Posted by: Richie Bernardo

Innovation is a principal driver of U.S. economic growth. In 2018, the U.S. will spend an estimated $553 billion on research and development — more than any other country in the world and over 25% of the world’s total — helping the nation rank No. 4 on the Global Innovation Index. According to the results of the ranking, knowledge and technology outputs are America’s particular strengths.

But certain states deserve more credit than others for America’s dominance in the tech era. These states continue to grow innovation through investments in education, research and business creation, especially in highly specialized industries.

In order to recognize the nation’s biggest contributors, WalletHub compared the 50 states and the District of Columbia across 22 key indicators of innovation-friendliness. Our data set ranges from share of STEM professionals to R&D spending per capita to tech-company density. Read on for our findings, commentary from a panel of experts and a full description of our methodology.

1. Main Findings
2. Ask the Experts
3. Methodology

Main Findings Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/31890/geochart-innovation.html" width="556" height="347" frameBorder="0" scrolling="no"></iframe> <div style="width:556px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2HOxrA4>

 

Most Innovative States

Overall Rank*	State	WalletHub State Innovation Index	‘Human Capital’ Rank	‘Innovation Environment’ Rank
1	Massachusetts	73.04	1	2
2	Maryland	68.53	2	6
3	Washington	67.69	4	3
4	District of Columbia	66.09	3	11
5	California	65.37	7	1
6	Colorado	64.38	6	4
7	Virginia	60.23	5	18
8	Utah	54.85	12	5
9	Delaware	52.34	11	7
10	Oregon	50.34	17	8
11	New Jersey	49.75	10	17
12	New Hampshire	49.67	15	9
13	Connecticut	49.37	8	22
14	Texas	49.31	13	14
15	Minnesota	48.45	14	15
16	Arizona	48.37	18	12
17	Michigan	48.15	9	21
18	New Mexico	46.57	20	16
19	Florida	46.52	22	13
20	Georgia	44.36	21	19
21	North Carolina	43.84	19	23
22	New York	43.32	24	20
23	Rhode Island	41.02	16	33
24	Illinois	39.44	23	29
25	Idaho	39.39	30	25
26	Pennsylvania	38.68	26	31
27	Wyoming	37.46	32	26
28	Nevada	37.29	48	10
29	Indiana	36.54	31	28
30	Wisconsin	36.48	27	40
31	Montana	36.07	38	24
32	Vermont	35.83	28	39
33	Ohio	35.75	29	38
34	Alaska	34.42	25	47
35	South Carolina	33.72	33	36
36	Missouri	33.56	36	30
37	North Dakota	32.97	41	27
38	Alabama	32.61	35	34
39	Kansas	32.16	39	35
40	Maine	30.75	34	45
41	South Dakota	30.23	47	32
42	Oklahoma	29.86	42	37
43	Nebraska	29.67	40	41
44	Hawaii	29.56	37	46
45	Kentucky	28.40	44	42
46	Iowa	28.26	43	43
47	Tennessee	27.81	46	44
48	Arkansas	25.99	45	49
49	West Virginia	22.40	49	51
50	Louisiana	21.48	50	50
51	Mississippi	19.32	51	48

*1=Most Innovative  

Ask the Experts

To help struggling local economies become more like successful tech-centric cities, we turned to a panel of experts for advice on stimulating innovation. Click on the experts’ profiles to read their bios and thoughts on the following key questions:

1. How can state policymakers encourage and facilitate innovation?
2. What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?
3. What skills best prepare individuals to be competitive in a changing economic landscape?
4. Which states have the most to offer to Amazon’s HQ2?
5. In evaluating the best states for innovation, what are the top five indicators?

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• John Russo Professor and Co-Director of the Center for Working-Class Studies at Youngstown State University
• Joy Anderson Asher Director of the Center for Career and Professional Development at Centre College
• Goncalo Pina Assistant Professor of Economics in the Leavey School of Business at Santa Clara University
• Ribhi Daoud Professor of Economics at Sinclair Community College
• Saba Rasheed Ali Licensed Psychologist, Associate Dean for Research and Professor of Counseling Psychology in the College of Education at the University of Iowa
• Marc C. Sedam Associate Vice Provost of Innovation and New Ventures; Managing Director, UNHI, University of New Hampshire
• Joseph C. Von Nessen Research Economist in the Darla Moore School of Business at the University of South Carolina

John Russo Professor and Co-Director of the Center for Working-Class Studies at Youngstown State University

How can state policymakers encourage and facilitate innovation?

States should stop doing the dumb stuff -- various relocation attractions, cutting taxes for corporations and wealthy to "incentivize the opportunity economy,” disinvesting in K-12 education or vocational education or community college education, slashing social services, and putting work requirements/drug testing et al.

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

Start doing the smart stuff -- steering procurements and contracts away from companies that take the low road with workers, and to those with good jobs to workers. This will yield a better value for taxpayers both in the immediate short term and long term. Shift incentives, loans, subsidies from low road employers and towards those who offer good jobs to workers. Invest well-designed infrastructure that meets public needs. Stop privatizing public infrastructures for some kind of short-term budget fix.

Joy Anderson Asher Director of the Center for Career and Professional Development at Centre College

What skills best equip individuals to be competitive in a changing economic landscape?

According to the National Association of Colleges and Employers, the talents most sought by employers are the so-called soft skills: leadership, teamwork, oral and written communication, a strong work ethic, initiative, and flexibility/adaptability. Skills that can easily be gained in one position, then utilized in future positions. Were I to pick one skill, however, I would say that the most important way to remain competitive in times of change is being adaptable. Individuals don’t necessarily need a certain set of work-specific skills, but the willingness to be nimble and trainable are key to a long and successful career.

Goncalo Pina Assistant Professor of Economics in the Leavey School of Business at Santa Clara University

How can state policymakers encourage and facilitate innovation?

There is substantial persistence in the ability to innovate across states, and very few policies are available in the short-run for policymakers. One option is to increase the amount of inputs going into innovation. For example, policymakers can try to increase the number of innovators, particularly, engineers or scientists, in their state. Alternatively, they can invest in large basic scientific research facilities, universities or in attracting companies' research units, hoping that this will attract innovators or increase the output of existing innovators.

Grants and tax breaks for companies or public institutions are an option, but they should target highly innovative departments within companies and universities. Not all departments are the same. Tax breaks for individuals with specific skills is an alternative. Over a longer horizon, encouraging education in STEM would potentially increase the number of innovators. Furthermore, encouraging out-of-state students, students that are willing to be somewhat out of their comfort zone in order to pursue their education, can potentially improve the quality of innovation.

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

It is difficult to predict how it is best to retrain an individual that lost a job or that has been displaced by innovation. I would focus on three proposals:

• Show these individuals that it is not hard to learn again how to learn. It's a daunting perspective to have to learn a new trade after years of specialization. However, teaching workers basic math or programming can empower them to learn again and encourage self-discovery on where to focus next.
• In addition to some basic education, internships and apprenticeships can provide these individuals with different experiences that may encourage good matches between workers and new careers.
• Finally, keeping a database of personal characteristics, retraining strategies and job experiences for these workers would allow policymakers to implement data science tools, in order to learn what works best for different profiles of workers.

What skills best equip individuals to be competitive in a changing economic landscape?

Related to the previous point, the ability to learn and confidence in the ability to learn. Nobody can predict the future, so the best approach is to encourage individuals to learn constantly. Learning should be hard, but not impossible, and does not have to be related to an individual's career. I give my students the same advice. When someone learns how to solve a math or a coding problem, they are learning not only math and coding, but that they can tackle complex issues. This will carry them through other complex issues that no one can anticipate.

Which states have the most to offer Amazon’s HQ2?

States with good university facilities, and a diverse, young population: Texas, California, Virginia/DC, Massachusetts, New York, New Jersey.

In evaluating the best states for innovation, what are the top five indicators?

• Engineers per capita;
• Engineering graduates per capita;
• Patents per capita;
• GDP per capita;
• Measures of diversity.

Ribhi Daoud Professor of Economics at Sinclair Community College

How can state policymakers encourage and facilitate innovation?

• Tax incentives for research and development;
• Encourage entrepreneurship;
• Financial incentives for higher education;
• Incentives to promote science and technology;
• Provide resources to encourage automation and high-tech manufacturing;
• Legislation to support capital investments in product and process development.

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

• Subsidize employment insurance programs;
• Provide resources for retraining programs;
• Provide financial incentives to employers for employing displaced workers;
• Provide incentives and material support for new start-ups;
• Encourage small business and entrepreneurship.

What skills best equip individuals to be competitive in a changing economic landscape?

• Critical thinking skills;
• High-tech and automation skills;
• Interpersonal and good communication skills;
• Managerial and organizational skills;
• IT skills;
• Competency in reading/writing skills;
• Vocational and specialized skills.

In evaluating the best states for innovation, what are the top five indicators?

• Investment levels in human, physical and financial capital;
• High-tech manufacturing and automation levels;
• Economic growth and productivity rates;
• Research in science and engineering;
• Educational levels and graduation rates.

Saba Rasheed Ali Licensed Psychologist, Associate Dean for Research and Professor of Counseling Psychology in the College of Education at the University of Iowa

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

Individuals need re-employment services that offer more than just job placement. Job placement (or replacement) is important, but we have a system that rewards people for finding a job/any job rather than finding a job that meets their needs or requirements or fits their skills. An overemphasis on job placement often results in displaced workers taking low-wage jobs, rather than getting retraining or more specialized skills that would lead to more permanent and sustainable employment. The best we can rectify this is for workforce development programs that involve employment counseling and funding for individuals to acquire skills (retraining, vocational training, higher education, etc.). People need help with this transition, so we should invest in human resources that would support people in work-related transitions including employment counselors (Fouad & Bynner, 2008).

What skills best equip individuals to be competitive in a changing economic landscape?

Beyond specific skills for a particular job, non-cognitive skills (often referred to as soft skills, workplace readiness skills, emotional IQ, etc.) are very important. These are often interpersonal and professionalism-type skills that are needed in almost any type of job because they involve flexibility, communication, interpersonal savvy, etc.) -- basically, these skills help people navigate any workplace that involves working with other people (which is just about every workplace). The more we help people to remain flexible, the more we can help them to adapt to changing economic conditions and new labor market demands. However, we have to couple this with specific types of skills training, such as technological skills. If we help people remain flexible and support them with specific types of skills training, we can more easily help people with shifting landscape.

Marc C. Sedam Associate Vice Provost of Innovation and New Ventures; Managing Director, UNHI, University of New Hampshire

How can state policymakers encourage and facilitate innovation?

Policy has to at least do one of two things—either it removes real or perceived barriers in the market to open competition or it has to change behavior. While there are still many examples where barriers to open competition exist (think about the strict licensure requirements some states have to get a barber’s license) over time these become disrupted through technological change. The most recent example would be ride-sharing where Uber and Lyft used technology to disintermediate the market for transportation. While people often focus on the convenience of the apps as the reason this worked, the real disruption was matching an available driver with a needed ride in real time with geolocation. It works way better than waving curbside, especially in markets historically underserved/unserved by taxis.

But good policy actually makes people change their behavior. Let’s take the example of a state that wants to encourage the growth of high-paying R&D jobs in their region. One typical tool in the toolbox is the R&D tax credit. States are racing to raise the limit of these credits and some states simply have no cap on how much R&D they can write off on their taxes. How does an R&D tax credit work? It allows companies to write off their R&D expenses against their taxes, thereby lowering their tax burden. But the only companies who actually benefit from these tax credits are those that have profits against which they can write off these expenses. Small tech companies who represent high-growth opportunities are doing R&D to create new opportunities but can’t benefit from the credits because they lose money, so there are no profits to write expenses off against (yes, some credits have carryforwards).

So a traditional R&D tax credit benefits existing, large, profitable companies almost exclusively—companies, by the way, who are likely going to do the same level of R&D whether the credit exists or not. But a policy that would allow a small firm to exchange a portion of the credits in for a refund from the state (or who can sell their credits to other companies) would put money into the hands of the small firm to continue the work. That changes the behavior of the firm who might ramp up R&D knowing that some of it would be funded by the tax credit. Or take the case of North Carolina, who in the 2008 recession offered up a $7,500 automatic tax credit for companies that hired a new R&D employee. Those types of creative policies reduce business risk and change behaviors. I ran a company in NC during 2008 and we actually hired an employees based on the availability of the credit. That employee stayed on payroll for four years at full tax rates.

In the big picture, states need to recognize the difference between what I call “incumbents vs. insurgents”. Incumbents are the larger existing firms who are known in the state, have influence, and whose opinions are often sought out by policy makers. Insurgents are the new firms who are fast-moving and fast-growing, and often are planning to disrupt the industries of the incumbents. When policymakers are considering new programs or changes who do they call? Incumbent -- and the incumbents are most likely to give suggestions or recommendations that further solidify their advantages in the state. Policymakers would do well to find a way to engage with the insurgents so they get an early signal as to what new businesses see, need, and are feeling as they try to grow. The irony is that most policies are intended to improve the environment for the insurgents but, to quote “Hamilton”, they’re never ‘in the room where it happens’ to provide insight.

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

Job retraining at the community colleges is always an effective method of working in a specific industry for a specific challenge. Remember that industries aren’t usually disrupted overnight—the seeds of disruption are often seen years in advance. Since the questions are at the state level, policymakers should be looking at their state’s research universities for the seeds of future economic development. The areas of the country that are resilient throughout both up and down cycles, indeed the areas that are aspirational for most parts of the country from an economic perspective, are those with a strong research university (and ideally more than one) at their core.

Policymakers should be looking at those research universities and creating programming or benefits from aligning with them, be it programs that provide a benefit from hiring an in-state graduate to promoting the creation of research parks aligned with the intellectual outputs of the institution. Research parks provide opportunities beyond scientific jobs too—the Association of University Research Parks did a survey with Battelle that reported for every job in a research park company nearly 2.5 “other” jobs were created. That’s in addition to the non-technical jobs (administrative, marketing, sales) that each company needs to operate.

Looking strategically at state resources like research universities would permit a state to take advantage of existing, local assets to help the regional economy. Workers who are displaced could easily be retrained in the technical areas of interest to the local research university, but these research parks/innovation communities create opportunities for workers of all skill levels. Companies are learning that access to workforce means that they have to engage the people who create the knowledge workers (universities) earlier and earlier. The same could be true for a forward-thinking strategic view that supports a strong regional economy BEFORE legacy industries are disrupted.

What skills best equip individuals to be competitive in a changing economic landscape?

Entrepreneurial skills are the most important to be competitive in today’s economy. This doesn’t solely mean teaching people how to start new companies, though that’s important too. Entrepreneurial skills means teaching people how to be creative problem solvers and how to be externally-facing and look at market trends and needs more than personal interests. These problem solving skills can be taught and are at many universities. UNH, where I work, teaches a program called I-Corps sponsored by the NSF. I-Corps uses Lean Startup principles to teach our faculty and students how to look for market needs. But all people can learn these skills and the basic principles are available online. The era of a single employer, or single industry in which you are employed, is basically over. Creative problem solving is needed in and across all industries and will make people more relevant even when switching careers.

Which states have the most to offer Amazon’s HQ2?

I’ll take the question to mean cities that are still in the running. Personally, I think that North Carolina offers the best location for what Amazon is intending to do. The region could easily take on the number of jobs proposed to be created, is investing in light rail, and three excellent universities within 20 miles of the proposed HQ. The cost of living and business climate (outside of the misguided HB2 debacle) are excellent and it’s a region without a dominant employer. Next up to me would be Philadelphia, which has some of the same factors as Raleigh but layers on access along the I-95 corridor (equidistant from Washington DC and NYC) and excellent public transportation both locally and regionally. If Amazon is looking for gilded incentive packages than the answer will be elsewhere, but most of the other locations have severe traffic and affordability issues that would be exacerbated by Amazon. If I had to pick a traditional city, then Boston would be it. And Pittsburgh is my dark-horse candidate.

In evaluating the best states for innovation, what are the top five indicators?

Number of recent college graduates, in-migration of the 18-49 year age group, patents (issued patents and patent applications, both per capita and raw numbers), firm formation, and R&D expenditures (both university and overall) are great indicators of innovative activities. College graduates speak to the availability of knowledge workers; in-migration addresses the relative attractiveness of a state; patent activity is a direct indicator of new idea creation; firm formation is a marker of new opportunities; and finally R&D expenditures is the actual amount of dollars dedicated to driving the innovation economy.

Ironically there is a ton of narrative around tax policy and the tax structures of states. When an incumbent achieves significant size and scope then, of course, taxes are more relevant and may even lead to relocation if there’s downward pressure on the business. But the question was about innovation. No insurgent thinks about tax policy or the tax rate of a state when they first come up with an idea.

First figure out if the idea works. Next, are there any customers? Then, can you build/create it with a value proposition that generates paying customers? Then does your region already have the workforce necessary to grow? Then comes scale and hopefully profits and overwhelming success, economic impact, and profits and the conversion from insurgent to incumbent. Only then are you thinking about taxes. Anyone who considers the tax structure before all of these other concepts is, in my opinion, predestined to fail. California and Massachusetts are some of the highest-tax environments in the country--they also house our best innovation ecosystems and the greatest number of insurgent firms. One upside of higher taxes is that states have the resources to invest in other innovative activities in their ecosystem to make their state even more attractive creating a positive cycle.

Joseph C. Von Nessen Research Economist in the Darla Moore School of Business at the University of South Carolina

What can policymakers do to assist those who may lose their jobs or otherwise be displaced by innovation across industries?

Perhaps the best action that policymakers can take is to encourage and maintain direct connection points between employers and those who are looking for work. These connection points, such as a technical college system or an apprenticeship program, should have a working knowledge of current and projected labor needs of employers in the local region, and would ideally be able to facilitate the training and matching of potential employees to firms that are hiring. Such a system would also help economic development efforts because firms are more likely to locate in a region in which they can more easily identify and hire qualified workers. The South Carolina Technical College System, for example, represents a long-standing success story in providing technical training and matching employers with potential employees.

What skills best equip individuals to be competitive in a changing economic landscape?

Unfortunately, there is no single technical skill that is necessarily immune to economic recessions, outsourcing, or automation. Thus, to remain competitive in a changing economic landscape, individuals must develop a strong set of soft skills (such as a good work ethic and the ability to be flexible), as well as a willingness to assertively pursue retraining opportunities as technology changes. Individuals can also benefit from developing a talent stack -- that is, mastering a set of ordinary skills that become extremely valuable when combined. For example, in the business world, someone who has sales experience, is good at public speaking, and can do basic data analysis is likely to be more than three times as valuable as someone who only has one of those skills.

Methodology

In order to determine the most and least innovative states, WalletHub compared the 50 states and the District of Columbia across two key dimensions, “Human Capital” and “Innovation Environment.”

We evaluated those dimensions using 22 relevant metrics, which are listed below with their corresponding weights. Each metric was graded on a 100-point scale, with a score of 100 representing the most favorable conditions for innovation.

We then determined each state’s weighted average across all metrics to calculate its “State Innovation Index” and used the resulting scores to rank-order our sample.

Human Capital – Total Points: 50

• Share of STEM Professionals: Double Weight (~14.29 Points)
• Share of Science & Engineering Graduates: Full Weight (~7.14 Points)Note: This metric measures the percentage of science- and engineering-degree holders aged 25 and older per total degree holders in the same age group.
• Projected STEM-Job Demand by 2020: Full Weight (~7.14 Points)Note: This metric measures the projected number of STEM jobs needed by 2020 per total jobs.
• Scientific-Knowledge Output: Full Weight (~7.14 Points)Note: This metric measures the number of peer-reviewed articles published per 1,000 science-, engineering- and health-doctorate holders.
• Eighth-Grade Math & Science Performance: Full Weight (~7.14 Points)
• AP Exam Participation: Full Weight (~7.14 Points)Note: This metric measures the percentage of public high-school students in the graduating class who completed one or more Advanced-Placement exams at any point in high school.

Innovation Environment – Total Points: 50

• Share of Technology Companies: Double Weight (~5.13 Points)Note: This metric measures the number of technology establishments per total establishments.
• R&D Spending per Capita: Double Weight (~5.13 Points)Note: “R&D” refers to research and development.
• R&D Intensity: Full Weight (~2.56 Points)Note: This metric measures the ratio of total research and development (R&D) performed to state gross domestic product (GDP).
• Invention Patents per Capita: Full Weight (~2.56 Points)Notes: Data include utility, design, plant, and reissue patents per million of state population.
• IP Services Exports as a Share of All Services Exports: Full Weight (~2.56 Points)Notes: Intellectual Property Services Exports (Patents, Trademarks, Copyrights, and Other Licenses) as a Share of All Services Exports
• Business Churn: Full Weight (~2.56 Points)Note: This metric measures the share of businesses that opened and closed in a state in the past year.
• Jobs in New Companies: Double Weight (~5.13 Points)Note: This metric measures total employment in businesses that opened in the past year.
• Net Migration: Full Weight (~2.56 Points)Note: This metric measures the net number of people moving to or from a state per 1,000 residents.
• Entrepreneurial Activity: Full Weight (~2.56 Points)Note: This metric is based on data from the Kauffman Index of Startup Activity.
• Tax-Friendliness: Double Weight (~5.13 Points)Note: This metric is based on data from the Tax Foundation’s State Business Tax Climate Index.
• Industry-Cluster Strength: Full Weight (~2.56 Points)Note: This metric is based on data from the U.S. Cluster Mapping Project. “Industry-Cluster Strength” refers to the level of high employment specialization of a cluster, which is defined by the U.S. Cluster Mapping Project as a “regional concentration of related industries in a particular location.”
• Open Roads & Skies Friendly Laws: Half Weight (~1.28 Points)
• Average Internet Speed: Full Weight (~2.56 Points)
• Share of Households with Internet Access: Full Weight (~2.56 Points)
• Venture-Capital Funding per Capita: Full Weight (~2.56 Points)
• Average Annual Federal Small-Business Funding per GDP: Full Weight (~2.56 Points)

 

Sources: Data used to create this ranking were collected from U.S. Census Bureau, Bureau of Labor Statistics, National Science Foundation, National Center for Education Statistics, Georgetown University’s Center on Education and the Workforce, United States Patent and Trademark Office, Information Technology & Innovation Foundation, Economic Innovation Group, Ewing Marion Kauffman Foundation, Tax Foundation, Consumer Technology Association, Akamai Technologies , U.S. Cluster Mapping Project and National Venture Capital Association.

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