Innovation and Entrepreneurship

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Innovation and Entrepreneurship

Innovation is the act or process of introducing new ideas, methods, or products into the economy. Entrepreneurs are the agents who help create, identify, and capitalize on innovation to develop high-growth businesses. Virginia ranks highly on many measures of innovation and entrepreneurship, thanks in part to its proximity to the federal government in Washington, D.C.; a wide-ranging mix of industries; numerous military research labs; and top-notch universities.

Why is This Important?

Innovation is the most important determinant of long-term economic competitiveness and accounts for the majority of productivity and per-capita income growth in the nation. Innovations can be large or small but still have a big impact: a new or cheaper source for a critical component (such as copper wiring or coffee beans); an engineering tweak that yields cost-savings or improved yields (e.g., higher gas mileage); a new packaging design that has such broad appeal it generates added sales and then turns into an industry standard (the stand-up toothpaste tube); or a brand new product (the smartphone) that creates an entire paradigm shift, both among consumers and in the broader economy.

Regardless of size, innovations foster economic growth by boosting competitiveness and creating markets for new products and services, which in turn support growth in their supplier and support industries. Innovation often creates higher worker productivity as well, which can lead to higher wages and salaries.

Clusters of innovative firms that share customers, suppliers, and workers can create additional local productivity advantages, called "agglomeration economies," that boost growth. Higher rates of entrepreneurship and innovation in a region can also improve economic resilience, which enables businesses to better withstand, and bounce back from, negative economic shocks.

How is Virginia Doing in Innovation?

Research and Development (R&D)

R&D Performed by State. See text for explanation.

Money spent on research and development is a key input to the innovation process. Virginia ranked 21st on R&D expenditures as a percentage of gross state domestic product in 2012, at 2.3 percent of state GDP, below the U.S. average of 2.7 percent. New Mexico led the nation with 6.7 percent in 2012, largely because of the Los Alamos and Sandia national laboratories there. Among peer states, Maryland's R&D spending was significantly higher at 5.6 percent of state GDP. North Carolina and Tennessee lagged Virginia, at 2.1 percent and 1.5 percent, respectively.

Federal R&D Obligations as a Percentage of GDP. See text for explanation.

The federal government invested $110 billion in total R&D spending in 2015. This federal investment plays a large role in Virginia, where 2015 federal obligations in the Commonwealth were 1.6 percent of state gross domestic product; this was well above the national average of 0.6 percent and ranked Virginia 4th nationally. Maryland again ranked first with federal R&D obligations at 4.6 percent of their GDP. Peer states Tennessee (0.7%) and North Carolina (0.4%) had more average investment rates.

Business-performed R&D as a Percentage of Private Industry Output. See text for explanation.

When R&D expenditures are restricted to those made by private business, Virginia dropped to 27th highest in 2013, at 1.2 percent of private industry output. That lags behind the national average of 2.2 percent, as well as peer states Maryland (1.8%) and North Carolina (2.0%); Tennessee was at 0.6% in 2013. California had the highest private-sector R&D expenditures, at 4.6 percent of private industry output.


Patents by State. See text for explanation.Patents provide another measure of innovation levels. Although patent generation took a slight dip in 2015, Virginia's rate of patent formation has been steadily improving. In 2015 it was 24.5 patents per 100,000 residents; however, that is still well below the U.S. average of 43.8. Among peer states, Maryland (30.6) and North Carolina (33.4) were higher, while Tennessee was lower (15.3). California again led the nation in 2015 with 102.7 patents per 100,000 residents.

Patents by Virginia Region. See text for explanation.

Within Virginia, the growth rate for patents varies widely. The Northern region had the highest patent rate in 2015 with 43.4 per 100,000 residents, followed by the West Central (30.8) and Central (21.2) regions. The Southside region had the lowest rate of patent formation in 2015 at 2.7 patents per 100,000 residents.

High-technology and High-growth Firms

High-tech Firms as a Percentage of the Total. See text for explanation.

A significant portion of innovation occurs in high technology firms. In 2015, Virginia again led the nation in the percentage of establishments -- 8.3 percent -- that are high tech. The national average was 4.6 percent. Maryland was at 7.4 percent, North Carolina 4.3 percent, and Tennessee 3.2 percent.

High-tech Firms by Virginia Region. See text for explanation.

Among Virginia's regions, the Northern region has by far the highest percentage of high tech establishments -- 14.3 percent in 2015, followed by the Eastern (5.2%), Hampton Roads (5.0%), and Central (4.9%) regions. The Southside (2.2%) and Southwest (2.5%) regions were lowest.

High-growth Firms, by State. See text for explanation.

The presence and growth of dynamic firms also provides a key measure of entrepreneurial activity. In 2014, Virginia had the 3rd highest percentage of firms among the nation's 500 fastest growing firms -- 0.033 percent and triple the national rate of 0.011 percent. Massachusetts led the nation with 0.041 percent. Comparable figures for Maryland, North Carolina, and Tennessee were 0.032 percent, 0.010 percent, and 0.011 percent, respectively. 

How is Virginia Doing in Entrepreneurship?

Venture Capital

Venture Capital Investments by State. See text for explanation.Venture capital (VC) investment is an important source of funding for entrepreneurs. VC dropped significantly across the U.S. after the bubble burst in the early 2000's and again during the Great Recession of 2007-10, but has since resumed growth with the gradually improving economy. In 2016, Virginia was ranked 4th best in venture capital spending as a percentage of state GDP (0.43%), higher than the national average of 0.32 percent. Virginia's rate was higher than all peer states: Tennessee (0.06%), Maryland (0.08%), and North Carolina (0.12%). California was again the leading state with a VC investment percentage of 1.21 percent.

Business Startups

Business Startups by State. See text for explanation.The number of business startups is another good measure of entrepreneurship, as well as of the quality of an area's business climate and its long-term prospects for growth. Without new businesses to replace those that decline or close -- a natural part of every business cycle -- it is unlikely that an economy could fully maintain a healthy supply of jobs.

Due to a variety of factors, the business startup rate has been trending downwards nationally for more than 30 years, but especially since the Great Recession. Many cite the increasing dominance of large, established companies; the growing trend toward business consolidation; a slow-growth economy; banks that are more reluctant to give loans to unproven borrowers; a Millennial generation saddled with large debts; and tax / regulation policies that add time and cost to many entrepreneurial efforts.

In 2014 Virginia was ranked 21st best in the nation, with a growth rate for new employer establishments of 9.5 percent, a slight drop from the year before (9.6%). The national average was 10.0 percent. Virginia's rate was the same as Maryland's, but slightly higher than North Carolina (9.3%) and Tennessee (9.0%). In 2015 Nevada was again the national leader for business startups, with a rate of 13.3 percent.

Business Startups by Virginia Region. See text for explanation.Within Virginia, the growth rate for small business startups (consisting of 1-250 employees) per 10,000 residents generally rose in 2015. The Southside region had the highest rate per 10,000 residents in 2015 with 21.0, while the Hampton Roads region again had the least, with 10.5 business startups per 10,000 residents. The Southside region overall has seen the most dramatic improvements in new business growth since 2005.

While the number of new business startups typically corresponds with economic expansions, the role of entrepreneurship in net job creation is less clear. One view of the relationship between startups and economic growth is that entrepreneurs breed innovation. However, low rates of survival and the limited growth of most small businesses suggest that business startups do not significantly contribute to employment growth.

University Spinoffs

University Spinoffs by State. See text for explanation.Colleges and universities are increasingly being called upon to commercialize their discoveries in order to boost economic development. One method is through nurturing university start-ups, which account for a relatively small but growing number of high-growth, entrepreneurial ventures. A common example is biotechnology research and development, which marries biological processes with technical ones to create both entirely new products (e.g., nanobots) and new techniques or proposed solutions (e.g., nanoparticles programmed to attack cancer cells).

Virginia universities generated 2.04 startups per one million residents in 2014, below the national rate of 2.72 startups and ranking the Commonwealth 27th in the country. Utah was first at 6.80 startups per million residents. Among peer states, Maryland (4.52) and North Carolina (3.22) were higher than Virginia, while Tennessee (1.37) was lower.

What Influences Innovation and Entrepreneurship?

Entrepreneurship and innovation both drive change and react to it. External changes may be due to fluctuations in demand-side conditions like consumer tastes, the business cycle, or population demographics. They may also be stimulated by supply-side factors, such as research and development investments and deployment of information obtained from universities, labs, other firms, and customers.

Several factors influence the rate of entrepreneurial formation and innovation:

  • Market conditions
  • Ease of access to capital, including debt financing and venture capital
  • Entrepreneurial capabilities of residents developed through education and migration
  • Quality of human capital, including availability of STEM college graduates
  • Quality of the higher education, transportation, and telecommunications infrastructure
  • The tax and regulatory framework, including the tax rates facing early-stage ventures, amount of paperwork and time it takes to comply with government rules, and laws governing bankruptcy, contracts, and labor
  • The entrepreneurship culture, including citizen acceptance of risk-taking, receptiveness to new ideas, and appreciation of diversity
  • Levels of R&D creation and diffusion, including business and government funding of R&D and degree of commercialization of university and government research laboratory innovations

What is the State's Role?

Most innovation occurs as the result of private industry and private investment. The federal government also plays an important role in the innovation system by supporting infrastructure; regulating financial markets and intellectual property; and sponsoring research and development through tax credits, grant and loan programs, national laboratories, and federally funded R&D centers.

States have a much closer relationship and familiarity with regional firm needs and can more directly promote entrepreneurship and innovation through the following channels:

Economic Development Strategic Planning. The state can identify its concentrations of competencies in innovative fields and industries to help organize economic development initiatives there; state government could also solicit entrepreneurs to determine their needs and areas of interest.

Education and workforce development. The innovation system critically depends on a ready pool of entrepreneurs and skilled workers. The state can support that by 1) bolstering primary, secondary, and post-secondary education and 2) better aligning curricula with industry needs, particularly through programs that expand the number of STEM graduates. The overall education system should also foster career links between schools and businesses through apprenticeship, school-to-work, and employer-college partnerships. K-12 schools, colleges and universities can also improve entrepreneurship readiness by offering entrepreneurship programs and training.

Business Startup Services. State-sponsored entities -- university incubators and accelerators, small business development centers, and other agencies -- can help companies obtain business services, such as business planning, mentoring, financing, and identifying opportunities in domestic and international markets.

Capital Availability. The success of companies depends on adequate access to different types of capital during their various stages of growth. The state can help by identifying gaps in available financing, establishing public investment capital funds, encouraging the establishment of "angel investor" networks, promoting the creation of venture capital pools, and serving as broker of financial resources.

Tax and regulatory environment. The state can create a more favorable environment for innovative, early-stage companies by offering a competitive tax structure and tax credits for research and development activities. The costs of complying with regulations can be minimized by streamlining and simplifying compliance with regulatory paperwork for small businesses, such as offering unified reporting and creating a "one-stop shop" for permits and registrations.

Research and Development. The state can sponsor and promote R&D activities at its universities; promote public-private collaborations like Manufacturing Extension Partnership (MEP) centers; and facilitate commercialization of university research through business support services and seed capital.

Infrastructure. The state can support advanced transportation, logistics, and transit systems; promote faster broadband and expand connectivity to underserved communities; and enhance the safety and security of digital assets through cybersecurity measures.

Innovation in State Operations. The state itself can become an innovation leader by adopting new approaches to public service delivery and employing new digital technologies to improve transparency, participation, collaboration, and decision-making (e.g., Commonwealth Data Point, Regulatory Town Hall.)

Page last modified June 14, 2017
Federal R&D Obligations. Business-performed R&DPatents by State Patents by Region High Tech Firms High Tech Firms by Region High-growth Firms Venture Capital Investments Business Startups by State.Business Startups by Virginia Region.University Spinoffs

State rankings are ordered so that #1 is understood to be the best.

Data Definitions and Sources

State-level Data

R&D as a percentage of gross domestic product, by state, 2003-2012; business-performed R&D as a percentage of private-industry output, 2002–2013
National Science Foundation
Science and Engineering Indicators

Federal Obligations for R&D as a percentage of gross domestic product, by state
Federal Funds for R&D

Gross Domestic Product by State
Bureau of Economic Analysis

Utility Patents Issued per 100,000 population
U.S. Patent and Trademark Office

U.S. Census Bureau
Population Estimates

High Tech Establishments as Percentage of Total Establishments
Source: U.S. Census Bureau, County Business Patterns
NOTE: Definition of "High Tech" here is same as that of the Tech America Foundation / Professional Services Council

Percentage of State Firms that are Fast Growing
NOTE: Fast Growing Firms are those on the "Inc. 500" and "Technology Fast 500" lists
The State New Economy Index, Information Technology and Innovation Foundation Fastest Growing Firms

Venture Capital
Venture capital investments as Percentage of GDP
PricewaterhouseCoopers, National Venture Capital Association

Business Startups
Statistics of U.S. Businesses

The Kauffman Index, 2015 Index of Startup Activity: National Trends

"American Entrepreneurship is Actually Declining: Here's Why," INC. Magazine, May 2015

University Start-ups
Association of University Technology Managers (AUTM)
Statistics Access for Tech Transfer (STATT) Database

Regional-level Data

U.S. Patent and Trademark Office

Business Startups
Virginia Employment Commission

New small-business startups were firms that had at least one employee and matched the following criteria:

  • Setup Date and Liability Date occurred during same the year and quarter
  • Establishment had no predecessor Unemployment Insurance Account Number
  • Business is privately owned
  • Average employment is less than 250
  • No other accounts with the same UI Account Number existed that did not match the above criteria
  • There are no other previous establishments by the same enterprise

High-Tech Establishments
Same as state-level sources

See the Data Sources and Updates Calendar for a detailed list of the data resources used for indicator measures on Virginia Performs.

At a Glance:
Innovation and Entrepreneurship in Virginia

Performance Trend:  Trend is improving!
State Influence:  

National Ranking: Various sources measure and rank different aspects of economic innovation and entrepreneurship. Due to many positive state characteristics, Virginia overall ranks highly, especially in federal R&D investment and high-tech / high-growth firms, but performs less well for patent generation and capitalization of university research.

Related Agency Measures
State Programs & Initiatives

Developed with the Center for Innovative Technology, the Innovation and Entrepreneurship Report Card complements the performance data here in the Innovation indicator and monitors performance in additional goal areas.

Check it out!

The Center for Innovative Technology (CIT) promotes technology-based economic development and helps foster the next generation of technology and technology companies. A nonprofit organization, CIT addresses gaps at the earliest stages of the innovation continuum -– commercialization and seed funding -– as it helps entrepreneurs launch and grow technology companies.

CIT offers a number of services to qualified Virginia innovators and entrepreneurs:

Recent legislation created the Virginia Department of Small Business and Supplier Diversity, combining what had been two separate agencies for small business and minority business services and outreach. Its small business division is one of the state's main points of communication with the business community. It has streamlined access to the resources businesses need to maximize their chances for success through 3 key programs:

Virginia Business One-Stop logo

Business One-Stop:  Each year thousands of Virginians begin the journey toward entrepreneurship. Many will need to develop a detailed business plan, secure financing and investigate industry, state, and federal regulations. The Business One-Stop site gives entrepreneurs an online system that organizes all of the Commonwealth's business formation requirements and walks them through the process step by step. The site also helpfully directs users according to their stage of business development, company size, and so on.

Virginia 2015-16 Guide to Establishing a Business (pdf)

The Virginia Small Business Financing Authority (now officially part of VSBSD) assists businesses and non-profit organizations looking to grow in Virginia. It provides debt financing to economic development authorities and municipalities, as well as bankers.

Additional Information

Virginia's Small Business Development Centers (SBDC) consist of 29 local offices across Virginia that provide professional business counseling, training, and business resources to help grow and strengthen Virginia businesses. They also offer specific programs for veterans, retail and restaurant, international trade, and technology and innovation.

The federal Small Business Administration provides access to a wide range of federal and regional resources.

GENEDGE Alliance is part of a nationwide network of Manufacturing Extension Partnership centers affiliated with the National Institute of Technology and the U.S. Department of Commerce. GENEDGE provides tailored services to help small and medium-sized enterprises innovate, compete, and grow. Services include innovation and growth strategies, continuous process improvement, sustainability, supply chain optimization, technology acceleration, and workforce improvement.