REMARKS AS PREPARED FOR DELIVERY - SANDY K. BARUAH ASSISTANT SECRETARY OF COMMERCE FOR ECONOMIC DEVELOPMENT NORTH STATE VENTURE FORUM - CHICO, CALIFORNIA

THURSDAY, MARCH 2, 2006

(As Prepared for Delivery)

Introduction by Scott Gruendl, Mayor, Chico, California

Thank you, Mayor Gruendl, for that kind introduction. I would also like to thank Jon Gregory of Golden Capital Network for the invitation to be here today.

We at the Department of Commerce appreciate Jon’s leadership in promoting innovation and entrepreneurship, and the great work Golden Capital Network is doing to fund future high-growth companies. We were also glad to get his expertise as a member of the Economic Development Awards 2005 Selection Panel, which helped to select and award the best and brightest in innovation-led economic development. Thank you for your good work, Jon.

On behalf of President Bush and Commerce Secretary Carlos Gutierrez, it is my honor to be here today in Chico to discuss innovation and regional competitiveness. As an Oregonian, I always enjoy the opportunity to travel back to the Pacific Northwest. In order to get the full Northern California experience, my travels this week with Congressman Herger and Congressman Doolittle will also take me to Weed and Grass Valley. By the way, there is a Grass Valley, Oregon as well – of course, Grass Valley, Oregon does not have a stop light.

I appreciate the Mayor’s hospitality and the leadership and friendship of Congressman Herger. You folks are represented well.

As we meet here today, we have good reason to be optimistic about the business environment in which the companies of tomorrow are being formed. Our economy is strong, and it is gaining steam. The U.S. is now in its fifth year of uninterrupted economic growth, with a healthy growth rate of 3.5% last year in spite of high energy prices and record-breaking storms that we are all painfully aware of.

Real after-tax income is up nearly 8% since 2001, which is one of the reasons why retail sales last month made their biggest gain in more than four years. Homeownership is at record levels, with more minorities owning a home than ever before in our nation's history. America's unemployment rate is down to 4.7%, what many economists consider full employment. And, we've added 4.7 million new jobs over the last two-and-a-half years.

President Bush understands very clearly that this economic success is largely attributable to entrepreneurs like those that you fund. While government can play an important role in the economy, it is the private sector – the great American entrepreneurs – that create jobs and economic opportunity. The Bush Administration and EDA see entrepreneurship as the engine for America’s economic growth, and innovation as the fuel for that engine.

Growth-oriented entrepreneurs lead the economy in innovation – small firms innovate more than large ones do, producing about 13 times more patents per employee than larger firms – small firm patents are more likely to be driven by leading edge technology than large firm patents. Small firms are more likely than large companies to produce specialty goods and services, and custom-demand items.

Small businesses provide approximately 75% of the net new jobs added to the economy, and represent 99.7% of all employers.

One of the largest barriers to entry into small business ownership is access to capital – a barrier that your organizations help to overcome. We appreciate the important role you play in our nation’s economy by helping promising new businesses get off the ground, bring innovation into the commercial marketplace.

President Bush also understands that, despite the fact that the economy is strong and getting stronger, we cannot be complacent. Other countries – like China and India – are rapidly catching up in areas where we have traditionally been strong. They are opening their markets, strengthening their financial, legal and other public institutions, and making both public and private investments that are making them more competitive.

In the 21st century, change will come faster, cycle times for products and trends will accelerate, and the nations, regions, organizations, and individuals that succeed will be those best able to innovate and continually adapt.

Innovation drives our economy. Economists calculate that approximately 50% of U.S. annual GDP growth is attributed to increases in innovation. Innovation drives productivity, and a nation’s productivity directly impacts its economic growth and overall standard of living.

America is clearly the world’s leader in innovation. This country has generated more technological breakthroughs and brought them to the marketplace than any other nation.

We are also still the world leader in venture capital. China is indeed a tough competitor, although much of their manufacturing platform is based on technology and products that originated in the United States. And, while indeed China is intent on moving up the value chain, if you look at where the venture capitalists and the growth-oriented entrepreneurs are located, they’re right here in the U.S. – and right here in Northern California, and not just San Francisco, Boston and New York City.

We are home to many of the finest research facilities and universities, places where the world seeks to come for education and knowledge. We possess one of the most open economies for trade and investment; a stable government – which is exceptionally led in my humble opinion – and a culture uniquely supportive of risk-taking, which must not be underestimated.

America has 5% of the world’s population, yet we employ one-third of the scientists and engineers, and we are the home to one-third of the world’s R&D spending. We invest more in R&D than the rest of the G7 nations combined. Nanotechnology R&D spending in America has increased 127% since 2001 – and total R&D – both public and private – comprise 2.6% of the nation’s GDP, greater than the E.U. and more than twice the level of China.

Of course, we all agree that we cannot rest on our past success. There is much more work to do to maintain our position as the world leader in innovation, especially as the nature of innovation changes. Our competitors are coming on strong, and they are hungry. A recent Wall Street Journal article noted that a World Economic Forum Survey of executives listed America #2 in competitiveness, behind Finland. While I’m not sure of what criteria the survey used, it is an indication that competitiveness is not something we can take for granted.

Our challenge today is how do we maintain our leadership role in an increasingly competitive global economy? We need to attack this challenge on a number of fronts, and President Bush has outlined a strategy for the role of the federal government in the new and ambitious American Competitiveness Initiative – the ACI. Through the ACI, the President reminds Americans that our continued economic leadership depends in large measure on continued advances in technology.

The ACI acknowledges that as the global marketplace grows and becomes more dynamic, other nations will become more technologically advanced and America will face new competition. We have a choice: We can retreat and ignore this reality, or we can do what has historically made us successful and engage with the world around us. This is a choice between hiding from the future, or helping to shape the future.

The American Competitiveness Initiative calls for $5.9 billion in Federal resources in 2007, and more than $136 billion over 10 years to increase our investments within two “competitiveness components” – R&D and human talent. The R&D component bolsters Federal funding in basic research, and the talent component addresses the growing shortage of scientists, engineers, and other technically skilled workers.

Within the R&D component, the ACI proposes to double the critical core physical science budgets of three agencies over 10 years: the National Science Foundation; the Department of Energy Office of Science, and the Department of Commerce National Institute of Standards and Technology. Federal commitments to R&D in the 2007 budget proposal represent 13.5% of discretionary spending – matching the level during the Apollo Space Program.

To spur private-sector investment in technology, the President continues to support making the Research and Development Tax Credit permanent. A permanent R&D tax credit would enable companies to have certainty in their tax planning and reduce impediments to R&D investment – which is critical as the bulk of the R&D dollars are invested by the private sector.

Within the talent component, the ACI calls for investments in K-12 education by training 70,000 teachers in science and math education so they can inspire students in elementary school and provide targeted assistance in middle school for students who need additional math instruction.

The ACI also seeks to recruit, train, and deploy 30,000 math, science, engineering, and technology experts from the private sector in classrooms across America to enrich math and science education.

In support of life-long learning, the ACI calls for providing Career Advancement Accounts, self-managed personal training accounts that will allow up to 800,000 workers to seek skills and education that will prepare them for the jobs of the 21st century.

The ACI also proposes immigration policy reforms designed to attract the world's best and brightest to work along side America's best and brightest in math, science, and engineering fields of research and development. These high-skilled workers not only spur innovation, but create other good jobs for more Americans – and the President is committed to doing this in a manner that protects our National security interests.

President Bush also understands – as do you, given the theme of this Forum “Building a Regional Entrepreneur and Angel Investing Culture” – that the competitiveness of our nation will increasingly depend on the competitiveness of America’s regions. The key to competing successfully in a new era of worldwide competition is through regional collaboration. In order for America’s companies to be fully competitive, the regions in which they do business must be competitive as well.

The Federal Reserve Bank of Kansas City recently concluded, “Regions can develop only by exploiting their distinct economic assets, seizing unique opportunities in rapidly shifting markets, and fostering the entrepreneurs that make both happen at once.”

What the Federal Reserve Bank folks know, and what you and I know, is that in our global economy, our competition is not next-door. The areas around us are our strength, not our competitors. Regional competitiveness is simply the Tom Friedman, The World is Flat, 21st century version of what we all learned on the school playgrounds of our youth: There is no “I” in T – E – A – M and we are stronger working together than when we stand alone.

By thinking of ourselves as part of a broader economic region, we can build on our strengths to better align a critical mass of local resources to spur innovation.

The Economic Development Administration will play an important role in supporting the President’s American Competitiveness Initiative by helping to create an environment that fosters regional collaboration and coordination.

The President has proposed a $47 million increase for EDA in his 2007 budget request to Congress to focus strongly on regional competitiveness. This direction is not new – it mirrors EDA’s long-standing commitment to regional approaches – but we now have a “Good White House Seal of Approval,” and therefore we will re-commit ourselves to this goal.

EDA’s investments in regional strategies for economic growth will help build the capacity for innovations such as high-performance computing, next generation manufacturing, upgrading communication systems to ensure that we are all linked to the 21st century economy, and business innovations focused on new technologies and new markets.

In addition to more resources, the President has asked EDA to develop a new way to do business, making it easier for our customers to do business with us. In the 2007 Budget, EDA introduces the “Regional Development Account” that will offer all of EDA’s traditional economic development programs – Public Works, Economic Adjustment and Technical Assistance – into one unified account.

This will allow broader flexibility for our investment partners, allowing EDA to respond more quickly and flexibly to economic challenges, and provides grantees the opportunity to access EDA strategic planning, technical assistance, and infrastructure funds in a single investment application.

In addition to a strong focus on regional, collaborative approaches to economic development, EDA will focus its investment dollars on those initiatives that drive innovation and support entrepreneurship. We focus on these critical components of the economic development puzzle because of the inherent truth of the following equation:

Entrepreneurship drives innovation…

Innovation drives productivity…

Productivity drives higher wages and higher standards of living.

And a higher standard of living for more of our citizens is a goal that both the public and private sector share.

I am excited about the President’s budget request for 2007, which I see as an exciting nexus of EDA’s strengths and focus and fulfilling an important national need that has broad consensus. President Bush supports the mission of EDA, and I am grateful that during his time in office he has called for increases in EDA funding and has successfully secured reauthorization for the agency.

I am also excited that, for perhaps the first time, a President highlighted in a State of the Union Address a far-reaching initiative that directly complements and bolsters the EDA mission. The President did this in his American Competitiveness Initiative, and I am looking forward to working aggressively to help implement that Initiative.

On behalf of the President and Commerce Secretary Carlos Gutierrez, thank you for your kind invitation to be here today in California. I look forward to our further discussion.

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