Innovation and the Endless Frontier
Charlotte, the Triangle, and the past and future of economic transformation in the Carolinas
After starting 2021 with back-to-back jobs announcements from top tech companies Google and Apple, North Carolina’s Research Triangle received another revelation last week. A note buried in, of all places, a New York Times book review of “Amazon Unbound,” revealed that Raleigh had made a very short list of final contenders for Amazon’s highly publicized second headquarters (HQ2) back in 2017-2018.
After a national sweepstakes that sent local politicians and business recruiters from throughout the country scrambling to market their regions through two rounds of intense requests for information and elaborate pitchbooks, Raleigh made the internal list of three final candidates, along with Chicago and Philadelphia. Ultimately, CEO Jeff Bezos “went with his gut,” to pick sites in Queens, New York, later abandoned after local activist opposition, and northern Virginia.
A few years removed, this new validation of Raleigh’s prominence, coupled with the Apple and Google announcements, made some boosters a few hours down I-85 in Charlotte introspective. Charlotte’s bid for HQ2, after all, didn’t even make it to the second round of 20 cities. Despite strong recent growth in software development jobs in banks and headquarters, Charlotte’s tech talent pool, Amazon representatives said, wasn’t deep enough at the time to make the cut.
Seattle-based Amazon’s ultimate decision to locate in already large and prosperous markets despite a national search was a symbol, some commentators said, of the increasingly “winner-take-all” landscape of the American economy. And Raleigh’s place on the third-round list, though discarded, seemed to put it in the winners’ column.
Innovation and Consolidation
Six tech companies with the acronym “FAANG” (Facebook, Apple, Amazon, Netflix and Google) make up 15% of the S&P 500. Two out of three have now made firm commitments in the Triangle and an internal analysis had told a third that Raleigh should be on its list. The other two cities on Amazon’s list, Chicago and Philadelphia, were rarely competitors for a region like Charlotte. In fact, Charlotte was more likely to lure companies from those higher-cost Northeastern cities, touting lower taxes, labor costs, and better winter weather.
But something about what the FAANGs were looking for was different than the typical company Sunbelt recruiters had gotten used to landing. While Philadelphia might offer a discount from larger northeastern cities, costs clearly weren’t the main driver. Those cities had a few things in common - internationally recognized universities capable of attracting international talent and pursuing cutting edge research, embedded in a business community willing to invest in the type of research and development that could retain that talent while pushing industries forward. Raleigh also happened to have the lower taxes and home prices to boot.
Just as the FAANG’s consolidated market share, certain cities and regions have begun to consolidate the innovative jobs that drive the technological breakthroughs behind those company’s success. Recent research found that 90% of growth in innovation sector jobs happened in just five US metro regions - San Francisco, Seattle, San Jose, Boston, and San Diego. While Raleigh didn’t make the headline from that report, the region ranked seventh in innovation sector job growth, just behind Madison, Wisconsin.
Regional consolidation is happening within states, too. Charlotte, Raleigh, and Durham now account for about 40% of North Carolina’s population and 54% of the state’s GDP. While a statistical fluke splits Raleigh and Durham into separate metro areas, the combined Triangle region makes up close to 2.1 million people, smaller than Charlotte’s 2.6 million. But given that 400,000 or so people live in Charlotte’s South Carolina counties (two of which are the metro’s fastest-growing), the Charlotte metro and the Triangle region represent comparable portions of the state’s population.
The two regions took different paths to this growth, and the varied makeup of their economies and built environments reflects that. While Charlotte grew around first textiles, then energy and finance, the Triangle has relied on tech and pharma research, higher education, and state government to power its economy. Where the centripetal force of Charlotte’s uptown urban core concentrated economic activity in a densely developed center, the purposely sprawling Research Triangle Park in the middle of three smaller urban centers, led to a more suburban mode of development. With the long-standing seat of state government in Raleigh, the Triangle region also benefitted from earlier institutional development, particularly in higher education. Where publicly funded UNC Chapel Hill opened in 1795, NC State in 1887, and privately-funded Duke University in 1892, Charlotte would have to wait to get a state university until the post-WWII higher education boom funded by the GI Bill.
Turning Points and New Frontiers
The post-WWII era represented a turning point in the country’s economic history, ushering in a vast restructuring of American economy and society that allowed Southern and Western regions to catch up with the more advanced economies in the Northeast and Midwest that had left them behind. Today in 2021, those cities and regions capturing the lion’s share of innovation jobs are beginning to leave others behind, too. And just as defense contracts and highway spending helped spread prosperity in the middle of the twentieth century, the federal government’s interest in spurring business innovation beyond winner-take-all tech hubs today has implications for domestic prosperity and international security.
The Endless Frontier Act, which the US Senate voted to consider earlier this week, ties this goal of diffusing innovation in technology throughout US regions with the broader national security threat of competition from China. While nine of the top ten universities for new patented breakthroughs are based in the US, Chinese universities are rising in the rankings of patent applications, and as the Huawei incident back in 2018 shows, control of new technologies can have national security implications. Shoring up American innovation and technology transfer to American companies would strengthen not only US economic competitiveness but also reinforce our geopolitical strength.
The bill calls for creating 10 new innovation hubs around the country focused on areas like artificial intelligence, robotics, semiconductors, and materials sciences (among other advanced fields). The program wouldn’t build these hubs from scratch, but rather invest in existing universities and concentrations of industries, then help connect research breakthroughs with commercial uses (technology transfer).
Areas with robust existing hubs would not be eligible. In the Carolinas, the Raleigh-Durham area would be excluded, but Asheville, Charlotte, Columbia, Greensboro-Winston Salem, Greenville, NC; Greenville-Spartanburg, SC, could qualify.
Raleigh and Durham combined received an average of $2.4 billion in federal Research and Development Funding over the decade between 2008 and 2018, according to National Science Foundation data. Charlotte received an average of about $37 million (Research funding at UNC Charlotte did surpass that number in more recent years, surpassing $50 million in 2019, showing the potential for growth in this area). While there’s a lot of private R&D happening in the Charlotte region, private R&D doesn’t get captured in these statistics. And private R&D typically focuses on incremental improvements with clear commercial applications - the type of bets with clear and less complicated upside.
Basic research (and to some extent tech transfer) is riskier, with less clear connection between investment and commercial application. Federal funding bridges that gap between the pie-in-the-sky and the practical. Much of the research doesn’t pan out, but when it does it can transform entire fields or, in the case of DARPA’s 1960s computer networking project which would blossom into the internet, society itself.
Focused and funded research efforts can also transform regions. And the Raleigh-Durham Triangle is a prime example.
‘Desperation’ and Innovation
It’s hard to imagine today, sitting in rush-hour traffic on I-40 in Morrisville amid signs advertising Whole Foods and $100/hour yoga studios that North Carolina was once, in living memory, the second poorest state in the nation. In the 1930s, per capita income in the Carolinas was about 40% of the national average, and even with a burst of federal military spending and thriving textile and tobacco industries, incomes only rose to about 65 cents for every national dollar by the 1950s.
That’s a far cry from the $187,000/year Apple says it will pay on average at its new campus in Research Triangle Park, or the similar salaries at Google’s new engineering center in Durham.
With cities like Charlotte and Raleigh rating as top destinations for post-college graduates (or “millennial magnets”), it’s also a bit hard to imagine mid-century hand-wringing about a vast brain drain from the Tar Heel state. In the 1950s, two-thirds of all science and engineering graduates from Duke, UNC-Chapel Hill, and NC State had to leave the state to find suitable jobs, according to then-governor Luther Hodges.
It was from this “state of desperation and great economic crisis,” that the idea for an innovation district, designed to leverage research at the state’s three major universities to attract companies in advanced industries, emerged. The Research Triangle Park would sit in between the three mid-sized cities - Raleigh, Durham, and Chapel Hill - and their universities, with a non-profit foundation to manage the special district, recruit companies and match cutting-edge basic research activities at the universities with applied needs from the private-sector (I’m oversimplifying here but that’s the general idea).
With industry and state government support, an independent district separate from squabbling between the three cities, and an independent research institute with the funds and academic chops to recruit a director from Stanford’s Research Institute, the Research Triangle could thread the needle between academic snobbery, industry swagger, and local political spite.
In 1965, after a decade of debt – two major announcements sealed Research Triangle Park’s success. The Federal Environmental Health Sciences Center (now the National Institute for Environmental Health Sciences) chose Research Triangle Park for a new facility. On the private sector side, IBM opened a manufacturing facility in the park as well, just as computers were finding their way into more and more large offices.
Combined, these private and public-sector announcements in health care and technology set the tone for the Park and the region’s future growth, building off successful engineering and medical schools at the three nearby universities. From there, more companies and research institutes called the park home. By 1988, one study found that RTP accounted for 24% of the Raleigh-Durham area’s non-governmental employment growth over the 20 years prior – and as the seat of state government, Raleigh has a sizeable government sector.
This model proved remarkably resilient, despite one misstep, which park leaders are attempting to mitigate today. Like nearly all 1950s development, park planners zoned RTP for cloistered lab facilities that discouraged, quite intentionally, interaction between employees of different companies. That’s changing now, thanks to a new development plan to add apartments and mixed-use, walkable areas in the interior of the park. Regardless, the park’s continued success provides the backdrop to back-to-back announcements this year from Google and Apple that will add thousands of six-figure-and-up tech jobs to an already vibrant regional tech hub.
These efforts have brought a stable prosperity to the Raleigh-Durham area. Per capita income here has been at or above the national average since the 1980s. And though it’s slowed down a bit in the 2010s, relative income here still outpaces Charlotte, as it has with few exceptions since the early 1970s. The Triangle’s income has also been more stable through boom-and-bust cycles (thanks not least to state government and university employment), while income in Charlotte has been more volatile with noticeable drops as the textile industry outsourced in the 1990s, then a peak shortly before the 2007-09 Recession.
Risk and Rewards
Charlotte, of course, is no one’s loser in the new economy. The finance industry’s recovery over the past decade has benefitted the region, especially through the COVID-19 pandemic. As other sectors shed jobs, Charlotte’s finance sector continued to add them, lifting other sectors. The finance sector’s focus on modernizing payment process has led to a boom in tech jobs here as well.
The region is also benefitting from earlier eras of leadership. Nuts-and-bolts infrastructure planning brought the city an airport that punches well above the metro’s weight, while forward-looking urban planning (pushed by private- and public-sector interests) made Charlotte’s Center City a selling point just as the urban revival of the 2000s kicked into gear.
Still, perceptions of Charlotte trend toward headquarters, banks, and utilities - all industries that in theory seek to minimize risk. The region’s increasingly advanced manufacturing sector is even less well known.
As technology and digitization expand to become integral in more and more industries, the cities at the forefront of technological breakthroughs will become increasingly vibrant. Until now, US industrial policy and R&D has focused largely on software and medical research rather than tangible production. Americans will engineer the ideas, the thinking goes, and the rest of the world will make the products, more cheaply and in some cases better. But after a few decades of offshoring, there are strong arguments that where production goes, engineering will follow.
The economic benefits of a stronger industrial policy, investing not only in software and healthcare, but also manufacturing, are apparent. The national security benefits are becoming clearer, as China outspends European and Asian rivals in R&D. An industrial policy with a physical industry focus also presents the opportunity to bridge domestic divides. With manufacturing jobs often clustering in exurban areas on the fringes of larger metros, such a policy could have benefits beyond the urban environments where innovation so often thrives.
Supercharging existing research universities along the I-85 corridor (UNC Charlotte and Clemson in the Greenville/Spartanburg area) and connecting them to industry clusters (finance/data security and energy in Charlotte; and automotive automation in Greenville/Spartanburg) offer starting points for innovative growth.
The Atlanta-RDU corridor is already emerging as a new American megalopolis. With more people drawn here each year, the region’s transformation is a given. There are many details to work out, but as the Carolinas’ influence grows in national politics, so does the states’ opportunity to shape the future.
After all, we’ve done it before. Just look up I-85/40.