Measuring the Innovation Economy: A New Yardstick
November 25th, 2008 by Al Lewis (alewis)If indeed the US follows its historical pattern, the next sustained boom – the one that will lead the country out of this recession — will be in new technologies. Almost by definition, we don’t know which technologies, though alternative energy is a good bet. But we do know that throughout history we have invented things and started companies to commercialize them and produce them. As the production of these items became more routinized, the locus of production has moved to lower-cost venues, first states and then countries. Sometimes, as in auto manufacturing, that industrial migration takes generations. More recently, it has taken only years.
Therein lies one of the reasons the US economy is no longer invincible: The flattening of the globe (to use Thomas Friedman’s metaphor) has taken place at a magnitudinally faster pace in recent years than in previous decades. If we don’t innovate constantly, we stand to lose much more than we’ve lost historically, as previous innovations move offshore at an accelerating pace.
Encouragement of innovation isn’t hard, as compared to other government initiatives. Innovation is what the private sector does, and usually for government, the best policy “answer” is to leave innovation alone. Of course there are exceptions — other ThinkOOB postings have talked of the importance of ensuring that new technologies in alterative energy enjoy a “level playing field” rather than competing against fossil fuels, which enjoy a substantial hidden subsidy. All the direct government subsidies alternative energy companies lobby for, don’t come close to offsetting that hidden subsidy.
For local governments intent on intervening to encourage new business, managing this innovation economy would be facilitated by knowing how to measure it. There are a myriad of ways to measure innovation but as of now, none which directly account for the impact of innovation on the economy as a whole as measured by total jobs created by innovation as a whole.
We propose a new index, which tallies the number/proportion of people employed by companies which did not exist one year, five years, and ten years earlier. This simple yardstick would allow states and municipalities to see how they are doing in this critical sector.
There are several reasons this would be a valuable index. First, where states and local governments are using taxpayer-financed dollars to subsidize start-up companies, bringing the benefits statement down to the level of the individual person can help “sell” the concept of the subsidy. (Whether such a subsidy is or is not a good idea in specific situations, is not our call.)
Second, the interstate and intercity comparison itself would shine a bright light on states’ and cities’ abilities to incubate new business. While not all new businesses would be technology businesses, and vice-versa, the composition of the new businesses is not that relevant. Both new business startups as a whole and technology startups are good harbingers of a state’s climate for innovation, provided they grow. Just measuring the tally of new businesses masks how fast they have grown. Looking at employment figures in new business would be a much more important measurement.
Policymakers would have a field day determining what factors encourage not just business startups (they can do that with today’s data), but rather what factors encourage new business growth. New business startups themselves are often driven by layoffs in existing businesses, and are predominantly sole proprietors in personal service businesses and don’t generate growth, so startups by themselves can be a misleading statistic. Growth of those startups is the critical factor in creating an innovation economy…and the best way of measuring the economic significance of that growth is measuring the percentage of the workforce employed by those startups.
Massachusetts would no doubt finish first in this measure, probably by a considerable margin. We’d guess that 20% of the private-sector workforce works for companies not in existence ten years ago. Other states might study why, despite high housing costs, high taxes, and the lack of a state policy to specifically encourage new business, Massachusetts is so successful. Curiously, most of its neighboring states are notably unsuccessful.
Third, as a result of the bright light, and the focus on learning what works, the entire economy would become more innovation-oriented. No specific government intervention in the marketplace is needed. People manage what is measured. The most effective and least intrusive government policy in this area could be simply to measure and then let the measurements themselves guide the public and private sectors from there.
Tags: encouraging innovation, innovation economy, innovation measurement, measuring innovation
November 25th, 2008 at 6:15 pm
I really like all of your postings. You read them and say “why aren’t we already doing this?” This is perfect example. Why wouldn’t we do this?
November 30th, 2008 at 9:00 am
There is something called the “New Economy Index” which tries to meaure what you are describing, but with much more complexity. It seems like a thoughtful index but due to its complexity it is only compiled every 5 years. Yours could be done every year and would be much more understandable to the lay person. A really good idea
December 4th, 2008 at 10:48 am
i am familair with the New Economy Index. It is probably very accurate if in nothing else, in predicting which states Obama would win — he won all the “new economy” states and lost many of the old ones. but this is a one-stop shop. This could be done every year. This could be easily updated and publicized every time it comes out.
December 28th, 2008 at 8:54 am
One of the things which is fun on this site is to read the Globe’s usual gang of idiots who write their op-eds and see how stupid their ideas are as compared to the ones posted here. Today they completely missed the boat again, on how to brand New England’s innovation economy. Never occurred to them that first you have to prove that there IS an innovation economy in a way the average person would undertand
April 4th, 2009 at 7:36 am
The problem isn’t a lack of an innovation index — it’s that there are too many innovation indexes. many of them are statewide or published way after the fact.