Koelemay's Kosmos

Doug Koelemay

Aesop or Buffett?

Will Virginia lawmakers, like the teller of fables, demand immediate gratification in 2004? Or will they, like the billionaire investor, calculate the benefit of nvesting for the future? 

Billionaire Warren E. Buffett has been known to tell shareholders and business admirers that Aesop’s principle of a bird in the hand being worth two in the bush can be upgraded easily into good 21^st-century economic guidance. Answers to three questions are the key, Buffett suggests, because those answers help establish a value for the bush. Question one: “What are the chances there are birds in the bush?” Question two: “How many birds are there and when will they emerge from the bush?” And, question three, one that Aesop knew little about: “What is the risk-free interest rate?”

Virginians will recognize many of the dozens of companies Berkshire Hathaway owns -- from Shaw Industries, CTB International and Dairy Queen to GEICO, Benjamin Moore and CORT Business Solutions. Buffett and his Berkshire Hathaway, Inc. conglomerate have profited in every economic cycle, good or bad, by learning how to value both bird-in-hand (the present) and bird-in-bush (the future). As the Virginia General Assembly conducts its tax, budget and appropriations discussions over the next three months, a similar appreciation for the trade-offs between present and future value can be an instructive, sophisticated and business-like response to challenges.

Deep down -- and in non-campaign situations, of course -- legislators already know this. In 2003, for example, the General Assembly asked the Virginia Research and Technology Advisory Commission (VRTAC) to recommend strategies to boost research and development and the creation of new technology industries in the state. Research, development and the incubation of new technology industries are integral to Virginia’s future in the years, even decades, ahead.

In a 2002 study, the State Council of Higher Education noted a host of positive outcomes from R&D: a stronger, more diverse economy, Virginia as a preferred location for technology and high-wage businesses, higher incomes, a larger tax base, greater college learning opportunities, better healthcare, an improved quality of life and a higher standard of living. But in an Assembly that works on a two-year budget cycle and seems reluctant to secure adequate revenue even for education, health, transportation, public safety and other day-to-day needs, there is a tendency to see R&D and business incubation as luxury items Virginia cannot afford.

Nothing could be further from the truth -- especially with the economy still recovering from 2002 and 2003, when for the first time the Commonwealth lost more technology companies than it created.

Research, notes VRTAC, is the keystone to the innovation system in Virginia, “particularly research combined with education in Virginia’s universities.” Critical are state funds for the university research infrastructure, "to match federal dollars and to attract top researchers and research enterprises.” Yet, the governor and General Assembly in 2002 and 2003 “reduced state funds directly available for research and innovative entrepreneurship, cut budgets for state universities and Virginia’s Center for Innovative Technology that provide indirect investment in research and kept faculty pay below peer institution averages.” Virginia Tech’s Board of Visitors, for example, estimates its faculty salaries have slipped into the 20^th percentile of peer institution averages, nowhere near the 60^th percentile that is the goal for universities and Commonwealth alike.

VRTAC concluded that the most affordable, most realistic state-fostered research strategy is one led by renewed investments in human capital supported by a strategy that encourages collaboration and partnerships. Eight specific recommendations of the House study dealt with both present and future.

1. Assemble and dedicate resources necessary to attract and retain top researchers, research faculty and graduate research assistants at Virginia’s colleges and universities. This strategy incorporates specific suggestions, such as a significantly more robust eminent scholars fund for science, technology and engineering and a new graduate research assistant stipend program.

2. Review and invigorate partnerships with local governments, economic development agencies and regional technology councils to improve the attractiveness of Virginia as a location for new private and non-profit research and development enterprises. This effort might include targeted investments in science, technology and engineering workforce development; in quality-of-life improvements; in tax and other business incentives specifically for R&D activity; in real time prospects/projects of opportunity information sharing; and in coordinated marketing initiatives.

3. Reestablish the strong foundation necessary to coordinate and integrate the teams, consortia and partnerships of the R&D future by funding its Center for Innovative Technology (CIT) for at least $7.65 million annually, but preferably a baseline level consistent with annual appropriations made prior to the rounds of budget-driven cuts in the last two years. The Commonwealth also should monitor and analyze continuously the investments and initiatives of other states to remain competitive.

4. Ensure there are dedicated state research and investment funds in the existing Commonwealth Technology Research Fund (CTRF) to meet leverage and/or match requirements for the federal and private sector investments it is pursuing.  Annual budget allocations should be set based on the projected federal and private investment targeted.  Additionally, the Commonwealth should renew its commitment to seed R&D ventures in Virginia directly by investing $10 million annually in the existing CTRF.

5. Continue to promote the Institute for Defense and Homeland Security, the consortium of university, industry and federal research and development partners launched in 2003, and to invest where possible to further the work of the Institute.

6. Form and fund aggressively new research consortiums devoted to life sciences and nanotechnology.

7. Encourage and reward those institutions of higher education making the most progress in expanding their R&D efforts in priority fields of inquiry in a collaborative manner by authorizing institutions to recover the 30 percent of indirect costs associated with R&D that is now credited to the general fund.

8. Develop plans to convert into specific investments the results of the 2003 governor’s initiative to identify the most promising R&D areas and programs in Virginia .

Paralleling these recommendations were others from the VRTAC’s study on growing more technology companies in the Commonwealth. The study found that more than 90 percent of technology startups were funded by the private sector and so made seven specific recommendations to policy makers (technology facilitators), universities (technology developers) and corporate sponsors (technology marketers) to collaborate more closely.

1. Extend Virginia’s already “business-friendly” climate to address stage two (growth oriented) venture-backed businesses to secure their establishment of headquarters and/or key operational units in Virginia.

2. Create an “Invest Virginia” program to mobilize investments in Virginia-based venture capital funds from private sources through use of selective investment incentives.

3. Provide Virginia code changes and allocate baseline funding for the Center for Innovative Technology of at least $7.65 million annually.

4. Develop Virginia’s nanotechnology sector, focusing on industry leadership in nano-manufacturing.

5. Conduct a study of alternative ways to create a world-class science and technology-focused research and post-graduate educational institution in Northern Virginia , which can leverage the expertise in Virginia’s leading science and engineering departments across all of the state universities.

6. Eliminate barriers between Virginia universities and industry.

7. Revise leave-of-absence policies and reward faculty with bonuses to increase quality of research and education in Virginia universities.

Living hand to mouth is one hallmark of developing countries, which see the future as a luxury item to be considered only after present needs are met. The 2004 General Assembly session will provide an indication of whether the Commonwealth is more dynamic, sophisticated and business-like in recognizing the importance of present and future simultaneously. Implementing VRTAC’s recommendations is a great starting point for a strategy that is more Buffett than Aesop.

-- January 5, 2004

Douglas Koelemay is a member of the Virginia Research and Technology Advisory Commission.