The Rural Innovation Equation

The standard method of measuring innovation may miss the homegrown ways that rural firms introduce new ideas for operating their businesses. A new tool shows that innovation in rural America is associated with higher pay and growing markets.

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Rural areas are generally thought to be less innovative than their urban counterparts.  But most measures of “innovation” focus on patents or research and development activity.  These activities typically take place in large firms – which tend to locate in urban locations.

But there’s more to innovation than just patents.  And a new study that develops a broader “innovation index” finds that rural firms are innovative – and that rural innovation has a large impact on firms and the regions in which they operate.

This new study found that while rural areas still lag urban ones under this broader innovation metric, innovation does take place in rural areas.  This innovation in turn affects businesses and regions. In fact, findings from the study indicate that having more innovative firms in rural areas resulted in higher hourly wages and an expanding market.

The majority of innovation research has looked mostly at patent activity or research dollars spent, potentially overlooking homegrown innovation and its role in regional dynamics. For these reasons the study developed a unique, broader measure of innovation, and then assessed its relationship with business- and regional-level economic outcomes.

As rural areas score higher on the innovation index, they also have higher household incomes, according to this regression analysis. (Gallardo, Whitacre, Meadowcroft)

The data was obtained from the United States Department of Agriculture-Economic Research Service Rural Establishment Innovation Survey (REIS) that was performed in 2014.  The survey included more than 10,000 businesses with at least five employees, of which three-quarters were from nonmetropolitan counties.

To compile a new and broader innovation measure, we used 15 questions from the survey. These were questions such as how often business processes are changed in order to address customer complaints, the number of sources of information about new opportunities, introduction of new or significantly improved goods/services, etc..

After applying a statistical technique called factor analysis, the 15 innovation-related questions were grouped together into four components: innovative accomplishments, intellectual property, innovation sources, and customer focus.

The innovation score index ranged from 0 to 1 and the average score was 0.4, suggesting there is plenty of room for innovation growth among the businesses that participated in this survey. As expected, the information industry had the highest innovation score, followed by manufacturing of food and textiles.  In general, business located in more rural areas had lower innovation scores, though not by much.

When using the innovation index score to understand business-level outcomes, the study found that more innovative businesses paid higher hourly wages (more so in urban locations) and were expanding their markets (more so in rural locations).  When looking at regional outcomes, higher innovation was associated with a 1) higher percent employed in creative occupations, 2) higher median household income, and 3) lower poverty levels.  There were also some “spillover” effects of innovation, with neighbors of high-innovation areas having higher levels of creative class employees than expected.

These findings suggest that federal, state, and local initiatives supporting innovation should not focus solely on research and development or patent-oriented metrics.  Instead, they should also incentivize firms to develop new sources of information or implement methods for assessing  customer satisfaction and using what they learn to improve the business, for example.

In addition, regional innovation policies focusing on improving wages may be more successful in urban firms while a rural advantage may exist in terms of market growth opportunities. Lastly, investments in innovative cores do result in spillovers that benefit neighboring locations, which are more than likely rural.

Brian Whitacre is a professor, and Devon Meadowcroft is a graduate student at Oklahoma State University. Roberto Gallardo is the assistant director of the Purdue Center for Regional Development.  Their study was recently published in Entrepreneurship & Regional Development and is entitled “Firm and regional economic outcomes associated with a new, broad measure of business innovation.”  This work was initially supported by the Economic Research Service and the Northeast Regional Center for Rural Development.

 

 

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