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Commentary: Growing Kentucky’s economy reliant on high-tech innovation sector

By James Gover

An article in the Wall Street Journal notes that the Southeastern United States — including Kentucky — spent the last century growing manufacturing-based, blue-collar jobs fueled by low cost labor and favorable tax treatment of companies. The economies of these states almost caught-up with the rest of the U.S. For example, per capita income in these states grew from 66.3% of national per capita income in the 1940s to a peak of 88.9% in 2009 for the overall region.

By 2017, per capita income in these states dropped to 85.9% of the per capita national income. Some believe this is a long-term trend caused by 33% of population in these Southeastern states living in rural areas in contrast to less than 20% for the rest of the U.S. Economic growth is generally taking place in large cities and a few small cities; rural areas are largely in economic decline.

However, only a few large cities are actually experiencing an economic boom! Researchers at Brookings Institution and the Information Technology and Innovation Foundation (ITIF) claim even though it has become clear that the future of America’s economy lies in its high-tech innovation sector, the majority of U.S. cities are falling behind a few “superstar” cities.

Most “superstar” city economic growth has been due to the innovation sector — comprised of 13 of the nation’s highest-tech, highest-R&D “advanced” industries. Its diffusion into new places would greatly benefit the nation’s well-being. However, far from diffusing into nearby cities, the innovation sector has been concentrating in a few cities.

Brookings-ITIF (B-ITIF) observe that just five top innovation metro areas — Boston, San Francisco, San Jose, Seattle and San Diego — accounted for more than 90% of the nation’s innovation-sector job growth during the years 2005 to 2017. In contrast, the bottom 90% of metro areas (343 of them) lost share.

B-ITIF recommends the U.S. designate eight to 10 new regional “growth centers” across the heartland from their list of 35 candidates for federal funding support. Lexington, Ky., had the fourth-highest ranking of these candidate cities.

The Milken Institute annually ranks the top 200 large and small U.S. cities using an algorithm based on percentage of job, salary and high-tech growth. Since 2010, five Kentucky cities: Louisville, Lexington, Bowling Green, Elizabethtown and Owensboro made Milken’s top 200 list with the latter three designated as small cities. I divided Milken’s rankings into two time periods: 2010 through 2016 and 2017 through 2019. Two observations stand out:

• EACH KY CITY HAD ITS LOWEST RANKING IN 2019. Lexington and Louisville lost 56 and 48 positions, respectively, from their average for the 2010-2020 decade. Bowling Green, Elizabethtown and Owensboro were down 36, 60 and 74 positions, respectively, relative to their average for the past decade. This downward trend was also observed in 2018 for all Kentucky cities except Bowling Green.

• FOUR OF FIVE KY CITIES LOST GROUND IN THE LATTER PART OF THE 2010-2020 DECADE. Lexington’s average for 2017 through 2019 was 43 positions below its average for 2010 through 2016. Louisville lost 12 positions, Elizabethtown lost 67 positions, Owensboro lost 57 positions and Bowling Green gained 17 positions.

Milken has examined features of the top 25 cities. In order of decreasing frequency of citation these are: presence of high-tech companies, favorable business climate, nearby university, educated workforce and tradition of innovation and entrepreneurship.

The World Economic has polled executives in 12 industry sectors employing over 15 million to determine which factors determine where they locate. For two-thirds of the sectors the top factor is talent availability. The talents most needed were big data analytics, app- and web-enabled markets, internet of things, machine learning, cloud computing, digital trade, augmented and virtual reality and encryption.

Milken has ranked the states with a science index based on: 1. research and development (R&D) inputs, 2. risk capital and entrepreneurial infrastructure, 3. human capital investment, 4. technology and science workforce, and 5. technology concentration and dynamism. Kentucky ranks 46th among the 50 states.

If, as B-ITIF asserts, the future of America’s economy lies in its high-tech innovation sector, these data indicate KY is not prepared to compete.

James Gover is professor emeritus at Kettering University, an IEEE Life Fellow and a graduate of University of the Cumberlands and University of Kentucky.