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Point of View : Oct 1, 2009 (Vol. 29, No. 17)

Economic Realities of Clusters

Communities Must Understand Opportunities and Drawbacks
  • Michael Sable, Ph.D.

Knowledge-intensive industries such as biotechnology, are increasingly important sources of job growth and revenue to communities—particularly in California, Massachusetts, and New York—seeking to develop their economies. Indeed, a 2002 survey of 77 local and 36 state economic development agencies reported that 83% listed biotechnology as one of their top two targets for industrial development.

While biotechnology clusters are coveted as potential drivers of economic development, the realities of the industry—including both opportunities and limitations—must be understood so that communities can reap the greatest reward from their investments.

What is routinely referred to as the biotechnology industry is not really a distinct industry at all, but rather a collection of techniques. While biotechnology is most often associated with the biopharmaceutical sector, from which 95% of revenues have been derived, these techniques may be applied to a broad array of industries including agriculture, manufacturing, and, increasingly, cleantech.

It is here that the real opportunity for local economic development lies if communities endeavor not to replicate what has been done elsewhere, but rather to find their own niche by using biotechnology to leverage and enhance the local industrial competencies with which they are endowed.

Successful biotechnology clusters such as those in Boston, San Diego, and San Francisco have several characteristics. Biotechnology firms tend to cluster around universities. This is because the technology typically has a long research phase before marketable products are produced. The federal R&D expenditures and basic science base in the university milieu are also a magnet for biotechnology entrepreneurs. This basic science output, which has an economic value of its own, tends to attract the venture capitalists and intellectual property lawyers who play a key role in commercializing the innovations of university researchers.

Moreover, many founders of biotechnology firms are university professors for whom the maintenance of academic relationships is important. In particular, access to top university graduates is paramount as this scarce human capital serves as the source of many nascent biotechnology firms’ employees.

The networking and social capital that is fostered by proximity to major institutions of higher learning is critical to biotechnology organizations because they tend to thrive when they are a part of a localized ecosystem that comprises customers, talent pools, thought leaders, research centers, and academia.

Biotech entrepreneurs benefit as a result of intellectual, technological, and social “spillovers” from network interactions with other entrepreneurs, other scientists, financiers, and people with comparable entrepreneurial mindsets. Organizing in clusters around universities is regarded as a superior model because of the opportunities for trustful tacit-knowledge exchange made possible by the absence of bureaucratic watchdogs.

Moreover, the more collaborative atmosphere also makes “coopetition” through new business formation from start-ups and spin-offs more common than in other settings because new business opportunities and market niches can be spotted early. All of this means that biotechnology is a uniquely urban form of economic development as research universities and hospitals, a concentration of talent, and opportunities for networking among a dynamic corps of highly trained professionals—all intrinsic to attractive urban milieus—are critical success drivers for the industry.

Employment Opportunities

Nonetheless, there are significant realities that must be understood. In particular, while successful biotechnology firms generate taxable revenue, generally, biotechnology is not a significant source of employment for low- and semi-skilled workers, and an exclusive focus on biotechnology is not conducive to the economic diversity that is essential to sustainable local economic development.

The inability of the biotechnology industry to generate jobs for those other than the highly skilled is acknowledged by the Boston Redevelopment Authority (BRA). The BRA, which has been promoting the expansion of biotechnology, projects that while 79% of the jobs created by the biotech industry typically demand a college degree or higher, 15% require an associate’s degree, and only 6% a high school diploma.

In spite of its growth in recent years, biotechnology remains a small percentage of metropolitan economies in communities such as Boston and San Diego. No biotech company is among the top 25 employers in Boston. In the Boston metro region only about 20,000 people are employed in the biopharmaceutical industry; and in the San Diego metropolitan area, which has over 2.8 million people, only about 10,614 are directly employed in biotechnology, so to date, even in successful biotechnology industry clusters only modest employment returns to regional economies have been produced.

Nationally, most biotechnology firms are quite small—only 44 have more than 1,000 employees. Even in medium-sized firms (50–149 people), most of the jobs are held by highly skilled professionals with the exception of some jobs in facilities and administration.

The inability of biotechnology to generate jobs for low- and semi-skilled workers is also affected by the structure of the industry. At present, most of the biotechnology clusters in the U.S. are centers for biotechnology R&D, not production. R&D is more capital intensive than production so fewer workers are needed.

In addition, a focus on biotechnology alone is not conducive to the economic diversity that is essential to sustainable local economic development. For officials to promote biotechnology as an essential pillar of local economic development is inconsistent with the recent lessons about the importance of economic diversity.

The demise of dot-coms has shown that a diverse economic base is a buffer during economic downturns.Moreover, biotechnology is an exceedingly risky endeavor. Over the past 30 years, only 100 biotech-related drugs have reached the market with the top 10 accounting for nearly all of the sales.

Biotechnology is largely sustained by supply-side forces—government and venture capital investors—that are prone to significant variability. Therefore, a downturn in the market or a change in political opinion regarding biotechnology may have a significant impact on the financing that is crucial to the growth of the biotechnology cluster.

To address the aforementioned challenges and harness the potential of biotechnology to generate both jobs and revenues, several steps must be taken. First, a greater emphasis on biomanufacturing and not just R&D is essential. The number of production jobs increases between the R&D process and commercial manufacturing while skill requirements for production workers declines.

To boost the economic development benefits of biotechnology, a greater emphasis needs to be placed on biomanufacturing. Massachusetts took steps in this direction in 2006, when officials brokered a $660 million deal to facilitate Bristol-Myers Squibb’s acquisition of space at the former Fort Devens. In order to broker the deal, state officials agreed to commit $34 million for infrastructure to support the plant, which is expected to generate at least 350 jobs that pay an average salary of $60,000.

Biomanufacturing is a natural follow on to R&D for certain types of operations—including pilot manufacturing, large molecule manufacturing, processes involving complex R&D-intensive techniques, and also packaging and finishing. As a result, there is a tremendous advantage to locating biomanufacturing operations close to R&D centers and headquarters, and firms are often willing to pay a premium for it.

Programs like BEST and Just-A-Start have done a good job of preparing high school graduates for jobs as lab technicians. In North Carolina, the state has succeeded in attracting biotechnology manufacturing jobs in the $26,000–40,000 income range through its BioWork program that trains workers for these positions. These programs should be emulated and expanded.

Second, localities interested in biotechnology must diversify not just through a greater emphasis on biomanufacturing, but also, by identifying market niches that leverage local competencies. While pharmaceutical-related biotechnology is risky and involves competing with well-entrenched competitors, more salient opportunities exist in agricultural and industrial/cleantech biotechnology.

Efforts to foster biomanufacturing and develop new niches are most successful when they bring together local and regional stakeholders to develop social and business linkages and frameworks of cooperation where none had previously existed.