The State New Economy Index

The 2002 State New Economy Index includes most of the indicators used in the [1999] State Index. However, in our continuing effort to better measure the New Economy, especially as it is affecting all sectors and not just "high-tech," the 2002 Index includes several new indicators using newly available data. Several of these indicators assess the extent to which non-IT sectors have embraced IT. The report measures the percentage of information technology workers in "traditional" sectors that use IT, the extent to which farmers are using computers and the Internet, and the share of manufacturing plants with Internet access. To assess the degree to which a state's manufacturing sector is embracing high-performance, high-skill work practices, it measures the educational levels of a state's manufacturing workforce. Finally, it measures the states' high-speed broadband communications infrastructure.

In addition, for variables that measure company behavior (R&D, exports, patents), the report controls for a state's industry sector mix. Holding the industry mix constant is important for these variables since some industries by their nature export, patent, or spend more on R&D than others. For example, without controlling for industry mix, Washington state would score very high on manufacturing exports because the aviation sector (e.g., Boeing) is so large, and exports are a large share of the industry's output. To present a more accurate measure of the degree to which companies in a state, irrespective of the industry they are in, export, invest in R&D, or patent, these three indicators control for states' industry mix. 3

Because the 1999 and 2002 reports use different indicators and different methodologies, the total scores are not necessarily compatible. Therefore, movement of a state to a higher or lower rank from 1999 to 2002 should not necessarily be seen as reflecting relative changes in the structure of its economy.

The 21 indicators are divided into five categories that best capture what is new about the New Economy:

1) Knowledge jobs. Indicators measure employment of IT professionals; jobs held by managers, professionals, and technicians; the educational attainment of the entire workforce; and the education level of the manufacturing workforce.

2) Globalization. Indicators measure the export orientation of manufacturing and foreign direct investment.

3) Economic dynamism and competition. Indicators in this category measure the number of fast-growing "gazelle" companies (companies with growth of 20 percent or more for four straight years); the rate of economic "churn" (which is a product of new business start-ups and existing business failures); and the value of initial public stock offerings (IPOs) by companies.

4) The transformation to a digital economy. Indicators measure the percentage of population online; the number of ".com" domain name registrations; technology in schools; the degree to which state and local governments use information technologies to deliver services; Internet and computer use by farmers; Internet use by manufacturers; and access by residents and businesses to broadband telecommunications.

5) Technological innovation capacity. Indicators measure the number of jobs in technology-producing industries; the number of scientists and engineers in the workforce; the number of patents issued; industry investment in research and development; and venture capital activity.

In all cases, the report relies on the most recently published statistics available, but because of the delays in publishing federal statistics, the data in some cases may be several years old. In addition, in all cases, data are reported to control for the size of the state, using factors such as the number of workers or the gross state product as the denominator.

Scores in each indicator are calculated as follows: In order to measure the magnitude of the differences between the states instead of just their rank from one to 50, raw scores are based on standard deviations from the mean. Therefore, on most indicators, approximately half the states initially have negative scores (below the national mean) and approximately half have positive scores. The scores are equally adjusted (10 is added to each of the five indicator category totals) to ensure that all are positive.

In three of the five indicator categories, and in the calculation of the overall New Economy scores, the indicators are weighted so that closely correlated ones (for example, patents, R&D spending, and high-tech jobs) don't bias the results. (See Appendix A.)

The overall scores are calculated by adding the states' adjusted scores in each of the five indicator categories and then dividing that total by the sum of the highest score achieved by any state in each category. Thus, each state's final score is a percentage of the total score a state would have achieved if it had finished first in every category.

The maps were coded using the following methodology: The range between the highest and lowest scores was calculated and divided by four. That product was subtracted from the top score to calculate the range for the 100th to the 76th percentile, and likewise for the other three percentile ranges. In other words, the percentiles do not necessarily divide into an equal number of states, but rather indicate which state scores fall into a particular range.

The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
600 Pennsylvania Ave., S.E., Suite 400, Washington DC 20003
Phone: (202) 547-0001
www.ppionline.org

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Overview and Methodology