Unless California invests deeply in university research and its "knowledge-intensive" industries, its dominance as the world's high-tech powerhouse could be at risk.

California's strength in knowledge-intensive industries is so great that many policy makers take it for granted. After all, California hosts more top-ranked universities than Europe and Japan combined. It is also a world leader in transferring new knowledge from the lab to the marketplace, thanks to a skilled, entrepreneurial workforce and a heavy concentration of venture capital. The result for decades has been a virtuous cycle of development in which the excellence of California's higher education system attracts more and more talent and investment to the state, which in turn enables it to dominate one emerging industry after another. For example, such world- class information technology companies as Google, Yahoo, Cisco and Sun have their roots in Berkeley or Stanford university research. And a full quarter of all publicly traded biotechnology firms in the U.S. can be found within 35 miles of a University of California (UC) campus.

Yet today, California's dominance in knowledge-intensive industries is under threat on two fronts. The first is the general decline of the state's infrastructure and quality of life. For example, lack of sufficient generating capacity leaves the state beset by extraordinarily high electricity prices and at significant risk of a second power crisis. Lack of affordable housing (especially in hot real estate markets such as the Bay Area) makes it difficult for businesses to attract new workers. The large numbers of high school dropouts and low rates of college completion, particularly among California's rapidly growing Hispanic population, are troubling indicators for our future workforce.

The second threat to California's leadership in high technology is more direct and immediate. At a time of growing competition from other states and countries, California has been scaling back its investments in higher education and high-tech economic development. For example, California has cut funding and raised fees at its state universities for four straight years, making it difficult for the University of California to compete for the best students both in the U.S. and abroad. It has also failed to come through with promised funding for such important endeavors as the California Institutes for Science and Innovation, and has lacked aggressiveness in attracting national research initiatives, such as the semiconductor industry's proposed Nanoelectronics Research Initiative.

Because of these and other shortfalls, California's high-tech business leaders are increasingly concerned about the state's long-term competitiveness, particularly with the emergence of China and India as global competitors. Intel's chief technology officer, Pat Gelsinger, warns: "Perhaps the current downsizing of the U.S. [information technology] industry is not a temporary thing. Maybe we are headed for becoming a second-class citizen in the world of IT."

Ray Bingham, CEO of Cadence Design Systems in San Jose, is concerned that as a result of China's decision to train more electrical engineers, "the semiconductor design of the future will take place there. If we continue not to invest in ourselves, we're in trouble."

The private sector alone cannot turn these trends around. That is because knowledge-intensive industries depend critically on government-funded research that is too long term and high risk to attract private investors. The birth of today's Internet, for example, did not come from private capital; it came from government-funded scientists, many of them working at UC campuses. UCLA was the first "node" on the ARPANET (the predecessor to today's Internet). Similarly, Berkeley scientists developed a version of UNIX that helped disseminate the basic protocols of the Internet. Even development of technologies that have near-term commercial application often rely on the quality of the state's universities. For example, it was two professors at the University of California at San Diego, Irwin Jacobs and Andrew Viterbi, who founded San Diego's Qualcomm, which is today a $5 billion wireless company.

What should be done? California has recently taken some steps in the right direction. The recent ballot vote establishing the California Institute for Regenerative Medicine will help secure the state's leadership in stem cell research. Another positive development is the compact reached in May 2004 between Governor Arnold Schwarzenegger, California State University Chancellor Charles B. Reed and UC President Robert C. Dynes. After years of retrenchment, the compact guarantees long-term growth in general revenue support for higher education.

More can and should be done, however. In an era of tight fiscal constraints, it's important that scarce tax dollars be used in ways that offer the highest possible returns to the state's economy. Accordingly, funding priority should go to areas of research that are likely to lead to industries of the future, such as bioengineering, information technology, clean energy and nanotechnology. The Pete Wilson Administration provided a model for such targeting of resources in 1998, when it directed additional funds to UC for hiring engineering faculty.

We also should also look for creative ways to leverage taxpayer investments with additional contributions from industry and philanthropists. For example, state government and university officials need to put more effort into recruiting help from successful entrepreneurs who have benefited from previous waves of taxpayer- financed innovation. Such entrepreneurs could assist with endowments that would help fund faculty "start-up" packages, which often exceed $1 million even for junior faculty. These packages allow faculty to launch their research programs by renovating lab space, purchasing equipment and getting the preliminary research results that are often needed to successfully compete for federal grants.

The state also needs to direct more resources to the California Institutes for Science and Innovation. Located on UC campuses, the institutes bring together researchers from a variety of disciplines to tackle some of the toughest challenges in information and communications technology, biomedical research and nanotechnology. For example, the Berkeley-led Center for Information Technology Research in the Interest of Society (CITRIS) has led the development of "smart dust" -- tiny slivers of silicon that combine computing, wireless communications and sensing. This could fuel the next wave of innovation in IT. For example, wireless sensor networks can be used to improve the energy efficiency of buildings by 40 percent by inexpensively monitoring temperature, light, humidity and room occupancy. Although it was originally envisioned that the state would provide $10 million per year in operational support for each institute, this funding never materialized. Given UC's agreement to match state funding two-for-one with outside financing from industry, federal grants and private contributions, this is an extremely costly "cut" in the state budget.

California also needs to be far more aggressive about courting new national research initiatives. Texas and New York, for example, are both being more vigorous than California in pursuing the semiconductor industry's proposed Nanoelectronics Research Initiative, which will rely heavily on federal and state funding. This program will address the biggest, long-term challenge facing the semiconductor industry. Throughout its history, the industry has been able to roughly double computer processing speeds every 12 to 18 months, thereby insuring strong demand for the latest information technology. But limits imposed by the laws of physics will soon dramatically lower that pace of progress unless a fundamentally new approach to chip design and manufacturing is found. The initiative will increase funding for university research in speculative technologies such as molecular electronics and quantum computing. If successful, the economic and societal consequences would be staggering. A quantum computer, for example, could solve certain classes of problems in 30 seconds that would take a conventional supercomputer 10 billion years.

A powerhouse at risk

Today, new combinations of bio-, info- and nano-technologies are emerging, and unless California is at the center of these new developments, it could quickly lose its position as a technological powerhouse. Not only are these three technologies important in their own right, in combination they can rapidly accelerate scientific progress.

Meanwhile, the push to unravel the mystery of "protein folding" is advancing state-of-the-art super-computing. Nanotechnology may lead to smart anticancer therapeutics that recognize cancer cells, diagnose cancer causes, deliver drugs only to diseased cells, and report on tumor location and cancer cell death. Nanotechnologists, in turn, are inspired and guided by molecular biologists, who provide insights into how nature assembles complex structures from individual molecules. Recognizing the Bay Area's unique capabilities in all three of these technologies, nonprofit community organizations such as Joint Venture: Silicon Valley Network are seeking to make such convergence of technology the basis of the region's future growth. For example, regional economic development organizations could help create a network of specialized tools that are too expensive for high-tech start-ups to afford. These efforts, and efforts like it throughout California, deserve state support.

Though it might seem that state funding for basic research and development competes with other social needs, the opposite is often true in the long run. Advanced technologies may not only help generate new industries, they may help solve basic infrastructure and quality-of-life issues threatening the state's long-term fiscal and economic health. For example, development of nanotechnology-based photovoltaic cells that are competitive with fossil fuels would not only reduce the threat of global warming and lower the nation's dependence on oil imports but could also solve California's unique disadvantages in power supply.

Similarly, other technologies under development at California's research labs could, in the long run, ease burdens on the state's infrastructure and ameliorate expensive social and economic challenges. These include software to teach English that could be as effective as a one-on-one tutor and as engaging as the best video game, as well as intelligent transportation systems that reduce traffic congestion, which currently costs Californians $15 billion a year in lost wages. To help bring such emerging technologies to market faster, the state should promise to become a "first customer" when such technologies emerge from the lab. The state should also consider sponsoring prizes (similar to the Ansari X PRIZE that has helped spur commercial space travel) to those who are first to bring important new technologies to market.

Clearly, the state budget crisis makes it difficult to find the resources for any new investments. A failure to fund higher education, science and technology, however, is a failure to fund our future.