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STATE OF THE STATES 2018: ANALYSIS
From Site Selection magazine, January 2018
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SUPERCHARGING INNOVATION

A recipe for curing economic development myopia.

STATE OF THE STATES 2018: ANALYSIS
by ROBERT D. ATKINSON & JOHN WU

The Information Technology & Innovation Foundation (ITIF), known for its rigorous evaluations of tech-driven economies, in November published its 2017 State New Economy Index, which uses 25 indicators to measure the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven and innovation-oriented. This year, for the first time, that index’s findings are included in the “Rankings That Matter” charts on all 50 data pages for this year’s State of the States report, on the pages that follow.

“All regions have technological or innovation-driven activity occurring locally,” write co-authors ITIF President Robert D. Atkinson and Economic Analyst John Wu. “Yet policy discussions about America’s innovation-driven, high-tech economy too often spotlight just a few iconic places. It has always been too myopic a view of how innovation is distributed across the country.”

Here, with permission of Messrs. Atkinson and Wu, we present an adaptation of subsequent analysis of the role of high-tech startups, published in late November 2017.

The number of technology-based start-ups surged 47 percent in the last decade. These firms still account for a relatively small share of all businesses, but they have an outsized impact on economic growth, because they provide better-paying, longer-lasting jobs than other start-ups, and they contribute more to innovation, productivity, and competitiveness.

While these firms provide outsized contributions to employment, innovation, exports, and productivity growth, many policymakers focus more broadly on helping all business start-ups without regard to type. Such a broad-based focus risks reducing overall economic growth.

Atkinson
Robert D. Atkinson

First, most owners of new non-tech-based firms have no intention of growing beyond just a few employees. Second, small, non-tech-based firms on average have much lower productivity and wage levels than technology-based start-ups. And third, most non-tech start-ups are in local-serving industries (e.g., retail) and create few or no net new jobs. As such, the focus of entrepreneurship policy should be squarely on spurring more technology-based start-ups.

Over the last few years a common narrative has emerged that new business formation is down and that this has been a contributing factor to the recent underperformance of the U.S. economy. There is a parallel narrative which holds that large technology firms are crushing technology-based start-ups, using their power to enter markets that start-ups otherwise would occupy. ITIF examined data on more than 5 million firms in 10 technology-based industries from 2007 to 2016. As it turns out, neither claim is true.

Technology-based start-up activity grew over the past decade, and their wages did too. Specifically:

  • The total number of technology-based start-ups increased 47 percent, from 116,000 firms to 171,000 firms. Employment among technology-based start-ups increased 20 percent, from 1.2 million to 1.5 million workers.
  • Technology-based start-ups account for a larger share of technology-based employment than typical start-ups’ share of total economy employment (33 percent to 19 percent).
  • Real annual wages grew by 20 percent among technology-based start-ups, as compared to 17 percent across all technology-based firms. Technology-based start-ups pay more than twice the national average wage, and almost three times the average overall start-up wage.

Start-Up Activity at the State Level

There is a strong correlation of 0.75 between a state’s level of tech-based start-up activity and its overall score in ITIF’s 2017 State New Economy Index:

  1. Massachusetts: High concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard.
  2. California: Thrives on indicators of innovation capacity due to Silicon Valley and Southern California high-tech; receives 55 percent of all US venture capital investment.
  3. Washington: Strong aviation and software exports; Puget Sound entrepreneurialism; widespread adoption of digital technologies.
  4. Virginia: Home to fast-growing firms, and with a high R&D talent quotient due to proximity to nation’s capital.
  5. Delaware: Most globalized due to business-friendly corporate law that also supports a high-wage traded service sector.
  6. Maryland: High concentration of knowledge workers, many federally connected.
  7. Colorado: Dynamic economy; third-most highly educated workforce in the nation; hotbed for high-tech innovation, with high knowledge-employment indicators.
  8. New Jersey: Strong pharmaceutical sector; high-tech agglomeration around Princeton; advanced services sector in Northern New Jersey; high level of FDI.
  9. Utah: Tops in economic dynamism, with strong high-tech manufacturing cluster centered in Salt Lake City and Provo; healthy venture capital scene.
  10. Connecticut: Excels in traded services; employs a highly educated workforce; high levels of R&D and FDI.

Policy Recommendations

All levels of government should bolster tech-based start-ups by crafting policies in key areas:

Tax Reform: Expand the rate of the Alternative Simplified Credit for R&D from 14 percent to at least 25 percent. Amend Section 469 of the tax code to permit passive investors to take advantage of the net operating losses and research tax credits of companies in which they invest. And amend Section 382 of the tax code to make it easier for small companies to carry net operating losses forward even as they continue to attract new investors.

Wu
John Wu

Regulatory Reform: Create an Office of Innovation Policy within the OMB to review the impact major regulations would have on future innovation. Charge the SBA’s Office of Advocacy with focusing solely on advocating for and reviewing federal regulations that affect new firms in technology-based industries.

STEM Skills: Appropriate approximately $325 million over five years for the National Science Foundation (NSF) to award prizes to colleges and universities that dramatically increase the rate at which freshmen STEM students graduate with STEM degrees, and that demonstrably sustain the increase. Shift more permanent resident slots away from family-based and other related immigration programs toward immigrant workers with advanced STEM skills.


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