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States step up push to lure innovators and investors

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Still, neither CEOs nor federal agencies have the interest of a locality at heart the way that a governor does. And while mayors share the local focus, the state is the one holding the keys to the institutions driving innovation: large universities.

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"You've got to have smart people. You've got to have research. They've got to be turned into a product, a business," says Mary Jo Waits, director of the Pew Center on the States, a research group in Washington that tracks state policies.

"Many of those things are really what I would call created assets," she says. "A lot of those things have to do with public policy."

A state can decide to train and hire talent, promote research, and create networks to connect the innovators with entrepreneurs and investors. This process can make the local economy more dynamic, say proponents of the model.

Many states have taken steps along these lines. In addition to the founding of Lancope, the Georgia Research Alliance can claim other successes such as creating clusters of medical and telecommunications activity near Atlanta.

Pennsylvania launched Keystone Innovation Zones in 2004 to encourage entrepreneurial activity. California and New Jersey aim to become hubs of stem-cell research. Some heartland states are targeting alternative energy, while Arizona wants to become a leader in "personalized medicine," Ms. Waits says.

On one level, states are competing with each other for top scientists and venture capital. But they are also building a common future.

The National Governors Association is working to pin down the best practices for states to pursue. At an Arizona meeting in December, the NGA began an "Innovation America" effort designed to promote a more competitive economy nationwide.

And states have plenty of room to tap the possibilities of innovation. According to a report last year by the Council on Competitiveness in Washington, about two-thirds of venture-capital investment in high-growth companies is located in just four areas: Silicon Valley, Southern California, and the metro areas surrounding New York and Boston.

What's needed, some say, are more networks of "angel" investors to help launch promising businesses, and more people – often outside business school – thinking seriously about entrepreneurial careers.

More broadly, the economics of innovation is about education. Rising prosperity hinges not just on new industries, but on people in all industries learning to be more productive.

Last year, researchers at the Federal Reserve Bank of Cleveland and the city's Case Western Reserve University studied various factors that might account for differences in per capita income among the 50 states. Their conclusion: Income differences are generally explained by different supplies of knowledge, as measured by patents and number of high school and college degrees.