Like its politics, Pennsylvania’s innovation challenges have national implications | So Good News
Pennsylvania is at the center of this year’s high-stakes midterm elections, with closely watched races for the Senate and governor’s office. The state’s Senate race could determine control of that chamber for the next two years, and the gubernatorial race will affect not only the state’s economic direction but broader issues from abortion to voting rights.
However, Pennsylvania’s status as an election bellwether 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 reflects elements of the country’s transitional industrial “heart” as well as its technological and service-oriented “shores.”
For much of the past year, we’ve been evaluating Pennsylvania’s innovation economy to deliver a strategy to inform the next governor. What we find is a state struggling with a number of innovation and competitiveness challenges that affect many parts of the country.
Broadly, Pennsylvania, like the nation, is struggling with rising average productivity and income. From 2012 to 2021, the state’s labor productivity grew by just 10% – a compound annual growth rate (CAGR) of just 1.1%. This parallels the country’s labor productivity growth of 12.2% and a CAGR of 1.3% over the same period.
Similarly, Pennsylvania’s per capita income growth has been anemic, with a CAGR of about 2.5% from 2010 to 2020, slightly higher than the national rate of 2.3%. Pennsylvania’s income growth is similar to a number of states (including Midwestern peers Indiana and Ohio), but far from leading states like California, which saw a CAGR of 3.2% over the same period.
As noted in our report, one of the factors underlying this drift is average performance in the innovation and entrepreneurial economy, as demonstrated in Pennsylvania. In fact, by some metrics, Pennsylvania’s trends reflect broader trends in several mid-innovation states.
This drift is observed in advanced industries of the state. Advanced industries are the 46 manufacturing, service and energy industries with the highest levels of R&D and STEM work. These industries account for 90% of private sector R&D and 85% of patents. They also create an average of 2.2 additional downstream jobs (of which 0.8 are local), compared to 0.8 downstream jobs in other industries (of which 0.4 are local).
While Pennsylvania has developed nationally significant clusters in advanced industries (particularly life sciences, computer/information services and robotics, chemicals, plastics, and rubber), the state’s overall advanced industry growth has lagged significantly behind the nation as a whole. From 2010 to 2020, Pennsylvania’s advanced industries experienced compound annual growth of just 0.7%, less than half the national rate of 1.5%. Many of Pennsylvania’s peer states lag behind the national average, from industrial Midwestern states like Ohio, Illinois, and Indiana to northeastern “coastal” states like New York and New Jersey.
Contributing to this drift is low performance even in areas where Pennsylvanians rightly view their state’s strengths. For example, while Pennsylvania ranks fourth in the nation for university-led research and development—including in areas with significant economic clusters—it performs below average when it comes to translating that research into advanced industry employment opportunities for residents. This is an issue that many states and territories struggle with.
Additionally, similarly weak entrepreneurial trends can be found in Pennsylvania’s innovation ecosystem (as well as many of its peer states). Startups by new tech firms in advanced industries — a measure of Pennsylvania’s competitiveness in the nation’s most advanced high-tech industries — lagged behind. Pennsylvania’s 4.9 advanced industrial tech startups per 1 million residents is less than half of its 11.8 startups per 1 million residents, but comparable to many of its peer states. Not surprisingly, Pennsylvania and several of its peer states lag behind in startup job creation. Pennsylvania startups create an average of just 3.43 jobs in their first year, about the same as peer states like Ohio and Michigan, but trailing the national average of 4.74 jobs per startup.
These trends contribute to and exacerbate the relative lack of capital for Pennsylvania entrepreneurs. For example, funding awards from the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) assistance programs remain below levels commensurate with the size of the state’s overall economy and its level of higher education research. Additionally, Pennsylvania has seen a modest increase in venture capital (VC) deal flow. While VC deal flow grew 160% (three-year average) nationally from 2009-11 to 2018-20, and significantly more in VC hotbed states like New York, Pennsylvania grew 98% during that time. only increased. time. Here, Pennsylvania is representative of several Midwestern and coastal peer states with below-average VC growth, including Ohio and New Jersey. But it lags behind others, including Illinois (where Chicago acts as a small VC hotbed) and Michigan, which performs closer to the US average. Additionally, Pennsylvania (reflecting national trends) saw no inflation-adjusted growth in VC deal flow from 2014 to 2020.
Pennsylvania’s overall innovation challenges are exacerbated by significant geographic and demographic disparities that mirror the disparities that exist across the country. While more than 40% of Pennsylvania’s advanced manufacturing jobs are located outside of the state’s largest innovation hubs (the Philadelphia, Pittsburgh, and State College metro areas), the share of advanced industry jobs in those smaller innovation communities has declined over the past decade. Many communities across the state, particularly those in central and northwestern Pennsylvania, saw an absolute decline in industry jobs from 2010 to 2020.
Additionally, the racial and gender disparities in Pennsylvania’s innovation ecosystem show how far the state and nation have to go to increase economic opportunity. For example, STEM education from K-12 education to higher education is grossly unequal by race and gender. Women, blacks, Latinos or Hispanics, and native Pennsylvanians are underrepresented among STEM degree graduates. These groups face similar challenges in obtaining employment in advanced industry jobs, with women, blacks, and Latinos or Hispanics experiencing significantly lower representation relative to their population share.
These disparities are perhaps most apparent in relation to entrepreneurship and firm ownership. Only 19% of firms with employees in Pennsylvania are dominated by women (only 17% have an equal number of men and women). Additionally, only 1% of firms with employees in the state are black-owned and only 1% are Latino or Hispanic-owned.
There are no silver bullet solutions when it comes to solving these complex innovation challenges. However, we propose a number of policy themes in the Pennsylvania Report to boost innovation and help regions and states achieve balanced, equitable growth. These themes include investing in innovation ecosystems in large metro areas as well as smaller communities. In addition to boosting overall growth and closing spatial disparities, states like Pennsylvania must take care to close the still-significant racial and gender gaps in innovative fields ranging from STEM education and cutting-edge employment to entrepreneurship and business. property.
Given Pennsylvania’s role as a model for other states and regions nationally, the solutions that work there will be relevant to communities across the U.S. As such, Pennsylvania should be closely watched not only for upcoming election results, but also for potential innovative policy moves in 2023. and further — aimed at addressing some of the country’s long-standing economic imbalances.