The 2010 State New Economy Index

The bottom five states were unchanged from 2008. Mississippi and West Virginia have lagged most in making the transition to the New Economy. The other lowest-scoring states include, in reverse order, Arkansas, Alabama, and Wyoming.

The State New Economy Index uses 26 indicators to assess states’ fundamental capacity to successfully navigate the shoals of economic change. It measures the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven, and innovation-based – in other words, to what degree state economies’ structures and operations match the ideal structure of the New Economy. The 2010 Index builds on four earlier Indexes, published in 1999, 2002, 2007, and 2008.

Regionally, the New Economy has taken the strongest hold in the Northeast, mid-Atlantic, Mountain West and Pacific regions; 13 of the top 20 states are in these four regions. In contrast, 18 of the 20 lowest-ranking states are in the Midwest, Great Plains and the South.

States at the top of the ranking not only have an abundance of high-tech firms, but also have a high concentration of managers, professionals, and college-educated residents working in “knowledge jobs” – those that require at least a two-year degree. And, even if their employment is not growing rapidly, all of the top-ranked states show above-average levels of entrepreneurship.

A large share of the leading states’ institutions and residents have embraced the digital economy. Most of these states also have a solid innovation infrastructure that fosters and supports technological innovation, and many have a good quality of life coupled with high levels of domestic and foreign immigration of highly skilled knowledge workers.

The lowest-ranking states tend to rely on natural resources or on mass-production manufacturing, and to depend on low costs rather than innovative capacity to gain advantage. But innovative capacity, derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive, increasingly impels competitive success, the report said.

Lower-ranking states are not without opportunity, however. The IT revolution makes it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Because metropolitan areas in many of the top states suffer from high costs and near-gridlock on their roads, locating in less-congested metros, many in lower-ranking states, may be more attractive to entrepreneurial companies.

The report recommends that, to pursue this new approach to economic development, states should 1) establish policies that reduce within-state zero-sum competition; 2) implement state policies to spur “win-win” economic results; and 3) pursue new state-federal innovation-based economic development partnerships.

In addition to 2010, Massachusetts topped the four previous State Index lists. Washington, which ranked fourth in 2007 and in 2002, moves to second-place in 2010.  Maryland, with its high concentration of knowledge workers, maintains the third-place rank it held in 2007 and 2008. New Jersey’s strong pharmaceutical industry, coupled with a high-tech agglomeration around Princeton, an advanced services sector in Northern New Jersey, and high levels of inward foreign direct investment help drive it to fourth place (up from sixth in 2002 and fifth in 2008). Connecticut also moved up in the rankings, from sixth in 2008 to fifth in 2010.

Between 2007 and 2008, most states and the United States as a whole made sustained progress toward the New Economy. Of the 23 indicators that were comparable between 2008 and 2010, overall the United States increased on 14 and decreased on three, for a net increase of 11 indicators.