California's Innovation Economy Standing
Innovation State has complied research from around the world, to provide a comprehensive global innovation economic standing and outlook. Since globalization, many look to California as leader of innovation, although our government has failed to create a plan and vision. It’s time that California must not only look to benchmark itself on other states, but also other countries. With exponential advances in technology, it is the utmost importance for California’s policy leaders to be informed with the macroeconomic trends and how we can better prepare Californians for the future.
California and the World
Internationally, the United States is ranked 6th on the Global Innovation Index (GII), which is a comprehensive and extensive annual report about the international innovation standings with over 70 different metrics. This index takes into account innovation inputs and outputs with the inputs including, institutions, human capital and research, infrastructure, market sophistication and business sophistication. The innovation output index includes, knowledge and technology and creative outputs. Figure 1 (right, hover for details) illustrates the ranking of the U.S. which leads in 6th behind, Switzerland, United Kingdom, Sweden, Finland and Netherlands.
Another concerning indicator that is a part of the innovation economy, is the capability of the citizens to purchase new products. The growth of the U.S. Purchasing Power Parity (PPP) to GDP growth per worker is at a stagnant 0.5 percent, placing the U.S. 77th. Technology in the long-run does become cheaper, but other costs continue to grow given inflation rates. These indicators are just the tip of the iceberg with regards to California’s innovation economy.
The U.S. ranks 8th internationally with 2.8 percent of GDP spent towards R&D. Figure 3 displays the top 27 countries that have committed a significant portion of their GDP towards R&D. Israel, Finland and Sweden have the highest percentage of R&D to GDP with 3.9, 3.6 and 3.4, respectively. Figure 4 illustrates the percentage of GDP change from 2001-2011, which reveals a greater change in policies for some countries trying to capture the growth of an innovation economy.
The Self-discovery or entrepreneurial discovery process. This process is unlike the top down approach to economic planning but rather a bottom up approach where the private sector is discovering and producing information about new activities and the government provides the conditions for the search to happen. Acting as an ear for the private industry and to assess potential and empower those actors (i.e. entrepreneurs and companies) most capable of realizing the potentials. Creating and coordinating resources to help the environment of structural change and uncertainty, risk and information asymmetries.
Activities, not sectors for setting knowledge investments. While specific industry sectors still matter, the issue is how these sectors are using investments. Activities can be tied to specific technologies or technology mix, to specific capabilities, natural assets etc. In general what is discovered as future priorities are those activities where innovative projects complement existing productive assets, hence the need to differentiate the target of smart specialization according to the overall position of a given activity (e.g. modernization, transition, and diversification).
Smart specialization entails strategic and specialized diversification. Rather than encouraging specialization along predetermined paths, the smart specialization approach recognizes that new or unexpected discovers of activities might emerge within a given part of an innovative system leading to “specialized diversification”. That is specialization on selected activities that provide a comparative advantage based on differentiation of their operations and products in global markets.
Evaluation and monitoring. As other versions of new industrial policies, smart specialization emphases the need for policy makers to carry out evidence-based monitoring and evaluation and to feed back into policy design. It also requires flexibility in policy making to be able to benchmark and criteria for success and failure. Smart specialization policies need to have measurable goals, whether it involves increase in new business formation or business R&D or commercialization of products.
The rationale for smart specialization goes beyond traditional market failure arguments for framework conditions and highlights the role of regional governments, knowledge-based institutions and entrepreneurs, in shaping specialization and competitiveness in a holistic place-based approach. General purpose technologies play a particularly essential role in straightening existing specializations and revealing new economic opportunities in high tech sectors but also in traditional industries.
California and The United States
California leads the nation but for how long?
Figure 6 (right, hover & scroll for details) illustrates California’s total gross state product (GSP) categorized by industry. Not surprisingly, real-estate, rental and leasing, accounts for $341 billion or 16 percent of California’s GSP, followed by professional and business services and the government. Figure 7 depicts the growth or decline of industries over the pass 10 years from 2002 to 2012. The greatest top 5 sectors for growth are in natural resource extraction with oil and gas extraction leading a 500 percent increase, followed naturally by pipeline construction and chemical manufacturing, with a 290 percent and 232 percent, respectively. The sixth highest growth was computer systems design, followed by data processing and internet publishing, 136 percent and 125 percent, respectively. Beyond natural resources, the technology sector continues to be the largest sector for growth and will continue to be as we move through 2020. On another major and important front for California’s economy is the manufacturing sector, which in the past decade California has seen a major decline, illustrated in figure 8 (below). This decline in manufacturing is not limited to only California, it is a macroeconomic trend that has effected every state across the country. Manufacturing accounted for only 9 percent of California’s employment in August 2013; year over year, manufacturing employment fell slightly, whereas almost every other industry in the state grew.
American Apparel has been leading this apparel manufacturing boom in Southern California, by investing in a 6,000 employee factory in the heart of Los Angeles, which manufactures in a seven-story 800,000-square-foot facility where it produces more than 55,000 different products and garments. The company also owns and operates its own fabric dye house, garment dye house, and knitting facility, all based in Los Angeles. It does not outsource its labor, paying factory workers an average of over twelve dollars an hour and often more than $100 a day. Garment workers for similar American companies in China earn approximately 40 cents per hour. It claims to have the ‘highest earning apparel workers in the world.’ The factory claims to have the capacity to produce 1 million shirts per week and manufacture 275,000 pieces a day and is the largest single garment factory in the United States. They among, many others employ countless technologies to improve efficiencies within the factory to delivery to their stores.
Overall, California’s economic recovery is slowly moving forward, along with the nation. With about 1.6 million Californians that remain unemployed, nearly double the number who were unemployed before the recession. Creating jobs and increasing full-time employment in the technology sector is key to California’s recovery. A thriving California economy leads to a financially strong state to support more education and healthcare.
Although California has several key industry clusters, such as film, computer systems design, high-tech, apparel manufacturing and wine-making, the state’s economy is highly diversified, similar to the mix in the nation. Economic policy should reflect the breadth and movement toward the innovation economy. Similar to the OECD’s ‘specialization approach’ policy should act as a catalyst to support technology in multiple industries. Although, it’s important not to promote a niche specific industry booms such as clean tech, as they don’t normally deliver stable, steady growth. But, technological advances have been without a doubt the number one driver of growth in California’s major cities and valleys.
Even with promoting the innovation economy, ultimately, the number one way to promote economic opportunity is through education. It’s essential for the well-being of the state that more is done to promote more graduates in science, technology, engineering and mathematics (STEM). With an increase in graduate with these degrees the opportunities in these areas will only increase the quality of life not only for the STEM holder, but for all Californians.