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NYCEDC Innovation Index

The 2011 NYCEDC Innovation Index provides an analytical,comprehensive depiction of innovation activity in New York City. The data presented in this year’s Index and subsequent updates will 120 inform policies geared to unleash New York City’s enormous potential for innovation. The NYCEDC Innovation Index offers a new approach to innovation measurement in two respects. First, it is focused solely on New York City. Second, it tracks innovation activity over time to uncover its trends and characteristics.


INTRODUCTION
The key to New York City's success lies in the ability to continuously reinvent itself. From its origins as a hub for trade, through the industrial phase dominated by sugar refining, publishing and the garment trade, to today's role as a center for finance, professional services and creative industries, innovation has always been at the heart of the City's economic success. 1 Diversifying the City's economic base and being at the forefront of emerging sectors is necessary for sustained growth in the future.
Cities and urban areas -especially those as vibrant and diverse as New York City -are magnets for highly skilled, entrepreneurial talent; they are dense hubs that fuse knowledge, financial resources, firms and markets, and they offer the thriving cultural environment that galvanizes creativity.
The 100 largest metropolitan areas in the U.S. hold two-thirds of the nation's total population, jobs, and research universities, and they account for three-quarters of graduate degree holders, GDP, and patents; four-fifths of research and development (R&D)-related employment; and virtually all venture capital funding. 2 Additionally, cities are more likely to produce start-ups, entrepreneurs and small businesses that turn ideas into new products and create new markets. Cities are the perfect breeding ground for innovation. But how successful is New York City at harnessing its innovation potential?
The NYCEDC Innovation Index was created for the purpose of tracking the City's success as a center of innovation and entrepreneurship.
To ensure that New York City stays among the most innovative places in the world, there is a clear need for city-level measurement. Tracking innovation activity over time to uncover trends, understanding its drivers, and identifying areas of strength and weakness will also be critical to create a policy and regulatory environment that does not inhibit, but rather unleashes the City's innovative forces. The NYCEDC Innovation Index, for the first time, gives us the tools to do this.
The Index will also provide the evidence necessary to evaluate and improve policies designed to spur innovation and to lay the foundation for the City's future prosperity. In doing this, the Index also sheds light on the scale and pace of the City's transformation.

The success of cities
The agglomeration of people in cities provides a fertile environment for the conception, development and implementation of ideas and knowledge. In cities, ideas travel faster and can access the resources and services necessary to become business realities. A scientist or inventor alone may not know how to secure funding, but within a city it is easy to find the expertise that can.
An innovative product has little value if it is not commercialized, and cities are home to large markets with highly sophisticated consumers who are typically amongst the first to experiment with new technologies and business models. In an area where talented people are able to get together face-to-face in more informal settings, ideas are more likely to be spread than through communication that is limited to email.
Given the benefits of proximity, density and scale, it is no surprise that cities that specialize in the production of knowledge are better able to adapt to and take advantage of technological and economic changes. 3

THE NYCEDC INNOVATION INDEX
The NYCEDC Innovation Index is tailored to track the critical aspects of New York City's innovation economy in two respects.
First, the data collected provides a standardized and comprehensive picture of innovation activity associated with the City's economic transformation. As a result, the Index captures various aspects of innovation activity to provide its high-level overall trend. Second, the Index components provide insights on specific trends affecting and resulting from innovation. Overall, the Index documents that the barriers to business creation for high-tech and innovative firms are lower today than just a few years ago, and continue to decrease as more entrepreneurs are attracted to the City and make it a center for high-tech innovation. But with inputs continuing to rise, there is reason to be optimistic about the City's future performance.

Using composite indicators
Composite indicators like the NYCEDC Innovation Index and rankings are tools capable of summarizing complex and multi-dimensional information in an easily accessible way.
Composite indicators can uncover differences in overall innovation activity across regions or, in our case, trends in innovation activity over time.
There are drawbacks to the creation and use of composite  The data for the Index are collected from a large variety of sources and can be broadly split between innovation inputs and outputs.
More details are provided in the technical appendix to this report. 4 Within inputs and outputs, the variables are assigned to a cluster.  To achieve comparability, they need to be expressed in a single unit of measurement and we use growth rates because of their intuitive appeal and their tractability. 7

Measuring the outcomes of innovation policy
The national initiative known as STAR METRICS (Science and

R&D
R&D spending is a measure of investment in the creation and development of new ideas. Spending on R&D represents the value of innovation to firms and institutions, but it also supports jobs in these fields which contribute to overall economic vitality. Universities and colleges play a major role in the nation's basic research and account for 13% of its total R&D. 8

Finance
Financing for new and emerging small firms is critical for their growth. Resources beyond the traditional banking system allow businesses to take bigger risks, providing for bigger payoffs if they are successful. Growing businesses take on more employees and are more able to create innovative products with this additional human capital.
We observe financing in two ways: VC funding and federal funding through small business grants.
Venture Capital measures cash-for-equity investments by firms in private companies at various stages in their development. VC funding may also provide an additional incentive for firms to grow, as they are responsible for maximizing returns for their investors as well as for themselves.
Federal funding through SBIR and STTR grants provides capital for small businesses to create innovative products. SBIR funding is available from 11 federal departments, while five fund the much smaller STTR program. Phase I grants are given to a relatively large pool of applicants and allow the study of the feasibility of ideas. The most successful firms move to Phase II, where the funding amount jumps. Phase III is commercialization, for which private funding is required.
There were 350 VC deals in the New York area in 2010, with a total value of $1.9 billion. 12 This represents 10.7% of the total number of deals in the US and 8.6% of the total value. New York City accounted for 64% of total amount and number of deals in the New York area in 2010. Additionally, 62 New York City small businesses received a total of $30.5 million in SBIR/STTR funding in 2009, which was more than double the level recorded in 2003. The growth in the number of VC deals in the area was the main driver of the overall increase in the finance cluster. 13 VC funding received more weight in the cluster because of its relative magnitude and the fact that firms receiving investments are closer to the commercialization stage.

Financing new and small businesses
The availability of venture capital is critical for innovation. Entrepreneurs starting technology-based companies face significant challenges in securing financing to take products from concept to commercialization. Debt-financing is often not available to tech entrepreneurs, because of the high degree of uncertainty associated with early-stage innovations, the limited (or non-existent) cash-flow generated by start-ups and the fact that their assets are often intangible (e.g., knowledge) and therefore cannot be collateralized. Venture capital fills this gap. In fact, every dollar spent on venture capital returns three to four more dollars worth of patenting than traditional corporate R&D. 16 Venture capital is a good indicator to gauge innovative start-ups. Similar arguments apply to federal grants to small businesses for innovation research and technology transfer (SBIR/STTR). Such grants are one step removed from commercialization as they only finance the conception and feasibility study of ideas.
Recent evidence suggests that small firms engage in R&D with the objective of creating new products and capturing market share, whereas larger firms tend to concentrate their R&D efforts on improving their existing product lines. 17 As a consequence, new and small firms contribute relatively more to economic growth.
The innovation index measures venture capital and SBIR/STTR investments from different angles: by their total annual amount and U.S. share (as innovation inputs), and by the quality of the ideas being funded (as innovation outputs). Proxies for quality are the share of firms successful enough to attract more investment within a span of two years (e.g. a phase 2 SBIR grant or a series B venture capital) and the share of total funding attributable to such later investments.

"Silicon Alley"
At the end of the 1990s, a wave of entrepreneurs attracting VC investments emerged in the City, located on a relatively narrow corridor on Broadway in the neighborhoods of Flatiron, SoHo, and Tribeca. The moniker "Silicon Alley" may have aptly described the geography, but less so the focus of the firms, which was mainly in the City's traditional strengths of advertising and media (notable among them are DoubleClick, MediaMind, and Meetup). Today's start-ups, while still locating close to each other, have grown into an economic reality beyond the confines of one small area. 14 The City's start-ups in social media and web-based services have risen to particular attention. The World Economic Forum's Technology Pioneers 2011 list included 13 companies in Information Technologies and New Media. 15 Of the 7 based in the U.S., 3 were located in New York City: Foursquare, Knewton, and SecondMarket.

Immigration, innovation and entrepreneurship
Immigration is a key factor in sustaining New York City's innovation advantage. Immigrants contribute a dispropor- This highlights the enormous stakes for New York City.
As a destination point for immigrants from the world over, the City has benefited from newcomers since its founding.
In 2009, the City was home to nearly three million immigrants.

Intellectual Property
New ideas are at the core of innovation. Quantifying these ideas,

High-Tech Gross City Product (GCP)
A measure of the value of high-tech sectors to the City's economy, both in amount and in significance, is necessary to track its innovative success. The dynamic nature of high-tech sectors forces firms to constantly develop new products; the growth of these sectors is therefore directly linked to the emergence of new products.

Our measure of economic activity in the high-tech sectors is
Gross City Product (GCP), or the value of production in the City's economy, which we include on a per capita basis as well as looking at the share of the City's overall economic activity (total GCP).
In 2009, New York City GCP per worker in its high-tech sectors was more than $200,000, up nearly 30% from the 2003 level, and among the highest level of any sector. Over the period, the high-tech share of total New York City GCP increased by nearly 25%.

Entrepreneurship and Employment Dynamics
Several theories of economic growth link innovation to the rate of employers' births, deaths, expansions and contractions in a process known as "creative destruction." We measure entrepreneurship and employment dynamics by examining these changes in high-tech sectors combined with measures of entrepreneurial success and NASDAQ market capitalization.
Employment dynamics in high-tech sectors examine job reallocation, employer churning, and the share of job creation accounted for by births among small employers in the City.
These indicators, taken together, show as comprehensive as possible a picture of creative destruction as possible.
The ability of new businesses to bring new products to the market is dependent on whether they are successful. A measure of new firms lacks the ability to track this, so a proxy for the quality of ideas is the access to further stages of funding from venture capitalists or SBIR/STTR Phase II grants. Successful businesses should receive funding repeatedly (or be acquired by other firms) and at increasing amounts. Therefore, absent more direct indicators of growth such as sales or profits, we calculate the likelihood that the City's entrepreneurs receive venture capital or SBIR/STTR grants repeatedly (e.g. that they receive Phase II SBIR grant after receiving a Phase I) as well as the ratio of total funding obtained in later funding rounds. 25 Finally, as a proxy for the value of larger firms that tend to be

Measuring entrepreneurship
Entrepreneurship is a tangible outcome of innovation: the birth, death, growth and failures of businesses in the marketplace. Such a process of "creative destruction" is at the heart of innovation. However, quantifying entrepreneurship is difficult.
Self-employment is often used as a proxy for entrepreneurship as it covers both employers and non-employers. The Kauffman Index of Entrepreneurial Activity measures business creation in the U.S. and smaller geographical areas between 1996 and 2010 using this approach. 26 Although the Kauffman Index is not available for subsectors of the economy, its behavior is not dissimilar from the result of the entrepreneurship cluster. The number of workers per firm has also been used as a proxy, with a lower average signaling the presence of smaller scale entrepreneurs. This measure too suffers from the lack of distinction between types of firms or industries. 27 The importance of small firms for job creation has been confirmed in recent research, in particular highlighting the positive role of business startups. 28 Such firms, particularly in the high-tech sector, are also likely to increase productivity and push economic growth.
The relationship between innovation and job creation may however not be linear. According to Inc. 2010 rankings, 7 out of the top 10 firms in terms of job creation specialized in business process outsourcing, staffing and third-party business logistics. Arguably, while innovative and productivityenhancing, such organizational changes may lead to job growth at the expense of larger firms' internal structures. 29 A more direct measure of success is revenue growth.
The same rankings showed that the New York City area led the country in this respect, driven by media and advertising, two of the bedrocks of the City's economy.

CONCLUSIONS
The NYCEDC Innovation Index provides an analytic, timely and detailed measure of innovation in New York City to help identify the strengths and weaknesses of the City's innovation system.
Most strikingly, the Index shows the City's economic transformation and documents its attractiveness and pull on high-tech entrepreneurs around the globe. By linking innovation inputs and outputs, the Index will provide the guidance for prioritizing efforts to support innovative businesses.
The results lead to four distinct recommendations for policy-makers: 1. Innovation and economic transformation must be prioritized as the key to New York City's future growth and prosperity.   30 To extend our estimates to 2010, we used such preliminary data, as well as estimates based on each variable's time trend.
The construction of composite indicators relies on a choice of weights for its components, ideally chosen to be representative of their influence on the object being measured. If data limitations do not allow such an optimal choice of weights, robustness tests can be conducted to assess the results' sensitivity. We chose the latter strategy. The Innovation Index is derived by averaging the clusters presented in the report, themselves averages of the underlying variables. 31 The results show a steep increase in innovation inputs in 2010, driven by venture capital. The increase in inputs determines the overall increase in the Index between 2009 and 2010.
We also surveyed academic experts in the field of innovation and asked them to provide weights to the clusters and to their sub-components.
Therefore, the survey yielded two different sets of results: one looked at average weights assigned to the clusters, while the other applied the average survey weights to construct the clusters and the average survey weights assigned to the clusters. The two alternative scenarios paint the same larger picture: innovation increased in the City. Furthermore, the NYCEDC Index falls between the indexes constructed using the survey responses, as the following figure shows.

INDEX OF THE NEW YORK CITY INNOVATION ECONOMY, CENTER FOR AN URBAN FUTURE
The first index to quantitatively measure the NYC innovation economy, this report examines the City's performance relative to other cities and regions in nine science and technology-related areas. In particular, attention is focused on individual academic research institutions.
Using data for the latest year available, it does not track trends over time, and while it sheds light on performance in individual variables, it stops short of producing a composite indicator of overall innovation activity.
Main findings: New York City has not taken full advantage of the innovative potential of its academic research institutions. It has lagged behind other areas of the country, particularly Silicon Valley and Boston.

STATE NEW ECONOMY INDEX, THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION
The State New Economy Index benchmarks economic transformation across states. Rather than economic performance, the Index aims to answer the question "To what degree does the structure of state economies match the ideal structure of the new economy?" The indicators of the Index fall into five groups: knowledge jobs, globalization, economic dynamism, transformation to a digital economy, and technological innovation capacity. Massachusetts, Washington and Maryland led the ranking.
Main findings for NYS: New York State was ranked 10th overall in 2010, having improved from 16th since 1999. New York performed best in the share of high-wage traded services, which includes employment in the finance and publishing industries; it was weakest in online population, where the state ranked 34th.

STATE TECHNOLOGY AND SCIENCE INDEX 2010, MILKEN INSTITUTE
This index, published every two years since 2002, ranks each of the 50 states in five categories of technology and science indicators that are often used as innovation measures. As well as comparing states, the Milken index is beneficial in that it addresses how the rankings have changed since the previous release. Additionally, it creates an overall ranking by giving equal weight to each category.

Main findings for NYS:
Overall, New York ranked 16th in 2010, but ranked 9th in investment in human capital which includes variables like the share of population with advanced degrees.

INNOVATION INDEX, INDIANA BUSINESS RESEARCH CENTER AT INDIANA UNIVERSITY
First published in 2009, this online tool is designed for comparison of different states, metropolitan areas, counties, and other geographies for the latest year for which data are available. Four categories of indicators are included, including an "economic well-being" sub-index, which includes poverty rate and unemployment rate. By including a wider range of variables, this index adds factors that are important for innovation in the long-term, but that do not necessarily directly measure activity.
Main findings for NYC: The index found that NYC performed slightly worse than the U.S. in its composite indicator. An area of positive performance was productivity and employment, which includes job growth and GCP, among other measures.

APPENDIX C: THE CENTER FOR ECONOMIC TRANSFORMATION AT NYCEDC
The Center for Economic Transformation (CET) at NYCEDC is at the heart of our effort to change the City's economy. Created in early 2010, CET conceives and implements policy and programmatic initiatives that address complex challenges faced by the City's industries. CET uses analysis of current economic trends to understand the needs of the City's business community, and to develop and implement programs that address and resolve the challenges facing each sector. During the past year, CET has launched more than 60 groundbreaking initiatives.
These programs have included measures to help "legacy industries" like media, fashion, financial services, and manufacturing transition to 21st century business models, as well as tactics to attract and support "emerging industries" like bioscience, green services, and technology.
CET innovation policies focus on easing the process of business creation and entrepreneurship. By offering incubator space, information portals, training, and business competitions, CET aims to attract talented and creative entrepreneurs to New York City and provide the resources and create an environment where they can grow their businesses.