Three Decades of Regional Innovation

Innovation is the principal source of economic growth. Novel and useful inventions, as important and often patented embodiments of innovation, come from collaborative research activity in often clustered networks of universities, educated workers, and tech-industry workers.

That is the basic message of a Brookings report published today, “Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas,” that I co-authored with Mark Muro, José Lobo, and Deborah Strumsky.

The analysis uses a new database of digitized patent records from 1975 to 2012 and other data to show that metro areas with more patents have higher levels of productivity 10 years later, using regression analysis to control for other factors. It is a big effect akin to having a broadly educated workforce.

Consider a few examples. In 1980, the average worker in San Jose produced 10 percent less value than the average U.S. worker. After years of innovation and patenting, San Jose caught up in 1997, and by 2012, the average worker in San Jose was 54 percent more productive than the average U.S. worker; and the San Jose economy is generating 15 times more patents per year than it did in 1980,  more than any other metropolitan area.

A similar story can be told for metro areas like Boston; Durham, North Carolina; Austin, Texas; Manchester, New Hampshire; and Portland, Oregon. Only recently, productivity in these metro areas was lower than the national average; now, it is higher after years of strong patenting performance. Many metro areas with weak patent growth or output have seen their productivity measures stagnate or even fall relative to the national average—including Las Vegas, Denver, Phoenix, Philadelphia, Detroit, and Pittsburgh.

Admittedly, these conclusions are not particularly radical. Innovation is linked to growth in accepted macroeconomic theory from scholars like Paul Romer, Chad Jones, and Daron Acemoglu. Likewise, political speeches from both parties acknowledge its importance; and yet, there seems to be a lot of confusion about who does it: “job creators,” (anyone who hires someone), innovators, or inventors? Patents provide clarity by concentrating on inventions in R&D intensive industries, of the sort that economic historians have identified as the most important in driving economic growth.

Yet, for all the well-established logic and empirical evidence behind the theory that innovation is the principal source of growth, it is remarkably at odds with much of economic policy in recent years. Perhaps, this is one reason why the United States ranks just 9th globally on patents per capita, despite its many assets. Even as R&D has become more complicated and expensive, federal R&D spending as a share of GDP has fallen from an average of 1.8 percent in the 1960s to 0.8 percent in the 2000s. The recovery bill helped by channeling $14.4 billion to R&D (which was less than 2 percent of total recovery spending and one fifth of the money spent on infrastructure and transportation), but this boost was only temporary. Now, the House Republican Party budget plan offers to “continue” funding basic R&D funding but explicitly calls for cuts to applied and development R&D, which comprise two-thirds of federal R&D spending. Meanwhile, the federal government is slated to spend $1.6 trillion from 2013-2017 on tax expenditures subsidizing  two of the least productive and innovative sectors of the economy: housing and health care—through the mortgage interest deduction and the tax exclusion for employer-provided health care.

State and local governments have also been persuaded to pursue development strategies that ignore innovation, or explicitly undermine it—like zoning policies that isolate poor kids from good public schools. The most catchy non-innovation strategy in recent years has been “amenity” driven growth. After observing the rapid population growth of low-cost (and low-patenting) and lightly zoned Sun Belt states in recent decades, urban economists concluded that regional growth was driven by consumption and amenities, rather than innovation. Accordingly, public investments focused on attracting migrants and inducing people and businesses to spend more money on experiences, rather than developing their skills or ideas. Such projects are not even close to providing net economic benefits to taxpayers, according to empirical research on stadiums and convention centers.

More fundamentally, the Great Recession revealed the weak endurance of amenity-fueled growth. For many metropolitan areas, especially in the Southwest, Florida, and inner California, the chief export industry was real estate and construction, which, of course, is only an export in so far as new residents bring themselves or their money to the area and is almost never a source of productivity growth. Meanwhile, five of the ten most patent intensive states in 2012 are in the “amenity” poor Northeast.

Pro-innovation policy alternatives exist, as my colleagues Bruce Katz and Mark Muro have outlined in terms of a cluster strategy. These efforts should not entail showering public dollars on companies to relocate or otherwise internalizing what are rightly the private costs of production (including the fixed costs of a stadium). Instead, regional public policy should internalize the costs of public goods that generate wealth, rather than merely transfer it. Novel and useful ideas are public goods, even when sheltered from direct copying for profit by a patent. Human capital is a public good, so are well-functioning financial markets that allocate money to its most useful channel. The public sector has a role to play in all of these, and in some places the intervention needs to be more ambitious and transformative than in others, but the goal of public spending should be clear: elevate innovative capacity, not consumer amenities, which will follow from prosperity.

In my next two blog posts, I will examine 1) the role of research universities in invention and 2) how to reform the patent system which has come under considerable criticism in recent years.