The purpose of this report will be to analyze the current state of New Jersey’s innovation economy using state-level Science and Engineering Indicators provided by the National Science Foundation so that the Commission may understand the position of NJ’s innovation economy using factual, rigorous data. The NSF regularly compiles and updates 60 different state-level and US-wide indicators relating to science and technology in the economy. The District of Columbia is included as if it were a state and some indicators include data for Puerto Rico; for the purposes of this report, the rankings mentioned herein include DC but exclude Puerto Rico. These indicators measure a diverse range of economic and educational barometers, ranging from eighth grade mathematics performance, the rate of Bachelor's degree holders among individuals 25–44 years old, to R&D as a percentage of GDP, and much more. For this report, I will be specifically focusing on five indicators directly related to the innovation economy’s size and growth and analyzing NJ’s performance relative to other states and the general trend of the entire US.
These indicators (and their respective NSF codes) are as follows:
- High Science, Engineering, and Technology Employment Establishments as a Percentage of All Business Establishments (NSF S-52)
- Net Formations of High Science, Engineering, and Technology Employment Establishments as a Percentage of All Business Establishments (NSF S-53)
- Average Annual Federal Small Business Innovation Research and Small Business Technology Transfer Funding per $1 Million of Gross Domestic Product (NSF S-55)
- Venture Capital Disbursed per $1 Million of Gross Domestic Product (NSF S-58)
- Venture Capital Deals as a Percentage of High Science, Engineering, and Technology Employment Establishments (NSF S-59)
High Science, Engineering, and Technology Employment Establishments as a Percentage of All Business Establishments (NSF S-52)
This indicator measures the percentage of a state’s businesses that employ twice the amount of science, engineering, and technology (SET) employees than the general average. The employees who work in SET typically have a deep understanding of their field and often have a post-secondary degree. This data is compiled from statistics from the US Census Bureau and the North American Industry Classification System (NAICS). It is within a state’s best interest to attract and retain these kinds of businesses because SET employees have the advanced skills needed to take a fledgling innovative business from concept to success. Additionally, they typically have high compensation levels compared to the general population, bringing in more tax revenues and providing the greatest “bang for your buck” in terms of growing the economy. Put simply, the quality of a state’s innovation economy and the robustness of its SET employers are inseparable. Thus, for New Jersey, given the Commission's goals of creating new jobs “oriented towards the adoption of the most advanced scientific and technological techniques”, achieving a high percentage of employers that employ a high number of SET employees will be crucial.
The indicator data shows NJ in a strong position relative to the rest of the country. In 2016, NJ was ranked #10 for highest percentage of SET employment among the fifty states plus DC. This demonstrates that NJ has a solid, strong base of SET employment on which it can rely to advance the goals of the Commission. However, the data also demonstrates a concerning stagnation of the size of NJ’s SET economy. While NJ was ranked #10 in 2016, in 2003 it was ranked #5. Since 2003, the national trajectory for this indicator has been on a consistent upward trend, but NJ has retained almost the exact same percentage of these employers as a portion of its economy in that time. Other states have seen rises in the size of their SET economies, and with it the increased tax revenue, capital investment, economic growth, and innovation that comes along with it.
Net Formations of High Science, Engineering, and Technology Employment Establishments as a Percentage of All Business Establishments (NSF S-53)
This indicator measures the percentage of business formations that occur in industries with high employment of SET occupations, as measured by the same criteria as the indicator S-52. This indicates the relative expansion of such businesses in a given year. For NJ to stay competitive in today’s economy and to advance the goals of the Commission, it needs to grow these types of businesses; it is not enough to simply preserve what already exists in the state. Thus, good performance in this category will be necessary to reverse the trend of a stagnant SET economy as described by indicator S-52. “Net formations” in this instance is calculated by measuring the difference between the amount of businesses formed and the number that shut down in the previous year. This data is also tabulated using US Census Bureau and NAICS data.
This indicator shows New Jersey generally following the national trend, which has seen boom and bust cycles over the years. NJ has ranked poorly in this category for the entire time that the data is available, ranking #48 in 2004 and #44 in 2016. Extremely few new businesses that are formed in NJ belong to the industries that have a high percentage of of SET employees. NJ has seen slight improvement in this category over the years that data is available, however, the point remains that NJ has had little growth in the types of high technology and science businesses that drive the innovation economy, and that there remains much room for NJ to improve further in this category. This confirms the suspicions characterized by indicator S-52, that while the rest of the country has seen an increase in these types of businesses, NJ has remained stagnant.
Average Annual Federal Small Business Innovation Research and Small Business Technology Transfer Funding per $1 Million of Gross Domestic Product (NSF S-55)
This indicator measures the amount of funds awarded from the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs per $1M of each state’s GDP. The normalization to GDP means that each state can be compared directly, despite the vastly different overall size of each state’s economy. These funds support innovation and R&D in businesses with 500 or fewer employees. It is essential for a state with a growing innovation economy to attract the kinds of federal funds that these programs provide. These awards cover both R&D expenditures and expenditures related to bringing new innovations to market. Due to fluctuations between years, this statistic is calculated using 3-year moving averages. The data for this indicator is compiled from several sources, including the Small Business Administration Office of Technology and the US Bureau of Economic Analysis.
NJ has generally been slightly above average in this category, but has fallen behind in the past few decades. NJ ranked #18 in the nation for attracting these funds in the three year period from 1990 to 1992, but #25 in the period from 2014 to 2016. The state can do a better job of getting these kinds of federal funds in order to reverse the trend elucidated by indicator S-53. However, there are dramatic differences between different states and the amount of these funds that they receive, even when adjusted for GDP. Indeed, states in the highest quartile often attract several times more of these funds than those in the lowest quartile. This means that every ranking lower NJ sinks in this category has an outsized effect on the state’s ability to raise these funds and to grow the innovation economy. NJ has been fortunate to stay in the top half of all states, but could easily slip deeper into irrelevancy in this category.
Venture Capital Disbursed per $1 Million of Gross Domestic Product (NSF S-58)
One of the most visible and well known drivers of innovative, upstart businesses is venture capital. There are many well known venture capital investments that have launched what are today incredibly large companies (Flaherty 2017). Venture capital is important because it provides the necessary funds to support a business’s growth and expansion before they would qualify for other types of funding. Attracting high amounts of venture capital is a highly visible way to demonstrate the strength of a state's innovation economy. This indicator measures the amount of venture capital investment in a state per $1M of each state’s GDP, the same normalization adjustment performed for indicator S-55, and like S-55, this allows for direct comparisons between states. This measurement includes seed, early, and late stage funding. Seed funding supports initial product development and marketing. Early-stage funding supports further development, marketing, and the initial entry into the market. Late-stage funding supports management, buyouts, and acquisitions. This data is compiled from the PitchBook Venture Capital and Private Equity Database and the US Bureau of Economic Analysis.
As is the case for indicator S-55, NJ has fallen in the rankings in attracting venture capital, ranking #19 in 1995 and falling to #23 in 2018. This indicator features an even starker difference between the top earners and others than S-55. In recent years, Massachusetts and California alone can account for over 50% of all venture capital dispersed in the nation. Thus, like S-55, every ranking NJ falls in this category has an outsized effect. However, given the highly geographically concentrated nature of venture capital, it will likely be very difficult for NJ to meaningfully move the needle of attracting more of these investments.
Venture Capital Deals as a Percentage of High Science, Engineering, and Technology Employment Establishments (NSF S-59)
This indicator measures how frequently venture capital is used to fund growth and development of businesses with high SET employment. It is calculated by dividing the number of venture capital investments by the number of businesses with high SET employment in each state. A higher value indicates that these states are doing a better job of using venture capital as a means to expand the types of industries that contribute to the innovation economy. Like indicator S-58, this includes seed, early, and late stage funding. This data is also compiled from the same sources as indicator S-58, the PitchBook Venture Capital and Private Equity Database and the US Bureau of Economic Analysis.
NJ has seen a decline in this category, ranking #16 in 2003 but sliding all the way down to #42 in 2016. That means that of what little venture capital NJ gets, less and less of it every year of it goes towards industries with high amounts of SET employees, the types of industries that are in the best interest of the Commission to grow. Due to the high geographic concentration of venture capital as shown by indicator S-59, this ranking is highly concentrated in the top earning states. However, despite this, NJ’s performance as compared to the national trend revels a very concerning pattern for NJ. Even though the rest of the country has not significantly increased their venture capital input as to reduce the dominance of Massachusetts and California, they have significantly increased the amount of that capital that goes towards high SET employment businesses. Since data has become available, the US as a whole has significantly increased the level to which venture capital funds these industries, while NJ has remained stagnant at best. A better focus on directing what little venture capital resources NJ has towards high SET businesses will be essential to grow the innovation economy.
Findings and Recommendations
These five indicators, when collectively analyzed, paint a picture of the current state of NJ’s innovation economy and health of the businesses that drive it.
- New Jersey, despite setbacks, remains in the top quartile of advanced, high-SET employment businesses in the economy.
- NJ consistently ranks near the bottom of the nation in forming new businesses with high SET employment, meaning that NJ’s remaining position in that top quartile is at risk.
- The types of programs and funds that encourage the development of new such businesses are not being well utilized in New Jersey.
- Federal small-business investments in high-SET employers in NJ are low and getting lower.
- Venture capital investments, while heavily concentrated in a few geographic areas and a challenging area for many states to improve, also remain low in NJ.
- The few venture capital dollars NJ receives largely do not go to the types of businesses that are in the best interests of the Commission to develop.
The Commission should thus focus its effort on programs that create new businesses and increases NJ’s performance in the indicators relating to capital investment in small NJ high-SET employment businesses, rather than programs and incentives that simply retaining the existing ones. The Commission should explore:
- Reforming the state’s Economic Development Authority (EDA) incentive programs to focus on the kinds of small, upstart businesses that are essential to the innovation economy. Currently, these incentives largely focus on retention or investments in large, well-established companies. By contrast, Tennessee's INCITE Co-Investment Fund specifically targets small, high-tech businesses by matching its federal funding with private venture capital, investing $175M in Tennessee companies and maximizing the resources measured in indicators S-55 and S-58 (LaunchTN 2011). NJ’s EDA incentives have been subject to scrutiny over their efficacy and potential abuse, with critics saying that they are a waste of taxpayer money and often go to businesses who do not need them. Indeed, Governor Phil Murphy convened a task force charged with examining the effectiveness of these incentives and found that they often go to companies who claim they are moving out of state but in reality have no intent to (Governor’s Task Force on EDA Tax Incentives 2020). Reforming the EDA’s incentives could not only improve the usage of New Jerseyans’ taxpayer dollars, but could significantly advance the mission of the Commission, and should be a top priority for further study.
- Establishing public-private partnerships to help small businesses navigate New Jersey’s complex regulatory structure for starting and running a business. NJ is routinely panned for its complex rules and regulations on starting a business (Duvall et al. 2017), with the state’s large amount of municipalities along with county and state government rules making permitting and licensing frustrating. While significant, structural reform is ultimately needed, the Commission can seek out partnerships that help prospective business owners navigate what exists today.
- Doing more to tap into the potential of NJ’s world-class universities as hotspots of business incubation. Currently, collaboration between academia and industry is hampered by administrative burdens, lack of coordination, communication and funding issues, and more. To encourage collaboration between universities and the private sector and grow the NJ economy with the types of new high technology businesses the Commission seeks to create, the State, academia, and industry should collaborate to unify IP protocols, form consortiums dedicated towards producing innovative ideas, create Centers of Excellence for innovation, coordinate efforts to bring in greater federal funding, and more (New Jersey Policy Research Organization 2013).
New Jersey was once renowned around the world for its innovation economy. This was the site of Thomas Edison’s lab, whose nickname “The Wizard of Menlo Park” made that little New Jersey town a household name. This is the home of Bell Labs, the site where the transistor was invented; the fundamental building block of digital electronics, 13 sextillion transistors have been manufactured since. It was at the Institute for Advanced Study in Princeton where Albert Einstein pushed the boundaries of scientific understanding. New Jersey innovations have unequivocally transformed the world we live in. Many of the advantages that made New Jersey such a hotspot for innovation still exist today; our highly educated workforce, our central location, our world-class universities continue to endure New Jersey’s ability to reinvigorate the innovation economy will be the key to economic success in the coming decade and beyond. With the right focus on growing and nurturing new innovative businesses, the Commission can once again make New Jersey a household name in innovation.