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)
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 2010, at 2.4 percent of state GDP, below the U.S. average of 2.6 percent. New Mexico led the nation with 8.0 percent in 2010, largely because of the Los Alamos and Sandia national laboratories there. Among peer states, Maryland's R&D spending was significantly higher at 6.2 percent of state GDP. North Carolina and Tennessee lagged Virginia, at 2.1 percent and 1.6 percent, respectively.
The federal government invested more than $115 billion in R&D in 2012, although this amount was lower than in 2011 ($130 billion). This federal investment plays a large role in Virginia, where 2012 federal obligations in the Commonwealth were 1.8 percent of state gross domestic product, well above the national average of 0.7 percent, and ranking the Commonwealth 4th. Maryland ranked first with federal R&D obligations at 4.6 percent of their GDP. Peer states Tennessee and North Carolina had lower investment rates than Virginia, at 0.8 percent and 0.4 percent, respectively.
When R&D expenditures are restricted to those made by private business, Virginia dropped to 24th highest in 2011, at 1.6 percent of private industry output. That lags behind the national average of 2.3 percent, as well as peer states Maryland (2.1%) and North Carolina (1.7%); Tennessee was at 0.6% in 2011. Washington had the highest private-sector R&D expenditures, at 4.8 percent of private industry output.
Patents provide another measure of innovation levels. Virginia's rate of patent formation has been steadily improving and in 2014 was 25.0 patents per 100,000 residents -- but that is still well below the U.S. average of 45.3. Among peer states, Maryland (31.0) and North Carolina (34.3) were higher, while Tennessee was lower (16.2). California led the nation in 2014 with 104.8 patents per 100,000 residents.
Within Virginia, the growth rate for patents varies widely. The Northern region had the highest patent rate in 2013 with 40.1 per 100,000 residents, followed by the West Central (26.3) and Central (20.6) regions. The Southside region had the lowest rate of patent formation at 2.4 patents per 100,000 residents.
High-technology and High-growth Firms
A significant portion of innovation occurs in high technology firms. In 2013, Virginia again led the nation in the percentage of establishments -- 7.7 percent -- that are high tech. The national average was 4.5 percent. Maryland was at 7.0 percent, North Carolina 4.1 percent, and Tennessee 3.1 percent.
Among Virginia's regions, the Northern region has by far the highest percentage of high tech establishments -- 13.9 percent in 2013, followed by the Hampton Roads and Central regions with 4.7 percent. The Southside (2.1%) and Southwest (2.5%) regions were lowest.
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 (VC) investment is an important source of capital for entrepreneurs. VC dropped significantly across the U.S. after the dot.com 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 2014, Virginia was ranked 17th in venture capital spending as a percentage of state GDP (0.10%), lower than the national average of 0.28 percent. Virginia's rate was the same as Maryland's (0.10%), but higher than North Carolina (0.07%) and Tennessee (0.05%). California was the leading state with a VC percentage of 1.17 percent.
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.
In 2012, Virginia was ranked 22nd best in the nation for business startups, with a growth rate for new employer establishments of 10.8 percent. The national average was 11.3 percent. Virginia's rate was slightly higher than Tennessee (10.4%) and Maryland (10.7%), but lower than North Carolina (11.2%). In 2012 Nevada regained its longstanding position as national leader for business startups, with a rate of 14.4 percent.
Within Virginia, the growth rate for small business startups (consisting of 1-250 employees) per 10,000 residents generally remained steady in 2014. The Southside region had the highest rate per 10,000 residents in 2014 with 16.7, while the Hampton Roads region again had the least, with 7.5 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.
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. One 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 1.94 startups per one million residents in 2013, below the national rate of 2.38 startups and ranking the Commonwealth 27th in the country. Utah was first at 11.38 startups per million residents. Among peer states, Maryland (4.39) and North Carolina (4.37) were higher than Virginia, while Tennessee (1.23) 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.)
State rankings are ordered so that #1 is understood to be the best.
Data Definitions and Sources
R&D as a percentage of gross domestic product, by state, 2002-2011; business-performed R&D as a percentage of private-industry output, 2002–2011
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
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 investments as Percentage of GDP
PricewaterhouseCoopers, National Venture Capital Association
Statistics of U.S. Businesses
Association of University Technology Managers (AUTM)
Statistics Access for Tech Transfer (STATT) Database
U.S. Patent and Trademark Office
See the Data Sources and Updates Calendar for a detailed list of the data resources used for indicator measures on Virginia Performs.