What States Need to Foster Innovation and Economic Growth
Rhode Island’s economy is at a crossroads. While the state is recognized for having a high quality of life, (a) its economic growth is stagnant, unemployment is elevated,1 and there has been a net migration of residents out of the state over the past few decades.2
One way to understand Rhode Island’s economic challenges – and potential solutions to those challenges – is to take stock of the state’s existing strengths and weaknesses. To do this, I developed an Innovation Index ranking the state relative to its regional and national peers in eight different areas: Human Capital, Economic Capital, Business Environment, Energy, Quality of Life, Health Care, Ideas, and Prosperity.3 Each sub-index combines multiple metrics based on publicly available data from government agencies and rankings created by non-profit organizations and media outlets.
The goal of the Innovation Index is to understand Rhode Island’s potential for building an innovative, dynamic economy.4 The Organization for Economic Cooperation and Development (OECD) defines innovation as the use of information, knowledge, skills, and technology to create new or significantly improved products or services, including new organizational structures and ways of doing business.5 To compete in the 21st century, many countries are pushing innovation as the key to economic growth, in some cases developing national centers to nurture and promote innovative economies.6 Rhode Island has an opportunity to embrace this strategy at the state level, particularly as a means to foster the growth of small- and medium-sized enterprises (SMEs).
(a) Architectural Digest described Providence as “the country’s best small city,” Travel and Leisure Magazine named it “America’s Favorite City,” and ranked it the second best city for food snobs, and the website Livability ranked Providence second on its list of the country’s “ten best downtowns.”
FIG 1. RESEARCH METHODOLOGY
Fig. 2 RHODE ISLAND’S INNOVATION POTENTIAL
Roberts, Basu, and Mohan (2015)17
RHODE ISLAND'S POTENTIAL FOR INNOVATION
Rhode Island fares very poorly on two components of the Innovation Index: Economic Capital and Business Environment, where it ranks close to the bottom among all states. The Economic Capital index combines a handful of measures related to productivity growth: the strength of venture capital investments, labor productivity, and the size and growth of the state’s exports. The Business Environment index represents the cost of doing business, including taxation, regulation, and cost of living for employees.(b) These two metrics substantially shape a negative perception of Rhode Island as a challenging place to do business. A business climate that is unfriendly and lacks a rich base of investments can make a state less regionally and nationally competitive. Reshaping its business and investment climate could help Rhode Island fuel long-term economic growth.7
The state’s overall economic outlook is not entirely bleak, however, and there are key areas of strength that can be leveraged. Rhode Island does well on the Human Capital and Ideas rankings, which measure the quality of the workforce in terms of education and ability to generate ideas, respectively. Both of these measures are critical to innovation. Rhode Island’s Health Care and Energy systems also rank highly, an insight that could be used to target industries and economic development.
(b) Rhode Island consistently pops up on lists of the worst states for doing business, including in rankings by The Economist, Forbes, and CNBC.7
FIG. 3 REGIONAL RANKINGS ON KEY MEASURES OF INNOVATION
Roberts, Basu, and Mohan (2015)17
BUILDING ON EDUCATION, IDEAS, AND INNOVATION
Human capital is a key component of economic growth,8 so it is encouraging that some of the state’s strongest assets relate to education and ideas. The Human Capital Index seeks to quantify the education level of the state’s population and the amount of government investment in education. The state performs quite well on some measures, though there is room for improvement in the high school graduation rate and in higher education funding.
Tight budgets in Rhode Island have made investments in education difficult. Nonetheless, the state has increased per-student funding for K-12 education by 5.6% since 2008, a rate greater than the majority of other states.9 If this trend continues, it will likely improve Rhode Island’s competitiveness when it comes to having an educated workforce. Unfortunately, the same is not true for higher education funding, which declined by 26.3% from 2008 to 2013.10 To compete in the technologically advanced global economy, the state may want to increase its investment in higher education, particularly in the high-demand areas of science, technology, engineering, and math.
According to the Ideas Index, the labor force in Rhode Island is quite successful at generating new and innovative ideas that can drive productivity.(c) The state ranks very high when it comes to investment in research and development (R&D), spending $454 per capita on R&D across all fields, more than double the national average of $224.11 It also performs well in the number of patents produced per capita: 38.95 patents were issued per 10,000 people in Rhode Island, compared to the national average of 38.41 patents per 10,000 people.12
(c)The Northeast region tends to perform well in this area and is home to five of the top ten states in our Ideas Index.
FIG. 4 HUMAN CAPITAL IN RHODE ISLAND
Roberts, Basu, and Mohan (2015)17
Rhode Island can improve its chances of developing a rich, vibrant, and productive economy by capitalizing on its existing strengths in education and idea generation. Among the most promising opportunities is the development of special innovation districts that provide business development tools and infrastructure to support the translation of ideas and knowledge into economic development.(d) Innovation districts are “geographic areas where leading-edge anchor institutions [universities, hospitals, etc.] and companies cluster and connect with start-ups, business incubators and accelerators.” Research suggests that innovation districts are crucial to helping states operate at the forefront of emerging technology.4
There are three broad models for innovation districts.13 In the anchor plus model, a large anchor institution, usually a university or health system, drives innovation through “spin-off ” companies. Cambridge, Massachusetts has developed this type of innovation district in the Kendall Square area around MIT and Mass General Hospital. In the reimagined urban model, underutilized land is reclaimed and repurposed to build new economic enterprises. In the South Lake Union district of Seattle, for example, former warehouse and industrial spaces have been converted to a thriving high-tech hub. The last innovation district model, the urbanized science park, involves the urbanization of existing suburban or exurban research parks. The well-known Research Triangle Park in North Carolina is undergoing an effort to increase density and bring in retail, entertainment, and other amenities.
Providence has a unique opportunity to develop a regional innovation hub by combining the anchor plus and the reimagined urban models with the opening of the former Interstate 195 land. This site offers proximity to universities and major health systems, easy transit accessibility, existing options for redevelopment, and open space for new development. One potential focus of this innovation district could be leading the nation in the development of ideas and products for a green energy economy. Rhode Island ranks highly on the Energy Index, though Suchandra Basu’s research suggests that the state could expand the scope of its investments into new areas in the sector.14 Directing investment in this manner could result in both environmental and economic benefits.
(d) Successful innovation districts tend to be “physically compact, transitaccessible, and technicallywired.” They often incorporate mixed-use development that combines housing, retail, and office space.13
FIG. 5 OVERALL INNOVATION INDEX RANKINGS FOR NEW ENGLAND AND THE MID-ATLANTIC
Roberts, Basu, and Mohan (2015)17
Rhode Island could also benefit from continuing to build out its strong health care sector, working with leading local providers like Lifespan, Care New England, and Brown University Medical School to make the state a regional center for medical care and health technology innovation. As in the area of green energy, directing investment into the health care sector could have a dual benefit of both improving public health and growing the economy.
Other opportunities for improvement relate to Quality of Life and Prosperity. Rhode Island can raise its competitiveness in these areas by making housing more affordable, increasing employment, raising wages, and expanding educational opportunities for all its citizens. These are not simple tasks, but one step in the right direction might be tax credits that target specific industries and entrepreneurs, potentially in connection with innovation districts.(e) The state may also want to consider redeveloping and improving infrastructure and, in particular, creating transit hubs to serve high-growth communities and areas with large underserved populations.16
FOSTERING INNOVATION IN RHODE ISLAND
My Innovation Index suggests that Rhode Island is not, on balance, in as perilous shape as some pundits would have us believe. It has a relatively well-educated and competent workforce (Human Capital Index) that generates ideas and innovation (Ideas Index). It also has a sound health care system (Health Care Index) and energy sector (Energy Index). However, there are clear challenges, specifically a discouraging business climate (Business Environment Index) and lack of investment and productivity growth (Economic Capital Index). Furthermore, its rankings are middling when it comes to Prosperity and Quality of Life. Addressing these problem areas could be a key step in helping grow Rhode Island’s economy
(e) One example of the successful use of tax incentives to drive growth is the CORTEX innovation district in St. Louis. The project has used tax increment financing (TIF) to improve infrastructure, tax credits from the state of Missouri to develop a business incubator, and other credits to spur the development and relocation of targeted biotechnology firms to the area.15
Innovation breeds productivity, which in turn fosters prosperity. The regions that are most successful embrace innovation and productivity as the foundation of their economic development strategies.4 With this in mind, Rhode Island is positioned to make significant strides in the coming years, provided it leverages its strengths, addresses specific challenges, and acts in a targeted fashion to promote longterm economic growth.
- Neil Mehrotra (2015) "Rhode Island Unemployment: Is There Labor Market Mismatch?" Footnote, March 23.
- J. Scott Moody and William J. Felkner (2011) "‘Leaving Rhode Island’: Policy Lessons from Rhode Island’s Exodus of People and Money," Providence, RI: Ocean State Policy Research Institute. Measuring Regional Innovation: A Guidebook for Conducting Regional Innovation Assessments," Washington, DC: Council on Competitiveness.
- For more on the importance of innovation to economic growth, see Council on Competitiveness (2005) "Innovate America: National Innovation Initiative Summit and Report," Washington, DC: Council on Competitiveness.
- OECD & Eurostat (2005) "Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition," Paris, France: OECD.
- Stephen Ezell, Frank Spring, and Katarzyna Bitka (2015) "The Global Flourishing of National Innovation Foundations," Washington, DC: Information Technology and Innovation Foundation.
- More information on Rhode Island’s business climate is available in Ramesh Mohan (2015) "Good for Business: How States Can Be More Business-Friendly," Footnote, June.
- International Labour Office (2011) "A Skilled Workforce for Strong, Sustainable, and Balanced Growth: A G20 Training Strategy," Geneva, Switzerland: International Labour Organization.
- Michael Leachman and Chris Mai (2014) "Most States Still Funding Schools Less Than Before the Recession," Washington, DC: Center for Budget and Policy Priorities.
- State Higher Education Executive Officers (2014) "State Higher Education Finance, FY13," Boulder, CO.
- Author calculations based on data from the National Science Foundation
- Author calculations based on data from the U.S. Patent and Trademark Office.
- Bruce Katz and Julie Wagner (2014) "The Rise of Innovation Districts: A New Geography of Innovation in America," Washington, DC: Brookings Institute.
- Suchandra Basu (2015) "Does Cap and Trade Work? A Market-Based Approach to Energy Sustainability in Rhode Island," Footnote, June.
- Evan Binns (2012) "CORTEX Set to Unveil Next Phase of Development," St. Louis Business Journal, October 19.
- Jonathan Harris (2015) "Millennials on the Move: Attracting Young Workers Through Better Transportation," Footnote, June.
- For full details on the creation of and findings from the Innovation Index see: Joseph W. Roberts, Suchandra Basu, and Ramesh Mohan (2015) "Strategies for a Competitive Rhode Island: Assessing Innovation Potential with Emphasis on Energy and Easy of Doing Business," Providence, RI: The Rhode Island College & University Research Collaborative.
What factors influence business relocation, and in which sectors should Rhode Island compete for companies seeking a New England presence? What can we learn from examples of this success?
What non-monetary incentives could Rhode Island provide to support business relocation to the state?
Type of Research
- Responds to questions of Policy Leaders with research projects that closely align with state priorities
- Provides implications for challenging state issues