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ECONOMIC DEVELOPMENT ADMINISTRATION

This article discusses the development of a Portfolio Innovation Index that goes beyond patents to measure a region's capacity for innovation. It explores the variables used in the index and how they are classified. The article also highlights the importance of innovation for economic well-being and provides examples of recent research conducted by the US Department of Commerce.

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ECONOMIC DEVELOPMENT ADMINISTRATION

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  1. US Department of Commerce ECONOMIC DEVELOPMENT ADMINISTRATION Developing a Portfolio Innovation Index: Beyond Patents to Economic Well-Being William P. Kittredge, Ph.D. Director, National Programs & Performance Evaluation

  2. Overview • Research drives the investment agenda • Investment policy guidelines • Performance evaluation essential • Lessons from the United States • Enhancing cooperation between European and US cluster policy makers

  3. EDA Integrated Research Agenda • Peer-review quality research • EDA Research Conference • Economic Development Quarterly publications • Arising from and building upon the academic literature • Practitioner accessible reports • Analytical tools and customized web-based data access • Common Definitions • Responsive to Practitioner Demand • Know Your Region Curriculum and Website

  4. Sample of Recent EDA Research • Cluster-based Economic Development: A Key to Regional Competitiveness – October 1997 • Unlocking Rural Competitiveness: The Role of Regional Clusters – January 2007 • Gulf Coast Cluster of Opportunity – July 2007 • Crossing the Next Regional Frontier: Information and Analytics Linking Regional Competitiveness to Investment in a Knowledge-Based Economy – October 2009 • Green Economy Regional Innovation Systems – forthcoming • Asset Mapping of Regional Innovation Clusters - forthcoming

  5. Innovation – What Is It? • Innovation • incremental and emergent or radical and revolutionary changes in thinking, products, processes, or organizations. • innovation, ideas applied successfully in practice Schumpeter (1934), • Innovation translates brainpower into jobs and wealth. • Limiting ‘innovation’ measurement to patents in a services, knowledge economy is limiting. • Innovation Index is our first attempt to generate an overall picture of a region’s capacity to transform its economy in the global context – especially in rural and other areas not usually thought to be innovation centers

  6. Innovation – A Portfolio Index Approach • Innovative capacity, or inputs, can be combined with outputs to create a single, composite index value. (ETCI 2005; Pro Inno Europe 2006; Porter and Stern 1999; Atkinson and Correa 2007) • Index variables used in previous analyses (Barkley et al. 2006; Drabenstott and Henderson 2006; ETCI 2005; Pro Inno Europe 2006; Lee 2006; Atkinson and Correa 2007) • Several additional variables were identified as theoretically important and investigated for possible inclusion. • The final list of variables was restricted to those for which county-level data were available, or that could be developed on the county level with relatively little imputation.

  7. Variable Classification • Human capital • Economic dynamics • Productivity and employment • Economic well-being • State context category • composed of science and engineering graduates from state institutions per 1,000 residents of the state • R+D spending per capita

  8. Inputs - Human Capital • Variables suggest the extent to which a county’s population and labor force are able to engage in innovative activities. • Educational attainment • Growth in younger age brackets of the workforce (signifying attractiveness to younger generations of workers) • Number of innovation-related occupations and jobs relative to the overall labor force.

  9. Inputs - Economic Dynamics • The economic dynamics sub-index measures local business conditions and resources available to entrepreneurs and businesses. • R&D Investment • Venture Capital Investment • Broadband Density • Churn – creative destruction rate • Business Sizes

  10. Outputs - Productivity and Employment • Variables in this index suggest the extent to which local and regional economies are moving up the value chain and attracting workers seeking particular jobs. • High-Tech Employment Share Growth • Job Growth-to-Population Growth Ratio • Patent Activity • Gross Domestic Product

  11. Outputs - Economic Well-Being • Innovative economies improve economic well-being because residents earn more and have a higher standard of living. Decreasing poverty rates, increasing employment, in-migration of new residents and improvements in personal income signal a more desirable location to live and point to an increase in economic well-being. • Net Migration • Compensation

  12. Calculating the Indices • Sub-indices for human capital, economic dynamics, productivity and employment, and economic well-being calculated by summing weighted ratios that divide the county-level metric by the U.S.-level metric (Atkinson and Correa 2007; Pro Inno Europe 2006) • The Portfolio Innovation Index (PII) combines the four sub-indices • Each sub-index weighted relatively equally. • Economic well-being has a less direct relationship to innovation activities, and receives one-third the weight of the other three sub-indices.

  13. Calculating the Indices • Sub-indices for human capital, economic dynamics, productivity and employment, and economic well-being calculated by summing weighted ratios that divide the county-level metric by the U.S.-level metric (Atkinson and Correa 2007; Pro Inno Europe 2006) • The Portfolio Innovation Index (PII) combines the four sub-indices • Each sub-index weighted relatively equally. • Economic well-being has a less direct relationship to innovation activities, and receives one-third the weight of the other three sub-indices.

  14. Caveats • Of potential concern may be the degree to which concepts or measures are related conceptually and statistically. The research team minimized correlations between factors of the PII by carefully selecting data series, calculations and measures. • The Europeans have noted that their own effort to create national measures for innovation has been fraught with difficulties. For example, using indices can result in a loss of variability and explanatory power through the grouping of data. It also implies that more data are always better. Finally, using all available data ignores multicollinearity between variables and that some data are redundant (Hollanders and van Cruysen 2008). The Portfolio Innovation Index shares several of these flaws. • .

  15. Practitioner Accessibility In order to address the issue of potentially spurious grouping of data and the loss of variability, a web-enabled database and tool was created as a part of this research project. The database and tool allow a practitioner to see the effects a particular measure (or data series) has on a county or region’s overall index. As with all indices, however, the overall estimate is not as important as the sum of its parts. Economic development practitioners not only get a quick snapshot of how their region is doing in terms of innovation with the portfolio index, but they also have the ability to drill down into the highly granular data to gain a better understanding about their region’s strengths and weaknesses.

  16. Future Directions • In the future, the state context could expand in scope to mimic several of the state-level indicators reported by Atkinson and Correa (2007) • Export of high-tech goods • Service exports • Foreign direct investment flows • Bureau of Economic Analysis • Service flows reporting • Empirically Based Innovation Index • index innovative activities by identifying those specific factors with the greatest influence on economic growth, while controlling for some non-innovation factors. Interpreting this index is simpler than the portfolio approach because there is only one output measure―economic growth

  17. Future Directions • Augmenting the set of innovation indicators • Exploring whether some indicators such as establishment churn or knowledge-based technology occupations should be broken down further into their component parts • Determining empirically which indicator has the greatest influence on an output measure for innovation, such as growth in GDP per worker • Exploring the influence of county characteristics—e.g., size, proximity to a metro area, broadband connectivity—on economic growth or rates of entrepreneurship • Updating the indexes to reflect more current data as it’s released from the American Community Survey (all counties should be covered by ACS data by 2010)

  18. Concluding Thoughts • This index is, to the research team’s knowledge, the first attempt to create a comprehensive innovation measure at the county-level unit of analysis in the United States, and the measure is admittedly not perfect. • Imperfections aside, this index presents a state-of-the-art measure of county and regional innovation performance and capacity. This index can serve as a valuable tool for policymakers and practitioners to quickly evaluate innovative capacity and potential.

  19. Contact Information • Full Report: http://www.statsamerica.org/innovation/reports.html • William P. Kittredge, Ph.D. wkittredge@eda.doc.gov

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