How Innovative Is Your State?

may carrotA robust and innovative start-up sector is key to sustainable economic growth. For innovation to occur, however, enterprises must have both the incentive and the capacity to invest. Incentives are multi-faceted and heavily reliant on the overall investment climate. Capacity depends on the education level of employees and management, their experience in rapid adaptation of products and processes, and their access to funds for R&D and commercialization. 

A number of excellent rankings of entrepreneurial activity exist. For example, Kauffman ranks states by the rate of business owners and small business density. These provide a vital snapshot of the small business environment, as do various other measures of “business friendliness” such as tax rates, connectivity measures, legal ratings and education levels.

For the investment community interested in high growth start-ups, a number of other figures may prove illuminating, These provide some idea into the “innovativeness” of such states. As a first cut, some interesting 2014 measures include: Venture Capital invested as a percentage of worker earnings, Industrial R&D as percentage of worker earnings, non industrial/ academic R&D as percentage of Gross State Product, and patents per thousand people.

Of course, since these are only a yearly snapshot they are problematic. The patent process is quite lengthy and many filed patents may still be pending. Likewise, R&D and VC figures can be thrown off by one/ two large investments and/ or university grants. Still, these rough proxies are worth a glance.

The top states in patents per population? Wisconsin (3.51), Washington (3.48), Texas (3.41), Utah (2.19), California (1.05), and Massachusetts (1). The bottom five were Alaska (0.07), Mississippi (0.05), Tennessee (0.04), West Virginia (0.02) and Wyoming (0.02).

VC figures are more in line with expectations, being led by Massachusetts (0.86), California (0.82), Utah (0.31), Washington (0.27) and Colorado (0.25). The lowest (all zero) were Arkansas, Alaska, Hawaii, Wyoming, Iowa and South Dakota. Industrial R&D was more varied, with the leaders being Delaware (10.15), Michigan (5.5), California (5.01), Connecticut (4.34) and Massachusetts (4.26). At the bottom were Arkansas, Wyoming, Louisiana, Alaska and Mississippi (all below 0.9). Lastly, the academic winners were New Mexico (7.37), Maryland (4.79), Rhode Island (1.86), Massachusetts (1.63) and Alabama (1.35). The lowest rankings were for Louisiana, Arkansas, Delaware, Wyoming, and Nevada, all below 0.33.

What are some of the surprises? First, that places like Utah and Washington are investing quite a bit in R&D, and this is partly paying off in the form of patents. Secondly, that Maryland’s recent state-supported boost to technology is at least being reflected in academic spending, if not yet in patents (which was only 0.31 for 2014, a similar level to previous years).

Thirdly, it appears that VC is still fairly concentrated in the usual suspects, despite the apparent investment in innovative capacity in other parts of the country. This suggests a missed opportunity on the part of many VC firms, and maybe a need to develop more of a VC culture in less traditional industry sectors and states. 

Lastly, and sadly, it appears that there is a vicious circle in states clustered at the bottom of the rankings. Given the importance of innovation and entrepreneurship in reversing poverty and raising living standards, this dearth suggest interstate inequality will continue to worsen. The positive news is that many states have broken this cycle with flexible regulation, ameliorative policy and an investment in education. Hopefully this “best practice” will be adopted by more states in the future.

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