Regional Innovative Capacity with Endogenous Employment: Empirical Evidence from the U.S.

Using the endogenous growth model proposed by Romer (1990) and operationalized by Stern, Porter, and Furman (2000), we seek to identify factors that affect innovative capacity in the U.S. We find strong evidence of endogeneity between employment growth and innovative capacity. In response, we estimate a generalized two-stage random effects model of hi-tech employment and patenting activity. We find that the stock of knowledge (standing on shoulders effect), industry R&D expenditures, and the number of high-tech employees explain the rate of change of innovation among the states during the 1990s. The stock of human capital also influences the innovation rate. Our findings suggest that patenting activity and wages in the high-tech sector are the primary forces influencing the demand for high-tech labor.