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.
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:
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:
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.
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.