Innovation districts have become the norm in cities across the country, but creation of these areas do not always equate to success. Previous research has shown just because a city supports entrepreneurial efforts or is in close proximity to a research university doesn’t mean it will produce more innovation.
But one business school professor is measuring the best indicators of innovation by looking at the effectiveness of research and development (R&D) investment of all public firms in all 50 states using a measure called research quotient (RQ). Washington University business professor Anne Marie Knott’s method measures the effectiveness of a company’s R&D compared to the competition to see what changes affect the bottom line and a company’s market value.
Knott found that California and Minnesota are leading the way when it comes to innovation. California notches a RQ score of 103.5, with the highest number of publicly-traded firms doing R&D (435), while Minnesota earned an above average score of 101.5 and also had a big portion of companies doing R&D (38).
So what makes these states so successful? Both welcome a wide range of industries and no single type of work comprises more than 15 percent of companies in either state. It’s certainly not features, as California’s sunny climate is a far stretch from Minnesota’s freezing temperatures. Both states are also vastly different in culture and each located in very different parts of the United States.
According to Knott, California and Minnesota share one institutional component: how they approach non-compete agreements. Both states restrict the enforcement of a non-compete, thus creating an environment that enables more people to pursue entrepreneurial ventures without having to leave the state.
As research has shown, states that de-emphasize non-competes result in more innovation as employees have more freedom to start new business ventures in the same industry, which creates an innovation cluster around a successful larger innovator. Comparatively, states that enforce non-compete contracts may retain some employees in the long-term, but the entrepreneurs who are going to leave regardless will end up leaving the state, ultimately hurting the overall production of innovation.
So while California and Minnesota’s friendliness may look like it hinders business production, it’s one of the biggest reasons these states are leading the way in entrepreneurship.