Featured Indicator: The State New Economy Index - States with Unexpectedly High Innovation Capacity

Our cities and towns, regardless of size, will need to learn to mold to the evolving technological landscape.

The ability to adopt new technologies and emulate innovation with the release of new products and services has become essential to remaining competitive, though this is not always a seamless transition for all organizations. The vision of success now mirrors companies such as Apple and Google, which are thriving in the tech capital of the U.S., the Silicon Valley, a place where young STEM graduates dream of landing their first job opportunity. But, despite Silicon Valley’s notoriety, there are many other regions in the U.S. that are well positioned to become innovation-driven economic hubs that attract top-notch talent; for example, New Mexico, Michigan, and Delaware are each garnering high levels of R&D investment each year.

State New Economy Index

Realizing this potential and misconception, the Information Technology and Innovation Foundation (ITIF) developed the State New Economy Index (the “Index”), which measures the economic structure of all states using 25 different indicators. The Index points to states that well represent the ideal structure, incorporating technology in all industries and therefore offering quality jobs and the potential for future growth.

While some of the top ranked states are predictable, a few are somewhat unexpectedly well-positioned for future success and show particular strength in individual categories within the State New Economy Index. Here we delve into one category of the index – Innovation Capacity – and discuss states that are high-performing, but not necessarily nationally recognized as innovation centers. Innovation Capacity is quantified by combining variables such as high-tech jobs; concentration of scientists and engineers; patents awarded; R&D investment; clean energy; and venture capital.

The ITIF posits, “…states’ and regions’ competitive positions in the U.S. and global economies hinge on developing broad-based understandings and support for modernizing policy frameworks to spur innovation and growth.” The Innovation Capacity indicators are especially compelling, because our economy continues to increase its demand for efficiency. The map below shows state performance in the Innovation Capacity category.

Innovation Capacity Performance by State 

Map Source: The 2017 State New Economy Index p. 42

The top 10 ranked states for Innovation Capacity are:

  1. Massachusetts, Score: 19.3

  2. California, Score: 17.6

  3. Delaware, Score: 15.9

  4. Washington, Score: 15.2

  5. Michigan, Score: 14.6

  6. Colorado, Score: 14.4

  7. Maryland, Score: 14.3

  8. New Jersey, Score: 13.4

  9. New Mexico, Score: 13.2

  10.  Minnesota, Score: 12.6

High Performing States

Let’s take a closer look at a couple of examples from the top 10. Delaware, ranked 3rd in Innovation Capacity, Michigan, ranked 5th in Innovation Capacity, and New Mexico, ranked 9th in Innovation Capacity, are three states that show great success in this category that are unique from other top 10 states. 

Breakdown of Delaware's Innovation Capacity Score (15.9)

Though a small state, Delaware garnered a spot in the top 5 overall rankings for the State New Economy Index, and a ranking of 3rd specific to Innovation Capacity. Delaware previously achieved a 2nd place overall ranking in 2014. The ITIF attributes some of Delaware’s overall success to its globalized economy, which offers a business environment that “attracts both domestic and foreign companies and supports a high-wage traded service sector.” Delaware is home to many firms in the financial sector, as well as large federal labs, both bringing in quality jobs. Delaware’s location on the east coast provides access to downstream demand markets and proximity to a strong workforce, created by the many top-notch universities nearby. These factors contribute to Delaware’s Innovation Capacity strength which can be accredited to patents awarded and industry R&D investment. Here’s how Delaware faired in these indicators:

  • Patents: Delaware has the highest number of patents granted per 1,000 workers of all states, with 24.5. The state boasts successful high-tech manufacturing industries and a high-performing university (University of Delaware), which now houses a biopharmaceutical institute of Manufacturing USA.

  • Industry Investment in R&D: Delaware also claims a top ranking for the largest percentage of Gross State Product invested in R&D, at 4.1%. This comes as no surprise, given the strong correlation between patents granted and industry investment in R&D. Firms like DuPont are leading this trend throughout the state.

Breakdown of Michigan's Innovation Capacity Score (14.6)

Michigan scores 15th in the overall index, an improvement from its ranking of 18th in the 2014 report. Michigan is one of two states representing the Midwest region in the top 15 (accompanied by Minnesota), its strengths stemming mostly from the Innovation Capacity and Digital Economy categories. The report states, “[Michigan] fair[s] significantly better in the New Economy Index than would be expected solely by per-capita incomes.” Much of this success can be attributed to Michigan’s auto industry, which attracts skilled workers and lots of R&D expenditures, leading to increased incomes. Michigan’s growth in the automotive industry has the potential to act as a catalyst for future growth throughout the state. The state’s success can be attributed to the following Innovation Capacity indicators:

  • Scientists & Engineers: Michigan ranks 6th with scientists and engineers making up 4.4% of private-sector employment. This will be instrumental in Michigan’s ability to drive innovation and economic growth, thereby attracting more skilled workers.

  • Patents: Michigan ranked 4th in the nation for patents awarded, at 17.1 patents per 1,000 workers. According to the ITIF, patents are highly correlated with private investment in R&D. 

  • Industry Investment in R&D: Michigan ranks 2nd behind Delaware, with 3% of Gross State Product invested in R&D by businesses. Michigan’s success in this category is largely due to investment in the auto industry.

Breakdown of New Mexico's Innovation Capacity Score (13.2)

New Mexico ranks 33rd in the overall index, but the state is positioned for movement towards a tech-driven economy. The ITIF states, “many parts of the state outside these metropolitan regions are more rooted in the industrial-age economy, with more jobs in traditional manufacturing, agriculture, and lower-skilled services; a less-educated workforce; and a less-developed innovation infrastructure.” However, New Mexico is home to two national labs and booming production of semiconductors, providing a plethora of high-tech jobs and federal R&D funding. These labs are the source of New Mexico’s top 10 ranking in the Innovation Capacity category and success in the following areas:

  • High-Tech Jobs: New Mexico achieves a ranking of 2nd in high-tech employment, with 7.3% of private-sector employment concentrated in high-tech industries. With this comes significantly higher wages, bringing a more skilled workforce.

  • Non-Industry Investment in R&D: New Mexico makes up for lack of industry R&D investment by ranking first in non-industry R&D. With non-industry R&D investment contributing to 5.8% of Gross State Product, New Mexico is leaps and bounds ahead of all other states. Maryland receives the 2nd ranking with 4.1%, followed by Massachusetts at 1.4%. The ITIF also posits that, “…the federal government invests billions on federal laboratories, which foster partnerships with universities and private industries and help lay the foundation for future private-sector research.”

In total, the Innovation Capacity category is comprised of 7 indicators, which are then weighted to reach a composite score for the category. The national average composite score of these indicators is 10.0. The 7 indicators are:

  1. Export competitiveness and high wages are measured by employment in high-tech industries as a share of total private-sector employment. National average: 4.8%.

  2. Workforce skill is shown by number of scientists and engineers as a percentage of private-sector employment. National average: 3.4%.

  3. Capacity to develop new products is measured by patents issued per 1,000 private-sector workers. This number is adjusted based on the state’s industry mix. National average: 10 patents/1,000 workers.

  4. Knowledge base is assessed through measuring industry R&D as a share of GSP. This is the most heavily weighted of the Innovation Capacity indicators. National average: 1.5%.

  5. Non-industry spending on R&D can pave the way for future private investment and thus, R&D investment outside of the industry is also an important measure of the economy’s knowledge base. This includes investment by government, universities, and nonprofits. National average: 0.7%.

  6. Investment in a clean energy economy is measured by combining change in energy consumption per capita, renewable energy as a share of total energy consumed, and change in renewable energy’s share of total energy consumed. National average: 5.

  7. Venture capital invested as a share of GSP is a strong proxy for entrepreneurship. National average: 0.33%.

As innovation becomes exponentially more essential in navigating today’s world, it’s important that economic developers understand how to effectively strategize. Our cities and towns, regardless of size, will need to learn to mold to the evolving technological landscape. How does your state or locality measure up to the New Economy Index? Check out the full report and explanation of methodology here: http://www2.itif.org/2017-state-new-economy-index.pdf?_ga=2.47761191.1087132762.1511528020-19612346.1511528020.

Source

Wu, John, and Robert D Atkinson. “The 2017 State New Economy Index.” Information Technology & Innovation Foundation, 6 Nov. 2017.

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