Like its politics, Pennsylvania’s innovation challenges have national implications

With closely watched races for the Senate and the governor’s office, Pennsylvania sits at the center of this year’s high-stakes midterm elections. The state’s Senate race may determine control of that chamber for the next two years, while the gubernatorial race will affect not only the state’s economic direction, but also broader issues ranging from abortion access to voting rights.

And yet, Pennsylvania’s status as an electoral bellwether can also be seen through the state’s economic performance, which in some ways reflects the nation as a whole. In short, the Keystone State displays elements of both the nation’s transitioning industrial “heartland” as well as its tech- and service-oriented “coasts.”

For much of the last year, we’ve been assessing Pennsylvania’s innovation economy to deliver a strategy designed to inform the next governor. And what we found is a state contending with a number of innovation and competitiveness issues that also affect many regions across the country.

At the broadest level, Pennsylvania, like the nation, is struggling with mediocre productivity and income growth trends. From 2012 to 2021, the state’s labor productivity grew by just 10%—a plodding compound annual growth rate (CAGR) of just 1.1%. This parallels the nation’s similarly weak 12.2% labor productivity growth during that time and 1.3% CAGR.

Likewise, Pennsylvania’s per capita income growth has been anemic, with a CAGR hovering around 2.5% from 2010 to 2020—only slightly higher than the nation’s 2.3% rate. Pennsylvania’s income growth is similar to a number of states (including Midwestern peer states Indiana and Ohio), but a far cry from leading states such as California, which saw a 3.2% CAGR during that time.

As our report stresses, one factor underlying this drift is mediocre performance in the innovation and entrepreneurial economy—which Pennsylvania epitomizes. In fact, on some indicators, Pennsylvania’s trends exemplify broader trends in multiple middling innovation states.

This drift is most visible in the state’s advanced industries. Advanced industries are the 46 manufacturing, services, and energy industries with the highest levels of R&D spending and STEM employment. These industries generate 90% of private sector R&D and 85% of patents. They also create an additional 2.2 jobs downstream on average (0.8 of which are local jobs), compared to just 0.8 downstream jobs in other industries (0.4 of which are local).

While Pennsylvania has developed nationally significant clusters in advanced industries (notably in the life sciences, computer/information services and robotics, chemicals, and plastics and rubber products), the state’s overall advanced industry growth has significantly lagged the nation as a whole. From 2010 to 2020, Pennsylvania’s advanced industries saw compound annual growth of just 0.7%—less than half the nation’s 1.5% annual rate. Many of Pennsylvania’s peer states also lagged the national average, ranging from industrial Midwestern states such as Ohio, Illinois, and Indiana to Northeastern “coastal” states such as New York and New Jersey.

Contributing to this drift is underperformance even in areas that Pennsylvanians rightly consider their state’s strengths. For example, while Pennsylvania ranks fourth in the nation for university-led R&D—including in areas where it has significant economic clusters—it performs below-average when it comes to translating that research into advanced industry employment opportunities for residents. That’s a problem many states and regions contend with.

Meanwhile, similarly weak entrepreneurial trends can be found in Pennsylvania’s innovation ecosystem (as well as many of its peer states). New tech firm startups in advanced industries—a measure of Pennsylvania’s competitiveness in the nation’s most cutting-edge high-tech industries—are lagging. Pennsylvania’s 4.9 advanced industry tech startups per 1 million residents is less than half of the nation’s rate of 11.8 startups per 1 million people, but comparable to many of its peer states. Unsurprisingly, then, Pennsylvania and several of its peer states also lag in startup job creation. Pennsylvania startups create an average of only 3.43 jobs in their first year—similar to peer states such as Ohio and Michigan, but lagging the nationwide average of 4.74 jobs per startup.

These trends both contribute to and are exacerbated by a relative lack of capital for Pennsylvania entrepreneurs. For example, award funding from the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) assistance programs remains below where it could be given the size of the state’s overall economy and its level of higher education research. At the same time, Pennsylvania has seen only modest increases in venture capital (VC) deal flow. While VC deal flow grew by 160% nationally (using a three-year rolling average) from 2009-11 to 2018-20—and by significantly more in VC hotbed states such as New York—it grew by just 98% in Pennsylvania during that time. Here, Pennsylvania is representative of several Midwestern and coastal peer states with below-average VC growth, including Ohio and New Jersey. But it lags others, including Illinois (where Chicago acts as a mini VC hotbed) and Michigan, which performs closer to the U.S. average. Moreover, Pennsylvania (reflecting national trends) saw essentially no inflation-adjusted growth in VC deal flow from 2014 to 2020.

Pennsylvania’s overall innovation challenges are exacerbated by significant geographic and demographic divides, which are representative of inequalities that exist throughout the country. While over 40% of Pennsylvania’s advanced industry jobs in lie outside the state’s largest innovation hubs (the Philadelphia, Pittsburgh, and State College metro areas), the share of advanced industry jobs in those smaller innovation communities has been in decline over the last decade. And many communities in the state, particularly those in central and northwestern Pennsylvania, saw absolute declines in advance industry jobs from 2010 to 2020.

Meanwhile, stark racial and gender divides in Pennsylvania’s innovation ecosystem underscore just how far the state—and the nation—have to go to increase equity in economic opportunity. For example, STEM education remains starkly unequal by race and gender, starting from K-12 education and extending through higher education. Female, Black, Latino or Hispanic, and Indigenous Pennsylvanians are all underrepresented among STEM degree graduates. These groups face similar challenges accessing employment in advanced industry jobs, with female, Black, and Latino or Hispanic residents seeing significant underrepresentation relative to their share of the population.

These inequalities are perhaps most stark when it comes to entrepreneurship and firm ownership. Just 19% of firms with employees in Pennsylvania have majority-female ownership (while just 17% have an equal number of male and female owners). Meanwhile, only 1% of firms with employees in the state have majority-Black ownership, and just 1% have majority-Latino or -Hispanic ownership.

When it comes to solving these complex innovation challenges, there are no silver-bullet solutions. However, we propose a set of policy themes in our Pennsylvania report to bolster innovation and help regions and states achieve balanced, equitable growth. These themes include investing in both large metro area innovation ecosystems as well as smaller communities. And in addition to bolstering overall growth and closing spatial imbalances, states like Pennsylvania must also take care to close the still-significant racial and gender gaps that exist in innovation fields, beginning in STEM education and extending to advanced industry employment, entrepreneurship, and business ownership.

Given Pennsylvania’s role as an exemplification of other states and regions nationally, solutions that work there will have relevance for communities across the U.S. In that regard, Pennsylvania should be closely watched not just for its upcoming election results, but for potential innovation policy moves in 2023 and beyond—with an eye toward solving some of the nation’s long-standing economic imbalances.