An economic development idea worth patenting?

What helps economies grow? That question vexes economists, economic development professionals, policymakers and local government officials looking for something to generate faster growth in local and state economies.

Innovation is widely believed to be important for local economies because the invention and introduction of new ideas can create long-lasting effects for business. But getting your hands around that notion and turning it into pursuable policy might be another matter.

Some equate innovation with patents. A recent Brookings Institution argued that “inventions, embodied in patents, are a major driver of long-term regional economic performance.” The study mapped patents nationwide and found that U.S. patent levels have been increasing in recent decades, and an increasing concentration of patents is coming from the top 20 metropolitan statistical areas (MSAs).

But do high patent levels lead to measurably better economies? The Brookings report did not answer that question definitively, and there are enough struggling metros in the top 20—Detroit, Philadelphia, Phoenix—to suggest that it’s not a perfect correlation. California has four of the top eight MSAs in patent production, yet all of them have high unemployment rates; San Francisco took the top patent spot, but its average unemployment rate from 1990 to 2011 ranked 161st of almost 360 MSAs analyzed.

Among 24 MSAs in Ninth District states (including 10 in Wisconsin that are located outside Ninth District boundaries), there was a wide range of patents per thousand workers (see Chart 1). Rochester, Minn., lapped much of the competition several times over—it ranked third best nationwide in patents on a population basis, thanks mostly to being home to an IBM campus. Wisconsin MSAs, many of them manufacturing hubs, also tended to rank high. But patent levels at a majority of MSAs in district states were less than one per thousand workers; only one in three regional MSAs was above the national average of 0.6 patents per thousand workers.

Not surprisingly, the top ranking MSAs tended to have a larger share of technology jobs as a share of all employment, as well as a higher proportion of workers with degrees in science, technology, engineering and math (so-called “STEM” degrees; see Charts 2 and 3. In the four scatter graphs, the MSAs from Chart 1 are rank-ordered, so low-ranking Great Falls = 1, high-ranking Rochester = 24).

However, patents themselves are not a particularly good predictor of economic growth over time. As Charts 4 and 5 demonstrate, there is virtually no relationship between recent patent trends and either growth rates per worker or unemployment rates.

None of this means that patents and other innovations are not valuable to local economies. It only means that local economic activity is a complex recipe, and patents are likely only one ingredient for faster growth.

More evidence that businesses expect to grow, increase hiring

Signs are upbeat that the Ninth District economy will continue to grow, according to a recent poll of more than 300 business contacts from across the district (see methodology below).

For starters, 40 percent plan to increase employment at their firms, and nearly three-quarters of these firms cited expected high sales growth as the most important factor. Only 7 percent plan to decrease employment. In the same survey a year ago, 38 percent planned to increase employment and 10 percent planned to cut jobs.

Other important factors cited for new hiring were overworked staff, improved financial condition of firms and the need for additional skills. The majority of respondents plan to use word of mouth and advertising to get new employees. Twenty-eight percent plan to use a recruiting firm, and surprisingly few (9 percent) plan to raise starting pay.

For those respondents not planning to hire additional people this year, most expected low growth sales and a desire to keep operating costs low. Many reported difficulty finding skilled candidates. Though fiscal policy developments were not a factor for most respondents, 35 percent said they had a detrimental effect on hiring and 4 percent said they would increase hiring plans.

The survey also asked about wages and benefits; 36 percent expected wage growth of 2.5 percent or more, and a similar amount expected positive wage growth of less than 2.5 percent (see Chart 1). Respondents generally believed benefit increases would be larger than those for wages (see Chart 2).

 

Methodology: On Jan. 15, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from across the Ninth District to answer the special question in a web-based survey. By Jan. 31, 303 contacts had filled out the survey. The respondents come from a variety of industries (see table below).

The state(s) of entrepreneurship

Everybody loves a ranking, except when you’re on the unflattering end. That’s particularly the case when it comes to business and entrepreneurial types of rankings, because economic activity and jobs are so desperately desired.

So it is that some states are clapping or wringing their hands over a recently released annual index of entrepreneurial activity by the Kauffman Foundation, the largest foundation in the world dedicated to entrepreneurial research. The index captures new business owners in their first month of significant business activity and then tabulates a score based on a state’s adult population (per 100,000 people). Kauffman uses consecutive-month reports from the Current Population Survey from the U.S. Census Bureau. It flags people who report working for themselves for at least 15 hours per week during the past month (and not doing so the month before that).

District states didn’t fare particularly well in the rankings. Montana was the only state to exceed the national average, and South Dakota came within a whisker (see chart). But North Dakota, Minnesota and Wisconsin lagged well behind.

Such rankings hold some interesting insights into entrepreneurial activity. But they are not particularly good barometers of a state economy or the economic well-being of its residents. For example, among the top six in entrepreneurial activity, half of the states were in the bottom half of per capita income, compared with only two of the six states with the lowest index ranking. Average income gains in 2011 also favored low-ranking states over high-ranking ones. On average, those in the bottom of the index also had lower unemployment than high-entrepreneurial states (see chart). That shouldn’t necessarily be a surprise: States with high unemployment tend to have more self-employed people by necessity as they hustle for any income they can find.

On the other hand, the performance of district states implies an old adage: in all things, moderation. District states rank toward the middle of the index pack, and even toward the lower third for Minnesota and Wisconsin. But their unemployment rates are all considerably below the national average, and per capita income was higher than the national average for three of the five states (Wisconsin and Montana are ranked 25th and 35th, respectively, among states). More to the point in annual rankings, every district state ranked in the top half in per capita income gains in 2011.

One final tidbit: North Dakota saw its 2011 index score drop from a year earlier and is considerably below the national average, yet it has by far the best unemployment rate in the country and had the highest gains in per capita income last year (6.7 percent). That doesn’t mean North Dakota’s entrepreneurial activity is necessarily in a good spot, but it does mean that one can’t read too much into any economic index.

State tax credits are heavenly to angel investors

With a strong desire to spur job growth, states are eager to nurture young, entrepreneurial firms in hopes that they will develop into booming companies. And you might say the angels have been answering.

Angel investment groups have been popping up across Minnesota and Wisconsin. These are groups of high net worth individuals who seek investment opportunities, often in local or regional businesses. While other investment markets have been fairly static since the recession—and possibly because of it—angel investment groups in Wisconsin and Minnesota have been busy.

Last year, angel investors in Wisconsin doled out $61 million to needy startup firms, and the state has seen a heady increase in total (measured) angel investment since the recession (see Chart 1). Since 2005, the state has seen angel investment groups expand from a small handful to 24 today, sprinkled across the state, including six in the fairly sparsely populated northern and northwestern part of the state located in the Ninth District.

Many attribute that growth to the presence of tax incentives. Wisconsin was an early adopter of tax credits for investors who put their money into very young companies. The state has two such programs, initiated in 2005: an angel tax credit, which allows an accredited investor to offset up to 25 percent of an investment, and a similar program for so-called early-stage seed credit, which is considered the next financial step for a firm after angel investment, but before more sizable venture capital. Investor tax credits in the state topped $9 million for the first time last year (see Chart 2).

The net benefits of such tax credit programs are less obvious than recent activity might suggest. While data imply that tax credits have generated more angel investment, it’s unknown how much angel-like investment was occurring before tax credits and formal angel organizations came around, and how it would have evolved without tax credits. And it shouldn’t be surprising that investors are taking advantage of free money to cushion their risk-taking.

Still, angel activity across the border was enough to convince Minnesota lawmakers in 2010 to create a similar angel tax credit modeled after the cheesehead version, with annual program caps of $12 million in credits. The program wasn’t launched until July of that year, yet investors claimed $7 million in tax credits, and almost $16 million last year (thanks also to $4 million of unallocated credits from the previous year that were rolled over). The state saw $63 million in angel investments in 113 companies last year, which topped Wisconsin.

Not to be outdone, Wisconsin lawmakers greatly expanded their state’s investor tax credit program, allowing the program to allocate up to $40.5 million in tax credits per year, split between angel and early-stage seed investors.

Flyover country? Not for Fortune 500 HQs

For most people, the words “Fortune 500” conjure up images of Manhattan, maybe Silicon Valley or southern California, even the gleaming office towers of Dallas. So here’s a heart-warming economic stocking-stuffer for the holidays: You should be thinking “Minnesota.”

In spite of real and perceived obstacles—from weather to business environment—the Gopher State has been a decades-long powerhouse in nurturing Fortune 500 companies, according to recent research by J. Myles Shaver, a professor of strategic management at the Carlson School of Management at the University of Minnesota.

Shaver is a Twin Cities transplant. He said he was aware of the fact that the Twin Cities metro area was home to a number of major corporations, but once here, “I soon found out that the extent of HQ activity was much more than I thought.” So he began to look into the matter “with the recognition that such things evolve over decades. I wanted to start with getting a picture of what this looks like now and what things have looked like over the last 50 to 100 years.”

Today, Minnesota has 20 companies on the Fortune 500 list—almost double the number (11) from 1955—and is tied with New Jersey and Virginia for eighth-most in the country. These companies represent such diverse industries as health care (Medtronic and UnitedHealth Group), food (Land O’ Lakes and Supervalue), retail (Best Buy and Target), energy (Excel Energy), finance (Ameriprise and U.S. Bancorp), manufacturing (3M) and mining/agriculture (Mosaic).

New York, California and Texas have the most Fortune 500 headquarters, each with over 50. But on a population-adjusted basis, Minnesota is tops in the nation, and by a considerable margin (see table). In fact, flyover country avails itself rather well, with Nebraska, Illinois, Ohio and Michigan also making this top 10 list on a population basis.

Because of the size of Fortune 500 companies, people tend to think of them as economic mainstays, unchanged over the years. But in fact this list sees significant turnover through the course of decades. Shaver found that only three of Minnesota’s 11 Fortune 500 companies in 1955 remain today: 3M, General Mills and Hormel. Others on the list merged with other firms (Seeger Refrigerator, ranked 264th in 1955, merged with Whirlpool the same year) or were bought outright (Pillsbury, ranked as high as high as 61st in 1987 and acquired by General Mills in 2001). Archer Daniels Midland ranked 155th in 1955 and 39th in 2011, but is no longer on Minnesota’s list because it moved its headquarters from Minneapolis to Decatur, Ill., in 1968.

Minnesota’s net gain of nine Fortune 500 firms over this period—seventh best in the country—also tells a fraction of the turnover story. Since 1955, a total of 51 Minnesota firms have been on the Fortune 500 list, and 31 subsequently fell off the list by 2011, leaving the current list of 20. The state also has 16 firms on the Forbes 500 list of the nation’s largest private firms, including the top company, Cargill. That ranks ninth nationally and second (to Missouri) on a population basis.

Shaver pointed out that few companies relocate their headquarters to Minnesota. Combined with a lot of turnover among the nation’s biggest companies, he said the state has shown a penchant for “creating and growing new businesses that grow really big.” The reasons behind Minnesota’s success are mostly a matter of conjecture.

Some cite the state’s strong education system or its hard-working Nordic culture. “Most of the answers to ‘why’ are an individual’s pet theories,” said Shaver, adding that common explanations may have some merit, “but I think they’re incomplete at best.”

Shaver expects to tackle the source of Minnesota’s success in future research. What he’s learned so far is that the state and Twin Cities in particular have “an amazingly dynamic business community. When my colleagues around the world ask if I like being here, this is one of the things I note. Most are surprised by what is here.”

A powerpoint presentation of Shaver’s research is available here.

And now for something completely different (and positive?) on employment

You have to look long and hard to find positive employment news these days. But there appears to be some good news lurking outside the spotlight of the traditional job market you typically hear about in regular government reports.

Much of the state and national information on employment comes from the Quarterly Census of Wage and Employment (QCEW), a state-administered survey whose information is then passed up the ladder to the federal Bureau of Labor Statistics. The QCEW counts employment in sort of a round-about fashion: Companies with at least one paid employee must register with their home state’s unemployment insurance (UI) system and then regularly report their company’s employment levels, and these reports are the basis of the QCEW.

While the large majority of workers are covered by the UI umbrella, there is nonetheless a hole in the employment doughnut because workers in some occupations or industries are exempt from UI. There are no official government counts of this so-called noncovered worker population, and it’s a hard group to measure.

For starters, states have different exemptions to UI. There are more than 30 UI exemptions in Minnesota alone, for example, including (among others) self-employed workers, some farms, insurance and real estate salespeople who work on commission, most religious personnel and all elected public officials. Some of these categories, like the self-employed, are particularly difficult to measure (and is the focus of the cover article in the January fedgazette.)

Private firms have begun to reverse-calculate these figures through a complicated process that uses employment and income data from the likes of the Bureau of Economic Analysis, which goes to great lengths to identify income-producing jobs. Estimates are then developed for jobs not typically covered by UI.

Economic Modeling Specialists, Inc., for example, is an economics and labor market consulting firm in Moscow, Idaho. It shared its estimates on noncovered workers with the fedgazette, as well as its methodology, “quite a bit (of which) is based on the BEA's much-appreciated work in this area,” said Jared Miller, an EMSI data analyst.

Unlike the population of covered workers, which has taken a big and well-publicized drop during the recession, EMSI’s data show steady, if modest, growth among noncovered workers in every district state, as well as the nation as a whole (see chart).

 

There are also a couple of important caveats to acknowledge that might well take some of the shine off this seemingly good news. For starters, the noncovered population is a count of jobs, not employed individuals, which means there are multiple plausible interpretations for job trends. From an optimistic standpoint, a growing number of noncovered jobs might mean there are more employed individuals in this gray area of employment. However, a growing number of noncovered jobs might also be indicative of growing part-time jobs and outsourced labor in the form of independent labor contracts. Were this the case, total noncovered workers could well be stagnant or even falling as they take on more of these jobs to make ends meet.

Secondly, noncovered job counts cannot distinguish employment duration; in many cases, someone self-employed for a single month would count the same as a year-long job, whereas QCEW is more precise, reporting monthly job counts as well as quarterly and annual averages.

Montana business confidence: Location, location, location

In a soft economy, Montana’s businesses are betting on themselves.

The Federal Reserve Bank of Minneapolis surveyed Montana businesses on their confidence in the coming 12 months. They reported being very confident about their own prospects, and increasingly less so the farther they got from home.

Fully two-thirds of respondents said they were either very or somewhat confident regarding their firm’s prospects for the next year. That confidence plummeted when asked about their confidence in local, state and national economies (see Chart 1).

 

Though respondents were positive overall regarding their firm’s outlook, they were not exactly over the top (see Chart 2). Close to 40 percent expect sales to climb and productivity to rise; still, profit expectations were mostly a wash.

There was also little belief that public policy and other outside factors would offer much help, with the exception of labor availability, which is still believed to be good from employers’ perspective. There are some common complaints from businesses regarding taxes and regulation, but many were also quite negative on federal efforts to stimulate the economy and on federal health care reform.

The survey was conducted in mid-June in partnership with the Montana Chamber of Commerce. It received 155 responses. It also reflects some of the same optimism and caution of Ninth District businesses responding to the Minneapolis Fed’s recent semi-annual poll on business conditions. For more information, as well as the short-term outlook and forecast for employment, unemployment and housing in the district, see the July issue of the fedgazette.

A state of entrepreneurship: Careful what you wish for

The entrepreneur is widely lauded for the innovation and energy he or she brings to the economy. States desperately hope to be the seedbed of the next Google, Apple or even Applebee’s these days. States often take great effort to be (or at least appear) entrepreneur-friendly and worry when they perform poorly in any nationwide ranking.

The Kauffman Foundation, the largest foundation in the world dedicated to entrepreneurial research, comes out with an annual index of entrepreneurial activity. The index captures new business owners in their first month of significant business activity and then tabulates a score based on a state’s adult population.

The bad news for several district states is that annual scores have fallen considerably since 2006. Minnesota, South Dakota and Wisconsin all slipped below an index value of 0.2, while the national average crept up slightly and finished at 0.34 during this period (see Chart 1). North Dakota held its ground; Montana’s rate fell significantly, but from very high levels.

 
 
Woe is the Ninth District entrepreneur? Not necessarily. Entrepreneurship encompasses many things, running the gamut from those working out of a basement or back of a truck to a sophisticated high-tech startup. For its index, Kauffman uses consecutive-month reports from the Current Population Survey from the U.S. Census Bureau. It flags people who report working for themselves for at least 15 hours per week during the past month (and, importantly, not doing so in the month before that).

It’s difficult to know the direct relationship between the recession and self-employment. But those looking for work often make ends meet by doing informal side jobs, and recessions create conditions that likely increase the amount of entrepreneurship done out of necessity rather than opportunity or desire.

Coincidence or not, high-unemployment states tend to rank high in Kauffman’s index. The states with the three highest average scores from 2008 to 2010—Arizona, Georgia and California—all have unemployment rates considerably above the national average of 9 percent in April (see Chart 2). California is world-renowned for its entrepreneurial culture, à la Silicon Valley; less known might be the fact that its 11.9 percent unemployment rate is the second highest in the country.

 
In the most recent single-year ranking (2010), Louisiana and Nevada joined Georgia as the top-ranked entrepreneurial states in the country. Nevada currently has the nation’s highest unemployment rate at 12.5 percent. Louisiana’s is better, at 8.1 percent, but the state would not be mistaken for an economic hotbed.

In the Ninth District, Montana has consistently scored high in Kauffman’s index—its average from 2008 to 2010 was second nationwide—and has long had a reputation for bootstrapping small businesses. But it also happens to have the highest unemployment rate in the district (tied with Wisconsin) and does not rank particularly well on income, poverty and other economic measures that might suggest a high ranking comes with big economic benefits.

Even acknowledging the methodological shortcomings, low-ranking district states don’t have much to brag about, either. The lowest ranking states—Alabama, Pennsylvania and West Virginia—don’t offer much explanatory bravado for Minnesota or Wisconsin, two states that have seen their scores drop to similar levels.

In the end, it appears there might be something of a Goldilocks effect here—not too high, not too low, but just right … in the middle. North Dakota, for example, has had one of the best economies over the past few years, and its index score has remained steady, generally hovering in the middle of the index range.

Additional research on establishment trends and entrepreneurship will be featured in the July issue of the fedgazette.

A deadly recession for many Wisconsin businesses

Wisconsin business, we barely knew ye.

That might be the funeral theme for many businesses that were incorporated—and subsequently unincorporated—in the land of cheese during the past four years. Those interested in starting a business must register with their home state under a variety of legal classifications (corporation, limited liability, partnership, etc.).

Few states track the active status of registered businesses over time. Wisconsin is one exception. Statutes allow the state to administratively dissolve entities that fail to file their required annual report, and it has an ongoing program to do just that, according to a state source.

Figures from the Department of Financial Institutions (provided at paid request), show a huge spike since 2007 in the number of mergers, dissolutions and otherwise defunct business registrations taken off state books (see Chart 1). This is particularly the case with corporations and LLCs, which make up the large majority of business registrations.

 

The recession had the opposite effect on new business registrations. The annual number of new LLCs, for example, skyrocketed from the late 1990s until about 2006 (see Chart 2), due largely to changes in Wisconsin law (and laws in many other states) giving greater legal protection and tax advantages to sole proprietors and others organized as LLCs. But by 2007, LLC registrations leveled off and subsequently fell. The number of corporation filings also fell, but that merely continued a trend started well before the recession (see Chart 2).

 

On net, the state witnessed an 8 percent decline in the annual number of registered businesses from 2008 to 2010—the first such decline in at least a decade, and likely much longer given the general strength of the economy in the 1990s.

Much more research on birth and death trends among businesses across the Ninth District will be published in the July issue of the fedgazette.