A How-To Guide for States to Spark Innovation

During Arizona’s state of the state address, Gov. Doug Ducey sent a warning to his neighboring state to the west: California, we are coming after your startups.

“Arizona should be to the sharing economy, what Texas is to oil and what Silicon Valley used to be to the tech industry,” said Ducey in January. “Moments ago, I signed an executive order creating the governor’s council on the sharing economy. Its mission: stop shackling innovation and, instead, put the cuffs on out-of-touch regulators. I want startups in the sharing economy to know—California may not want you, but Arizona does.”

According to the Consumer Technology Association’s (CTA) 2016 Innovation Scorecard, an annual innovation policy performance index, Arizona is well positioned to lure startups from California due to its tax friendliness, strong tech workforce, ability to attract investments and growing science, technology, engineering and math (STEM) pipeline. Last year, Arizona was among the 23 states that embraced the sharing economy—and all the consumer choice, job creation and economic growth this technology offers—by legalizing ridesharing statewide.

The Golden State may be home to the epicenter of the tech startup universe—Silicon Valley—but more and more states are not only actively encouraging their homegrown entrepreneurs, they’re proactively seeking and supporting innovators who can make a difference in our everyday lives and the state’s bottom line.

CTA’s latest Scorecard named Arizona as one of the states best-suited to welcome and nourish startups. Arizona was also joined by Delaware, Indiana, Kansas, Massachusetts, Michigan, Nebraska, North Dakota, Texas, Utah, Virginia, Wisconsin and Washington, DC.

So, which part of the country best supports innovation? You may be surprised. The Midwest features a number of states that now effectively champion innovation – further proof these states have earned the nickname “Silicon Prairie.”

Kansas is among the country’s most innovation-friendly states after improving aggregate Internet speeds thanks to investments from Google Fiber and entrepreneurial activity, nearly doubling its venture capital (VC) funding from $14.51 per capita to $28.67, and legalizing Uber and Lyft ridesharing services. These steps, whether in Kansas or elsewhere, signal to entrepreneurs and startups that a state is receptive to allowing the next big, revolutionary business to be part of the state’s economy.

Next door, Missouri—a state ranked among the bottom half of states in the 2015 Scorecard, improved its ranking by boosting average Internet speeds by more than 30 percent and increasing research-and-development per capita by more than 50 percent, the biggest jump of any state.

To the north, Nebraska joined the top tier of innovation-friendly states by improving its Internet speeds, increasing VC funding nine-fold and legalizing ridesharing. Nebraska also embraced pro-innovation sustainable policies by creating a pilot project to explore new ways to collaborate and collect old electronics for recycling.

Which states are sending mixed signals about adopting sound policies that best enable innovation to flourish?

In general, states that follow an approach of a light regulatory framework and favorable tax policies, and nurture students in science, technology, engineering and math fields effectively attract tech businesses. That’s part of the reason why California—Arizona’s target for scooping up startups—isn’t among the country’s most innovation-friendly states. In fact, it’s not even among the top 25.

California attracts the most high-tech investment of any state by far, leading the nation is VC and research and development funding. But California scored poorly for its onerous tax policies and lack of innovation-friendly sustainability policies. And while ridesharing is legal statewide, Uber has faced threats of suspension and homesharing companies like Airbnb face a frustrating mix of municipal laws.

Mississippi has flexible labor laws and a tax-friendly environment—but it’s all over the map on supporting disruptive innovations. It is one of four states at the forefront of supporting drone technology, yet the state has driven ridesharing out of several municipalities and doesn’t have clear statewide laws. More, Mississippi Attorney General Jim Hood continues to threaten to chill Internet activity by demanding that online search engines censor results in violation of federal law.

Also in the South, Kentucky shows an interest in fostering innovation—it legalized ridesharing statewide last year—but has failed to put in place the right policy tools that would help attract startups. Passing right-to-work legislation, increasing Internet speeds and building a talented STEM pipeline and tech workforce would do wonders for Kentucky’s future.

It is often said that states are the laboratories of democracy. Right now we have 50 experiments happening across the country, each designed to help support their economies and be home to the next successful innovation product or development. As states continue to find innovation strategies that support a company’s vision and capabilities, governors should look at some of these states to help them bring incremental and breakthrough growth to their home states.