The long view: Fostering Indiana's innovation and entrepreneurship.

• Author: Slaper, Timothy F.

In July 2016, Governor Mike Pence announced a new $1 billion initiative for promoting Hoosier innovation and entrepreneurship. This ambitious initiative follows in the wake of the recent Regional Cities Initiative, in which seven major regions in Indiana competed for three $42 million quality-of-life and workforce attraction investments. (1)

It is no secret that Pence's administration prides itself in the story of Indiana's positive economic growth since he took office in 2012. Between 2013 and 2016, the unemployment rate fell from 8.4 percent to 5 percent, for example, and employment grew 10 percent from the end of 2012 until the summer of 2016. (2) Many have heralded Indiana as a key player in the grand rebirth of Midwest manufacturing since the height of the Great Recession in 2008.

Indiana ranks highly among states with the highest number of manufacturing jobs. (3) These initiatives are a clear sign that Indiana is taking great strides to capitalize on this economic momentum.

The Hoosier state is certainly not alone in this endeavor. Startup activity, a vital indicator of economic growth, has risen significantly in dozens of major metropolitan areas since 2015. (4) However, the sheer scale of the Indiana Regional Cities Initiative and the innovation-entrepreneurship bill is quite unmatched elsewhere. Economic development agencies are taking a keen interest in attracting young and ambitious talent to accelerate startup growth. Funding for venture capital, business incubators and industrial parks has become standard operating procedure in a majority of economic development districts. It is difficult to escape, and not be slightly envious of, the endless stream of enviable business statistics coming from high-growth regions, such as Austin, San Antonio, Seattle, Denver, Boston and San Francisco.

Public officials, when formulating economic development strategies, often heed the advice of high-profile business leaders and internalize bold claims, such as that "democracy only works in a growing economy," which the current President of Y Combinator--the behemoth tech incubator responsible for startups like Airbnb, Reddit, and Dropbox--made in a warning to other entrepreneurs in the Bay Area. (5)

In actuality, the majority of interested parties probably do not maintain such a grim philosophy; however, there appears a heightened sense of urgency and determination behind these two government actions.

What is an entrepreneurial ecosystem?

What would an entrepreneurial ecosystem look like in Indiana? How can the state spur greater economic growth? An entrepreneurial ecosystem, as described in the Ewing Marion Kauffman Foundation report, is the complex system of infrastructure, resources and human capital that drives innovation. It is measured by four distinct characteristics: density, fluidity, connectivity and diversity. (6) Let's examine these concepts one at a time.

To measure the density of an area's entrepreneurial vibrancy, one can look at several figures that describe the makeup of businesses and startups. These figures include, but are not limited to, the number of new firms per 1,000 people, the share of employment in new firms and high-growth sector density. Ideally, one can interpret these figures to garner an idea of the relative density of entrepreneurs in a given area.

Our second characteristic, fluidity, is concerned with how entrepreneurs move between businesses and firms in an area. Some economists place a high value on the ability of workers to sort and re-sort themselves into optimum employment. Furthermore, a natural byproduct of such worker allocation is an increase in the sharing of ideas, which in turn produces more entrepreneurial activity. The Kauffman Foundation report suggests using an area's population flux, rates of labor market reallocation and the density of high-growth firms to describe this fluidity.

Next, there is a great deal of importance placed on the connectivity of a particular ecosystem. This concept encompasses how businesses and startups connect to, and draw inspiration from, others. One facet of this is the network of educational programs, resources and support organizations available in an area. Innovation thrives in a densely linked business...