The long view: does research and development drive the state's economy?

• Author: van der Does, Tamara

Not infrequently, one gets asked by a reporter, or even an aspiring reporter: What is holding Indiana back economically? The question may be motivated by Indiana's relatively poor per capita personal income or by an honest investigation about whether economic policies, past or present, will bear fruit.

The topic of innovation is often broached in tandem with research and development (R&D). Is the state losing ground in the race to develop, market and produce new products and services? Innovation today will lead to economic growth tomorrow, so the theory goes. Will innovation initiatives today have an effect on the state's longer-term economic outlook?

We consider this question here by exploring one facet of the innovation landscape: the state's activity and strength in research and development. Often, the efficacy of research and development expenditures is measured in terms of patent production. The correlation between the two is almost self-evident. But note, a patent and its intellectual content can be developed in one place and applied in another. Massachusetts can be a patent or R&D making location, but another location (e.g., a manufacturing state) can be a patent or R&D using location. This distinction may be helpful in interpreting the degree to which a state's R&D intensity drives broader economic growth.

First, a quick description of the data and the method we use to gain insights. For research and development intensity, we use National Science Foundation data on R&D expenditures on science and engineering. To make the comparisons fair (we do not want states with large populations to get an unfair advantage), these data are scaled by number of workers. Current-dollar (cu$) GDP is likewise scaled at the aggregated state level. GDP, recall, is all the value-added associated with production. The vast majority of GDP is in the form of salaries, wages and benefits--although it also includes dividends, profits, rents and royalties. We also compare GDP annual growth rates in two critical sectors: manufacturing and professional, scientific and technical services.

Not to spoil the movie, but the innovation outlook related to R&D for Indiana is mixed. From 2003 to 2012, Indiana was below the national averages for both R&D spending per worker in science and engineering and GDP per worker. That said, Indiana is not falling further behind. As Figure 1 shows, Indiana follows nationwide growth rate trends for both measures, with the exception of...