Innovation and the Wealth of Cities
Is America losing its innovative edge? If you read the business press, you'd certainly have reason to think so.
Tyler Cowen, a professor of economics at George Mason University and the author of The Great Stagnation, and Robert Gordon author of influential recent study which asks "Is US Economic Growth Over?" both argue that innovation has plateaued; that the great life-changing inventions — automobiles, airplanes, electric lights, antibiotics, refrigeration — are in the past, and that the economic effects of today's technological breakthroughs will ultimately be incremental. Venture capitalist Peter Thiel was recently quoted in The Economist declaring that innovation in America is "somewhere between dire straits and dead."
A growing group of others - including the Daily's Beast's Daniel Gross, Irving Wladawsky-Berger, former vice-president of technical strategy and innovation at IBM, W. Brian Arthur of the Santa Fe Institute, and Philip Auerswald, author of The Coming Prosperity - counter that America is poised for a new era of innovation and growth. Reviewing the current evidence, The Economist recently concluded that: "The idea that innovation and new technology have stopped driving growth is getting increasing attention. But it is not well founded." This in line with the detailed empirical research by the influential late innovation economist, Christopher Freeman, who found that innovation slows during during the highly speculative times leading up to great economic crises, only to surge forward as the crisis turns toward recovery.
Detailed evidence from which to evaluate just how dead or lively America's innovation system has been hard to come. That's why a study released today by the Brookings Institution, Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas, is eye-opening. Authored by Brookings's Jonathan Rothwell and Mark Muro, Deborah Strumsky of the University of North Carolina at Charlotte, and José Lobo of Arizona State University, the report's conclusions provide more reasons for optimism than concern.
The study tracks America's rate of innovation (measured by patenting) over the long sweep of U.S. history, from 1790 to 2011. Despite their recognized weaknesses, patents are the most commonly used measure for innovation, and the report takes great pains to make sure the patent data they use is accurate and reliable.
The graph (above from the report) outlines the broad cycles of U.S. innovation. It shows the incredible uptick in the rate of patented inventions which occurred in the late 19th and early 20th century alongside the rise of a more science and technology based capitalism powered by the growth of industrial R&D. The rate of patented innovation leveled off in the early 20th century, as the graph shows, only to decline precipitously from the Great Depression to the 1990s. But over the past several decades the rate of patenting has picked up considerably. This might seem to suggest that the rate of invention is increasing as opposed to stagnating. As the study notes:
With the onset of the Great Depression, the rate of invention plummeted from the 1930s to 1955, but there was a noticeable post-war rebound from 1956 to 1973, when the major research breakthroughs in modern information technology were first made. The decade from 1974 to 1984 saw a precipitous decline in inventive activity, but since, then, and starting in 1985, a post-industrial era of invention has begun and patent rates have steadily increased and remained high.
There was one exceptional period with respect to this current trend towards higher patenting rates. The years from 2002 to 2005 saw one of the largest four-year drops in patent per capita since the Civil War—a decline of 17 percent, compared to a 2 percent increase for the average four year period since 1870. This was the height of the investment bubble in subprime mortgages, but this drop off also reflects slowed application growth from 2001 to 2002 in the wake of the IT-bubble. Still, patent growth has been very strong since the Great Recession officially ended in 2009.
The report also notes that patent quality (measured as citations), as well as quantity, increased steadily from 1975 and 2005; and while it declined somewhat in 2006-2007, has been on the uptick once again in 2010.
That said, it's important to point out that this recent period has also seen the globalization of science and technology and of U.S. patenting. Nearly half of U.S. patents are awarded to foreign inventors. I asked Deborah Strumsky, one of the coauthors of the report and a leading international expert on patent data how the study accounted for this, and she told me that: "Our counts are similar to U.S. GDP, it is about what happens within the U.S. border regardless of the company headquarters that produces it." Adding that: "These are all US filed patents. If the inventor was living outside the U.S., then they are not included." The study and chart thus include domestic patents granted to U.S. both native- and foreign-born inventors. From where I sit, this ability of the U.S, to attract foreign companies and foreign-born inventors to its shores acts to broaden its range of innovative capabilities and bolster its technological and economic advantage overall.
The study delves deeply into the geography of innovation across U.S. metros. Like so much else in our increasingly spiky world [PDF], the landscape of American innovation is clustered, concentrated and uneven. The report ranks all 366 U.S. metro regions on patent levels and growth, finding that:
The 100 largest metro areas are home to 65 percent of the U.S. population in 2010, but they are home to for 80 percent of all U.S. inventors of granted patents since 1976 and 82 percent since 2005. Few patents are invented outside of metro areas.
Just 20 metros, accounting for roughly a third of the U.S. population, generate almost two-thirds (63 percent) of patents, and just the five most patent-intensive metro areas account for about 30 percent of total U.S. innovation.
The San Jose metro — home to Silicon Valley — leads both in terms of total patents and its rate of patenting per capita. San Francisco, New York, Los Angeles, Seattle, Boston, Chicago, San Diego, Minneapolis-St. Paul, and Detroit make up the top 10 in terms of total patents, while university towns like Burlington, Vermont; Rochester, Minnesota; Corvallis, Oregon; Boulder, Colorado; Ann Arbor, Michigan; Austin, Texas; Santa Cruz, California; and Poughkeepsie, New York (home to IBM) round out the top 10 in terms of patents per capita. The reports substantiates the view that research universities increasingly act as anchors or hubs of the innovative, knowledge-based economy.
The report finds a connection between patents and regional development (measured as economic output per worker), based on statistical regression analysis that controls for population, industry, housing prices, human capital and other metropolitan specific characteristics. The report concludes:
The results clearly show that patenting is associated with higher metropolitan area productivity. The analysis cannot rule out that the link is caused by some missing variable or reverse causality, but given the control variables and the fact that patents were lagged ten years in the analysis, the most likely explanation is that patents cause growth.
I am somewhat less sanguine. A while back, with the help of my Martin Prosperity Institute (MPI) colleagues, I ran a simple analysis of the association between the rate of patenting and productivity (measured as gross metro product per worker). This analysis uses a somewhat different time period from the more detailed Brookings study, so that may lead to differences in results. Still, I am confident the pattern is fairly consistent over time.
MPI's Michelle Hopgood
The results of that analysis are displayed on the chart above. The line on the chart shows a positive relationship, sloping slightly upward. But what's even more interesting is how metros fall across the four distinct quadrants.
There are a group of metros located in the upper right hand quadrant of the graph where high rates of innovation go together with high productivity. These are the usual suspects on the list of America's high-tech hot spots: San Jose (the Silicon Valley), San Francisco, Boston, Washington D.C., New York, Seattle, Durham-Chapel Hill (in the Research Triangle), and San Diego among others. And there are those where patenting is low and so is productivity (lower left). But there are also a quite considerable number where patenting is high but productivity low (lower right); and a fourth group where productivity is high despite low levels of patenting (upper left).
When I asked Jonathan Rothwell, one of the report's authors about this, he told me he found a modest correlation (0.3) between patents per worker and economic output per worker. But when control variables were added to account for "non-competitive, highly-regulated industries with high productivity rates like mining, oil and gas, utilities, and finance," the relationship between patents and productivity increased substantially.
Even so, my take remains that only a relatively small subset of metros have the robust innovation ecosystems that enable the to effectively turn local innovations into economic growth. In many more, the fruits of local innovation flow away to other places. To be truly effective, cities and metros need to do more than produce innovations they must also have the "absorptive capacity" to productively make use of them.
The report concludes that there is much that government can and should be doing, in the areas of education, direct investments in R&D, insuring the integrity of the patenting process (and discouraging firms that "troll" the system, buying patents so they can threaten other companies with infringement suits); and working with metropolitan and regional officials to spur the development of innovation clusters in places that are lagging.