Innovation and entrepreneurship are now keys to economic success, not just nationally but in the states. With an increasingly globalized economy enabling easy access to low-cost production systems in nations like China, India, and Mexico, the United States’ competitive advantage will be found in areas such as advanced, technology-based manufacturing and high-wage, knowledge-based services that other nations are unable to produce or provide as easily or as efficiently. States that thrive in this new environment will have, among other things, a well-educated workforce and a greater share of jobs based on high-level skills; strong global connections; dynamic firms and entrepreneurs; industries and individuals embracing digital technologies and strong capabilities in technological innovation.
Fortunately for Colorado, the state ranks relatively well on these factors. In fact, in the 2014 State New Economy Index (SNEI), released this week by the Information Technology and Innovation Foundation, Colorado ranked 6th of the 50 states in terms of 25 indicators designed to project a state’s ability to compete in a fast-moving, high-tech global economy, up from 7th in 2012 and 9th in 2010.
The report sees state economies as more than static entities best measured by conventional measures like gross state product, but as constantly evolving ecosystems that are driven by entrepreneurs, research and development, the adoption of new technologies, and global connections. As a result, the Index measures economic performance not in current GDP terms, but in terms of future economic strength, using indicators to predict how a state will fair in the new age of globalization, big data, knowledge-based industries, and innovation.
When assessing the rankings, it is clear to see why Colorado is often referred to as a hotbed for high-tech innovation in the middle of the country. The state ranks 5th in venture capital, 4th in initial public offerings (IPOs), 3rd in high-tech jobs, and 2nd in the education levels of the workforce. Indeed, Colorado has become a beacon for highly-educated workers looking for a high quality of life and opportunities for creativity and invention in a supportive environment.
Does ranking high on the index matter for economic growth? If all a state wants is more jobs, it doesn’t. States with low rankings create just as many jobs as states ranking high. However, if good jobs are desired, then these indicators are powerful drivers. Indeed, there is a strong positive correlation between a state’s scores on these indicators and per-capita income growth.
There is of course room for Colorado to improve its economic vitality in the New Economy (and by extension its score on SNEI). Colorado lags in areas such as foreign direct investment and the export focus of manufacturing and services, currently ranking just 37th in indicators measuring globalization. Moreover, Colorado ranks 19th in the amount of money companies invest in research and development.
To promote further innovation-based growth, Colorado should adopt and pursue policies that encourage innovation and entrepreneurship. For too long many states have sought success simply by trying to “out-cheap” their neighbors and then use that advantage to go out and convince business to move to their state. But this strategy is a losing game, given that labor costs in many developing nations are between 10 and 20 percent of U.S. costs. Rather, states should seek to put in place the best environment for attracting and retaining high-skilled knowledge workers, helping firms access technology from universities and national laboratories, investing in high-quality education systems and infrastructure, supporting a dynamic start-up ecosystem, and ensuring that the tax code supports innovative activities like R&D. With Colorado’s already strong advantages, supportive policies can make the state even more of an innovative hotbed.