend for corporations to outsource their R&D functions; and the huge contribution of technology to growth. Several decades of studies identify technology as the single largest contributor to long-term economic growth. Technology grows productivity while providing high-paying jobs and driving product and service innovation. The Bay Area Economic Institute (BAEI) estimates that 4.3 jobs are created in the local economy for every one technology job created. The comparable number for manufacturing is 1.4. SCRA’s three core business activities — Technology Ventures, Applied R&D, and R&D Facilities — center on technology and capitalize on these facts.

Via its flagship South Carolina Launch, SCRA’s Technology Venture business provides seed capital, infrastructure support for early-stage startups, support for the commercialization of technology, and investments in mature tech companies. It also helps to attract high-tech startups to South Carolina. The Applied R&D business makes effective use of South Carolina’s top universities — including the University of South Carolina (USC), the Medical University of South Carolina (MUSC), and Clemson University — to provide competitive, technology-oriented services to more than 300 government and corporate organizations around the globe. The R&D Facilities business complements the other two segments by providing government and corporate organizations with access to SCRA-built advanced R&D facilities, including cutting-edge wet labs, offices, and advanced manufacturing facilities. These form the backbone for the commercialization of IP, which is critical to a knowledge-centric economy.

Proven Track Record

Success stories abound. SCRA has helped several companies relocate to South Carolina. One such company is Pandoodle, whose product, Voolio, enables interactive ads to be placed in videos. Another is Proterra, an electric-bus manufacturing company. Since its inception in 2006, South Carolina Launch has invested in 58 mature companies. More than 280 early-stage companies have enjoyed about US$15 million in direct SCRA funding, subsequently securing more than US$2.2 billion in additional follow-on capital from private sources. 52apps is one such early-stage startup. It develops one application per week based on need-ideas that the public submits online and has enjoyed more than half a million downloads to date. Another is early-stage biotech firm Immunologix. It focused on producing antibodies with the potential to tackle diseases as varied as cancer, diabetes, and multiple sclerosis; it was subsequently purchased by synthetic biology field leader Intrexon. A final example is ISI Technology. Its shoebox-size, water-heating technology can be used to heat water while generating electric savings of from 8% to 50% and water savings of up to 10%.

More than 280 early-stage companies have enjoyed about US$15 million in direct SCRA funding, subsequently securing more than US$2.2 billion in additional, follow-on capital from private sources.

SCRA’s Applied R&D core business is able to translate 70%-80% of its research into marketable technology (also known as the transition rate). This rate is typically 30% for federally funded research, which is about a third of research funding in the U.S. Applied R&D clients include aviation-industry players such as Boeing and defense-industry players such as the U.S. Department of Defense (DoD). The draw is SCRA’s track record. SCRA’s R&D effort yielded US$120 million in savings for a US$4 million research investment by the Office of Naval Research for the Navy’s Joint Strike Fighter. The private sector has certainly noticed. SCRA’s unique expertise in the defense and aviation industries, combined with South Carolina’s economic strengths (and possibly its “right-to-work” laws), encouraged Boeing to relocate the 787 Dreamliner manufacturing plant to the state in 2013. This move is expected to create 2,000 new jobs by 2020. SCRA also helped BMW to develop hydrogen fuel-cell-driven material-handling equipment, which now runs at the BMW manufacturing plant located in South Carolina. Other products include a 3D virtual-training kit, used in ship design and production courses, and the STEP product-development standard, used by companies as varied as Boeing, GE, Rolls Royce, GM, and Daimler Benz.

The final key element of SCRA’s success is its increasingly global reach. In the innovation market, this reach is a crucial factor that affects competition. Indeed, several examples demonstrate SCRA’s success in developing strategic partnerships with organizations in multiple geographies. Its partnership with BMW is one instance. In 2012, SCRA launched the first BMW-accredited components testing lab in the U.S. Prior to this, all products engineered in the U.S. still needed to be shipped to, and tested in, labs in Germany. Establishing this local lab unit turned BMW’s product development into a faster and more efficient process and created technology-oriented jobs in South Carolina. Today, all of BMW’s X3, X5 and X6 SUVs are manufactured only in South Carolina. Another example is SCRA’s recent investment in an Israeli defense technology startup that will bring a segment of that company’s R&D activities to South Carolina. “Over time,” Mahoney notes, “SCRA hopes to generate 15% to 20% of its revenues from these kinds of partnerships.”

Accordingly, SCRA has played an important role in South Carolina’s economic transformation. Since 2006, approximately 15,000 new high-tech jobs — with average salaries ranging from US$55,000 to US$77,000 — have been created in the state. Columbia and the Charleston-Summerville-North Charleston corridor, as a result, moved ahead of the San Francisco-San Mateo-Redwood City metro area in high-tech job-growth rates from 2006 to 2011, according to BAEI calculations based on U.S. Bureau of Labor Statistics data. The former grew at an average annual rate of about 40%, whereas the latter grew at a rate of about 27%. While South Carolina is starting out from a smaller base and has much more catching-up to do, this growth is no less impressive. Indeed, in June 2013 Inc. named the USC/Columbia Technology Incubator as one of the top three college-town incubators to watch in the U.S.

A main weakness — or strength as some may see it — is that SCRA’s revenues remain heavily tilted toward the defense sector. Approximately 70% of these revenues come through DoD and other publicly funded grants. Private companies account for the rest. SCRA acknowledges this challenge, and hopes to reduce this figure by growing its foreign partnerships and domestic corporate client base. Another weakness is SCRA’s low visibility, even in its home state. It is one of those great economic development not-for-profits people have never heard of. SCRA has been trying to address this. According to Micki MacNaughton, director of communication and legislative affairs, SCRA has recently “completed a brand consolidation and [has] changed [its] marketing strategy” by jumping on the social-media bandwagon. It has seen a significant jump in its social media followers, one of whom, prominent South Carolina Congressman Trey Gowdy, recommended a South Carolina Launch company to testify before the U.S. House of Representatives’ Small Business Committee. SCRA is also diversifying its client base, thus shedding what might be the stigma associated with doing work for the federal government in a state that is acclaimed for its dislike of that government.

SCRA: A Global Model

South Carolina is at an interesting point in its history and provides a viable alternative to the ever-publicized Chinese and Singaporean models for developing countries. There is at least one reason why the countries of the developing world may want to look at this state for their own growth and development strategies — its development model. What began as a predominantly agrarian state became a textile and light-manufacturing base. A transition to heavy manufacturing continues, with an emphasis on attracting high-tech investment. As such, South Carolina provides a unique model of legislative intervention — an autonomous impetus (SCRA) to attract investments from a diverse array of companies.

A main weakness — or strength as some may see it — is that SCRA’s revenues remain heavily tilted toward the defense sector.

A number of elements distinguish SCRA from similar initiatives in China and Singapore, particularly in the context of the different geopolitical frameworks. The U.S. is a democratic country based on the principle of free enterprise that culturally encourages entrepreneurship. China and Singapore, on the other hand, have strictly controlled politics and markets. In China, entrepreneurship historically has been carried out in the shadow of the central government to avoid detection and possible takeover. Today, the country is compelling both domestic and foreign enterprises to invest in innovation and high-tech R&D. While Singapore has been able to attract foreign investments, so far it has been unsuccessful in fostering domestic innovation or entrepreneurship. Its government is attempting to change this. As seen in China, however, this has resulted in an almost contrived and perhaps coerced attempt at innovation — a paradox.

Unlike Chinese initiatives, SCRA has had the advantage of being established when the U.S.’s system of law, including intellectual-property protection, was long in place and where, culturally, it remains permissible to fail. Unfortunately, these elements are often not as prevalent in the developing world.

All is not perfect, however. SCRA still faces challenges, many of which are also endemic in the developing world. South   Carolina as a state continues to lag behind the national average in education, human resources, and per-capita income. SCRA also has to battle popular perceptions of the South as lacking in technical skills, being culturally narrow, and being less than innovative – in other words, no place for a global company. It also has to leverage a relatively poorly educated and under-skilled labor force. Despite these pitfalls, SCRA has had a significant impact on the state’s growth. Other states are looking to South Carolina for their next big ideas. According to MacNaughton, “we have spoken to and hosted visitors from states across the country, including Florida,Idaho,Iowa, and Indiana.”

Even if not in its entirety, SCRA presents a template that may be easier to adopt and replicate in developing countries than other models currently being championed. South Carolina’s SCRA demonstrates what strong political impulse, combined with efficient management, can do for a state’s economy. It is unique in being a government-initiated entity that, save for the initial cash infusion, has been entirely financially independent since its inception. It has also served as a liaison between business and local research universities such as USC and Clemson University. As a successful consultancy, incubator, and service provider, it offers a dynamic path toward a more innovative and entrepreneurial future.

This article was written by Roberto Blum, Claudia Gutierrez, Toukam Ngoufanke, and Anirudh RR, members of the Lauder Class of 2015.

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