I was asked recently to give a speech on the state of innovation in the biotech sector at a convention for clever research scientists turned rich and swanky entrepreneurs. Like a bus and truck Broadway show, I do dozens of these types of crowd pleaser events every year -- Counter-intuitive premises, clever one liners and PowerPoint acrobatics that would impress Cirque du Soleil. Things were humming along until I came to a slide that stopped the audience straight away. Somewhere between my dazzling industry analysis and my fascinating account of the economic repercussions I slipped in a slide ranking the individual states in terms of their relative investments in innovation, tax rates and education levels.
The slide built up to what I thought was a fairly obvious premise: In general, tax rates have little effect on innovation investment, the growth engine of economies, while education levels have a strong correlation:
I pointed out that my home state of Michigan has much lower tax rates than our neighbor to the north Minnesota but we have less than a quarter of the outside innovation investment. The point being that the real difference between the two states is that Minnesota has a much higher percentage of college graduates than Michigan -- over one third. Ergo, education is the strong growth factor -- not tax rates.
After the customary quibbling about the validity of data sources, cultural biases that come with diverse demographics and obscure arguments about arcane differences between venture capital taxation and other incentives, this was after all a convention of brilliant Ph.D.s run amuck, the question and answer period turned into something right out of Mr. Smith Goes to Washington -- a maelstrom of consternation and conspiracy theories. The poor politician who was to speak at the conclusion of the conference never knew what hit him.
We've had evidence for over a decade now as to the key factors that drive innovation, growth and presumably jobs. While there are clearly some differences of opinion as to what innovation indicators to track, such as the strength of patents applied for or percentage of investment in research and development, there is little argument about the paramount role of a highly educated workforce. The negative effects of this can be clearly seen in my home state of Michigan where up until recently the automobile industry constituted over fifty percent of all employment. People didn't need an education to get a job. Culture both creates economic conditions and follows them so that at the very moment when we desperately need a viable educated workforce there is strong political pressure to cut educational spending at all levels.
This doesn't just happen in my world of higher education, which undoubtedly needs to reinvent itself to contain costs while serving a wider audience, but more so at the other end of the spectrum. It's heartbreaking to see early childhood programs on the chopping block for without a good head start our kids have little opportunity to be part of the innovation-centric occupations that will drive America's growth through the next half century -- biochemists and biophysicists, biomedical engineers and healthcare professionals, network systems and data communications analysts and artisans of all variety.
But it's easy to cut education because it's a latent form of value -- it pays sometime in the future -- just like our children. Innovation requires the development of new capabilities. Imagine taking your kid out of second and third grade because you're cutting costs and expecting him to do well in the fifth grade. Isn't that what we are doing?
As I wound up my session at the biotech convention, these leaders told story after story about how they were reluctantly sending their jobs offshore not so much to reduce costs but rather to acquire the much needed skills. Of course tax matters but talent matters more. Low taxes may in fact create jobs -- just not the ones driven by innovation -- the high paying plums. Those require an education, stupid.
Jeff DeGraff is a Professor of Management and Organizations at the Ross School of Business at the University of Michigan. To learn more about his book Innovation You and PBS Special by the same name, visit his web site at www.innovationyou.com or follow his blog on innovation at www.jeffdegraff.com.