Innovation may fuel economic recovery

Technology has saved Mass. before

Innovators, start your engines.

When the economy finally snaps back, technology is expected be the catalyst that pulls Massachusetts out of its doldrums, just as it has done in the past. It may not be computers or the Internet this time, but according to analysts, entrepreneurs are likely to ride to the rescue in fields like cellphones, medical gear, and the batteries that power the cars of the future.

With the state jobless rate now topping 7 percent for the first time in nearly 16 years, the economy looks to be sliding to levels not seen since the late 1980s and early 1990s, when unemployment in Massachusetts peaked at 9 percent. That period was followed by a technology boom fueled by the personal computer revolution.

"Technology has led us out of the last three recessions," said George Colony, founder and chief executive officer of Forrester Research, a high-tech reseach firm in Cambridge. "It's obvious that the new economy - whatever we're going to emerge into - is going to be built by the innovation that will emerge during this recession."

In a new report, consulting firm McKinsey & Co. said the current recession, though shaping up to be the worst slump since World War II, is following many of the same patterns set by downturns in the mid-1970s, the early 1980s, and the early 1990s. A return to growth in technology spending by businesses and consumers was a major factor heralding the end of those recessions, the report said.

A technology rescue will require an influx of bright inventors, researchers, and engineers into the field, suggested Simon Johnson, professor of entrepreneurship at the Massachusetts Institute of Technology's Sloan School of Management.

Many of the best mathematical and scientific minds gravitated to technology until relatively recently, when the rich incentives of Wall Street drew many into financial engineering, Johnson said. With the financial collapse, and the US government set to pump funding into such fields as healthcare and energy, the pendulum will now swing back, he said.

"It's all about where the talent goes," Johnson said. "This country is very good at producing great engineers and recruiting them from all around the world. I'm predicting a wave of entrepreneurship. It will kick in right away, but you won't see the full impact for five years."

The next technology boom is likely to focus less on computer hardware, a sector that is now mature and less likely to experience rapid growth, and more on healthcare, biomedical devices, drug development, and software that reduces health costs, Johnson said.

But he added: "These technology waves are very hard to predict. It's not until you're in it that you recognize what it is."

Colony predicted the rollout of a new generation of wireless, gaming, and music devices, but also a burst of innovation in fields like "virtualization," which makes data centers more cost efficient, as well as new media and social networking - ground trailblazed by popular sites like Facebook - which are increasingly being used by businesses like Raytheon Co. and Procter & Gamble to communicate with their customers and employees.

While some of these technologies will be developed by startups, others will emerge from research labs at established high-tech companies, Colony said. In recent weeks, companies ranging from software giant Microsoft Corp., which has a Cambridge research site, to computer-aided design software maker Parametric Technology Corp. of Needham have committed to boosting their research and development spending even as they cut staff in other areas to weather the downturn.

Paul Deninger, the Waltham-based vice chairman of investment banking firm Jefferies & Co., said the US government is likely to spur "green technology" advances through the purchase of hybrid vehicles, energy efficiency investments in federal buildings, and loan guarantees for solar and wind installations across the country.

"Green technology is going to be one of the things that gets us out of this," said Deninger, who cautioned that the economy is not likely to bottom out until the third quarter before recovery begins next year. "There's a lot to like about Obama's plan from a green technology point of view."

Not everyone is convinced that technology will cure the snake-bitten economy, at least in the short run. William Sahlman, professor of business administration at Harvard Business School, applauded government outlays for technology research but said the immediate problem centers around the frozen credit markets.

"It's all great, but it's not going to happen tomorrow," Sahlman said of technology advances. "Our problem is getting to the day after tomorrow. This is ultimately a problem of trust and confidence. So the only thing that can be done is address trust and confidence directly."

Sahlman said it is up to the Obama administration to apply "overwhelming shock and awe," committing to do whatever it takes to backstop the financial system by guaranteeing debt and other financial instruments and restoring the confidence of consumers and investors.

Louis E. Lataif, dean of the Boston University School of Management, said the priority of government should be working with financiers to identify, isolate, and value the mortgages and corporate debt bundled up in portfolios of so-called "toxic assets." That will put a floor on housing prices, and begin to rebuild confidence, he said.

"What has brought us to our knees is that consumers have lost their capacity to spend," Lataif said. "The ATM machine called increasing home values is broken. You want to get a floor, and once you have a floor the free market will do its thing. The engine that propels the whole world economy, which is US consumer spending, will kick in."

Those who see technology riding to the rescue agreed that government leaders will need to unclog financial channels and lift the cloud of uncertainty hanging over the economy, before the current crisis will end. But they believe it will take innovaton to mount a recovery.

"Real estate may have caused this mess, but it won't lead us out," said Jon Karis, chairman of the venture and emerging growth companies practice at Nixon Peabody law firm in Boston. "I think we're going to see some new disruptive technology. US ingenuity and brains will bring the world out of this through new technology."

Robert Weisman can be reached at weisman@globe.com.