Developed and presented at OECD in 2009, this presentation focuses on a cluster analysis approach to developing an innovation index that goes beyond merely counting patents.

1. Economic Development Administration – 2009 – Page 1
ECONOMIC DEVELOPMENT
ADMINISTRATION
Developing a Portfolio Innovation Index: Beyond
Patents to Economic Well-Being
William P. Kittredge, Ph.D.
Director, National Programs & Performance Evaluation
US Department of Commerce

2. Economic Development Administration – 2009 – Page 2
Overview
• Research drives the investment agenda
• Investment policy guidelines
• Performance evaluation essential
• Lessons from the United States
• Enhancing cooperation between European and US cluster policy
makers

3. Economic Development Administration – 2009 – Page 3
EDA Integrated Research Agenda
• Peer-review quality research
– EDA Research Conference
– Economic Development Quarterly publications
– Arising from and building upon the academic literature
• Practitioner accessible reports
• Analytical tools and customized web-based data access
• Common Definitions
• Responsive to Practitioner Demand
• Kno w Yo ur Re g io n Curriculum and Website

4. Economic Development Administration – 2009 – Page 4
Sample of Recent EDA Research
• Cluster-based Economic Development: A Key to Regional
Competitiveness – October 1997
• Unlocking Rural Competitiveness: The Role of Regional Clusters –
January 2007
• Gulf Coast Cluster of Opportunity – July 2007
• Crossing the Next Regional Frontier: Information and Analytics
Linking Regional Competitiveness to Investment in a Knowledge-
Based Economy – October 2009
• Green Economy Regional Innovation Systems – forthcoming
• Asset Mapping of Regional Innovation Clusters - forthcoming

5. Economic Development Administration – 2009 – Page 5
Innovation – What Is It?
• Innovation
– incremental and emergent or radical and revolutionary changes in
thinking, products, processes, or organizations.
– innovation, ideas applied successfully in practice Schumpeter (1934),
• Innovation translates brainpower into jobs and wealth.
• Limiting ‘innovation’ measurement to patents in a services,
knowledge economy is limiting.
• Innovation Index is our first attempt to generate an overall picture of
a region’s capacity to transform its economy in the global context –
especially in rural and other areas not usually thought to be
innovation centers

6. Economic Development Administration – 2009 – Page 6
Innovation – A Portfolio Index Approach
• Innovative capacity, or inputs, can be combined with outputs to
create a single, composite index value. (ETCI 2005; Pro Inno Europe 2006; Porter
and Stern 1999; Atkinson and Correa 2007)
• Index variables used in previous analyses (Barkley et al. 2006; Drabenstott and
Henderson 2006; ETCI 2005; Pro Inno Europe 2006; Lee 2006; Atkinson and Correa 2007)
• Several additional variables were identified as theoretically
important and investigated for possible inclusion.
• The final list of variables was restricted to those for which county-
level data were available, or that could be developed on the county
level with relatively little imputation.

7. Economic Development Administration – 2009 – Page 7
Variable Classification
• Human capital
• Economic dynamics
• Productivity and employment
• Economic well-being
• State context category
– composed of science and engineering graduates from state institutions per
1,000 residents of the state
– R+D spending per capita

8. Economic Development Administration – 2009 – Page 8
Inputs - Human Capital
• Variables suggest the extent to which a county’s population and
labor force are able to engage in innovative activities.
• Educational attainment
• Growth in younger age brackets of the workforce (signifying
attractiveness to younger generations of workers)
• Number of innovation-related occupations and jobs relative to the
overall labor force.

9. Economic Development Administration – 2009 – Page 9
Inputs - Economic Dynamics
• The economic dynamics sub-index measures local business
conditions and resources available to entrepreneurs and
businesses.
• R&D Investment
• Venture Capital Investment
• Broadband Density
• Churn – creative destruction rate
• Business Sizes

10. Economic Development Administration – 2009 – Page 10
Outputs - Productivity and Employment
• Variables in this index suggest the extent to which local and
regional economies are moving up the value chain and attracting
workers seeking particular jobs.
• High-Tech Employment Share Growth
• Job Growth-to-Population Growth Ratio
• Patent Activity
• Gross Domestic Product

11. Economic Development Administration – 2009 – Page 11
Outputs - Economic Well-Being
• Innovative economies improve economic well-being because
residents earn more and have a higher standard of living.
Decreasing poverty rates, increasing employment, in-migration of
new residents and improvements in personal income signal a more
desirable location to live and point to an increase in economic well-
being.
• Net Migration
• Compensation

12. Economic Development Administration – 2009 – Page 12
Calculating the Indices
• Sub-indices for human capital, economic dynamics, productivity
and employment, and economic well-being calculated by summing
weighted ratios that divide the county-level metric by the U.S.-level
metric (Atkinson and Correa 2007; Pro Inno Europe 2006)
• The Portfolio Innovation Index (PII) combines the four sub-indices
– Each sub-index weighted relatively equally.
– Economic well-being has a less direct relationship to innovation activities, and
receives one-third the weight of the other three sub-indices.

13. Economic Development Administration – 2009 – Page 13
Calculating the Indices
• Sub-indices for human capital, economic dynamics, productivity
and employment, and economic well-being calculated by summing
weighted ratios that divide the county-level metric by the U.S.-level
metric (Atkinson and Correa 2007; Pro Inno Europe 2006)
• The Portfolio Innovation Index (PII) combines the four sub-indices
– Each sub-index weighted relatively equally.
– Economic well-being has a less direct relationship to innovation activities, and
receives one-third the weight of the other three sub-indices.

14. Economic Development Administration – 2009 – Page 14
Caveats
• Of potential concern may be the degree to which concepts or
measures are related conceptually and statistically. The research
team minimized correlations between factors of the PII by carefully
selecting data series, calculations and measures.
• The Europeans have noted that their own effort to create national
measures for innovation has been fraught with difficulties. For
example, using indices can result in a loss of variability and
explanatory power through the grouping of data. It also implies that
more data are always better. Finally, using all available data ignores
multicollinearity between variables and that some data are
redundant (Hollanders and van Cruysen 2008). The Portfolio
Innovation Index shares several of these flaws.
• .

15. Economic Development Administration – 2009 – Page 15
PractitionerAccessibility
• In order to address the issue of potentially spurious grouping of
data and the loss of variability, a web-enabled database and tool
was created as a part of this research project.
• The database and tool allow a practitioner to see the effects a
particular measure (or data series) has on a county or region’s
overall index.
• As with all indices, however, the overall estimate is not as important
as the sum of its parts. Economic development practitioners not
only get a quick snapshot of how their region is doing in terms of
innovation with the portfolio index, but they also have the ability to
drill down into the highly granular data to gain a better
understanding about their region’s strengths and weaknesses.

16. Economic Development Administration – 2009 – Page 16
Future Directions
• In the future, the state context could expand in scope to mimic
several of the state-level indicators reported by Atkinson and
Correa (2007)
– Export of high-tech goods
– Service exports
– Foreign direct investment flows
• Bureau of Economic Analysis
– Service flows reporting
• Empirically Based Innovation Index
– index innovative activities by identifying those specific factors with the greatest
influence on economic growth, while controlling for some non-innovation factors.
Interpreting this index is simpler than the portfolio approach because there is
only one output measure― economic growth

17. Economic Development Administration – 2009 – Page 17
Future Directions
• Augmenting the set of innovation indicators
• Exploring whether some indicators such as establishment churn or
knowledge-based technology occupations should be broken down
further into their component parts
• Determining empirically which indicator has the greatest influence
on an output measure for innovation, such as growth in GDP per
worker
• Exploring the influence of county characteristics—e.g., size,
proximity to a metro area, broadband connectivity—on economic
growth or rates of entrepreneurship
• Updating the indexes to reflect more current data as it’s released
from the American Community Survey (all counties should be
covered by ACS data by 2010)

18. Economic Development Administration – 2009 – Page 18
Concluding Thoughts
• This index is, to the research team’s knowledge,
the first attempt to create a comprehensive
innovation measure at the county-level unit of
analysis in the United States, and the measure
is admittedly not perfect.
• Imperfections aside, this index presents a state-
of-the-art measure of county and regional
innovation performance and capacity. This index
can serve as a valuable tool for policymakers
and practitioners to quickly evaluate innovative
capacity and potential.

19. Economic Development Administration – 2009 – Page 19
Contact Information
• Full Report:
http://www.statsamerica.org/innovation/reports.html
• William P. Kittredge, Ph.D.
wkittredge@eda.doc.gov