Measuring Economic Development: The Innovation Index

Posted March 19, 2008

Many state economic development strategies are established for purposes of job creation or job retention, so gauging their effectiveness usually involves tracking positive and negative changes in employment. But a few states have sought new ways to measure employment environments beyond the number of jobs gained and lost.

One approach that recently has drawn increased attention is the innovation index, a type of benchmarking. (Benchmarking assesses a state's progress against selected economic measures that fit with state objectives and have data available for comparison.) Innovation is defined as "the process that transforms knowledge into value." An innovation index gauges the role of innovation in a state's economic success.

To help measure innovation, several states have developed scorecards that track innovation trends, compare their indicators to other states, and compile rankings to give their state an innovation score and grade. Each state's framework for measuring innovation ultimately reflects its unique priorities, characteristics, culture, resources, and political climate, although the concept of measuring innovation is transferable and states can learn from one anther.

Oregon, for example, has long been recognized for its efforts to measure progress in many areas of state responsibility. A recent effort under the direction of the governor and Legislature created the Oregon Innovation Council in 2005. Part of the rationale for doing so, as explained by the Oregon Economic and Community Development Department, is that every industry "must use ingenuity and technology to add value, streamline operations and develop competitive goods and services." Department and council responsibilities include an innovation index.

The original Oregon index identified three stages of innovation: (1) invention, (2) translation, and (3) commercialization, which describe the process by which new knowledge is transformed into products and services, creating economic value. The 2007 innovation index added (4) economic prosperity and (5) innovative environment to the initial three stages, and tracks 20 indicators under those five headings that aim to deepen understanding of the conditions that foster innovation, the process, and expected outcomes.

On its innovation scorecard, Oregon monitors trend data and compares itself nationally and to eight states that it typically competes with for technology-based development: Arizona, California, Colorado, Idaho, Minnesota, New York, Utah and Washington. The index describes the status of activities in the state ranging from university licensing income (payments from firms for the use of university technology) to the number of scientists and engineers in the workforce. Indicators that appear in the innovation index come from research by a variety of organizations that specialize in the topics. Overall, the state gives itself a "B."

Maine's Office of Innovation (OOI), established by the Legislature in 2004 within the Department of Economic and Community Development, also maintains an innovation index. The OOI's 2008 innovation index includes 25 indicators measuring Maine’s economic capacity and progress toward competing in an innovation-driven economy, with indicators organized into five categories of capacity: (1) research and development; (2) innovation; (3) employment and output; (4) education; and (5) connectivity. A chart showing one- and five-year trends in these areas, along with a comparison to peer states, and a comparison to the United States as a whole, provides a quick picture of where the state seems to be doing well and where it lags behind. For example, the state ranks relatively high in areas such as entrepreneurial activity, not-for-profit laboratory R&D performance, classroom connectivity, and eighth grade math and science skills. On the other hand, Maine lags behind many other states in areas such as academic R&D, venture capital investments, and science and engineering graduate enrollments.

The Mississippi Technology Alliance (MTA) is a publicly funded non-profit organization that also publishes an innovation index. Annual statewide data are used to calculate performance levels for eight broad innovation goals in the technology life cycle: wealth creation, statewide research capacity, university research capacity, business research and development, technology business development, industrial productivity, technology workforce development, and investment capital. The 2008 index's 24 detailed indicators provide feedback about how well the state is doing in key areas of innovation-related activity. The innovation research database provides researchers a source for technology-based economic development trend data for all states. Overall, the state has progressed by 85 percent since the goals were established in 2002. Analysis uses materials originally designed for corporate productivity measurement; some techniques are drawn from work done by the Oregon Productivity Center.

Higher education institutions also are potential resources for innovation research. For example, Michigan and Massachusetts monitor innovative economic activity with indexes developed at the University of Michigan-Dearborn School of Management and the John Adams Innovation Institute of the Massachusetts Technology Collaborative, respectively.

Michigan's index, new in 2008, tracks accelerations and decelerations in economic innovation based on calculations of employment of "innovation workers," trends in venture capital, trademark registrations, incorporation activity, small business loans and gross job creation.

The Massachusetts 2007 index tracks the state's performance against both domestic and international competitor states and nations, analyzing 11 key clusters and 20 benchmark indicators. According to the Institute's web site, "The Index provides a valuable platform to better understand Massachusetts and how it can optimally position itself on the global economic landscape." Some findings from the 2007 index showed that Massachusetts invested more than 5 percent of its gross state product in research and development, the "best performance of any single region in the world." On the other hand, Massachusetts--as well as other leading technology states--is missing opportunities to export IT hardware such as computers and component parts to growing markets, especially Asia.

Whether innovation indexes like these can contribute to legislative policy decisions that result in more effective economic development is yet to be seen. Currently, they are a useful component in ongoing efforts to get a handle on the complex and rapidly changing world of economic success.

Innovation Index Web Sites:

 

For more information, contact Judy Zelio in the Fiscal Affairs Program in Denver, Colo., telephone (303) 364-7700 or email econ-info@ncsl.org.