States step up push to lure innovators and investors

As economic development schemes go, hiring about 50 "eminent scholars" may sound modest. But in Georgia, that move is bearing fruit that may end up being more important than the peaches for which the state is known.

One example: Atlanta is home to high-tech company Lancope because a state program lured computer scientist John Copeland to the Georgia Institute of Technology. The seven-year-old company does not employ hundreds of people yet, but it does put the region at the forefront of a budding field of guarding computer networks by tracking user behavior.

Georgia's effort symbolizes an emerging focus by state governments on the economics of innovation. From Indiana to Arizona, a similar notion is taking root: in a competitive and fast-changing world, local prosperity depends on having strategies in place to stay at the forefront of new industries and ideas.

Some states, like Georgia, have been in this game for years, and local leaders have long sought to nurture new jobs, in part by forging links between universities and industry. But experts on economic development say governors are focusing on this issue with a new intensity (innovation is the theme of this year's annual meeting of governors, which began Saturday in Washington and runs through Tuesday).

"They've locked onto innovation as the key strategy for moving states into the future," says David Audretsch, director of the Institute for Development Strategies at Indiana University in Bloomington. "I don't think it's superficial."

Several forces are driving the trend.

The rise of China and India in recent years, like Japan's export success in the 1980s, has fanned concerns about America's ability to maintain its standard of living. It's not just about the loss of blue-collar jobs. It is also the worry that the emergent powers could soon compete with the US for the highest-skilled jobs as well.

Second, European nations are trying to ramp up their own innovation economies. They have an eye on the same threats from Asia, but generally lag behind the US in entrepreneurial activity.

Third, states want to play a bigger role alongside corporations and federal research programs. They aim to set policies that will welcome top talent, target industries that are a good fit for their region, and support new businesses often tied to the state's research universities.

"Nobody wants to base their state strategy on low-cost services," Dr. Audretsch says. "Every state makes massive investments [in] higher education.... There's this big potential that's sitting there. They want to get a harvest out of it."

Despite the competitive pressures, one region's success doesn't have to come at another's expense, he says. By its nature, a knowledge-based economy should spawn new industries, not simply a fight over the ones that exist now.

Some economists question whether state policy has much of a role to play in this process. After all, the federal government is likely to remain the big funder of basic research, and large corporations will continue to expand research and development spending, as well as find ways to turn this work into new products.

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.

"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.