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Which States Are Thriving in Innovation in the New Economy?

Why is it that, despite massive monetary and fiscal stimulus, U.S. employment seems locked in a persistent malaise? One diagnosis that has gone largely unnoticed holds that the underlying problem is the decline in the competitiveness of the U.S. economy as it has been unable to properly adapt to today’s globalized “New Economy.” As ITIF points out in Innovation Economics: The Race for Global Advantage this decline has been a relatively untold story over the past decade, although its symptoms have clearly manifested in the dramatic fall in manufacturing employment and investment since 2000, as companies look to other, more competitive countries when it comes to choosing locations.

For the United States to restore its competitiveness, one key will be to compete more on the basis of innovation and entrepreneurship and less on cost. Success in these terms, among other things, means having a workforce and jobs based on higher skills; strong global connections; dynamic firms including strong, high-growth startups; industries and individuals embracing digital technologies; and strong capabilities in technological innovation. These are the same keys for state economies and this is why the 2012 State New Economy Index focuses on these five areas. States that score highly on the index are best able to face the challenges brought on by the New Economy transformation while lower-scoring states may find they are unable to reap the job growth and quality of life improvements that the New Economy enables.

The 2012 State New Economy Index builds on prior State New Economy Indexes published in 1999, 2002, 2007, 2008 and 2010. The index uses 26 indicators, divided into those five key areas that best capture what is new about the New Economy:

1. Knowledge Jobs
2. Globalization
3. Economic Dynamism
4. The Digital Economy
5. Innovation Capacity

In general, the top tier New Economy states have more in common than just high-tech firms. They also tend to have a high concentration of managers, professionals, and college-educated residents working in “knowledge jobs” (jobs that require at least a two-year degree). With one or two exceptions, their manufacturers tend to be more geared toward global markets, both in terms of export orientation and the amount of foreign direct investment. Almost all are at the forefront of the IT revolution, with a large share of their institutions and residents embracing the digital economy. Most have a solid “innovation infrastructure” that fosters and supports technological innovation. Many have high levels of domestic and foreign immigration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a high quality of life.

In the past, the New Economy Indexes have ranked the economies of the Southern and Plains states in the lower tiers, in part because they are dependent on natural resources or on mass-production manufacturing, therefore relying on low costs rather than innovative capacity to gain competitive advantage. To improve their economic fortunes, these states’ old economic development policies must be adapted to the hyper-competitive New Economy, with states developing comprehensive “innovation strategies.” These strategies should focus on three key policy areas:

1. Policies to reduce zero-sum competition;

2. Policies to spur “win-win” economic results;

3. Policies to support the traded sector—manufacturing in particular.

Primarily, these states should take steps to limit local communities’ within-state zero-sum competition and also work to reduce zero-sum competition with other states. Secondly, states can expand incentives and programs to spur win-win results that benefit both their state and the nation as a whole by investing in areas that promise long-term growth and innovation. And third, both states and the federal government need to implement what ITIF calls the “4Ts”: tax, trade, technology and talent policy. While trade is mostly in the realm of the federal government, there are many policies available to states in the other three areas that can spur traded sector growth.

ITIF has released the full report including the rankings of all 50 states on www.itif.org.

Rob Atkinson is the president of the Information Technology and Innovation Foundation.

Image: Information Technology and Innovation Foundation