Testimony of Steven Zylstra

President and Chief Executive Officer Pittsburgh Technology Council and the

Southwestern Pennsylvania Industrial Resource Center to the

House Finance Committee: January 9,2002

Mr. Chairman, members of the committee, thank you for convening this hearing today to discuss the'very important topic of research and development. I am Brian Kennedy and I am representing Steven Zylstra, the president and chief executive oficer of the Pittsburgh Technology Council. .

The Pittsburgh Technology Council, which has been in existence since 1983, is a membership association representing 1,600 companies in the fields of information technology, biotechnology and advanced manufacturing from the 13-county region of southwestern Pennsylvania. The Council also is a sister organization of the Southwestern Pennsylvania Industrial Resource Center or SPIRC, one of the commonwealth's seven IRC's.

As a region, southwestern Pennsylvania is home to over 9,000 technology and related businesses that employ more than 250,000 employees. Earning in excess of $11 billion annually, these employees represent nearly 20 percent of the region's overall workforce and earn 27 percent of the region's total annual payroll. Over the past two decades, the technology community has replaced the equivalent number of jobs lost, as a result of the steel industry's demise.

By every indicator, southwestern Pennsylvania's technology community has demonstrated remarkable growth over the past five years. And having not been born out of the dot-com fever, Pittsburgh's technology industry continues to grow despite the highly publicized dot-com bust that has befallen that sector of the tech economy.

To be sure, the growth of our region's technology sector can be attributed directly to the strength of the R&D activities that take place there. Home to world-class institutions, such as Carnegie Mellon University and the University of Pittsburgh, over the past decade, our region has seen a 75 percent increase in federal university-based R&D. We currently benefit from more than $425 million dollars of annual R&D funding from the federal government.

Though university-based R&D has proven to be a valuable economic stimulator, the benefits ofprivate sector R&D play an even more crucial role in the expansion of our commonwealth's economv. Private sector R&D activities. not onlv serve to brine - exciting new products to market, they also provide the G e s inno;ative advances in manufacturing processes that have made our nation the most productive in the world.

With this said, private industry is often reluctant to invest scarce resources in high-risk R&D projects, which can result very often in failed projects. Seeking to reduce the cost for R&D activities and stimulate a slowing economy, in 1981 President Reagan signed legislation into law that would authorize a tax deduction for qualified R&D activities.

By the early 90's many states began implementing similar tax credits in an effort to attract and retain leading-edge companies. Faced with a declining competitive position and data that suggested private sector R&D was on the decline in Pennsylvania, in 1997 the General Assembly wisely authorized the Department of Revenue to issue annually up to $15 million in R&D tax credits to Pennsylvania businesses.

To measure the effectiveness of a region's private sector R&D activities, one source of measurement is the quantity and quality of patents being issues to companies within that geographic region.

For this reason, policy makers and economic development officials were troubled by the steady decline in the number of new patents being generated from businesses in the commonwealth during the early 1990's. From 1990 to 1997, patents issued to businesses in southwestern Pennsylvania declined by more than 20 percent. Additionally, venture capital, which typically is sought by companies with innovative new products, remained relatively stagnant during the same period.

Since the passage of our commonwealth's R&D tax credit, the results have been both positive and dramatic.

Positive Examples

In the two years subsequent to the credits passage, patents issued to businesses in southwestern Pennsylvania increased by more than 40 percent, ending the seven-year decline that began in 1990. Likewise, venture capital investments, which had hovered annually between $20 million and $40 million prior to the credits enactment, soared to more than $750 million dollars in just three short years.

Recommendation

Having just described the unprecedented and remarkable results of Pennsylvania's R&D tax credit, I come before you today to ask for your consideration for House Bill 1848, which expands and extends this already successful provision.

I would like to commend Representative Stetler for his leadership on House Bill 1848. This legislation seeks to resolve several long-standing short-falls of the existing legislation. Specifically, Representative Stetler's legislation would increase the $15 million cap that was placed on the amount of R&D credits that the Department of

Revenue is permitted to approve on an annual basis and provides a much deserved extension of the original legislation's authorization.

Though we certainly recognize that the General Assembly was entering somewhat uncharted waters when it initially approved the R&D tax credit, we would suggest that since then, this credit has proven to be highly effective at creating new growth and innovation in our commonwealth.

However, the existing $15 million cap prohibits the commonwealth from reaping the full potential benefit of expanded sector R&D and surely harms our ability to compete with states with further-reaching provisions.

According to the Department of Revenue's annual report on the effectiveness of the R&D tax credit, every year that this provision has been in effect, the commonwealth has received qualified applications for R&D tax credits that are far in excess of the existing cap. In fact, in 1997 business claimed in excess of $66 million. By the year 2000, most companies were receiving credits for less than 20 percent of their qualified claims. As an economic development tool, the $15 million cap diminishes the attractiveness of the commonwealth to large corporations who might otherwise consider locating large R&D and manufacturing facilities in Pennsylvania.

Likewise, the pending expiration of Pennsylvania's credit serves to create a level of angst within the business community. Recalling the history of the federal R&D tax credit, which was allowed to expire several times, many industty leaders are hopeful that the general assembly will take a proactive position and reauthorize this legislation prior to its scheduled expiration in 2004. Moreover, I would urge the committee to consider a permanent authorization for this legislation. In the absence of a long-term reauthorization or permanent authorization, baniers will be created for companies that are seeking to make long term, sustainable investments in R&D.

Recognizing the enormous potential for growth and innovation associated with an expanded R&D tax credit, I respectfully urge full consideration for H.B. 1848. Once again, I would like to thank the chairman and the members of this committee for convening this hearing and considering this very important issue.

PATENTS The number of patents filed in any given year is one measure of the robustness of its innovative activity.

Since 1990, there has been a steady but subtle decline in the number of patents filed each year, until the middle of the decade. There was a spike in 1994, and 1997 began an upward trend.

By 1999, 874 patents were filed, 106 of which came from the university community.

^ • ^ Despite a Cooling Economy Technology Remains Hot in SWPA

low it today is quite different than it was just a few short years ago. ^ [ ^ ^ ^ ^ ^ ^ ^ |

Technology is transforming our world. Perception often holds that

technological innovations and economic drivers are based in select hot spots. When in

k reality, advances are being made in cities across the nation and right here in Pittsburgh.

V The technology sector in Pittsburgh and its surrounding region is unique. Southwestern

Pennsylvania's technology industry was not born of dot.com fever. Even with its share of

m dot.com hype and fizzle, the region's technology fortune and future are rooted elsewhere.

Now home to emerging and established tech ventures exploring the latest in computer

hardware/software, Internet technologies, life sciences, advanced manufacturing and

other sectors, the region has transformed itself into a thriving technology center -

despite an overall slowing global economy.

The latest State of the Industry Report (commissioned by the Pittsburgh Technology

Council and compiled by Carnegie Mellon University's Center for Economic Development)

highlights the dynamism of the 13-county Pittsburgh region technology industry.

more »

ie real story?

, an industry that has strong growth, Biomedical/BIotechnology

i, leading-edge research and an F r o m m a p p j n g t n e human genome and the development of

sneurial spirit. cloning capabilities to the advent of new, life-improving and r that employs nearly 20 percent of saving pharmaceuticals and medical devices, scientific advance-erall workforce. ments in life sciences have profound implications for humankind.

in which the $10.9 billion earned in N o o n e s n o u l d b e surprised with Pittsburgh's role in such

lal technology workers represents more c r i t i ca l areas- T h e r eg'o n is h o m e to s o m e o f t n e wor ld 's m o s t

it of the region's total annual payroll. bleeding-edge research and medical advancements. The 74 biomedical/biotechnology firms in the region employ

that has more than $458 million within m o r e t h a n 6 i l 0 0 ^ p ^ a n d h a v e a to ta | a n n u a | pay ro | | o f

Jevelopment activities in the region's s o m e $393 million d federal government facilities.

S M H H p M ^ ^ ^ H ^ ^ ^ ^ ^ Advanced Manufacturing/Advanced Materials

With southwestern Pennsylvania's manufacturing history and chnology t n e current growth in technologies, Pittsburgh has become an

an is home to a robust group of emerging leader in advanced manufacturing and materials.

ogy (IT) firms covering the gamut Composed of 121 companies employing more than 3,500 workers re, Internet technologies and tele- w i t h a tota| annua ( ^^^ o f $ 1 4 0 mi||Joni a d v a n c e d manufacturing ctors- companies typically are highly automated and utilize a high degree

firms in the region employ 39,000 °^ process controls. The advanced materials sector is 344 businesses II of some $1 Q hillinn The strong and employs more than 20,000 people with an annual

' payroll of $988 million-

firms employing 10,477 people with lg$403mlllk>n- ^ ^ ^ a g ^ p p ventures employing 14,667 people — reaching more than $921 million.

people a ^ ^ ^ ^ ^ ^ H ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ H

or is rapidly growing and currently involved in research, development, mercial sales of robotics and With some 5,784 people employed 3 latest innovations, it's no Kirnal dubbed Pittsburgh as November 1999 article.

Other Indicators noloqy In addition to the impressive growth in Pittsburgh's technology

business sector, there are numerous other indicators that measure Idwide leader in environmental a n d p r e d j c t t n e f u t u r e o f t n e regjon.s t e c n n o |0 g y strength. The

s skills cleaning up the effects of its following indicators are based on the 13-county region. turing industries. From university-nental remediation and even

jch as robotics, this is an area of B y 1 9 9 9* i r e s e a r c n a n d development spending at the region's e learn to protect the environment. universities increased 75 percen t since the beginning of

technology firms in the region t h e decade.

eople and have a total annual

8 million-University R&D by Field

1999 Southwestern PA

( Life Science 57% ) \

^Z&JZm&tb* MlSB^^^M ( Engineering T i -P)

\ / 1 ^ C Physical Science 5%")

^ ^ ^ _ Jj^^C Other Science & Engineering 8%~)

^ ( Math & Computer Science 17%")

etary of the U.S. Department of Energy *Last year of available data. m o r e > :>

;ont.)

_ , , , , . ... Science and Engineering Graduate Students were issued to local universities; ' ^ executed; $6.5 million in Southwestern Pennsylvania

le. 8000 — 6.900

s ranked 21st in terms of 7 0 0 0 A ^ Ith in overall patents issued ^ A l l l l l l l ) patents issued per capita J S 6 0 0 0 — « l l l l l l l l l H mmmn I 2.1 million smaii H 300° l l l l l l l l l l l ards were made in the region. ^ B 2000 — l l l l l l l l l l l

•; l l l l l l l l l l l . x. 1988 1990 1992 1994 1996 1998

business incorporations in the X). In 1998*, Pittsburgh had more than 6,900 science and

engineering graduate students - a strong indicator for the region.

region saw $674 million in . . . . . . . . „ . Venture investment reached an all-time high in the region ;hree initial public offerings. n ^ „__ e

L . &

m 2000, hittmg $741 million - a 233 percent increase over 1999.

Venture Capital Disbursements Southwestern Pennsylvania (by industry) «^ $741 mill ion

^ _

^ ( Communications 15% )

^Semiconductors/Other Elct. <1%^

^ ^ S Biotechnology <l%

^ ^ M ^ Consumer-Related <1% J

^ ^ ^ ( C o m p u t e r Software & Services 13%)

W- ( Computer Hardware 6% ) ^ ( Medical/Health 5% ") ^ ( Industrial/Energy 3%~ )̂ ^ ( Other Products 1% ) tistical Area encompasses six counties including. p Washineton and Westmoreland

tal Technology

Pittsburgh's reliance on heavy industry for our economic security has waned over the years H One lasting remnant of that legacy is the lesson learned about the environmental impact of those H and other industrial activities H

With that heritage in tow, and with today's growing regional technology boom, it's little wonder that H Pittsburgh is home to a burgeoning environmental technology sector H

From university-level research to environmental remediation and even to crossover technologies H such as robotics, this is an area of growing importance as we learn to protect and enhance H the environment H

The more than 432 Environmental Technology firms in the region employ more H than 18,000 people and have a total annual payroll of more than $815 million. H

fact» pjttsburgh-based RedZone Robotics developed I

PlOflPPr a robot that was used in the stabilization of I

' the damaged Chernobyl nuclear reactor. \

fact» Carnegie Mellon University's X Electrical and Computer Engineering Department

was ranked f j r e t by U.S. News and World Report in April of 2001.

The number of science and engineering graduate students reflects the availability and ^ ^ ^ f l

talent of a region's entrepreneurial and labor pool ^ ^ H

In 1998, the latest year of available data, Pittsburgh had over 6,900 such students — ^ ^ H

a strong indicator for the region ^ ^ H

Science and Engineering Graduate Students ^ H Southwestern Pennsylvania ^ ^ H j

6.900 —-N ^^M

Mm ! 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 ^ ^

4 ̂ ^La^^r >*-»

Pittsburgh's robotics industry has experienced rapid growth over the past two decades and currently ^ ^ H boasts more than 100 organizations involved in research, development, engineering and the commercial ^ ^ ^ L sales of robotics and automation technologies. In November 1999, the Wall Street Journal recognized j ^ ^ ^ H

Pittsburgh's leadership position in the industry by dubbing the city " R n h o b l j T S h " ^ ^ ^ 1

Today, the region's robotics firms employ more than 5,784 people. Employment growth statistics show I ^ ^ ^ H that between 1996 and 2000, there was a 14 percent increase in robotics firm employees, a 14 percent j ^ ^ ^ T increase in automation company employees, a 91 percent increase in robotics medical equipment ^ ^ H employees and an astounding 211 percent increase in the number of vision and guidance employees ^ ^ H in the region. ^ ^ J

But perhaps the most powerful indicator that Pittsburgh is well on its way to achieving its status as the ^ ^ H global center of excellence in robotics is recognition by its peers In its January 2001 issue, Prism ^ ^ H Magazine, published by the American Society for Engineering Education, featured Pittsburgh on its ^ ^ B

cover as a " BOOITltOWn " In t n e ro l30t ics fie'cl- j ^ ^ |

^ » The Robotics Institute at Carnegie Mellon University H

hasthe largest research facility I of its kind in the United States. ^U

fact» Pittsburgh ranks within the

T O D 1 0 US'cities with seven Fortune 500 company headquarters

Patents are yet another measure of continued scientific and technological development. ^ ^ ^ B

In 1999, the last year of available data, 8 7 4 patent appl icat ions w e r e f l l ed in t n e ^ ^ H region, with 809 issued ^ ^ H j

While the Pittsburgh MSA is ranked 21st in terms of population, it is ranked 18th in overall ^ ^ H patents issued and 15th with respect to patents issued per capita (3.47 patents issued per ^ ^ H 10,000 in population ) ^ H !

!GH MSA: Our Technology Sector at a Glance

'mation Technology

The Pittsburgh Metropolitan Statistical Area (MSA)* is home to a robust and diverse group of infor- ^ ^ ^ mation technology firms comprised of businesses in the hardware, software (including prepackaged, ^ ^ H customized, embedded, Internet and enterprise solutions), and telecommunications sectors ^ ^ H

firms form the economic core of Pittsburgh's vibrant technology sector. ^ ^ H

In all, the more than 1,200 information technology firms in the region employ nearly 36,000 people ^ ^ H and have a total annual payroll of roughly $1 9 billion ^ ^ H

The sector includes ^ ^ H

• 101 hardware firms that employ more than 9,700 people with a ^ ^ H total annual payroll of roughly $384 million ^ ^ H

• 939 software firms that employ more than 14,200 people with a ^ ^ ^ ^ total annual payroll of $911 million ^ ^ ^ H

• 222 telecommunications firms that employ more than 11,800 people ^ ^ ^ H with a total annual payroll of $585 million ^ ^ ^ V

^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ The Pittsburgh Metropolitan Area ^ ^ ^ |

^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ encompasses six counties including ^ ^ ^ |

B ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ k Washington ^ ^ ^ |

There were X Q R Q new business incorporations

in the Pittsburgh region in 2000.

T

Perhaps the next headline written about the Pittsburgh region will read " V G n t l l T f i b U r S h " ^ L Y I ^

Why7 Because the flow of venture capital into the region in 2000 reached an all-time high of ^ ^ H m

$741 minion - a staggering 233 percent increase over 1999. ^m \«

Not surprisingly, the majority of those investments went toward Internet-specific ventures, and |V^vJ

roughly one-third of the region's venture capital dollars in 2000 went toward early stage ventures. ^ ^ H ^

••fll

Venture Capital Disbursements i^H c< Southwestern Pennsylvania (by industry) ^ ^ H E<

, ^^^^^ • ^ ^ ^ B ^ ^ ^ ^ ^ B H ^ ^ ^ ^ ( Communications 15% ) ^ ^ H

a^L^L^L^L^L^HSL^L^L^L^Lm L ^ H - ^ * * ' * ^ ^Semiconductors/Other Electrical <\°u\ ^ ^ H - ^ ^ ^ a ^ ^ ^ ^ ^ ^ R a j i a B ^ Biotechnology <1% ^ ^ H | ^ ^ ^ ^ ^ ^ ^ ^ H H H H ^ ^ ^ ^ ^ ^ B V̂ Consumer-Related <l% ~) ^ ^ B '

^ ^ B ^ ^ ^ B j B H B B H ^ ^ y ( Computer Software & Sevlces 13% ) ^ ^ H

^^^mUU^^^ ( Computer Hardware 6% ) B^^H

^ ( Medical/Health 5%~^ ^ ^ H

( Industrial/Energy 3%~~) ^ A V J ^

( Other Products 1% )̂ ^ "

ogy coupled with applied technologies So what's the real story? It's one that features a technology btechnology, advanced manufacturing sector that has strong growth, incredible innovation, leading- j ^ ^ echnology form the diversified foundation edge research and an indomitable entrepreneurial spirit. ^ ^ ^ st technology sector. ^ ^ H

• It's a sector that employs nearly 18 percent of the i ^ ^ l t f rgh is home to leading institutions like region's overall workforce I ^ ^ H nversity and the University of Pittsburgh, ^ ^ H S I

. . . x . • It's a sector in which the $9.9 billion earned in ^ ^ ^ H i and development occurs every day. I ^ ^ ^ H

, . „ _, „ the year 2000 by the region's technology workers ^ ^ ^ H eluding the resulting partnerships with t^^^M

.. r _ „ , * . represents more than 24 percent of the region's ^ ^ ^ H a vibrant picture of the region s tech- i ^ ^ ^ H

total annual payroll. ^ ^ ^ B . ,. • It's a sector that has more than $458 million within ^ ^ H

;ar of economic turmoil and, like every f^^M . „_ x . . _, research and development activities in the region's t^^M

las shared in this time of change and ^ ^ H _ , , . , , universities and federal government facilities fl^^H

have occurred in technology companies ^ ^ H al investment has slowed down from its • It's a sector that in the year 2000 saw $741 million I ^ H 0. Businesses are husbanding cash and m venture capital investments in the region - ^ ^ H Dn. But this isn't news, it isn't unique, and a spike of 233 percent over the $222 million j ^ H epresent the only picture of Pittsburgh's invested in 1999. ^ ^ |

! are no dreams too large, no innovation • nable and no frontiersToeyond our reach." •

John Harrison, former secretary of the U S Department of Energy ^ ^ H

Founded in 1983, the Pittsburgh Technology Council represents member

companies in the 13-county southwestern Pennsylvania region.

One of the largest regional technology trade associations in the nation, the

Pittsburgh Technology Council's mission is to drive the growth, development

and retention of the region's technology-focused businesses and talent.

For more information visit www pghtech org or call (412) 687-2700.

www.pghtech.org

About the Center for Economic Development

The Center for Economic Development advances the theory and practice of

regional economic development by applying best-in-class research to practical

development policies and programs, conducting new academic research and

training new economic development professionals.

www.heinz.cmu.edu/ced

>)))j Technology Council

i

\dustry Report was commissioned by the Pittsburgh Technology Council and compiled by Carnegie Mellon University's )

ic Development as a means by which to monitor the contribution that technology companies make to the southwestern '

rial economy. I •

Pittsburgh w8) Technology Council

2 0 0 0 Techno logy Dr ive • P i t t s b u r g h , PA 1 5 2 1 9 - 3 1 1 0

tel 412.687.2700 ° fax 412.687.5232 ° web www.pghtech.org