SOURCE: Kauffman Foundation

November 18, 2008 10:36 ET

Massachusetts, Washington, Maryland, Delaware and New Jersey Are Top Five States Advancing Toward New Economy, Says Kauffman Foundation Report

States Face New Imperative to Turn to Global, Entrepreneurial and Innovation-Based "New Economy" to Boost Competitiveness

WASHINGTON, DC--(Marketwire - November 18, 2008) - Five states -- Massachusetts, Washington, Maryland, Delaware and New Jersey -- are leading the United States' transformation into a global, entrepreneurial and knowledge- and innovation-based New Economy, according to "The 2008 State New Economy Index," released today by the Ewing Marion Kauffman Foundation and the Information Technology and Innovation Foundation (ITIF). The report is being released during Global Entrepreneurship Week, an initiative to inspire young people around the world to embrace imagination, innovation and creativity.

"Global Entrepreneurship Week celebrates the New Economy attributes that are measured in this report," said Robert Litan, vice president of Research & Policy at the Kauffman Foundation. "The New Economy is creating profound, irreversible changes in the U.S. economic structure at a pace we would not have imagined even a decade ago. Innovators in the United States -- and worldwide -- are increasingly investing in resources to compete based on this new reality."

Mississippi and West Virginia ranked lowest among the states in making the transition to the New Economy. The other lowest-scoring states include, in reverse order, Arkansas, Alabama and Wyoming.

Regionally, the New Economy has taken the strongest hold in the Northeast, mid-Atlantic, Mountain West and Pacific regions; 14 of the top 20 states are in these four regions. In contrast, 16 of the 20 lowest-ranking states are in the Midwest, Great Plains and Southern regions.

The State New Economy Index measures states' economic structures. Rather than measuring state economic performance or state economic policies, the Index focuses more narrowly on a single question: To what degree does the structure of state economies match the ideal structure of the New Economy?

The Index builds on the 1999, 2002 and 2007 reports, using 29 indicators to rank each state on the extent to which its economy is structured and operates to effectively compete nationally and globally. It divides the indicators into five categories that best capture what is new about the New Economy: knowledge jobs, globalization, economic dynamism, transformation to a digital economy and technological innovation capacity.

The principal driver of the New Economy, according to the Index, is the information technology revolution that, since the mid-1990s, has driven increased productivity and transformed virtually all industries. This "IT engine" is unlikely to slow down anytime soon. For the foreseeable future, the most promising New Economy advances will relate to a state's ability to use information more effectively.

"These and other opportunities and challenges mean that, to succeed in the New Economy, states face a new imperative to boost the competitiveness of their economies -- not just relative to each other, but to other nations," said Dr. Robert D. Atkinson, president of the Information Technology and Innovation Foundation and primary author of the Index. "If they are going to meet the economic challenges of the future, states will need to overhaul their familiar approaches to economic development."

States at the top of the ranking tend to have a high concentration of managers, professionals and college-educated residents working in "knowledge jobs" -- those that require at least a two-year degree. With only a few exceptions, manufacturers in these top-ranking states generally are more geared toward global markets, both in terms of export orientation and the amount of foreign direct investments.

All the states at the top of the ranking -- even those that are not growing rapidly in employment -- also show above-average levels of entrepreneurship. Most are at the forefront of the information technology and Internet revolutions, with a large share of their institutions and residents embracing the digital economy. Most have a solid innovation infrastructure that fosters and supports technological innovation, and many have high levels of domestic and foreign immigration of highly mobile, highly skilled knowledge workers coupled with a good quality of life.

While lower-ranking states face challenges, they also can take advantage of new opportunities. The information technology revolution makes it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Moreover, notwithstanding the recent decline in housing prices, metropolitan areas in many of the top states suffer from high costs and near-gridlock on their roads. Both factors may make locating in less-congested metros, many in lower-ranking states, more attractive.

In addition to 2008, Massachusetts topped the 1999, 2002 and 2007 State Index lists. Washington, which ranked fourth in 2007 and second in 2002, has moved back to second place, scoring high due to its strength in software and aviation. Maryland, with its high concentration of knowledge workers, maintains the third-place rank it held in 2007.

Between 2007 and 2008, most states and the United States as a whole made sustained progress toward the New Economy. Of the 23 indicators that were comparable between 2008 and 2007, overall the United States increased on 16 and decreased on seven, for a net increase of nine indicators.

Among the states, only 11 regressed, and 36 increased. Of the decliners, Mississippi led the way, falling in twice as many indicators as it increased, while Wyoming and Indiana also fell (a net of -6 and -5, respectively). In contrast, many more states saw significant increases in movement to a New Economy. Nine saw at least twice as many indicators increasing as decreasing, with Arizona, California and North Carolina showing the most progress.

Given some states' reputations as technology-based, New Economy states, their scores seem surprising at first. For example, North Carolina and New Mexico rank 24th and 29th, respectively, in spite of the fact that the region around Research Triangle Park (in the Raleigh-Durham metro area) boasts top universities, a highly educated workforce, cutting-edge technology companies and global connections, while the Albuquerque region is home to leading national laboratories and an appealing quality of life. In both cases, however, many parts of the state outside these metropolitan regions are more rooted in the old economy. As these examples reveal, most state economies are, in fact, a composite of many regional economies that differ in the degree to which their economies are structured in accordance with New Economy factors.

With the economic indicators as a reference, the Index also outlines a detailed and innovative public policy framework of "best practices" that state officials can use as a guide to transform their economies and ensure rising standards of living for their residents.

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies, and find alternative pathways for the commercialization of new knowledge and technologies. It also works to prepare students to be innovators, entrepreneurs and skilled workers in the 21st century economy through initiatives designed to improve learning in math, engineering, science and technology. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo., and has more than $2.4 billion in assets.

About ITIF

The Information Technology and Innovation Foundation is a non-profit, nonpartisan public policy think tank committed to articulating and advancing a pro-productivity and pro-innovation public policy agenda internationally, in Washington and the states. Recognizing the vital role of technology in ensuring American prosperity, ITIF focuses on innovation, productivity and digital economy issues.

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