Over the past century the standard of living of an average citizen of the United States has increased by a factor of 7.1 Despite inequality in the distribution of income all citizens of the United States can afford a vastly larger and more varied set of consumption goods today than they could 100 years ago. Moreover, because of increased years of education, longer life expectancy and shorter workweeks, the amount of leisure time has increased along with consumption of material goods.
The dramatic growth of material well being that has taken place over the past century is attributable in large part to technological innovations.2 The development of internal combustion engines, computers, lasers, and a host of other technologies have contributed to the development of new products and reductions in the cost of producing existing goods and services.
At the national level sustaining the pace of innovation is important for maintaining the country’s technological and economic leadership in the world. Innovation also has more localized effects, however. The prosperity of Silicon Valley and the economic transformation of the Route-128 area outside Boston, MA are commonly attributed to concentration of high technology businesses in these regions. Other examples of innovation-based local economic development include Austin, Texas, and the Research Triangle area in North Carolina.
More systematic evidence of the importance of innovation can be found at the state level. Patents provide one measure of innovative output in a state. Figure 1 plots the relationship between state income per capita and the number of patents issued to residents of the state relative to the total state population. There is a generally positive relationship between state-level prosperity and this measure of innovative activity. Figure 2 shows that the same relationship holds in between state income levels and the level of R&D spending per capita in the state.
The connection between innovation and economic development has been accepted among Kansas policy-makers for some time. The 1987 Redwood-Krider report, for example, advocated the promotion of a diversified economic base for the state, and identified promotion of innovation as one route to this end. The state’s 2001 strategic plan went further, stating that: "An Essential element of Kansas’ economic vision is to apply new technologies in every industry, be they new economy or old economy industries." The Kansas Economic Growth Act similarly emphasized the growth of the knowledge-based economy generally and the specific importance of bioscience industry development.
Yet Kansas faces significant challenges if it is to pursue an innovation-based economic development strategy. The most significant challenge is size. Innovation is a highly concentrated activity, reflecting the strength of agglomeration economies in science and technology. Taking patents as an example, residents of just five states—California, Massachusetts, Michigan, New York and Texas—accounted for 46% of all U.S. patents even though they contained only 32% of the nation’s population.
The goal of this essay is to assess where Kansas stands relative to the nation and other benchmark states. As I show, Kansas has had some success in increasing Research and Development (R&D) spending but this has not yet had much impact on measurable aspects of business innovation. But, looking at the record so far should give policy-makers some reason for caution. Efforts at innovation-based economic development strategies will need to be realistic about their goals and sharply focused on specific objectives. Given the small size of the state, Kansas cannot afford to take a general and unfocussed approach to innovation.
Innovation cannot be directly measured. Instead it is necessary to focus on a variety of related indicators that capture one or another dimension of economic activity related to innovation. These measures include:
- R&D spending—Expenditures by industry, universities, and other organizations on research and development are an important input into the production of new innovations.
- The Science and Engineering labor force—Innovation is the result of efforts primarily by skilled workers with backgrounds in science and engineering. The number of such workers provides another measure of state innovation capacity.
- Venture Capital investments—The process of converting promising ideas into marketable products typically requires substantial financial investments. Venture capital is one important source of funds to support these efforts at an early stage. Availability of venture funds will deter-mine whether promising ideas are developed in the state or if they must be developed elsewhere.
- Small Business Innovation Research (SBIR) grants—The SBIR program, administered by the U.S. Small Business Administration is another important source of funds to develop innovations into commercially viable products.
- Patents—Not all innovations are patented, and not all patents result in commercial products. Nonetheless the number of patents provides a rough measure of the output of new innovations.
In Figure 4, R&D spending, SBIR grants, and patents are compared to the state’s share of the economic activity. Consistent with Figure 3, these data suggest that generally innovation is less important in Kansas than we would predict based just on the size of the state’s economy, with the gap being largest for SBIR funding.
Venture capital funding in Kansas is quite limited. Figure 5 compares the value of venture capital investments in Kansas with that in surrounding states over the past few years. It is apparent that the situation in Kansas is not very different from the situation in other Great Plains states, but that in general the region receives relatively little venture funding.
Figures 6 and 7 provide a long-term perspective on the current situation. In Figure 6 it appears that Kansas has been successful in expanding its share of R&D relative to the national total. The year-to-year figures are quite volatile, reflecting the small overall size of the state’s efforts. But the long-run upward trend is clearly evident. Figure 7 indicates, however, that increased R&D effort has not, so far, translated into increased levels of patenting. Between 1981 and 2001, if anything, the state’s share of patents appears to have been falling. Since 2001 there is some evidence of a reversal of this trend.
The development of innovations and their conversion into commercial products requires a high level of interaction between innovators, and between innovators and sources of funding. Face-to-face communication remains important even today in explaining complex technological ideas and in securing funding to develop these ideas. These facts account in large part for the tendency of innovative activity to concentrate in places like Silicon Valley.
Kansas cannot afford to not compete in the knowledge economy. But the state’s small size means that it can-not afford to invest in a diverse portfolio. Rather, it must focus on areas of existing strength. These strengths are likely to be particular niches within broader streams of innovation.
The state may also need to do more to increase the availability of venture funding given the concentration of the sources of these funds today, and the resulting concentration of new businesses in close proximity to the sources of funding.
1. More precisely, real per capita GDP (measured in prices of the year 2000) increased from $4,943 in 1900 to $37,232 in 2005. If anything this increase understates the improvement in the quality of life because it makes no adjustment for modern goods—antibiotics, cell phones, computers—which were not available at any price in 1900. For historical comparisons of GDP see http://eh.net/hmit/gdp/.
2. The other major contributor to economic growth is the accumulation of physical and human capital. Precisely decomposing the sources of growth between different contributors is difficult. Nonetheless, most conventional calculations attribute the majority of growth in per capita income to technological change rather than accumulation.
3. Data on employment, SBIR grants, patents, and R&D funding are reported by the National Science Foundation in state profiles that are available on-line at http://www.nsf.gov/statistics/nsf05301/. Historical data on patents are compiled by the U.S. Patent Office and can be obtained from http://www.uspto.gov/go/taf/cst_utlh.htm. Data on venture capital funding are tabulated by Price Waterhouse Coopers, and are reported on-line at http://www.pwcmoneytree.com/moneytree/index.jsp.
Joshua L. Rosenbloom is Professor of Economics and Associate Vice Provost for Research at the University of Kansas, and a Research Associate of the National Bureau of Economic Research.