As staff at the College of Nanoscale Science & Engineering wait patiently in a conference room, a loud rumble shatters the silence. "Must be him," someone says. Alain E. Kaloyeros has just pulled into a parking lot at the State University of New York's Albany campus in his $220,000 red Ferrari F430 F1 Spider, the one with the "Dr. Nano" license plates. Minutes later, Kaloyeros, 52, the school's $696,000-a-year CEO, strides into the room talking into his BlackBerry and wearing a white long-sleeve cotton shirt and faded jeans. He apologizes for being late. "I can't understand why some people think they're saving money driving 15 miles an hour," he fumes.
Fast and flamboyant, Kaloyeros epitomizes a new breed of entrepreneurial public servant. He has helped persuade the state of New York to inject $900 million in taxpayer money into research and development facilities, including one of the world's most advanced clean rooms for making prototypes of next-generation chips.
Kaloyeros earns his high salary by running an operation that employs 2,200 researchers and has drawn $3.5 billion in R&D investment from the likes of IBM (IBM), Advanced Materials (ADMG), Tokyo Electron, and the government-industry chip-research consortium Sematech, for whom mastering materials at the atomic scale is vital for future products. The effort helped persuade IBM to build a plant nearby to make silicon wafers, the material used to manufacture chips. In October, struggling chipmaker Advanced Micro Devices (AMD) said it will build a $4.5 billion wafer facility near Albany with help from Abu Dhabi. New York is contributing $1.2 billion in tax breaks and cash rebates to help cover construction and equipment costs.
SUNY Albany's nanotech push marks a daring new direction in economic strategy sweeping U.S. states—one that is now being severely tested. States have lavished perks on private industry for decades. In recent years, though, some have brazenly crossed the line between the public and private sectors, designing strategies that look a lot like industrial policy. They have been targeting specific businesses and technologies and, alongside companies, investing big bucks in elaborate research centers, plants to test new technologies, and industrial parks whose occupants receive a special boost. States from Pennsylvania to Oregon have become increasingly important sources of early startup capital to technology companies.
Now many states face vast budget shortfalls and must choose between protecting public-private R&D programs that could create jobs in the long term and slashing public education and health benefits. Kansas Governor Kathleen Sebelius, for instance, has proposed cutting $35 million for a bioscience initiative and shutting an agency that offered financial and managerial help to promising tech companies. Indiana plans to slash $20 million for life sciences research and development, while budget cuts are forcing the Maryland Technology Development Corp. to close an incubator program for startups. "Since states can't print money like the feds, programs that encourage private and university partnerships are under stress," says Brian Darmody, associate vice-president for research at the University of Maryland.
The natural partners of these experiments also are hurting. University endowments have shrunk, and corporations are hard-pressed to raise funds for ongoing operations, let alone risky new ventures. Such financial pressures are sure to mount in 2009. To add to the pain, a forceful advocate of these public-private partnerships, Governor Bill Richardson of New Mexico, had to turn down the job of Commerce Secretary in the Obama Administration because of an investigation linking him to possible campaign finance abuses.
So far, though, most states are holding firm, saying these efforts are critical to creating new industries amid intensifying global competition. New York's nano initiative remains largely unscathed—a $150 million corporate-funded research center just opened at the Albany campus. And even though IBM is eyeing layoffs at its chipmaking operations around the U.S., Kaloyeros says it is talking about expanding its R&D collaboration at SUNY Albany.
EYEING A LONG-TERM PAYOFFThe Obama Administration's $900 billion economic stimulus package now being debated in Congress raises new hopes that states can tap Washington's funds to support their industrial policies. Some Obama appointees, such as incoming Small Business Administration chief Karen Gordon Mills, a venture capitalist, believe that more federal dollars for research and development, workforce training, and business promotion should be channeled through successful public-private collaborations in the states.
Mixing taxpayer money and private industry is risky, of course. Public officials can be bad at picking winners. State intervention can lead to cronyism and market distortion. Costly bidding wars rage for companies and elite labs in biotech, an industry poised for a shakeout. These are some reasons Harvard Business School competitiveness guru Michael E. Porter preaches caution. "The grassroots model, where regions get on with it without waiting for Washington, is one of America's great strengths," Porter says. But he calls many state interventions unrealistic. "Subsidies are usually a sign you have no underlying advantage in an industry."
Many state officials insist they are becoming more sophisticated about economic development. Rather than woo plants that could relocate to Mexico or China in five years, they are trying to build new industries in fields such as renewable energy, nanomaterials, and biomedical devices that could generate high-paying jobs for decades. That means first training the local workforce, supplying venture capital, and nurturing research and development. San Diego offers a promising model. There, government and local entrepreneurs have methodically cultivated a top biotech hub, now boasting some 700 companies. The effort began in the 1960s with investments in research institutes and the Torrey Pines Science Park.
San Diego-like partnerships are proliferating. DuPont (DD), Oak Ridge National Laboratory, and the University of Tennessee have formed a long-term R&D tie-up to refine switchgrass into biofuel. The state is investing $40 million of the $170 million needed for a pilot plant. California has allotted $400 million for institutes in biomedicine, nanotech, and other areas that aim to raise $800 million from corporations. Ohio, Michigan, Arizona, and Massachusetts have built huge public-private research war chests. "The rise of collaboration is the biggest shift in development thinking I have seen in decades," says Mary Jo Waits, who has studied the trend for the National Governors Assn. and the Pew Center on the States. "I'm surprised at how tightly governors are trying to hang on to investments in R&D, given budget constraints."
Some advocates contend governments are now one of the few sources of patient capital. Unlike info tech, where $25 million could launch a Google (GOOG) or Amazon.com (AMZN), plants for building next-generation solar cells, digital lighting, or electric-car batteries can cost billions. Startup A123 Systems of Watertown, Mass., for example, has lined up $10 million in aid from Michigan and is seeking a $1.8 billion federal loan to manufacture lithium-ion batteries for cars. "The old VC model that worked for IT won't work for clean technologies," says Chicago venture capital attorney James J. Greenberger, a specialist in renewable energy. "The scale and the risks are much greater."
CORPORATE WELFARE?That's why America's semiconductor industry is relying more on state funds for plants that can cost $4 billion. Since the '90s, most U.S. chip companies have abandoned manufacturing and hired Asian companies to make chips designed in U.S. labs. As the challenge of making ever more powerful chips rises, some analysts worry, it will be harder for designers to collaborate with factories half a world away. The same nanotechnologies used in chips are also vital to everything from photovoltaic cells to superthin TV displays. And though they are highly automated, a silicon wafer plant can support 5,000 jobs—from engineers and robotics technicians to laundry staff.
To critics, New York's subsidies for AMD's wafer factory and other plants by IBM are corporate welfare. Greg LeRoy, head of watchdog group Good Jobs First, has faulted such state efforts. He figures most of the $50 billion or more states spend annually on industrial incentives goes to "smokestack chasing"—courting companies that shrewdly play states off against each other to win subsidies for factories, offices, and even retail stores.
Kaloyeros says such criticism is misplaced. New York has invested steadily since 1995 in the research, labs, and manpower needed to make Albany a viable hub for nanotech, which designs systems at the molecular level. The state and IBM built an R&D center at the University of Albany to develop the next generation of computer chips. It is part of a consortium that includes Samsung, Freescale Semiconductor, and Singapore's Chartered Semiconductor (CHRT). The university then built a silicon wafer plant that IBM Research Director John E. Kelly calls "by far the most advanced research center in the nanotech world" and saved jobs that probably would have gone offshore. Dozens of chipmakers and equipment vendors have opened major labs on campus. In an old armory, Hudson Valley Community College in Troy, N.Y., started a program that has graduated 600 clean-room technicians. "States are stepping up and doing what the federal government should be doing," says Kaloyeros.
New Mexico has been even more ambitious in its partnerships under Governor Richardson. Soon after his election in 2002, state planners sought to identify new industries that would create high-paying jobs that could not be outsourced. They chose film production, renewable energies, financial services, and aerospace. To lure companies, New Mexico tapped multibillion-dollar trust funds set up by the state to invest the royalties on oil, gas, and minerals extracted from public lands. It set aside $600 million in venture capital for startups and has invested in everything from feature films to an aircraft maker and a $250 million "space port" for commercial space travel. New Mexico reimburses companies for 10% of the wages and other costs incurred for each new job they create that pays at least $50,000 a year. Film studios recoup 25% of the costs they incur in the state.
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