• Josh Sevin
Categorized As:
Business Growth

Continuous Reinvention: Greater Boston's Knowledge Economy Edge

Next month, more than 100 business, civic and government leaders will travel to Boston as part of our Greater Philadelphia Leadership Exchange. As we prepare for the visit, we take a closer look at how Boston is tackling critical issues related to growth and opportunity. This piece focuses on Boston's ability to reinvent its innovation economy by capitalizing on research resources for commercial success, even in the face of economic downturn.

 

Historians point out that Greater Boston’s economy has come back from the brink several times. In the post-World War II era, the region’s economic success has been attributed to its foundation of science and technology strengths, educated workforce, and repeated ability to adapt to disruptions and changes in the knowledge economy. Whereas many regions, including Philadelphia, boast substantial eds and meds research institutions, Greater Boston’s elite talent base and ability to reinvent its innovation economy have set it on a different path than other Rust Belt regions with similar research assets but economies that have faltered.

 

THE RESEARCH FOUNDATION

 

The dominance of Greater Boston research institutions such as Harvard, MIT, Tufts, and Boston University along with industrial production strengths prior to 1945 gave the region an important head start with science-based economic development. The birth of the modern US research university combined with a surge in Cold War defense spending following World War II accelerated Boston’s technology-fueled growth in the decades to follow.

 

MIT’s Vannevar Bush developed the concept of the moderun research university as a vehicle for federally funded basic research and worked in President Franklin Delano Roosevelt’s administration to enact this vision, enabling billions of dollars to flow back to his home region. Massive federal defense investments and medical research funding during the first two decades of the Cold War enriched elite research universities, allowed them to dramatically expand their scope and size, and prompted an explosion of industrial and biomedical research and high-tech production.

 

Today, there are more than 100 colleges and universities in Greater Boston, including eight major research universities, four medical schools, and 12 teaching hospitals. These institutions comprise the research and innovation engine at the core of Greater Boston’s sustained success. They ensure that Greater Boston receives the most federal R&D funding per capita of any US metro – a total of $8.3 billion between 2008 and 2012 (compared to $4.8 billion for Greater Philadelphia). And Boston does an impressive job of capitalizing on these research resources for commercial success. Almost 2,000 technology transfer licenses were executed by Boston-area institutions between 2008 and 2012 to help bring promising ideas and technologies to the marketplace. This licensing volume is more than three times Greater Philadelphia’s, which had the highest licensing growth rate among top R&D regions over the same period.

 

"THE ONE LEAD WE WON'T LOSE"

 

The heartbeat of Greater Boston’s innovation economy and its global marker along with its higher ed institutions is its life sciences sector. According to aJones Lang LaSalle analysis released earlier this year, the Boston region’s life sciences cluster remains tops in the US and worldwide. Over the past two decades in particular, biotechnology has emerged as a key driver of Greater Boston’s economy, with the sector’s pulse residing in the Cambridge innovation hub. Steady life sciences job growth has buoyed the region’s economy through recent downturns, as Greater Boston’s job base grew by 5.8% since a recession-induced employment low four years ago (two times the Philadelphia region’s 2.9% growth rate over the same period). Harvard Business School professor and cluster guru Michael Porter calls Greater Boston’s life science advantage “the one lead we won’t lose.”

 

Greater Boston’s life sciences leadership starts with its unparalleled concentration of medical research, which has led to the development of chemotherapy, pacemakers, and organ transplants, among hundreds of other transformative healthcare procedures and technologies. Of the 93 hospitals in the US that receive NIH funding, the five leading recipients – Massachusetts General, Brigham and Women’s, and Children’s hospitals, Beth Israel Deaconess Medical Center, and the Dana-Farber Cancer Institute – are in the center of Boston and received more than half of the total $1.9 billion that all US hospitals received from NIH last year.

 

One remarkably dense three-mile stretch in the center of Boston includes the Longwood Medical Area and is home to these research hospitals in addition to Harvard Medical School, Massachusetts Eye and Ear Infirmary, Tufts-New England Medical Center, and the BU School of Medicine. Just one mile across the river in Cambridge is MIT, the Broad Institute, and the Whitehead Institute for Biomedical Research. Outside of the Boston-Cambridge core, additional biomed research occurs throughout the region at hubs including EMD Serono’s research institute in Rockland 20 miles to the south and the University of Massachusetts Medical Center 35 miles to the west along the Mass Pike.

 

A Biotech Hotbed Grows in Cambridge

 

This research base drives the presence of almost 1,900 life sciences companies in the region and a biosciences workforce approaching 82,000 employees. These life science firms are spread across medical devices, drug development, contract research, drug manufacturing, and research. This growth has occurred via an explosion of small biotech startups, in contrast with the central role of large pharma companies in the Greater Philadelphia, New Jersey, and New York regions. The Boston region’s dedicated biotech firms emerged starting in the late 1970s in connection with specific R&D knowledge bases and the maturation of the region’s venture capital industry.

 

With rapid advances in drug development and gene manipulation during the 1980s, Cambridge’s Kendall Square/East Cambridge district become a hotbed of biotech growth. Biogen, one of the nation’s oldest biotechnology companies, was founded in 1978 by two MIT and Harvard scientists. The medical breakthrough that put them on the map was a drug called Avonex, the first effective treatment for multiple sclerosis, approved by the FDA in 1996. Avonex was viewed as a symbol of the growing strength of the biotech industry and put Kendall Square at the center of the biotech stage. Major biotech players including Genzyme, Millennium Pharmaceuticals, and Vertex Pharmaceuticals began and dramatically expanded in Cambridge, which earned the nickname “Genetown.”

 

Big Phish Swim after Biotech Minnows

 

Amidst the ongoing global trend of Big Pharma consolidation and downsizing, Massachusetts and Greater Boston are among the few places to recently experience pharma expansion. Among the major pharma firms that have shrunk their R&D presence elsewhere while growing in Massachusetts is GE Healthcare, which earlier this year announced that it would relocate its US life sciences headquarters to Marlborough, MA from Princeton, NJ. Amgen, the nation’s largest biotech company, announced an expansion of its Cambridge research center while cutting up to 2,900 jobs globally and closing sites in Colorado and Washington state. Swiss drug firm Novartis last year said it would cut 500 jobs and close sites in San Diego and Austria while adding 175 jobs at its one million-square-foot world research headquarters that was built in the heart of Cambridge one decade ago.

 

As an ever-smaller portion of large pharma companies’ long-run revenues are generated by their own research labs, the strategy has become going where the biotech are – and nowhere has a greater density of talent and labs than Cambridge. Ten years ago, none of the world’s 10 largest drug companies had a significant presence in Massachusetts; now, nine of them – Pfizer, Novartis, Johnson & Johnson, GlaxoSmithKline, Sanofi, AstraZeneca, Abbott Laboratories, Merck, and Bristol-Myers Squibb – do.

 

Far from resting on its laurels, the Commonwealth doubled down on securing its life sciences leadership position in 2008 with Governor Deval Patrick’s 10-year, $1 billion Massachusetts Life Sciences Initiative (MLSI). This ambitious effort aims to shore up existing biotechnology, medical diagnostics, devices, and bioinformatics advantages by focusing on funding translational research, investing in promising new technologies, facilitating workforce skill acquisition, and building partnerships among local and international life sciences communities. While such big economic development plays often come under criticism for waste or questionable impact, a recent analysiscompleted for the Boston Foundation suggests that MLSI is enjoying some early successes and strengthening the Commonwealth’s life sciences ecosystem.

 

REINVENTING GREATER BOSTON'S HIGH-TECH ECONOMY

 

While Greater Boston’s position as a medical research and biotech leader has been steady, its high-tech economy has had more ups and downs – and this is where the region’s ability to reinvent itself has been evident.

 

Greater Boston’s current high-tech strengths trace back to – like the catalyst that spawned the evolution of Silicon Valley – a surge in Department of Defense (DOD) research investments during the Cold War. This federal spending laid the groundwork for a wave of new electronics discoveries and innovations between World War II and the 1970s. Raytheon used federal research support to develop radar technology and the microwave during the 1940s. Draper Labs at MIT honed inertial navigation systems for missiles and spacecraft that made the Apollo moon landings possible. Greater Boston’s early electronics dominance was furthered by the development of vacuum tube and transistor technologies in the 1950s. In 1969, a small DOD-funded research team at MIT created the ARPANET (Advanced Research Project Agency Network), making today’s email and Internet possible.

 

During the 1950s, both new and established electronics firms such as RCA and Sylvania began to locate in newly developed suburban research parks near the Route 128 beltway 10 miles out from downtown Boston. This coordinated development was spearheaded by real estate firm Cabot, Cabot and Forbes, which bought substantial property along Route 128 to capitalize on growth associated with commercialization of government-funded research. The modern industrial facilities along Route 128 became a location of choice for research labs, high-tech manufacturers, and emerging venture capital firms in communities such as Needham, Waltham, and Wakefield. During the 1960s and 70s, Route 128 – also known as “America’s Technology Highway” or “Space Highway” – was more associated with technology than Silicon Valley.

 

The Minicomputer Boom and Bust

 

During the 1970s, a sharp decline in military research contracts impacted Route 128, spurring a period of recession and high unemployment. But the seeds had already been sown for the next big technology that would revive Route 128 and its high-skilled workforce. Back in 1957, a set of engineers left Lincoln Laboratory to found Digital Electronics Corporation (DEC) and develop a smaller alternative to room-sized mainframe computers. DEC’s breakthrough was producing desk-sized minicomputers that sold for one-fifth of the price of its competition and were four times faster. The DEC-led minicomputer boom – it accounted for 40% of worldwide minicomputer sales by the late 70s – gave rise to competitor firms like Data General and Wang Laboratories as well as software startups including Lotus.

 

Minicomputers played a significant role in the “Massachusetts Miracle” narrative that emerged around Governor Michael Dukakis’s 1988 presidential campaign, as the state’s unemployment rate dropped and remained below the national average driven by tech and financial sector growth. But just as minicomputers put mainframes out of business, Route 128’s prized technology rapidly succumbed to the personal computer. What had been termed a miracle collapsed almost overnight, with 50,000 jobs lost in the late 1980s at Route 128 firms that went out of business or were acquired.

 

Diversifying Greater Boston’s High-Tech Economy

 

The minicomputer industry bust felt so sudden and complete that some fretted that the computer sector’s collapse combined with the decline of other large industrial operations would send Greater Boston into an economic winter. But as UMass-Lowell economist Michael Best has subsequently observed, a period of creative destruction ensued during the late 80s and early 90s that allowed the region’s thousands of engineers and salespeople to reorganize and reapply their talents to other related tech opportunities. The deep experience within this workforce around complex product development, precision manufacturing, and instrument-making positioned it to lead again in new areas, including medical devices, robotics, energy, semiconductors, and Big Data. These product development and technology capabilities traced back beyond the recent minicomputer industry to defense firms focused on jet engines and missile defense systems prior and to textile and advanced manufacturing enterprises further back.

 

In the wake of the steep job losses associated with the minicomputers bust, Boston’s high-tech economy has become more diversified to survive the inevitable ups and downs of tech innovation and disruption. Current strengths include biotech, software, Big Data, telecom equipment, robotics, mobile communications, health IT, advanced manufacturing, cybersecurity, and Internet. Much of the economic and firm activity in these tech fields are not as visible to the general public since they are not involved with direct-to-consumer products. But Greater Boston is continuing to do what it has done best for the past century with tech innovation – basic research, industrial R&D, and complex product development.

 

VIRTUOUS CYCLES - ENTREPRENEURS AND RISK CAPITAL

 

The post-World War II development and evolution of Greater Boston’s biotech and high-tech industries has yielded a veritable bounty of the two most crucial ingredients for a thriving innovation economy – talent and capital. As the region’s pool of successful and serial entrepreneurs has grown, their experience, connections, and capital has driven further growth. A rich infrastructure of supports has emerged for entrepreneurs in the Boston area, from professional services firms to management consultants to business schools. And new social networking organizations such as Venture Café Foundation at the Cambridge Innovation Center and District Hall in Boston’s Innovation District are bringing together Boston’s considerable talent pool at innovation hubs to forge the kinds of connections that lead to innovation 

 

Given its long-standing research and talent base, it makes sense that Greater Boston was home to the first venture capital firm created in 1946, American Research and Development Corporation [ARDC]. Building on that tradition, Greater Boston’s share of total VC investment in the US is typically between 10 and 15% – second only to Silicon Valley, which accounts for 40% of total VC investment. The majority of this funding goes toward biotech and software startups. Driven by the new wealth being generated in the region, Fidelity and other mutual fund companies have made Boston the third-largest asset management city in the world, head and shoulders above any other US city and further deepening the pool of available risk capital.

 

Additionally, as might be expected of such a mature innovation economy, it has several sophisticated policy and advocacy organizations working to advance new and emerging clusters. Foremost among these organizations is the Massachusetts Technology Collaborative, a quasi-public agency that provides thought leadership and supports growth around Big Data, health IT, and advanced manufacturing, among other promising sectors.

While MIT has been a trailblazer since its 1861 founding in supporting innovation-driven entrepreneurship among students, alumni, and faculty, other area universities are working to catch up. Babson College is consistently ranked as having the top entrepreneurship program in US, Harvard recently opened a new Innovation Lab, Northeastern has opened a student-run venture accelerator lab, and Tufts is making a name for itself around entrepreneurial leadership.

 

MAINTAINING ITS INNOVATION ECONOMY EDGE

 

The Boston History and Innovation Collaborative’s 2006 report “Shaping the Future from our Past: Four Amazing Centuries of Innovation” provides a comprehensive overview of the region’s innovation economy stretching back to Boston’s founding. It closes with a look at four major concerns and challenges for continued success. Greater Boston has had a track record of letting the economic impact of major innovations such as transistors and automobiles (Massachusetts had the lead on early electric car technology before being passed by internal combustion) and potential industry-defining firms like Facebook slip through its hands. There’s a concern about potential diminished financial sector support to drive growth in emerging industries – either due to overall reduced size of the sector or branch city status concerns following bank mergers.

 

While a highly educated and skilled workforce has been Boston’s key sustaining element through its economic transitions, this advantage could fade if local talent chooses to leave due to lack of affordable housing, negative changes in quality of life, or finally gives up on the New England weather. The biggest threat of all, however, may be smugness and complacency in light of past success. Greater Boston’s relatively fractured civic leadership has managed to come together when faced with a sense of urgency or immediate opportunity (e.g., K-12 and health care reform, Big Dig), but might not be as responsive as other regions hone their game and become more competitive with current Boston cluster strengths.

 

Jennifer Egmont contributed to this article, which draws from the 2012 “Making University City a World Class Innovation Center” report completed for the University City Innovation Collaborative.