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