Betting on technology: with manufacturing dwindling, the heartland states are turning to high tech to draw new blood.

In a dingy, defunct, red-brick manufacturing complex in a nondescript quarter of Akron, Ohio, the old order of Midwestern manufacturing is literally giving birth to a new, lighter-weight generation. The 146,000-square-foot complex, once a B.F. Goodrich tire plant, today is home to 21 start-up companies that lease space from the Akron Industrial Incubator, a city- and state-sponsored cooperative that helps small businesses get off the ground.

At one of these companies, in a small office and laboratory on the fourth floor, Sebastian Kanackkanatt is trying to become a player in the industrial renaissance of northeastern Ohio. The retired University of Akron polymers professor founded his company, United Polymer Technologies, three years ago, and has developed new materials that range from the very practical (a resilient filler for the soles of athletic shoes) to the highly fanciful (white candles that take on deep colors when lit). Kanackkanatt says that he's close to obtaining enough purchase orders to justify setting up a manufacturing plant nearby, and he hopes to have more than 100 people turning out three or four product lines by the end of 2004.

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"With an initial investment of just $250,000, we can triple or quadruple business every year," says the 65-year-old native Pakistani. "Plus, everything I've developed is patented, and there's no direct competition for it."

What may be brewing in Kanackkanatt's lair is an example of what CEOs and economic development officials across the Midwest are after these days. With manufacturing facing continued, brutal global pressure, the Midwesterners are striving to establish clusters of fast-growing, high-technology businesses.

This isn't quite the same game that already has been played and won by Silicon Valley, the Boston tech corridor, and Research Triangle, N.C. Befitting "Flyover Country," the technology push going on in many pockets of the Midwest is less ambitious and more adaptive to its traditional strengths in manufacturing. "Economic development works best when it's enhancing, not trying to create something out of vapor," says Diane Swonk, chief economist for Bank One in Chicago. "The Midwest will never be Silicon Valley, and to accept that is the first thing. And we really wouldn't want to be, because you don't want to have to ride the peaks and troughs of information technology."

Yet whatever the shape of the process, clearly the region faces an urgent need to get on with it. The Midwest lost more than a half-million manufacturing jobs in just the past three years, says William Testa, a research vice president with the Federal Reserve Bank of Chicago, and very few of them will ever return. What's more, many Midwestern cities and states exacerbated their pain by participating for more than two decades in a derby to chase branch plants of global manufacturers with multimillion-dollar tax abatements, worker-training grants and other huge incentives. It was largely an expensive and unproductive effort, says Testa.

In response, hopeful CEOs and officials in metropolitan regions throughout the Midwest have been getting into the new-technology derby. A team from Columbus went to Austin to figure out what the Texas capital, a mecca of development for semiconductors and other computer ware, was doing right. Detroit is assembling an industrial park around its growing strength in alternative-energy technologies. Pittsburgh is trying to capitalize on the sway of its big universities in computer science and medical technology. Iowa is holding receptions for software developers and other young, technologically astute emigres just to convince them to consider moving themselves--and their brains--back to the state.

Facing Tough Challenges

In some spots, the change of approach has worked. There's already a medical cluster around Minnesota's Twin Cities, for example, called Medical Alley. "We've been booming for five or 10 years, with large companies like Medtronic leading the way," says Tim Scanlan, CEO of Scanlan Group, a St. Paul-based surgical equipment manufacturer. "Behind the big companies are close to 500 other medical companies in the state, and they've continued to develop even through the tough times."

If only the transformation could happen as magically throughout the entire region as Kanackkanatt's polymers change color. But the Midwest is twice as concentrated in manufacturing as the rest of the U.S., Testa says, and is likely to continue to be. The high cost of labor keeps degrading the region's competitiveness against overseas factories. Severe state budget woes make it difficult right now for officials to fund development efforts. And the recent recession drove more than 34,000 25- to 34-year-olds, about one in 20, from Detroit alone. Meanwhile, any new regional economy must be able to absorb the woeful legacy of heavy manufacturing's decline, including funding health care for the

growing wave of millions of new retirees--most of whom do want to stay put. The irony is that this is exactly the same demographic group that has proven least supportive of the education spending required to undergird new-technology development.

The Midwest cities and regions with the best chance of overcoming the odds and developing substantial, long-lived technology clusters meet each of a handful of crucial criteria. They have a work force with higher-than-average intellectual skills; an adequate combination of venture and institutional investment funds devoted to the cause; state and local tax and other policies that encourage technology development; and, perhaps most important, they have access to robust technological research capabilities of major universities.

"Several of the big state schools are near the top in terms of the amount of research they do that drives inventions, but they also have the biggest discrepancies in where the economic benefits of their output end up going," says Jim Adox, partner in EDF Ventures, an Ann Arbor, Mich.-based venture-capital firm that mainly seeds Midwestern technology companies. That is, the technology innovations may brew in Midwestern universities, but the fruits of their labor tend to benefit the coasts, because that's where the IT companies are clustered.

But if a Midwestern location has all of that, it may be able to capitalize on the intangible benefits long associated with America's heartland. "I've been able to recruit people from Silicon Valley, Austin and New York because of their disillusionment with those areas of the country--and the quality of life here," says Jay Coughlan, CEO of Lawson Software in St. Paul.

Three regions that can boast of meeting those criteria are using different approaches to try to leverage them, with varying degrees of success:

Champaign-Urbana, Ill. Local economic development officials were reminded last fall of the frustrations of chasing jobs with incentives when NTN of Japan chose Columbia, Ind., instead of Champaign-Urbana to locate a new plant employing 100 people making driveshafts and other automotive parts. Budget-strapped Illinois couldn't match Indiana's lure of an $8-million tax credit based on a new program that rewards 30 percent of the capital investment made by a company that already has a plant in the state.

But Champaign County and the state, working with the University of Illinois, are making progress in establishing a cluster of growing companies around the university's abundant digital expertise. Campus executives are focusing more on identifying promising commercial possibilities that they can hand off to a new regional entity called Illinois Ventures, which provides startups with business planning, market assessments, legal help and gap financing. "We need to nurture companies that already are here, make sure they stay here and, if they have ideas of expansion, that they expand here," says Mike Fritz, head of the university's technology-management office and a former economic-development official.

Early successes with this approach include ChemSensing, a two-year-old company that has developed a sort of digital form of litmus paper, for detecting chemicals, ready to go into production. Renew Power plans to have prototypes of its fuel cells for laptops and cell phones ready this year. And Volition, a 10-year-old company, develops games for Playstation 2 boxes.

Now that Volition has grown to employ more than 70 people, founder and president Mike Kulas is constructing a new, 130,000-square-foot headquarters building just a half-mile from the university. Easy access to campus, he says, will increase the flow of people and ideas back and forth. Kulas also is confident of Volition's future there, in part because the reasonable cost of living has helped him lure capable employees from all over. "Lots of my employees can afford houses here even though they're only in their late 20s," says the 42-year-old Kulas, who sold his company three years ago to THG, a video-game publisher in California. "They sure couldn't be buying houses in San Jose. And when you can buy a house, you start digging roots. It's a great employee-retention tool."

Polymers and Medical Tech

Northeastern Ohio. The Akron-Cleveland corridor is bubbling with activity around information technology, instrumentation and controls, fuel cells and biotechnology, but some denizens believe the most promising focus is polymers. At $50 billion in annual sales, it's already the second-largest business in Ohio, behind agriculture. And over the past generation or so, the region has established a tremendous infrastructure for polymer development as it evolved from the carcass of a highly related business: tire-making.

Now it's a matter of teasing truly high-growth businesses from new technologies in polymers and other advanced materials such as ceramics. There are nearly 3,000 polymer companies of some sort in the region, about half in and around Akron, including a half-dozen in the incubator alone. "Broadly defined, this is a mature industry," says Luis Proenza, president of the University of Akron. "But there's lots of room for major process improvements and value-added competitive advantage, which can put our polymer companies at the cutting edge of the global economy." Proenza also is excited about the potential impact of a new group called Team NEO, consisting of five major chambers of commerce in the region and two large organizations of CEOs.

But fractionalism has thwarted efforts so far to get the polymer industry to cooperate efficiently; the Ohio Polymer Enterprise Development Corp., just three years young, folded in June. "There are a lot of competitive issues, such as the portability of tooling, that have caused everyone to kind of hunker down and play things close to the vest," says Alan Robbins, president and CEO of Plastic Lumber in Akron. It also didn't help that a $500-million bond issue to fund a major piece of the state's efforts to grow "knowledge-based industries" was trounced by Ohio voters in November.

"We're obviously not there yet," says Dorothy Baunach, executive director of NorTech, a Cleveland-based regional economic development organization. "This is a giant transformation of a very old Midwestern economy through great structural change."

The Twin Cities. Champaign-Urbana and northeastern Ohio would be happy to end up with a technology cluster resembling the one already ensconced in east-central Minnesota around Minneapolis and St. Paul and south to Rochester, home of the world-famous Mayo Clinic. Scanlan's grandfather made surgical scissors for the Mayo Brothers in the 1920s, and Scanlan believes that medical-device businesses still have only bright horizons because of the aging of Western populations.

Other executives cite advantages from the Twin Cities' strong heritage in food processing and manufacturing of durable goods such as snowmobiles and farm equipment. "The availability of a strong manufacturing work force is as important as a good base on the science and technical side, because it enables you to keep product development and manufacturing processes hand in hand at one location," says Fred Colen, chief technology officer of Boston Scientific's Maple Grove, Minn., facility, which employs more than 2,800 people.

But locals aren't wont to take all of this for granted. An industry association called Medical Alley maintains a high profile for med-tech firms' needs and desires. The state has helped by developing and deploying at two-year colleges some highly specialized curricula, such as one that trains people to comply with complex Food & Drug Administration quality-control standards for medical devices, and by coordinating efforts to get federal research grants among medical companies, the University of Minnesota and other parties. "We'll even partner with other states if that's what it takes to put together a winning team to get a [federal] grant that will bring a significant amount of the funding here," says Matt Kramer, a state economic development commissioner.

Wherever Midwestern cities and regions currently fall on the spectrum of success in developing technology clusters, they have no choice but to stay on that track. "We've recognized that the old game of industrial incentives doesn't play itself out well," says Ed Morrison, an expert on regional economic issues at Case Western Reserve University in Cleveland. "Now there's a whole other set of partnerships and incentives that have to be developed to deal with the 'perfect storm' of globalization that's facing us."

RELATED ARTICLE: Three Gaining Ground

Three regions are working to leverage their relative strengths to recruit and retain top talent to the Midwest. Here is a look at what they've got cooking:

CHAMPAIGN-URBANA

* Collaboration between venture capital firms and the University of Illinois helps set up new businesses with commercial technology and the planning and financing assistance they need to succeed.

* Affordable housing for employees and lower cost of living encourages retention.

NORTHEASTERN OHIO

* Region leveraged its history in tire-making to build up polymers, which, at $50 billion, is now the second-largest industry in Ohio, behind agriculture.

* Team NEO, a new business development group comprised of five chambers of commerce in the region and two large organizations of CEOs, now must help develop high-growth businesses.

TWIN CITIES

* Strong in medical device technology. Industry association Medical Alley serves the needs of medical technology firms. State has developed specialized curricula at two-year colleges to train students on Food & Drug Administration compliance for medical devices.

* A strong heritage in food processing and durable goods manufacturing helps keep product development and manufacturing in the area.