A Knowledge-Based Economy for Arkansas? (Ron Goforth Commentary)

In Arkansas, as in the United States as a whole, the ability to create, distribute, and exploit knowledge is increasingly crucial to competitive advantage, wealth creation and better standards of living. The importance of knowledge-based activities to the economy is reflected in our country’s economic performance, and high-technology sectors contribute importantly to growth in manufacturing and services indicators. Furthermore, the overall efficiency of capital and labor increased in the 1990’s, due partly to more rapid technological progress, and the concurrent increase in patenting activities confirms the swift pace of innovation.

As knowledge has grown in importance, so has the proportion of knowledge-intensive new industry. In fact, if knowledge-intensive “non-market” education and health services are included, knowledge-intensive services account for nearly one-third of the nation’s economic activity.

These new technology-based enterprises require investment, of course, and despite serious recent problems, venture capital (VC) remains a major source of funding for them. More than 65 percent of the VC investment nationwide in the ’90s was in information and communications technology. Biotechnology and nanotechnology are of growing importance and are likely to be dominant consumers of VC and federal funding for the foreseeable future.

Despite the growing importance of the technology-based economic sector, the federal government’s funding in R&D declined through the ’90s. We Arkansans also know that State funding for such knowledge- and technology-based enterprises remains severely limited.

Complex Issues, Important Decisions

There are complex issues involved, but it is clear that the creation and use of knowledge, complemented by technological innovation, will increasingly impact economic performance in Arkansas and must be carefully studied. We must come to grips with how to best encourage the creation and growth of knowledge-based enterprises — and we must fully appreciate the consequences of failing to do so.

The recent Building Arkansas’ Knowledge-Based Industries forum here in Fayetteville was designed to continue the process of educating entrepreneurs and investors. One forum session was a discussion of state initiatives for building and retaining knowledge-based companies. John Ahlen of the Arkansas Science & Technology Authority and Jim Blakley of the Arkansas Department of Economic Development provided an overview of state incentives and changes proposed in them. Among the proposed changes were several that I would strongly encourage the incoming Legislature to enact into law and otherwise encourage. These include changing the job creation incentives to a payroll basis (from a number-of-jobs basis), creating a transferable job creation tax credit for start-up knowledge-based businesses, and expanding investor tax credits under the Arkansas Capital Development Company Act.

One more matter for careful thought is how to best define knowledge-based companies for any legislation or regulation. We might start with something as simple as companies in which the creation and use of knowledge is the dominant activity, where the workers are largely degree-holding and have specialized R&D skills, and where intellectual property is the primary asset held.

I would also propose that we define investment in knowledge as the public and private spending on higher education, expenditures on research and development, and investment in computer-based and information systems. Of these, spending on education and skills development — both of which are clearly critical to the growth of a modern workforce — will likely continue to account for the greatest part of the investment in knowledge in Arkansas. Now is the time to recognize the critical role that knowledge-based enterprise plays in our future.

R.R. (Ron) Goforth, Ph.D., is president of Beta-Rubicon, Inc., of Fayetteville, a firm that specializes in technology assessment and due diligence services. Beta-Rubicon may be contacted through its Website at www.beta-rubicon.com.