Friday, May 30, 2014

Measuring the Local Innovation Economy

By Evan Robertson, Senior Project Associate.

At Market Street, we continually assess and reassess a variety of metrics to determine the best measure for a variety of attributes that impact local economic competitiveness. Some metrics are relatively straightforward, such as population, job growth, diversity, and workforce sustainability. Others require a combination of data, local knowledge (gleaned from public input), and a bit of expertise to deduce what is actually happening in the local economy. The fact of the matter is, for some indicators, there is always a discrepancy between the knowledge we wish we had and the knowledge that is available from public and private data sources. Innovation falls within the latter category, Federal reporting standards tend to lag behind a continually evolving economy.

The Office of Management and Budget adopted the North American Industry Classification System (NAICS) in 1997, and for the first time, employment data for information services, healthcare delivery, and high-tech manufacturing were identified as separate industries. Industry sectors added by the shift from Standard Industrial Classification (SIC) to NAICS classification systems included semiconductor and related device manufacturing, cellular and other wireless telecommunications, satellite telecommunications, and internet publishing and broadcasting among other inclusions. With the shift, economic development professionals gained a more nuanced view of their local economies, which in all likelihood, were heavily impacted by the information technology revolution.

This is of course not to say that the Federal agencies are not adaptable in light of shifting economic tides. The Bureau of Labor Statistics made quick progress in defining and collecting information regarding Green Jobs after the Obama administration made a concerted effort to grow the sector. Inception to data collection took about a year and four months (January 25, 2010 to May 24, 2011). Having worked on a Green Job’s survey during an internship at the Council for Community and Economic Research (C2ER), I can tell you deciding what a green job is and how you measure it is fuel for a lengthy debate.

There is another ambiguous term floating around in the national lexicon: innovation. At its core, innovation is fairly simple: it is the act or process of introducing new ideas, devices, or methods. But measuring this, measuring its economic impact, and its future potential in a local economy is extremely difficult. Often times, measuring innovation requires a collection of data points, an assessment of local higher education capacity, and local knowledge obtained through intimate contact with the community’s leaders and innovators. In terms of publicly available data, however, there is probably no other more controversial innovation data point than the patent.

Patents, according to the United States Patent and Trademark Office, offer certain rights to the inventor for up to twenty years, during which time the inventor may exclude all others for making, using, importing, or selling their invention. In exchange, the information is disseminated to the public. At its core, the patent serves the public good by incentivizing the exchange of information. Without the patent, companies may have to reinvent the same technologies that have already been discovered provided the original inventor was able to keep the technology a secret. Had every semiconductor company been forced to reinvent the transistor, the centerpiece of the information technology revolution, it’s unlikely that the growth of the IT industry would have occurred at the pace in which it unfolded.

Patents, simply put, is one of the only methods our society has created in order to codify an idea. Leveraging patent data, however, presents a few challenges from determining the innovation potential in a local economy. The most glaring challenge is that all patents are not created equal. Some protected ideas are the foundations for multibillion dollar products, others hold no commercial value. Others still are valueless until they are combined with other ideas and technologies. Between 2000 and 2012, Apple filed 1,298 mobile technology patents according to a September 2012 Thomson Reuters report. While it is difficult to assess the economic value of each individual patent within the portfolio, the combination of patents (and trade secrets) resulted in a product that is estimated to have generated $150 billion for Apple. In terms of the local innovation economy, clearly being able to distinguish the valuable ideas from the valueless would go a long way in assessing the overall health of the local innovation economy.

Yet, patents present other challenges as well. For instance, the mere fact that a patent is created in the local economy does not necessarily mean that the local economy will benefit from the production of the patent. Again, using Apple as an example, while the majority of their design functions are located in California the actual iPhone is made all around the globe. Housing this production activity in California would certainly increase the overall economic impact of the iPhone within the state.

Another, albeit ancillary challenge, is the rise of the patent troll. Patent trolls are essentially companies who acquire patent portfolios with the intention of suing other companies for infringing upon those patents. Patent trolls have become so effective that many state legislatures are passing laws to curtail the practice. These acts relegate the economic value of an idea to whatever the patent troll can obtain through the litigation, again, providing limited economic benefit to the local economy.

Despite its shortfalls, patent data does provide for some really interesting information regarding the nature of the local innovation economy. Connecting individual patent inventors via social network analysis can lead to a greater understanding of the knowledge flow within the regional workforce and how your region is connected to the nation’s overall innovation system. Patents are also a legitimate metric for determining idea generating activity and reflect a degree of economic potential, however, there still needs to be some way to assess their overall economic impact.

Innovation is a loosely defined concept. So too are its measures. As it stands, the economic development profession seems to take a “we know it when we see it approach,” it’s a combination of local knowledge and federal data that paints an overall picture of the local innovation economy. Just as the Bureau of Labor Statistics embarked upon a year-long mission to define Green Jobs, it is perhaps time that we as a profession define innovation and communicate what information we need from federal, state, and local agencies to better assess our current and future potential in our innovation-driven economy.