Bacon Bytes

James A. Bacon



The Intangible Economy

Virginia ranks well in the Milken Institute’s comparison of states’ potential for technology-led growth. But the Old Dominion still has weaknesses to overcome.


 

Amidst all the budget gloom in the state capital, there’s not much for Virginians to be cheerful about. But take heart, there is good news: the Old Dominion ranks 5th in the country among the states as best positioned to succeed in the technology-

intensive information age, according to a recent report issued by the Milken Institute, “State Technology and Science Index: Comparing and Contrasting California.”

 

The Commonwealth’s strengths include the presence of a powerful information-technology industry cluster, a deep pool of science and technology workers and a high level of federal R&D funding.

 

Virginians should be encouraged by these strengths. But the report also raises a number of warning flags. Mediocrity in a number of areas -- SAT scores and the level of university R&D activity in particular – suggest that the state’s high standing is vulnerable. Also, the study doesn’t address disparities between regions within states. What the study doesn't say: Virginia’s indicators are pulled up by Northern Virginia, a world-class technology center. The situation doesn’t look as bright for the rest of the state.

 

The Milken Institute created an index of the technological and scientific assets that drive economic development in the 21st century. According to the Milken methodology, Massachusetts is best prepared to prosper in a technology-intensive future, followed by Colorado, California and Maryland. Virginia was the only Southeastern state to be ranked in the Top 10.

 

M.I. Science & Technology Index (2001)
      Rank  Score 

Massachusetts 

   1 84.9
Colorado     2 80.58
California     3 80.37
Maryland     4 77.86
Virginia     5 73.33
Washington     6 71.81
New Jersey     7 69.95
Connecticut     8 68.58
Utah     9 68.26
Minnesota     10 65.87
Delaware     11 65.54
New York     12 64.54
New Hampshire     13 63.44
Texas     14 60.35
Georgia     15 60.16
Pennsylvania     16 59.82
North Carolina     17 58.91
Arizona     18 58.6
Illinois     19 58.38
New Mexico     20 57.89
Rhode Island     21 57.3
Kansas     22 56.9
Oregon     23 55.54
Michigan     24 54.52
Wisconsin     25 53.74
Idaho     26 51.01
Ohio     27 49.24
Missouri     28 47.49
Florida     29 46.47
Indiana     30 46.09
Vermont     31 46.06
Nebraska     32 44.97
Alabama     33 44.97
Montana     34 44.14
Iowa     35 42.54
Maine     36 40.53
Oklahoma     37 40.29
Wyoming     38 39.53
Alaska     39 39.53
Tennessee     40 39.46
South Carolina     41 38.98
Nevada     42 38.61
Hawaii     43 33.98
Louisiana     44 32.45
North Dakota     45 31.72
Kentucky     46 31.12
South Dakota     47 30.5
West Virginia     48 30.17
Mississippi     49 28.73
Arkansas     50 22.8
         52.17

 

“The elements that make a state or regional economy vibrant and prosperous today are fundamentally different from those in the past,” write the authors, Ross DeVol, Robb Koepp and Frank Fogelbach. “Some states have been slow to recognize these changes or to make the required transformation to participate fully. States that don’t alter course quickly will leave their economies and citizens ill prepared and potentially devastated in the future.”

 

According to “old economy” logic, the factors that determined a region’s success were proximity to raw materials and transportation infrastructure, low land and labor costs, and low taxes – in other words, the factors that drove the development of traditional manufacturing enterprises. Those rules don’t apply to "new economy" businesses anymore nor, for that matter, even to technology-intensive manufacturing.

 

Perhaps “new economy” isn’t the best phrase to use, the authors note, tainted as it is by the dot.com crash. A better phrase, they suggest, is the “intangible economy.” This better describes the idea that value has shifted from tangible assets – bricks and mortar – to intangible assets such as patents, copyrights, design, customer relationships and brand value. In such an economy, companies that create new technology are key players, as are firms that deploy it in innovative ways to transform traditional industries.

 

The economics of the new, intangible economy suggest that the assets driving economic development are research-and-development institutions, human capital, and the institutions that support entrepreneurial creativity. States that succeed in technology and entrepreneurial-based growth will prosper; those that fail to make the transition will falter economically.

 

To create benchmarks to track the states’ transition to the intangible economy, the Milken Institute devised measures for R&D inputs, risk capital, human capital, technology and science workforce, and industry concentration and dynamism.

 

R&D Inputs

 

The U.S. commitment to R&D – which exceeds that of Japan, Germany, France, the United Kingdom and Italy combined – is the fount of economic progress. In the intangible economy, innovation, investment and growth concentrate where technological innovation occurs. To prosper, states must stimulate the growth of R&D institutions, whether in their universities, in federal labs or in private research facilities. Simply having prestigious research institutions is no guarantee of growth, however; other resources must be in place to commercialize technology in the local economy.

 

R&D inputs are an area of relative weakness for Virginia. The Old Dominion ranks third in the nation for federal R&D dollars invested per capita, but it doesn’t make the cut for either industry or academic research. Ranked by industry R&D, Virginia is a second-tier state (out of four tiers); ranked by academic R&D, it is a third-tier state.

 

Broken down by type of R&D, Virginia does best in engineering and environmental sciences, where it cracks the “second tier” ranking. But it’s strictly third tier for natural sciences, life sciences and math/computer sciences.

 

Risk Capital and Infrastructure

 

Entrepreneurs are the change agents of capitalism – they see the potential in new technologies and apply them to the business world. Successful regional economies are marked by high numbers of entrepreneurs and strong supporting institutions. Of those institutions, the most critical is risk capital. Virginia scored fairly well by this measure, ranking 10th overall in the Milken Institute’s composite index for this category. Massachusetts, California and New York – no surprise – were tops.

 

Virginia ranked fairly well by various measures of venture capital funding, but it failed to make the top 10 in the number of incubators, the rate of new business formations or the number of patents granted per 100,000 population. The state wasn’t a top performer in the volume of IPO (initial public offering) proceeds either.

 

Human Capital Investment

 

In the tangible economy of the past, labor was regarded as a cost to be minimized. Today, a company’s employees – along with their knowledge, skills, experience, relationships and ability to innovate – represent the tangible economy’s greatest asset. To an extent unimaginable a half century ago, brains substitute for physical resources in the production of goods and services.

 

In the knowledge economy, geography matters more than ever – not for proximity to raw materials or transportation facilities but for the ability to attract the scientists, engineers, entrepreneurs and highly skilled professionals who drive the pace of innovation. Despite certain strengths in this arena, Virginia does not make the composite Top 10 for human capital. Like its neighbor to the south, North Carolina , it is a second-tier state. It’s not much consolation that all other Southeastern states rank even lower.

 

Virginia ranks well in the percentage of population (25+) with a B.A. degree (it’s 6th in the nation) and percentage of the population (25+) with advanced degrees (5th nationally). But the Old Dominion scores in the bottom tier with the percentage of the population possessing a Ph.D. Also, verbal and math SAT scores rank in the 3rd tier. State appropriations per capita for higher education, a source of tremendous concern to Virginia policy makers, rank Virginia in the 2nd tier of all states. On the plus side, Virginia ranked 5th in the country for the percentage increase in higher ed funding between 2000 and 2001.

 

Technology and Science Workforce

 

While Virginia may not be a standout for investment in educational achievement, it does rank well – 4th nationally -- in those specific occupations most associated with technological achievement. Scientists, engineers and other skilled technicians are the new workforce elite. Comprising only five percent of the total workforce, they contribute disproportionately to economic growth.

 

Virginia has the third greatest concentration of computer and information scientists as a percentage of he workforce, trailing only Massachusetts and Colorado; seventh in engineers; and ninth in life and physical scientists.

 

“For state and local economic development,” states the study, “the lesson is this: The number of scientists, engineers, physicists, systems engineers and other creative technical workers that states train and retain, and attract from other locations, will largely shape their future development.”

 

Technology Concentration and Dynamism

 

Technology companies tend to experience superior growth when they are part of a “cluster” of similar companies than if they exist in isolation. “The paradox of the global economy,” states the Milken report, “is that enduring competitive advantages lie in location-specific competencies – knowledge, workforce skills, customer and supplier relationships, entrepreneurial infrastructure, management practices, the motivations and the quality-of-place attributes that allow firms to succeed. … A cluster of interdependent, linked firms and institutions represents a collaborative organization form that offers its members advantages in efficiency, effectiveness and flexibility.”

 

Virginia ranked 1st in the nation for technology concentration, based largely on two factors: the percentage of payroll in high-tech industries and the number of Inc 500 companies (per 10,000 companies) located in the state. Virginia also scored in the top 10 for the number of new companies formed in high-technology industries.

 

Conclusion

 

According to the authors, the factors in the State Technology and Science Index accounts for 75 percent of the variation in per capita income of the working-age population across the 50 states. Of the five broad factors, the most important was Human Capital Investment.

 

The lesson for Virginia policy makers is this: The economy has changed, and the drivers of economic development have changed along with it. Virginia state government tracks two metrics: jobs and investment generated through the expansion or relocation of corporate facilities – measures reflective of the old, “tangible” economy. If Virginia wants to prosper in the “intangible economy,” we had better start tracking measures of the intangible economy. Otherwise, we’re flying blind.

 

The Milken Institute measures are a good place to start.

 

-- Sept. 23, 2002

 

 

 

 

 

 

 

About Jim Bacon

 

Phone: (804) 918-6199
Email: jabacon@bacons-

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