Can Universities Be an Engine of Growth?

Every city wants to have its own MIT. Planners, city officials, and local politicians are constantly scheming to re-create the remarkable innovation hub that has flourished around the most famous engineering school in the world. They have in mind innovators like Yet-Ming Chiang and Dharmesh Shah. Chiang is a fifty-three-year-old professor of materials science. In addition to teaching and writing academic articles with engaging titles like “Overpotential-Dependent Phase Transformation Pathways in Lithium Iron Phosphate Battery Electrodes,” Chiang is a serial entrepreneur. His academic research has resulted in the creation of four high-tech companies. The most prominent are A123 Systems, one of the world leaders in clean tech, and SpringLeaf Therapeutics, which designs wearable drug delivery systems. A123 Systems is often profiled in the media, because it uses nanoscale technology to create more efficient batteries for electric cars. Chiang is directly responsible for thousands of new local jobs—A123 alone employs 1,700 people—and indirectly responsible for thousands more through the multiplier effect. Besides being exceedingly smart, he is very successful at leveraging all the competitive advantages offered by the Boston-Cambridge innovation hub. “I try to find partners at MIT who are experts in areas where I am not, and leading entrepreneurs to work with on the business side,” he told the press when he was recognized as one of Boston’s top innovators in 2011. “Then we interact with the venture community, and hire the best young business and technical talents. I take maximum advantage of our ecosystem.” Dharmesh Shah was a student at MIT when he founded HubSpot in his dorm. The company, an online marketing platform for small businesses, now employs two hundred people in downtown Cambridge.

 But do universities really change a community’s economy? The role played by universities in local development is complex. As we have seen, the number of college-educated workers is the key factor driving the economic success of cities. But college graduates are a very mobile group, and they do not necessarily stay in the city where they went to school unless market conditions are attractive. The majority of college graduates in New York were educated not at Columbia, New York University, or City University of New York but at schools in other cities or states.

My research shows that the presence of a college or university in a city increases both the supply of college graduates, by educating some and attracting others from outside, and the demand for college graduates, by making them more productive. 11 The demand effect comes through three channels. First, some businesses are created directly as a result of academic research, like the ones founded by Yet-Ming Chiang. A recent study indicates that the passing of the Bayh-Dole Act in 1980, which encouraged universities to exploit their innovations commercially, resulted in job growth for communities near universities. Since 1980, MIT has generated 3,673 patents; companies started by MIT graduates and faculty generate $2 trillion in sales each year. Stanford and Berkeley can make similar claims. While Larry Page and Sergey Brin were graduate students in Stanford’s engineering department, they developed the technology underlying Google’s fabled search engine for a research project. In its early days, Google even operated under the Stanford website, with the domain google.stanford.edu. Its first employee was a fellow student of Page’s and Brin’s who, thanks to that lucky break, is now a millionaire.

 A second important benefit of universities is that academic research generates the kind of knowledge spillovers discussed earlier, and this further fosters a local innovation sector. A study by Adam Jaffe has found that this spillover effect is particularly relevant in the areas of drugs, medical technology, electronics, optics, and nuclear technology. While some of the spillover accrues to companies everywhere, a significant part is local in scope.

A third channel is through a university’s medical school and its associated hospital. Because hospitals are open 24/7 and provide one of the most labor-intensive and skill-intensive products that exist, they generate hundreds or even thousands of high-paid local jobs. Much of health care is a local service that follows rather than causes local prosperity. But sometimes hospitals become regional or national providers. Rochester, Minnesota, where the Mayo Clinic is located, Pittsburgh, and Houston attract patients from all over the country and the world. These hospitals are effectively producing a tradable service that is exported outside the local economy—not unlike Microsoft and Apple—and therefore their presence is an important driver of local wealth.

Overall, my research suggests that the presence of a university is on average associated with a better-educated labor force and higher local wages. But at the same time, mayors and local policymakers should realize that a university—even a good one—is no guarantee of economic success. While most large cities have universities, only a small minority of metropolitan areas have large concentrations of innovative industries. Washington University in St. Louis is a better academic institution than the University of Washington in Seattle, but St. Louis has few high-tech jobs to show for it. In fact, it has been losing population for the past fifty years, while Seattle is now one of the world’s most dynamic innovation hubs. Arizona State and the University of Florida are among the largest institutions of higher education in America, but Phoenix and Gainesville rank low on the list of innovation hubs. Cornell and Yale dominate global academic rankings, but other than employers directly connected to these universities, there is little in Ithaca and New Haven to suggest a world-class high-tech cluster.

Thus, proximity to a research university is important, but it is not enough on its own to form a sustainable cluster of innovative companies. This is a key distinction, one that is ignored by countless local governments—from Las Vegas to Detroit, from Italy to China—that invest scarce resources in the creation of research centers. Universities are most effective at shaping a local economy when they are part of a larger ecosystem of innovative activity, one that includes a thick market for specialized labor and specialized intermediate services. Once a cluster is established, colleges and universities play an important role in fostering its growth, often becoming a key part of the ecosystem that supports it and makes it successful.