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California slips in national rankings of high-tech economies, according to Milken Institute study

Press Release
California slips in national rankings of high-tech economies, according to Milken Institute study

(SAN DIEGO) California's tradition of turning ideas into profitable businesses that can drive its knowledge-based economy may be at risk. While it still ranks among America′s leading high-tech states, California now shows increasing weakness in several key areas that could affect its economic future, according to a new report from the Milken Institute.

California dropped from 2nd to 4th place in the 2008 Milken Institute State Technology and Science Index, thanks in large part to its growing difficulty in attracting the top national and international graduate-level students, garnering federal R&D funding and preparing its future workforce in the K-12 system.

Overall, the state still maintains a spot in the national top 10 across the nation — a list that is once again led by Massachusetts. But this year, it was surpassed by Maryland and Colorado (states that ranked 4th and 3rd, respectively, in the last edition of the Index, which was published in 2004). Washington, Virginia and Connecticut are close behind in the overall rankings, with both Washington and Connecticut demonstrating positive momentum as they move up the Index.

The Institute's findings are captured in a report released today at the BIO International Convention in San Diego. California's Position in Technology and Science: A Comparative Benchmarking Assessment offers an in-depth look at California's high-tech economy. The report is a companion to the 2008 State Technology and Science Index, also released today, which ranks all fifty states' ability to build and foster high-tech industries.

"California is still a strong contender as a high-tech leader," said Ross DeVol, director of Regional Economics at the Milken Institute and lead author of the reports. "However, we are increasingly relying on existing strengths, such as the sheer number of industries and our model of capital funding, while other states are aggressively embracing new ways and new models to attract the economic engines of the future."

California leads the nation in entrepreneurial capacity and early-stage risk capital. Venture capital is particularly strong in the state and the state excels at business starts (per capita) and patents in the newest indicators for nanotechnology and clean technology. California received 48 percent of all venture capital dollar placements in the United States in 2006.

However, California is experiencing a significant drop in the quality of its human capital. The Human Capital Investment Composite detailed in the report shows that California, which ranked 7th in this measure in the 2004 Index, has dropped all the way to 13th place today -- a dramatic fall for a state that finished 4th in this area in 2002. Indicators for this measurement show that California students score poorly on standardized tests and that the percentage of the population with bachelor's degrees or higher is lacking (16th in the nation), particularly for a front-runner state. The unfortunate story behind this change is the state's struggling K-12 education system, which, according to the report, is turning out a "growing undereducated and unskilled workforce."

An additional factor contributing to the human capital problem is the recent decrease in foreign graduate students enrolling in the University of California and private universities across the state. This can be linked to the national post-9/11 visa policies and to increases in non-resident tuition.

The impact of human capital rankings is critical in today's economy. It isn't just that firms and industry concentrations attract top talent these days -- clusters of talent, particularly those concentrated in research facilities and top universities, now have the power to attract new firms.

California is one of several states, including Minnesota and New Jersey, that have developed high-tech industries but face new challenges by up-and-coming states -- states that are actively competing for the skilled high-tech workers and assets that foster sustainable economic growth. The report notes that Maryland and Colorado have attractive combinations of newly established high-tech economies and more friendly cost structures for businesses. Also, Virginia and Utah could continue their impressive recent growth in high-tech industry concentrations to eclipse California's current strength in this area.

California's Position in Technology and Science: A Comparative Benchmarking Assessment and the 2008 State Technology and Science Index look at 77 unique indicators that are categorized into five major components: Research and Development Inputs, Risk Capital and Entrepreneurial Infrastructure, Human Capital Investment, Technology and Science Work Force, and Technology Concentration and Dynamism. The Index is one of the most comprehensive examinations of state technology and science assets ever compiled.

The studies were made possible in part through the generous support of Goodwin Procter LLP.

Complete rankings (including interactive tables and maps) for all fifty states are available here. The full reports are available here.