Recent Research: Human Capital, Small Businesses Drive Local Patenting Activity

Over the past few decades, state and local policymakers have approached the task of increasing regional innovative activity from a number of directions. Leaders have deployed plans to increase the amount of available capital, to train entrepreneurs, to attract research-based companies and other strategies to create a thriving innovation economy. A key issue in this pursuit is how to keep the beneficial results of these efforts local. Investing in commercializing new technologies at a local university can lead to new companies that then leave the region, undermining the local effort to support and keep those new firms.

So, what kinds of strategies produce local results?

A recent working paper published by the Federal Reserve Bank of Philadelphia finds that local human capital is the most important variable in explaining why some regions patent at higher rates than others. Authors Gerald Carlino and Robert Hunt conclude that the education level of the local workforce is directly related to its innovative activity. While the paper itself does not connect patents to economic growth, it comes on the heels of another article, published last year by Carlino and Albert Diaz, that found a connection between local patenting activity to local employment numbers. Together, the articles suggest that investments in local human capital can be an effective strategy in spurring local innovation and creating jobs.

Carlino and Hunt use the share of the population over 25 years of age with a college degree as a proxy for local human capital. A one percent increase in the adult population with a degree is correlated with a one percent increase in local patenting activity, according to the study. The authors find that the estimated marginal effect of education on patenting is an order of magnitude larger than any other variable that was tested.

The other variables include historical mix of industries, the average number of employees per establishment, historical patenting activity in different industries and R&D activity at private firms, government laboratories and universities. University R&D was additionally broken down by academic field and source of funding.

The authors find little variation in the contribution of university R&D activity across different academic fields, but do find significant variation in the marginal contribution of academic R&D based on the source of its funding. Funding from "other sources," which includes funding from private foundations, outweighed privately-funded, state and locally-funded and federally-funded R&D in improving the local patenting rate. Federally-funded R&D was the least effective in improving patenting, which the authors acknowledge would normally be attributed to the fact that federally-funded research is often more basic than applied in character. The disaggregated data, however, shows that federal investment in applied R&D was no more effective at improving patenting rates than its investment in basic R&D.

The study also finds a modest negative effect associated with congressional earmarks of federal funds for R&D. Though not confirmed in this study, the authors find this result consistent with the idea that federal earmarks for academic R&D divert university researchers from activities that are more likely to produce patents.

"What Explains the Quantity and Quality of Local Inventive Activity?" is available at: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2009/wp09-12.pdf