Fact of the Week: To Boost Tech-Based Startup Activity, States Should Strengthen Their “New Economy” Fundamentals

December 15, 2017

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ITIF’s recent report How Technology-Based Start-Ups Support U.S. Economic Growth found that in most states, tech-based startups make up a relatively modest 2 to 3 percent of all businesses and employ just 0.75 to 1.25 percent of the workforce. Yet these startups have long been an important driver of America’s economic growth, innovation, and global competitiveness because they usually “export” their output, and in so doing they generate a high employment multiplier and pay high wages.

So, what can policymakers do to increase their states’ tech-startup activity? In short, they should accelerate their states’ overall shift toward the “new economy,” because there is a strong correlation of 0.75 between states’ tech-based startup activity and their overall scores in ITIF’s 2017 State New Economy Index(SNEI), which assesses indicators such as knowledge workers, tech exports, and information technology adoption to measure how well states are positioned.

To understand which factors were more closely linked with tech-startup activity, we assessed the relationship between tech startups and each of the SNEI’s 25 indicators. There were strong correlations with two indicators and moderate correlations with another seven.

Tech-startup activity was strongly correlated (greater than 0.7) with the number high-tech jobs in a state and the number of scientists and engineers. This should come as little surprise. After all, tech startups create high-tech jobs and the tech sector employs 60 percent of all R&D workers, many of whom are scientists or engineers. At the same time, many startups spin off from existing technology companies and rely on scientists and engineers as workers.

Other SNEI indicators that were moderately correlated with tech-startup activity include fast-growing firms (0.63); immigration of U.S. knowledge workers (0.61); independent inventors (0.60); managerial, professional and technical jobs (0.60); workforce education (0.57); venture capital (0.55); and IT jobs (0.54).

For policymakers looking to bolster tech-startup activity, these “new economy” indicators can provide a roadmap.