Like her politics, Pennsylvania’s innovation challenges have national implications

With closely watched races for the Senate and governor’s office, Pennsylvania finds itself at the center of this year’s high-stakes midterm elections. The race for the state Senate could determine control of this chamber for the next two years, while the race for governor will affect not only the economic direction of the state, but also broader issues ranging from access to abortion to the right to vote.

And yet, Pennsylvania’s status as an electoral indicator can also be seen through the state’s economic performance, which in some ways reflects the nation as a whole. In short, the Keystone State displays elements of both the country’s transitioning industrial “heart” and its technology and service-oriented “coasts”.

For much of the past year, we’ve been assessing Pennsylvania’s innovation economy to come up with a strategy designed to inform the next governor. And what we found was a state struggling with a number of innovation and competitiveness issues that also affect many parts of the country.

At the broadest level, Pennsylvania, like the country, is struggling with lackluster trends in productivity and income growth. From 2012 to 2021, the state’s labor productivity grew only 10%, a laborious compound annual growth rate (CAGR) of just 1.1%. This matches the country’s low labor productivity growth of 12.2% during this period and a CAGR of 1.3%.

Similarly, per capita income growth in Pennsylvania has been anemic, with a CAGR hovering around 2.5% from 2010 to 2020, barely above the national rate of 2.3%. Pennsylvania’s revenue growth is similar to that of a number of states (including peer Midwestern states Indiana and Ohio), but far from leading states such as California, which recorded a CAGR of 3.2% during this period.

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As our report highlights, one of the factors underlying this drift is the lackluster performance of the innovation economy and entrepreneurship, which Pennsylvania epitomizes. In fact, according to some indicators, Pennsylvania’s trends illustrate broader trends in several intermediate innovation states.

This drift is most visible in the state’s advanced industries. Advanced industries are the 46 manufacturing, service and energy industries with the highest levels of R&D spending and STEM employment. These industries generate 90% of private sector R&D and 85% of patents. They also create an average of 2.2 additional jobs downstream (including 0.8 local jobs), compared to only 0.8 downstream jobs in other industries (including 0.4 local jobs).

While Pennsylvania has developed nationally significant clusters in high-tech industries (including life sciences, computer/information services and robotics, chemicals, and plastics and rubber products), the overall growth of the state’s advanced industries has lagged considerably behind the nation as a whole. From 2010 to 2020, Pennsylvania’s advanced industries grew at a compound annual rate of just 0.7%, less than half the nation’s 1.5% annual rate. Many of Pennsylvania’s peer states also lagged the national average, ranging from industrial Midwestern states such as Ohio, Illinois, and Indiana to northeast “coastal” states such as New York and New Jersey.

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Contributing to this drift is underperformance even in areas that Pennsylvanians rightly consider their state’s strengths. For example, while Pennsylvania ranks fourth in the nation for university-led R&D, including in areas where it has large economic hubs, it performs below average when it comes to translating this research into cutting-edge industry employment opportunities for residents. This is a problem that many states and regions face.

fig3Meanwhile, similarly weak entrepreneurial trends can be found in Pennsylvania’s innovation ecosystem (as well as many of its peer states). New tech startups in cutting-edge industries — a measure of Pennsylvania’s competitiveness in the nation’s most cutting-edge high-tech industries — are lagging behind. Pennsylvania’s 4.9 top tech startups per 1 million population is less than half the national rate of 11.8 startups per 1 million population, but is comparable to most of its peer states. Unsurprisingly, Pennsylvania and several of its peer states are also lagging in startup job creation. Pennsylvania startups create an average of just 3.43 jobs in their first year, which is similar to peer states such as Ohio and Michigan, but trails the national average of 4.74 jobs per year. startup.

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These trends contribute to and are exacerbated by a relative lack of capital for Pennsylvania entrepreneurs. For example, grant funding from the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) assistance programs remains lower than it could be given the size of the state’s overall economy and its level of higher education research. At the same time, Pennsylvania has seen only modest increases in venture capital (VC) deal flow. While the flow of venture capital deals grew by 160% nationally (using a three-year moving average) from 2009-2011 to 2018-20, and much more significantly in the hub states venture capitalists such as New York, it grew only 98% in Pennsylvania during this period. time. Here, Pennsylvania is representative of several Midwestern and coastal peer states with below-average venture capital growth, including Ohio and New Jersey. But it lags behind others, notably Illinois (where Chicago acts as a mini venture capital hotbed) and Michigan, whose performance is closer to the US average. Additionally, Pennsylvania (reflecting national trends) has seen virtually no inflation-adjusted growth in venture capital deal flow from 2014 to 2020.

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Pennsylvania’s overall innovation challenges are exacerbated by significant geographic and demographic divides, which are representative of the inequalities that exist across the country. While more than 40% of Pennsylvania’s high-tech industry jobs are outside of the state’s largest innovation hubs (the Philadelphia, Pittsburgh, and State College metro areas), the share of jobs of leading industry in these small innovation communities has declined over the past decade. And many communities in the state, especially those in central and northwestern Pennsylvania, saw an absolute decline in advanced industry jobs from 2010 to 2020.

Meanwhile, the deep racial and gender divides in Pennsylvania’s innovation ecosystem underscore just how far the state — and the nation — must go to increase equity in economic opportunity. For example, STEM education remains wildly unequal by race and gender, starting in kindergarten through grade 12 and continuing into tertiary education. Female, black, Latino or Hispanic, and Native Pennsylvanians are all underrepresented among STEM graduates. These groups face similar challenges in accessing high-tech industry jobs, with female, black, Latino, or Hispanic residents experiencing significant underrepresentation relative to their share of the population.

These inequalities are perhaps most glaring when it comes to entrepreneurship and business ownership. Only 19% of businesses with employees in Pennsylvania are majority female-owned (while only 17% have an equal number of male and female owners). Meanwhile, only 1% of businesses with employees in the state are majority black-owned, and only 1% are majority-owned by Latinos or Hispanics.

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When it comes to solving these complex innovation challenges, there is no silver bullet. However, we offer a set of policy themes in our Pennsylvania report to support innovation and help regions and states achieve balanced and equitable growth. These themes include investing in innovation ecosystems in large metropolitan areas as well as in smaller communities. And in addition to supporting overall growth and closing spatial imbalances, states like Pennsylvania must also work to close the still-large racial and gender gaps that exist in areas of innovation, starting with STEM education. and extending to cutting-edge industry employment, entrepreneurship and business. ownership.

Given Pennsylvania’s role as an example to other states and regions nationwide, the solutions that work there will be relevant to communities across the United States. In this regard, Pennsylvania should be watched closely not only for its upcoming election results, but also for potential changes in innovation policy in 2023 and beyond, with the goal of addressing some of the economic imbalances. for a long time in the country.

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