Midwest prospects and the new economy

spends more on R&D for each dollar
of gross state product than any other
state, helping the Midwest to rank
third among U.S. regions (see figure
3). In addition to the R&D intensity
by location illustrated above, it is of-
ten instructive to look at the occupa-
tional intensity of regions across all
industries for those occupations that

3. Industry R&D spending, 1997

4. Scientists and engineers, 1997
tend to be associated with technolog-
ical pursuits and activities. For exam-
ple, according to National Science
Foundation estimates, the Midwest
ranks seventh in the concentration
of scientists and engineers (figure
4). Patent data may also add insight
to a region’s production of new
ideas across all of its industry sectors
and activities. The
Midwest states were
issued 16,049 patents
in 1999 (figure 5), or
17% of the national
total. Only the Pacific
region, with 25%, had
a higher share. One
caveat to these data is
that not all ideas and
processes are patent-
ed, possibly because
their usefulness is not
outlived by the patent
process gestation or
because their propri-
etary nature may be
easily preserved with-
out formal patenting.

Finally, there is a wide
body of opinion that
the source of the new
economy’s success lies
not with tech intensi-
ty and leadership per
se, but rather with the
underlying character-
istics of the U.S. eco-
nomic system and its
regional variants. With
highly developed and
specialized capital
markets, new ideas
can make their way
to market, and the
rewards of risk and
innovation can accrue
to their originators,
thereby encouraging
progress and change.
Entrepreneurship is
the buzz-word of the
day, but behind this
phenomenon, a fertile
infrastructure of insti-
tutions, law, and cul-
ture makes possible
rapid growth from
new technologies, as
well as growth that arises from changes
in consumer preferences, behavior,
and firm/industry organization. Dereg-
ulation of the old-line telephone in-
dustry, beginning in the 1970s, paved
the way to today’s entirely revamped
telecommunications industry. More
recently, the deregulation of electric
power in some states, combined with
new technologies of fuel cells and gas
turbines, is sparking new industry
growth. How, then, can we measure
and identify entrepreneurial activity
and climate by region? As a measure
of activity, investment flows may be the
most inclusive and broad indicator,
namely those of the venture capital
industry which funds early stage in-
dustries and innovations before such
businesses approach highly structured
equity markets. Accordingly, regional
policymakers now eagerly track the
trends in placement of venture capital
as an indicator of the emergence of
new industrial activity. The Midwest is
sharing in a surge of such investment
(figure 6). Even so, this surge appears
to be little more than part of a nation-
al phenomenon; the Midwest’s share
of such investments is not gaining on
other regions (figure 7). Still, who can
say what new industries or industry
segments may arise from Midwest
placements of venture capital?

Michael H. Moskow, President; William C. Hunter,
Senior Vice President and Director of Research; Douglas
Evanoff, Vice President, financial studies; Charles
Evans, Vice President, macroeconomic policy research;
Daniel Sullivan, Vice President, microeconomic policy
research; William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.

Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System. Articles may be reprinted if the
source is credited and the Research Department is
provided with copies of the reprints.

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