How Innovative Are Indiana’s Metro Areas?
In the previous edition of InContext, we presented a new tool for evaluating innovation on a regional basis (see Measuring Regional Capacity for Innovation). This web-based tool was designed for economic development practitioners who are interested in measuring a region’s innovative capacity and leveraging that capacity to promote economic growth.1 This article uses Indiana metros as a case study for using the Innovation Index to explore innovation capacity and innovative activity.
Why Is Innovation Important?
Innovation is a critical capability for regional economies. The innovation index provides some perspective on how well a regional economy translates innovative capacity into prosperity. Innovation turns knowledge into useful products and services. It is fundamental for building prosperity today and in the future. Undifferentiated commodities, such as soybeans, and routine work, such as data entry, will tend to go to the lowest bidder or the cheapest labor—here or abroad. However, when regions innovate, low-value added commodities, such as soybeans, can become higher-value added products like crayons and candles. One of the most important keys to a strong economy is continuous innovation. Having the ability to create new ideas, products and services is a critical element in economic development at the local, regional and state levels.
Until now, economic development practitioners had no practical way to measure the innovation capacity of their local or regional economy. This innovation index represents a breakthrough in regional economic analysis. For the first time, practitioners can examine the capacity of their economy to support innovative companies relative to the nation or other regions. Moreover, users can design their own region by deciding which counties to include in their analysis.
Thus, this tool provides the hard data to develop data-driven development strategies. To be successful with a regional strategy, local leaders face a number of challenges: designing a process of collaboration, defining the practical boundaries of the region, establishing a governance process, defining a common vision, creating shared regional initiatives, making collective investment decisions, agreeing on clear outcomes and metrics, and determining how to evaluate and adjust. Leaders who have access to critical information are able to make better decisions more quickly.
The innovation index lets the practitioner explore innovation in the region by guiding questions and conversations about the region’s performance. The data help to focus discussions among regional stakeholders. Generally, the tool provides information about how economic development practitioners and their colleagues in private industry, at universities and those holding public office can improve their region’s innovation capacity. An important goal of creating a durable development strategy is to align, link and focus the region’s human energy and resources.
Case Study: Indiana Metros
One application of the innovation index is to guide conversations about a region's strengths and weaknesses, and benchmark performance against other regions in the state. We present Indiana metros to show how an individual might begin the process of collecting and using the data.
The first impression one gets when looking at Indiana’s innovation indexes is that, generally speaking, the Hoosier state isn’t up to par. Most of the state metros are below the national average. However, as seen in Figure 1, Indianapolis-Carmel and Columbus score above 100 on the Innovation Index, exceeding the U.S. average (which is set at 100). At the opposite end of the scale, the three lowest overall scores can be found in northern Indiana: Michigan City, Gary and Elkhart-Goshen.
Figure 1 : Innovation Index Scores by Indiana Metro Area
Note: This article only looks at metros whose central city is within the state, thus excluding Louisville and Cincinnati. However, for the curious, the innovation scores for those metro areas were 83.5 and 102.8, respectively.
Source: Indiana Business Research Center
The overall index score is derived from 23 indicators that are grouped into the four sub-indexes described below.2 While Indianapolis-Carmel is the only Indiana metro to exceed the U.S. average on all four sub-indexes, it does not actually take the top spot in any of the individual sub-indexes.
Human Capital: This sub-index suggests the extent to which a county’s population and labor force are able to engage in innovative activities. Regions with high levels of human capital are those with enhanced knowledge that can be measured by high educational attainment, growth in young adult age brackets of the workforce (signifying attractiveness to younger generations of workers), and a sizeable number of innovation-related occupations and jobs relative to the overall labor force. The Bloomington metro scores highest on this measure, due largely to the presence of Indiana University. Elkhart-Goshen ranks lowest.
Economic Dynamics: This sub-index measures local business conditions and resources available to entrepreneurs and businesses. Targeted resources such as research and development funds are input flows that encourage innovation close to home, or that, if not present, can limit innovative activity. The Columbus area ranks highest on this measure, while Bloomington ranks lowest.
Productivity and Employment: This sub-index describes economic growth, regional desirability or direct outcomes of innovative activity. Variables in this index suggest the extent to which local and regional economies are thriving and attracting workers seeking particular jobs. The Kokomo metro ranks highest on this measure, while Terre Haute is at the low end of the spectrum.
Economic Well-Being: This sub-index considers the fact that innovative economies improve economic well-being because residents earn more and have a higher standard of living. Decreasing poverty rates, increasing employment, in-migration of new residents and improvements in personal income signal a more desirable location to live and point to an increase in economic well-being. Evansville ranks first among Indiana metros on this measure, while Muncie ranks last.
There is no perfect combination of factors that define an innovative region, but an innovative region could be expected to perform at or better than the nation in at least one category. Half of the 14 metros in the state meet this standard (see Table 1).
Table 1 : Innovation Index and Sub-Index Scores for Indiana Metros
|Metro Area||Innovation Index||Human Capital||Economic Dynamics||Productivity and Employment||Economic Well Being|
|Michigan City-La Porte||77.6||74.3||73.6||80.6||90.7|
Source: Indiana Business Research Center
Which Indicators Matter Most?
In order to address the question, it would be helpful to quickly define innovation and offer a measure for innovation outcomes. In short, innovation puts ideas into action with the result of increasing compensation and profits.3 From a business perspective, innovation only makes sense if it increases profits. Innovation also increases productivity and, typically, as productivity increases, so do wages. Therefore, we use growth in GDP per worker, which includes both wages and profits, as a way to measure innovation results.
Based on statistical analysis, we found that four measures appear to matter most, or, in statistical language, have a positive and significant relationship to innovation:4
- Change in high-tech employment share
- Average small establishments per 10,000 workers
- Percent of population, ages 25-64, with some college or an associate’s degree
- Population growth rate for ages 25-44
Every metro in the state scored above the U.S. average on at least one of these four variables. Interestingly enough, the Gary metro, which scored quite low on the overall Innovation Index, scores slightly above the U.S. average on three of these four indicators.
Virtually all of the state’s metros fared well regarding high-tech employment change (though admittedly most were working from a relatively low base to begin with). Fewer metros compared favorably to the United States when it came to the small establishments per worker ratio.
The dilemma every regional leadership team must resolve is how to direct limited resources that will produce the desired outcomes for the region in the long-term. This is no small feat, since the leadership team must weigh the likely returns with associated risks and returns (as well as questions of returns for whom). Hard data, whether the innovation index or other means to assess a region’s capabilities, help regional leaders focus the strategic dialogue on the issues that matter. One might say that the quality of the information drives the quality of decisions.
The capstone in successful regional collaboration is reaching agreement on the region’s strategic priorities. The regional team explores the region’s assets, strengths and weaknesses and identifies a range of strategic opportunities and threats. Implementing the strategic priorities will leverage the region’s existing economic strengths, shore up weaknesses and direct the region’s economy into higher pay-off activities.
A region’s performance in terms of the innovation index, and the data components that make it up, can potentially result in some interesting discussions. One might ask why, with the state’s flagship university, doesn’t the Bloomington metro have a higher innovation score? One might conclude that the Bloomington metro isn’t converting its intellectual and human capital into new products, services, income and jobs.
Digging deeper into the data raises some questions about Kokomo. While it is well below the national average on the higher-level indexes, it scores remarkably well in patents—a classic measure of innovation outcomes. The remaining outcome measures seem to indicate that this fertile ground for patent creation is not generating high levels of profits and compensation. Or, it may mean that, with the respectable growth in high-tech employment, one may see prosperity start to rebuild in the city. On the other hand, that fact that net migration is below the national average and that the young adult population measure is also below the national average may indicate that the brainpower creating the patents is not actually living in Kokomo.
These two examples may represent a phenomenon in Indiana as a whole—the Hoosier state isn’t taking advantage of its brainpower. The “state context” sub-index present data which are only available on a state level. Indiana does well in terms of science and engineering graduates (scoring a 107), yet many peer states do better in terms of indicators of economic progress. Again, the index may shed some light. The vast majority of the metros do poorly in terms of venture capital and research and development. Remove Eli Lilly from the Indianapolis equation, and, one speculates, Indianapolis would also lag the country. Further digging on why Indiana falls short on the venture capital front may spawn some interesting dialogue among businesses and government policymakers about how to revitalize new business and job creation.
We have provided a brief overview about how economic development practitioners can use the new innovation index tool and, using the innovation indexes of Indiana metro areas as examples, how practitioners can start the strategic process of identifying a region’s strengths, weaknesses, opportunities and threats. With focused energy and insight, Indiana can recapture its lost ground.
- The Innovation Index is available at www.statsamerica.org/innovation. For more background on the topic, see the article “Measuring Regional Capacity for Innovation” in the January-February issue of InContext. The Innovation Index was developed as part of a recent study conducted for the U.S. Economic Development Administration and done in collaboration with Purdue Center for Regional Development, Strategic Development Group,Inc., the Rural Policy Research Institute, and Economic Modeling Specialists, Inc.
- A state context sub-index is also provided that includes indicators only available at the state level, but it is not used to calculate the overall index score.
- The vast majority of value added is comprised of compensation and profits. In economics, value added refers to the returns to the factors of production—primarily labor and capital—that increase the value of a product and corresponds to the incomes received by labor and the owners of capital.
- In addition, the change in broadband density variable proved to be statistically significant in a model that focused on a smaller time span (2002-2007).
Timothy F. Slaper, Ph.D.
Director of Economic Analysis, Indiana Business Research Center, Indiana University's Kelley School of Business
Geodemographic Analyst, Indiana Business Research Center, Indiana University's Kelley School of Business