California, Massachusetts Rank as Most Innovative States

(Bloomberg) -- America’s top two most-innovative states share similar paths to success.

For the second consecutive year, California and Massachusetts took the first and second spots in Bloomberg’s annual State Innovation Index.

The ranking is based on six equally weighted metrics: research and development intensity, productivity, clusters of companies in technology, STEM jobs, residents with degrees in science and engineering disciplines and patent activity.

California and Massachusetts’ success dates back more than 150 years ago with the creation of land-grant universities under the Morrill Act, according to New York University Stern School of Business economist Paul Romer.

The Morrill Act of 1862 helped boost higher education in America by granting states public land they could sell and then use the proceeds to establish colleges. Massachusetts Institute of Technology was among the earliest recipients of the act, which served as the basis for many other institutions, including the University of California and Washington State University.

These schools “and their counterparts in every state created a new type of university with a new practical focus on problem solving that the world had never seen,” Romer, co-recipient of the 2018 Nobel Memorial Prize in Economic Sciences, said in a telephone interview. “The success of California and Massachusetts is a sign of the high level of investment that those states have made in their university and research systems.”

California ranked No. 1 in the Bloomberg index for patent activity and second for both technology-company density and concentration of science- and engineering-degree holders. Its state university system and pre-eminence in research -- along with private Stanford University -- have been influential in building Silicon Valley, headquarters for established tech companies including Alphabet’s Google and Apple and also the breeding ground for budding startups.

”Entrepreneurism and innovation are core to our economy, and our workforce and will be the foundation of our recovery,” said Chris Dombrowski, acting director of the Governor’s Office of Business and Economic Development.

Last year, California entrepreneurs received more than $67 billion in venture-capital funding, according to data from PitchBook. That’s more than three times New York, the second-highest state for deal flow.

According to a joint report from PwC and CB Insights, the top five highest-valued private U.S. tech companies are all California-based: JUUL Labs, Stripe, Airbnb, Space X and Palantir Technologies.

Among U.S. companies that went public last year, the five reaping the highest year-to-date returns also are in California: Zoom Video Communications, IT-service provider Fastly and life-science specialty businesses Vir Biotechnology, Livongo Health and IDEAYA Biosciences.

Second place Massachusetts took the crown for tech-company density. General Electric, Raytheon, Thermo Fisher Scientific and Biogen are headquartered in the Northeastern state. Prior to the pandemic, Boston-based Toast -- a restaurant-management platform -- was a venture-capital favorite. The startup raised $400 million at a $4.9 billion valuation in February.

Covid-19 Innovation

Rounding out the top five are No. 3 Washington, No. 4 Connecticut and Oregon, which jumped two spots to No. 5. Colorado is the only state in the top 10 that isn’t on the West or East coasts.

This is the third straight year that California, Massachusetts and Washington have lead the index. Romer noted the important work being done in all three to deal with the Covid-19 virus that has shocked the U.S. economy by causing businesses to close, putting millions of Americans out of work.

For example, Massachusetts-based Moderna Therapeutics developed a new vaccine, currently in human clinical trials, in just 63 days. BARDA -- the U.S. Biomedical Advanced Research and Development Authority -- awarded Moderna $483 million to begin producing it if it’s approved by the Food and Drug Administration.

Economic research shows that technological innovation is accelerated during recessions, so states that already have a strong foundation of R&D and tech investment may be best suited to adapt to a post-Covid-19 world.

Alabama was the biggest mover, rising five spots to No. 41. Its research and development spending has increased by 68 basis points, and Huntsville, near the Tennessee border, recently appeared in other rankings as having a high percentage of STEM workers and people with science and engineering degrees. Known as Rocket City, Huntsville is home to the Redstone Arsenal, which houses NASA’s Marshall Space Flight Center and the U.S. Missile Defense Agency.

The bottom five states are Kentucky, Louisiana, Arkansas, West Virginia and Mississippi.

To access the data behind this index, click here.

©2020 Bloomberg L.P.