OC LEADER BOARD

Our research team recently expanded the Chapman-UCI Innovation Index to cover 50 metropolitan areas.

That coverage includes an extensive databank and an index number we formulated to track the growth of jobs, establishments, and wages in “Advanced Industries.”  

As defined by the Brookings Institution, these jobs include a broad range of technology, software development, aerospace, scientific research, medical products, and pharmaceutical development.

The significance of these industries is reflected by the fact that the annual average wage paid in Orange County in advanced innovation industries is $125,000 as compared to an average of $66,300 for all other jobs in the county.  

That difference explains why advanced industry jobs comprise 24.2% of total wages even though these jobs represent only 14.5% of all the jobs in the county.

In addition to the higher value-added character of these jobs, research shows that urban areas that have a greater focus on innovation are better able to attract capital, grow faster and build wealth for their communities.

Figure 1 shows a ranking of the top 15 of the 50 advanced industry hubs as of 2005:1 and the most recent ranking of the Chapman-UCI Innovation index as of 2021:1.  

Several shifts in the top 15 rankings stand out. Notice that Detroit, which ranked at No. 3 in 2005:1, dropped to No. 9 in 2021:1. Houston fell even more from No. 5 to No. 15.

Perhaps because of Amazon’s explosive growth, Seattle’s rank moved up from No. 7 to No. 3. Salt Lake City, which at No. 19 wasn’t even in the top 15 in 2005, moved up sharply to No. 11 by 2021. The emergence of Salt Lake City as an increasingly important innovation hub may explain why it’s become known as “Silicon Slopes.”

Of greater interest to us, of course, is Orange County, which fell from No. 10 to No.12. It was displaced by Raleigh, N.C., as well as Salt Lake City.

Explaining these shifts over time has become a focus of our team’s more recent research efforts. Readers of this Leader Board may recall an article we wrote about Orange County’s decline versus San Diego’s faster growth. We argued that survey research will be necessary to explain why San Diego has become a greater magnet than Orange County in attracting innovation industries.

Although we haven’t yet embarked on that research path, we have begun to use statistical regression analysis to more broadly measure the growth and decline of innovation industries for all 50 hubs that we track.

While more research needs to be done, our nascent research efforts reveal a number of explanatory variables that help explain the rise and fall of innovation hubs as measured by the percentage change in the Chapman-UCI index between 2005:1 to 2021:1.

Those factors include such variables as a metropolitan area’s density, regulatory activity and median household income.  

Another significant variable we identified that determines if an innovation hub is losing or gaining ground is the desirability of an area’s climate and natural amenities as measured by the U.S. Department of Agriculture’s “Amenity Index.” For example, our regression findings suggest that a single point increase in a hub’s amenity score—the index score ranges between -3 to +11—leads to a 1.2% increase in the Chapman-UCI index.

But the most significant factor we’ve uncovered so far that explains the percentage change in that Chapman-UCI index between 2005:1 to 2021:1 is the ranking of state and local taxes in which the hub resides.  

The significance of state and local taxes is shown in Figure 2.  

That figure shows the average change in the Chapman-UCI index between 2005 and 2021 for each of 10 states arranged from the lowest quintile to the highest quintile of state and local taxes.  

The 10 states in the lowest quintile of tax ranking experienced a 37.8% increase in their average Chapman-UCI Index score, while the 10 states that rank highest in taxes grew only 17.2%. That’s less than half the average rate of the 10 states that rank in the lowest tax quintile (Quintile 1).

Clearly, taxes matter. The fact that California ranks 49th highest in state and local taxes places California at a disadvantage. Given the competitive environment of the global economy, state and local taxes play an increasingly important role in explaining where companies decide to locate.

In our next Leader Board piece, we’ll reveal what businesses in California are saying about its overall business climate. These findings are based on a recent Chapman, UCI and UCSD survey of 200 CEOs of California.  Not surprisingly, these survey findings buttress the empirical findings presented in this report.