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High Innovation in Rural Regions, Not Just Cities

Farm near mountains

(Tim Mossholder, Pexels.com)

3 Jan. 2019. An analysis of supply-chain interactions by businesses in the U.S. shows many more areas of the country create better products and processes than previously believed. Economists from Pennsylvania State University in University Park reported their findings last month in the journal Research Policy.

The team of rural economists Stephan Goetz and Yicheol Han are seeking better methods for defining and measuring innovation in local communities and regions. Goetz, professor of agricultural and regional economics and director of the Northeast Regional Center for Rural Development at Penn State, says current methods that focus on patents and R&D spending are missing a lot of innovation in American society.

“The way we traditionally measure innovation is very narrow, and focuses primarily on new products or processes that result in a patent or involve R&D spending,” says Goetz in a university statement released through EureakAlert. “This overlooks another kind of innovation: the incremental improvements that businesses make to their products and processes as a result of information they obtain from outside their firm.”

Goetz and Han — formerly a postdoctoral researcher at Penn State, now with the Korea Rural Economic Institute — constructed a statistical index of innovation that incorporates improvements and upgrades in products and processes, as well as improvements in technology, logistics, management, and marketing. Ideas for these improvements and upgrades, say Goetz and Han, often come from outside the enterprise, particularly from suppliers or customers. Therefore, a key factor behind an innovative business, say the authors, is that company’s ability to interact with and listen to its supply chain.

The Penn State team developed the index from an input-output table, a statistical representation of the economy showing the flow of goods, services, and monetary compensation within or between industries. The researchers started with the input-output table offered by the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce, from 2007. They chose 2007 to avoid the intense long-term disruption of the recession beginning in 2008, and focused on 381 industries producing intermediate goods, items produced and sold for resale or transformed into other finished goods.

Goetz and Han measured the extent of interaction in purchases of goods and services in these industries, where commercial dealings outside of their normal chains indicate more opportunity for new ideas. In addition, the team looked at the geographic distribution of those interactions, where close physical proximity of interactions often encourages innovation. For example, the authors cite  data showing a high proportion of patents reference other patents filed by inventors in the same city.

The researchers constructed their latent innovation index and correlated its results against income growth and employment patterns across the country, down to individual counties. The results show, as expected, high rates of innovation in metropolitan areas and a strong correlation with patents filed. But the authors also found many pockets of innovation taking place in rural counties and in a wider range of industries, including so-called older manufacturing industries such as metals, food and beverage, and chemicals.

Goetz notes that “places like Silicon Valley, Seattle, and Boston are home to tech firms that are developing entirely new products and technologies. But at the same time many non-tech businesses also engage in innovative activity that is less obvious, but nonetheless moving their industries forward and, more importantly, keeping them competitive.”

The authors make their data set available on the Northeast Regional Center web site.

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