In Depth January 29, 2009, 5:00PM EST

Rebuilding America's Job Machine

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HITS AND MISSES

Despite the recession and controversy surrounding Richardson, who denies any wrongdoing, the strategy is holding up. Hewlett-Packard (HPQ), Fidelity Investments, and Germany's Schott Solar are going ahead with new manufacturing and services facilities in Albuquerque that will employ more than 1,000 each. Before 2003 one or two major movies or TV series were shot in New Mexico each year. In 2008 there were 30, including Warner Bros.' (TWX) Terminator Salvation.

The state's 5% equity stake in Eclipse Aviation looks like a loser, though. The Albuquerque-based maker of light, six-seat aircraft, founded in 2003, filed for Chapter 11 protection in November after being beset by production delays and canceled orders. Analyst Richard Aboulafia of aerospace consultant Teal Group calls Eclipse "a case study in why governments are bad at making investment decisions."

Eclipse spokesperson Alana McCarraher counters that the state's $30 million investment so far has led to $100 million in taxes and local spending. "New Mexico has earned a substantial return from Eclipse Aviation," she says. On Jan. 20, Dutch firm ETIRC Aviation acquired Eclipse's assets and says it will keep some production in Albuquerque. Whatever happens with Eclipse, New Mexico Economic Development Secretary Fred Mondragón contends that the state's aerospace cluster, which includes an Air Force research lab, avionics companies, and the White Sands Missile Range, will flourish. In other areas, Mondragón says many U.S. and foreign renewable-energy companies are exploring investments, drawn by the brainpower at the state's three research universities and the national laboratories Sandia and Los Alamos. The strategy is creating jobs. A decade ago, New Mexico's unemployment rate was the nation's highest. As of December, it was 4.9%, well below the national average of 7.2%. And while film subsidies have been assailed as wasteful around the U.S., Ernst & Young says New Mexico's film industry employs more than 2,000 and contributed $811 million to the economy in fiscal 2008.

To residents of Bethlehem, Pa., the rusting Bethlehem Steel Works offers a daily reminder of the city's decline. The plant once employed 30,000 and furnished much of the steel for the World War II naval fleet. It closed in 1995. Yet within walking distance, office parks are filled with the headquarters of such companies as medical device maker Orasure Technologies (OSUR), semiconductor-materials maker IQE, and business outsourcer PeopleForce. They are among hundreds of startups launched with the aid of Ben Franklin Technology Partners, a state investment vehicle.

Founded in 1982 by then-Governor Dick Thornburgh, Ben Franklin began with grants to help local universities spin off technologies. Today it's one of America's biggest state-owned venture capitalists, parceling out sums ranging from $25,000 to $500,000 to help entrepreneurs develop prototypes, refine business plans, and expand production.

Such programs now exist in every U.S. state. The National Association of Seed & Venture Funds (NASVF) counts $2.3 billion in state seed capital, from Michigan's $109 million 21st Century Jobs Fund to Texas' $290 million Emerging Technology Fund. States account for a tiny portion of all U.S. private equity and venture capital. But in Pennsylvania, Oregon, New Mexico, and elsewhere, notes NASVF President James A. Jaffe, "the states have become crucial sources of early-stage capital."