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Knowledge Based Economic Development

KNOWLEDGE-BASED ECONOMIC DEVELOPMENT
A Simplified Model for Practitioners
by
Heinz Stucki and Gregg L. Andrews

SUMMARY
As the world continues its profound transition from an industrial economy to an "Information-Age Economy," knowledge-based economic development (KBED), the creation of a knowledge infrastructure based on active linkages among academia, industry and economic development organizations, is emerging as a promising tool for communities seeking to attain "world-class" status. A conceptual model that views the economic development process as a dynamic non-equilibrium "dissipative structure" provides a perspective for understanding KBED.

INTRODUCTION
Over the past decade, globalization and technology have combined to change forever the manufacturing environment. In the words of management guru Peter Drucker, "Economic growth...can only come from a very sharp and continuing increase in the productivity of the one resource in which the developed countries still have an edge: the productivity of knowledge work and of knowledge workers" (1). Competition for businesses has resulted in what some have termed the "War Between the States". A 1998 Time Magazine cover story pointed out that financial incentives used to promote economic development cost every working American the equivalent of two week's pay per year (2). In the State of Ohio, a legislatively-mandated study of Ohio's business incentive programs (3) issued preliminary findings in 1998 that tax abatement "provides a marginally positive net benefit to the state treasury and local governments". The study further made note of a frequently over looked side-effect of state financial incentives: "A fairly large percentage of each incentive dollar provided to a firm will end up in the federal treasury because the incentive increases the firm's federal taxable income and hence federal taxes".
Adding if you will, insult to injury, financial incentives do not seem to be as important to knowledge-intensive businesses. A recent article in the industry trade journal Plastics Technology counsels plastics companies "not to place too much emphasis on incentives like tax abatements, infrastructure grants, labor-training funds, and so on. Incentives are short-lived, can often be duplicated elsewhere and frequently mask serious and long-term drawbacks with an area" (4).

Communities searching for alternatives to financial incentives as tools for economic development in this new economic reality would do well to consider emulating their business clients. Juergen Dormann, CEO of the multinational chemicals giant Hoechst recently explained that company's strategy as a "shift from ... a high asset base and low R&D investment to a small asset base and high R&D investment, in other words, a shift from bricks to brains."(5). And Michael Henderson, a senior project manager for Cushman and Wakefield, has argued, "Companies seeking an R&D location look for a highly educated workforce with ties to local colleges and universities."(6). A similar strategy of refocusing from plant and equipment to knowledge and linkages with higher education would seem an eminently appropriate one for economic developers.

KNOWLEDGE-BASED ECONOMIC DEVELOPMENT
As might be anticipated for an emerging discipline, a concise definition of "knowledge" in the context of economic development is still lacking. Innovation is almost certainly the leitmotiv. The key concepts are programmatic, not physical. Although some KBED programs include the establishment of "knowledge parks," concern with real estate and physical infrastructure is ancillary.
Rather, key to the knowledge function are close linkages among academia, industry and local economic development entities. In "Organizing Research in an Information Society," Quentin Lindsey states:

"The conclusion is simply that a combination of academia, industry, and government is required to bring about major developments pertaining to accelerated and sustained economic growth through technological innovations. The industrial factory of the past has been replaced, not just by the university, but by growing university-industry-government complexes."(7).

The paradigm of internet hyperlinks has been used as a metaphor for the requisite networking among knowledge participants.

Technology transfer is involved, but not in the traditional sense. In fact as has been noted by the R&D Director for the chemical firm Henkel USA, "Technology transfer is dead...The old 1950 model doesn't work anymore; the old way of hoping R&D came up with something brilliant only works if you are the only game in town."(8). Rather, the cultivation of the core technologies of the community is stressed. Academic "centers of excellence" nurture the community's technological competitiveness in niche markets and provide goal-oriented workforce training. In "world-class" businesses and communities technology transfer has metamorphosed into knowledge transfer.

For example, in Canada, centers of excellence evolved based on a growing recognition that knowledge and highly-qualified people are essential components for achieving economic growth. Further, as the connections between industry and university researchers increase, knowledge transfer takes place, and business and industry become more competitive (9).

Finally, as will be stressed, knowledge dynamics are self-reinforcing. They are nonlinear rather than linear. Specific examples of operational KBED programs will be discussed later, but first it is necessary to establish a conceptual framework for understanding them..

EQUILIBRIUM VS. NON-EQUILIBRIUM MODELS FOR ECONOMIC DEVELOPMENT
For better or for worse, classical economics is largely predicated on the concept of equilibrium. An undergraduate economics text from one author's bookshelf states the problem quite succinctly: "Economists make frequent use of the equilibrium concept. But equilibrium is not something we can observe...The point is that equilibrium or disequilibrium depends on which factors we choose to include in our analysis...We shall see...that the equilibrium concept can confuse discussion at times by concealing critical assumptions." (10). Never-the-less, because non-equilibrium systems are inherently more complex, many economists continue using equilibrium models, resulting in what Toffler calls the WYMIWYG principle---What You Measure Is What You Get. (11).
The need for a non-equilibrium model is even more important in the case of economic development than in economics. Indeed, a system at equilibrium is a dead system: not a good model for economic developers wishing to effect changes. A particularly suitable theoretical framework for a dynamic process such as economic development is provided by the concept of a dissipative structure was developed by chemist and Nobel laureate Ilya Prigogine to describe stable systems far from equilibrium.

Dissipative structures, in contrast with the closed equilibrium systems of classical economics, are non-equilibrium systems, which are however, capable of maintaining their stability if three conditions are met. First, they are open to the environment. Second, they exhibit the property of self-organization: they evolve and change constantly. Finally they involve, and indeed require, processes in which the products of some steps feed back into their own production, e.g. nonlinear feedback loops. While initially developed to explain certain types of chemical reactions, dissipative structures have been used in weather forecasting and to explain the functioning of lasers, living organisms and of ecological, sociological and economic systems (12,13). Interestingly, Adam Smith had feedback loops embedded in his description of the "Wealth of Nations", but there is no evidence that other economists, politicians, philosophers and engineers of the time pictured loops of any sort in their thinking (13).

LOCAL ECONOMIES AS DISSIPATIVE STRUCTURES
Although the concept of dissipative structures can and has been used to elucidate the functioning of national economies, we are here concerned primarily with the community and regional economies of concern to most economic developers. Systems-oriented models have been applied to business analysis since the 1950's. An advance was made in the early eighties with the so-called St. Gallen model, which views business entities as dissipative structures (14). By extension, local economies can be viewed as clusters of business entities.
Figure 1 depicts a simple model of a local economy as a dissipative structure. As in the classical equilibrium model, labor, capital, land and raw materials are linearly inputted from the environment to the business cluster which generates profit, products and waste that are in turn linearly returned to the environment. In contrast with the equilibrium model, the non-equilibrium model explicitly includes a feedback loop for knowledge. In other words the effect of knowledge is amplified through iteration. As noted previously, such loops are requisite for the very stability of the system.

 

Figure 1: A Local Economy (Business Cluster) as a Dissipative Structure

Because this loop is nonlinear, it responds more strongly to catalytic action than do the linear input and output paths and it is here that the model predicts the particular effectiveness of knowledge. The word catalyst was coined by the chemist Berzelius in 1835: "Catalysts are substances which by their mere presence evoke chemical reactions that would not otherwise take place." Catalytic action has been likened to that of a coin inserted in a vending machine that yields a soda and also returns the coin (15). We would be hard pressed to come up with a better description of the action of knowledge in a local economy. Raw materials are consumed and labor, capital and land have associated opportunity costs. Knowledge, however, is not consumed nor does it have opportunity costs. Knowledge is like the "butterfly effect" of chaos theory which states that a butterfly flapping its wings in China can eventually cause a hurricane in the Caribbean because of the nonlinearity of weather patterns.

By extending the metaphor of the vending machine, it should be clear that traditional incentives such as tax abatement and low-interest loans do not have a catalytic effect but merely reduce the price of the soda. The Ohio incentives study cited earlier makes a similar point: "[if Ohio wants to encourage job formation] property tax abatements are not the best instrument. Economic logic would suggest that abatements reduce the price of capitol and ... will result in some substitution of capitol for labor" (3).

Although all discussion here has been on a strictly qualitative level, quantitative KBED simulations can be readily accomplished using modeling software that is free for the downloading (16).

CASE HISTORIES
In North America most KBED programs are in their early stages. The Institute of Island Studies at the University of Prince Edward Island has recently implemented a program to establish Prince Edward Island as a world pilot site for the application and refinement of knowledge assessment methodology and to contribute to the knowledge economy in Prince Edward Island (17).
InterTech, a consortium of nine northwest Louisiana educational institutions, government and economic development organizations was formed to "create a new reality for North Louisiana's regional economy by developing a competitive, knowledge-based economy focusing on the development of a growing center for healthcare based on advanced biomedical technologies and the cultivation of other core technologies and related high-tech industrial activity" (18).

North Carolina has drawn on the resources of higher education--from major research universities to two-year campuses, to successfully re-invent the local economy. The North Carolina model underscores the impact of a technically-skilled workforce with the infrastructure to provide ongoing training and retraining to enhance economic growth and vitality (19).

In Tuscarawas County in east central Ohio, elements of a KBED program are being assembled focusing initially on a nascent polymers processing cluster. The Community Improvement Corporation, the county's industrial development agency, has a launched a targeted initiative to nurture and promote that industry. Seed funding for this program was received from the electric utility serving the area. A parallel initiative between the CIC and Kent State University Tuscarawas Campus has developed new programs and services to nurture this core technology of the community. With funding provided by the Ohio Department of Development and the Ohio Board of Regents, the campus initiated a training needs assessment for the local polymers processing cluster. Focus groups were used to initiate dialogue between the university and local business leaders which also provided the foundation for the development of a survey research project. As a result of this business/university partnership, the campus developed both associate and baccalaureate programs in Plastics Technology and has provided a tuition waiver to employees from qualified companies. Cooperation between the CIC and the university is also enhanced by representation on each other's boards.

In Europe, where there is longer tradition of industry-academic cooperation, KBED is more mature and a better comparison with the model presented here is possible. Magnus Gulbrandsen (20) has studied successful KBED programs in Denmark, Norway, Sweden, Finland, France and Great Britain with the following conclusions:

1. There is a need to specialize both in terms of business area (biotechnology, medical technology, engineered materials, etc.) and functional area (contracts, entrepreneurship, marketing, etc.). While most programs have strategic plans reflecting areas of specialization, consistent with the self-organizational property of dissipative structures, actual control of activities is informal and unsystematic.

2. Consistent with the compounding growth effect of nonlinear feedback loops, successful programs have required from one to several decades to mature.

3. Working with individual small firms has proven difficult. Rather, as required by the "openness" criteria of dissipative structures, successful programs have focused more broadly on clusters of firms in related activities.


CONCLUSION
Knowledge-based economic development has the potential to serve as an effective and powerful tool for economic developers seeking to position their communities in the emerging knowledge economy. One could argue that the traditional industrial model can be replaced by a more focused approach which emphasizes specialized and directed activities around high skills/high technology. Importantly, the critical linkages between business, government, and academia must be nurtured and developed to bring about economic growth through technological innovation.
NOTES
Internet URL's were accurate as of the manuscript submission date but are subject to change.
1. Peter Drucker, The Profession of Management, Boston, Harvard Business School Publishing, 1998, viii.

2. Time, November 9, 1998, Vol. 152, N. 19 (cgi.pathfinder.com/time/magazine/1998).

3. Alan Peters and Peter Fisher, Ohio's Business Incentive Programs, July 29, 1998 Report to the Advisory Committee.

4. John Boyd, Where's Your Next Plant?, Plastics Technology, December 1998, p50. (www.plasticstechnology.com).

5. Madeleine Jacobs, Chemical and Engineering News, November 23, 1998, p. 5.

6. Karen E. Thuemer, When it Comes to Setting Up Research and Development Operations, The Advantage is Often Academic, World Trade, Volume 9, N. 1, January 1996, p44.

7. Quentin W. Lindsey, Organizing Research in an Information Society, Social Science and Public Policy, September/October 1990, p63.

8. Henry Etzkowitz and Loet Leydesdorff, The Triple Helix, EASST Review, Volume 14 (1), March 1995 (www.uva.nl/easst/easst951_3.html).

9. Steven Bell, University-Industry Interaction in the Ontario Centers of Excellence, Journal of Higher Education, Volume 67, N. 3, May/June 1996, p323.

10. Paul Heyne and Thomas Johnson, Toward Understanding Macro-Economics, Chicago, Science Research Associates, p40.

11. Alvin Toffler, Powershift, New York, Bantam Books, 1990, p282.

12. Fritjof Capra, The Web of Life, New York, Anchor Books, 1996, p181.

13. John Briggs and F. David Peat, Turbulent Mirror, New York, Harper and Row, 1989, p25.

14. Fritjof Capra, p76.

15. Walter J. Moore, Physical Chemistry, Englewood Cliffs, Prentice-Hall, 1962, p300

16. Two user-friendly sites are: www.hps-inc.com and www-c.mcs.anl/gov/otc/Server/neos.html

17. Knowledge Economy Partnership (www.gov.pe.ca).

18. InterTech (www.biomed.org/intertech.html).

19. Peter Schmidt, States Turn to Community Colleges to Fuel Economic Growth, The Chronicle of Higher Education, June 6, 1997, pA29.

20. Magnus Gulbrandsen, Universities and Industrial Competitive Advantage, The Triple Helix Workshop, Amsterdam, January, 4-6, 1996 (www.nifu.no/~magnus/amstpap.html).


BIOGRAPHIES
Heinz Stucki is the Director of Economic Development for the Community Improvement Corporation of Tuscarawas County (Ohio) and a member of the adjunct faculty at Kent State University Tuscarawas Campus. He is the immediate past president of the Ohio Development Association. He holds a PhD in Organic Chemistry from the University of Wisconsin at Madison and an MBA in Marketing from Rutgers University. He can be reached by telephone at 330/343-4474, by fax at 330/343-6526, or by e-mail at cic@tusco.net.

Gregg L. Andrews is the Dean of Kent State University at Tuscarawas in New Philadelphia, Ohio. He has been actively involved with business/education linkages throughout his career, having served as the Director of Special Programs and Continuing Studies at Kent State University's Stark Campus prior to his appointment as Dean at Tuscarawas. He holds a Master's Degree in Sociology from The University of Akron and a PhD in Sociology from Kent State University with a specialty in Organizational Analysis. He can be reached by telephone at 330-339-3391, by fax at 330-339-3321 and by e-mail at gandrews@ksu.tusc.kent.edu


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