Examining the Innovation Gap in the United States

Title: R&D, Socio-Economic Conditions, and Regional Innovation in the U.S. (fee or subscription required)

Authors: Riccardo Crescenzi and Andrés Rodríguez-Pose (both London School of Economics)

Publisher: Growth and Change, vol. 44, no. 2

Date Published: June 2013

All innovation, like politics, is local. That’s the main finding of a new study that examines variances in innovation across the United States. The authors pinpoint which regions of the country are most conducive to innovation and identify the socioeconomic factors likely to produce cutting-edge products or services. Their findings have implications for entrepreneurial firms, businesses seeking to relocate or expand, and foreign-based companies looking to establish a foothold in the United States.

In recent decades, the country’s innovation landscape has shifted. Patent applications filed by organizations in the Northwest and Southwest have shot up, eclipsing those from the Midwest and Northeast, the historical backbone of American invention. Although studies done in the European Union have established that geographic, institutional, and social factors can lead to variance in R&D within individual countries, little similar research has been done in the United States. And yet, there’s no doubt that firms operating in two of the country’s leading hubs of innovation—California’s Silicon Valley and Massachusetts’s Route 128—deal with wildly different innovation environments, labor pools, and state regulations.

To provide insight on how firms can tap into regional characteristics to boost their innovative output, the authors analyzed 179 economic areas from 1994 to 2007 as defined by the U.S. Bureau of Economic Analysis. In addition to measuring local investment in R&D, the authors looked at a range of socioeconomic factors, including population density, education levels, infrastructure quality, and the composition of the regional economy.

They found that the five U.S. regions with the highest levels of patent applications accounted for 35 percent of all patenting in the country, and that these regions are home to about one-fourth of all employees with higher education experience and 60 percent of private R&D expenditure in the nation. In terms of population-weighted patent applications, the three most innovative regions are those clustered around San Jose, San Francisco, and Oakland in Northern California; San Diego, Carlsbad, and San Marcos in Southern California; and Appleton, Oshkosh, and Neenah in Wisconsin.

Most of the more innovative areas in the U.S. lie on the West and East Coasts, the authors found, with a couple of smaller hubs around the Great Lakes. The least innovative areas are generally located in the Midwest and South, although the Houston–Baytown–Huntsville region in Texas and the Denver–Aurora–Boulder area in Colorado are major exceptions.

Private R&D spending patterns are even more clustered than patenting efforts. Indeed, the San Jose–San Francisco–Oakland nexus is the top economic area in both patenting and R&D activity, the authors found. Two other regions (Seattle, Tacoma, and Olympia in Washington and Rochester, Batavia, and Seneca Falls in New York) also rank in the top 10 for both R&D and patenting. In total, 13 regions feature in the top 20 list for both R&D and patenting, confirming that corporate spending on R&D is a crucial driver of patent activity in the United States.

The results are in line with theories that firms can benefit from the spillover effects of their proximity to one another, to research labs, or to universities to boost innovation output. And although the freedom that workers have to move around the country for jobs is an important part of the U.S. innovation dynamic, the authors note that a more powerful driver of cutting-edge output is the movement of employees between firms within a given region. 

A number of other local factors also played a part in translating R&D activities into patentable output. Surprisingly, firms operating in regions with higher unemployment levels and a robust agricultural workforce also innovated more. This could be because entrepreneurship levels rise as more people lose their jobs or face bleak employment prospects. Or R&D spending might actually increase in some regions where traditional industrial and manufacturing firms have lost their dominance. As a struggling local economy is restructured around smaller startups with more of a tech or service focus, R&D expenditure tends to rise.

And although conventional wisdom suggests that new entrants to the workforce recharge and upgrade the skills and knowledge required to innovate, this study found no such evidence. Instead, firms that can tap into a local labor pool with older workers innovate at the same rate, perhaps because they’ve hired experienced managers and employees with well-honed skills.

The authors argue that their empirical findings underline the need for companies to take a territorial viewpoint on understanding the process of innovation in the United States. Certain areas of the country, with the right mix of socioeconomic conditions for firms to draw from, are clearly more “innovation prone,” they write.

Given the disparity in the innovation output of different regions, the authors advise firms weighing a move or an expansion to examine local socioeconomic factors—including infrastructure quality and the number of universities—and state-level laws that might not directly be connected to innovation. For example, noncompete laws, which limit employees’ ability to jump ship to a rival firm in the same state, have become a contentious issue in the tech sector, with companies loath to lose their brightest minds and in-house knowledge to competitors.

Bottom Line:
Successful innovation requires a delicate blend of forward-thinking employees, funding for R&D initiatives, and access to research labs or university hubs. This paper tracks which regions of the country have the socioeconomic elements that are most conducive to supporting firms’ cutting-edge efforts.