Cultivating Innovation

 

Executive Summary

Today’s global economy is increasingly based on knowledge and innovation.

This report assesses the four-county Milwaukee metro area’s strengths and weaknesses on a range of metrics associated with economic innovation and dynamism. We use 20 indicators that gauge our region’s success in developing a skilled workforce; cultivating new ideas and transferring them to market; creating new businesses and entrepreneurs; and attracting financial resources needed to help enterprises innovate and grow.

In addition to tracking metro Milwaukee’s progress over the last decade, we compare the region’s performance with 10 other metro areas to determine how we are doing in relation both to peers and to national leaders. Most of our comparison regions are midsized metro areas located in the Midwest, including many with a historic focus on manufacturing. For additional perspective, we also include two metro areas often identified as national leaders in innovation (Austin and Portland). We level the playing field by comparing each indicator on a per-capita or per-employee basis.

We hope that this analysis provides insight to local policymakers, business leaders, and the broader community as to how our region is advancing and which economic development strategies we may wish to prioritize in the future.

Regional Talent

We first look at a range of indicators associated with the regional workforce.

Census data show that educational attainment is rising in metro Milwaukee. In 2015, the share of our region’s adults ages 25 and over who had earned at least a high school diploma or GED reached 90% for the first time ever. At the same time, the share with a bachelor’s degree or higher bumped up to 33% in 2015.

Our analysis also examines the concentration of individuals employed in occupations associated with innovation. For example, while scientists and engineers make up a relatively small share of the overall workforce, they are responsible for much of the research and development activity that defines innovation, making them a highly valued group. Between 2005 and 2016, metro Milwaukee added approximately 1,400 scientists and engineers (an increase of 14%).  

Information technology (IT) is another industry often associated with innovation. Since 2005, our region has added more than 7,700 tech and IT workers, an increase of 38%. We define tech/IT workers as those employed in 18 computer-focused occupations, including software and web developers, computer programmers, and computer systems analysts.

Overall, metro Milwaukee is experiencing positive growth in most of the metrics we analyzed related to Regional Talent. The region’s performance also is in line with our comparison metro areas, with a notable strength in our concentration of skilled and technical workers. The table below shows metro Milwaukee's ranking on each indicator among the 11 metro areas included in our analysis. In addition to those already introduced, “knowledge workers” refers to the concentration of individuals employed in a broad range of occupations that typically require a bachelor’s degree or higher. “Skilled and technical workers” is the concentration of those employed in occupations that typically require education beyond a high school diploma but less than a bachelor’s degree. “College-educated, foreign born” refers to the share of the region’s total population who are immigrants with bachelor’s degrees or higher.

Idea Development

In the business world, innovation typically refers to the generation of new ideas that lead to business creation and growth. Research and development (R&D) activities carried out by both universities and businesses are major ways in which innovative ideas are created and translated into original products and services.

Metro Milwaukee is home to six universities that together increased their R&D expenditures in nominal terms by approximately 42% between 2006 and 2015. The Medical College of Wisconsin was responsible for $199 million (68%) of the region’s total in 2015, while UW-Milwaukee was next with $63 million (22%).

Since data on the R&D expenditures of area businesses are not publicly available, we examined patent activity and found that the number of patent filings originating in metro Milwaukee rose by over 60% between 2008 and 2015.

Despite our region’s recent growth in university R&D activity, which has outpaced most of our peers, our total R&D expenditures per capita remain below that of most of our comparison metro areas. The combined efforts of Milwaukee area businesses are yielding a similar level of patent activity in the region as in our comparison metros.

Capital Formation

The process of developing viable products from new innovations – and then patenting, licensing, and marketing those products (“technology transfer”) – can be expensive, time-consuming, and risky. A number of public and private funding sources help to facilitate those processes.

For example, the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grant programs are among the largest sources of early-stage capital for technology commercialization. Phase I grants fund exploration of the feasibility of new ideas, while Phase II grants support further R&D and evaluation of commercialization potential.

The total value of SBIR and STTR grants received by businesses in metro Milwaukee during the most recent five-year period (2012-2016) was roughly $11.5 million, which is about 50% lower than the amount received during the previous five-year period. Nationally, there was a much smaller decline; the total value of grants distributed nationally between 2012 and 2016 was only 7.2% lower than during the previous five-year period. 

The U.S. Small Business Administration (SBA) guarantees small business loans provided by banks, credit unions, and other financial institutions through its 7(a) and 504 loan programs. The 7(a) loan program provides SBA-guaranteed funding to startups and existing small businesses for general business purposes, while the 504 program provides long-term, SBA-guaranteed loans to small businesses for fixed assets (e.g. real estate or equipment).

Between 2011 and 2016, the total value of SBA loans flowing to metro Milwaukee businesses decreased by 26%, while the total distributed nationally increased by 56%. Thus, the decline in metro Milwaukee did not follow a national trend.

While most business startups and expansions are financed through loans and other means, venture capital (VC) funding is a helpful source of financial support for those who can access it. VC funds facilitate entrepreneurial activity by pooling investments by groups of individuals to support businesses that show strong potential for growth.

Annual VC investing in support of metro Milwaukee businesses has been in the $20-45 million range for the last five years and do not show a clear trend. These data include investments made not only by venture capital firms, but also by individual angel investors, angel groups, seed funds, corporate venture firms, and corporate investors. National data also show that among our comparison metro areas, Milwaukee attracted the second lowest amount of VC investments per capita in 2016 and was among the bottom three metro areas in each of the last five years.

Business Dynamism

According to recent Kauffman Foundation research, new businesses account for nearly all net new jobs created in the U.S. In light of the importance of small business development to economic growth, we analyzed recent data on small business creation and business survival.

The number of micro and small businesses (those with fewer than 100 employees) in metro Milwaukee has not recovered since the Great Recession. In fact, there were 2,328 fewer businesses in those categories in our region in 2015 than there were in 2005, a 6% decline. To put that in context, only the Cleveland metro area lost a higher share of its small businesses during that ten-year period.

Another way to measure business dynamism is to examine the ratio of business openings (births) to closings (deaths). In the Milwaukee metro area, more businesses opened than closed for several years leading up to the Great Recession. That trend reversed during and immediately following the recession (2008-2011) and has leveled off to a roughly one-to-one ratio since 2011. These data only are available through 2014, and it is possible that changes have occurred since that time.

Yet another way to evaluate business dynamism is by measuring the pace of startup activity. Startups often are defined as businesses that are less than one year old and that employ at least one person other than the owner.

The number of startups per 1,000 total firms in metro Milwaukee (and nationally) fell sharply during the recession, from more than 79 startups per 1,000 total firms in 2008 to less than 55 in 2013. Startup density has ticked up in each of the last four years but remains well below pre-recession levels.

Of course, the value of business creation only is significant if a large share of businesses survive over the long term. The Kauffman Foundation also tracks business survival using Census data, which shows that the 5-year survival rate of metro Milwaukee businesses dipped during the recession and has continued to remain lower than the national average.

The State of Wisconsin ranked 6th among the 25 largest states in business survival, but metro Milwaukee was less successful, ranking 34th for business survival among the 40 largest metro areas and last among our comparison regions.

The Milwaukee metro area already is home to a diverse population, and that diversity is growing over time. Thus, the rate of business ownership among racial and ethnic minority populations provides both an indicator of current regional economic equity and valuable perspective on the region’s future.

Metro Milwaukee’s minority business ownership rate has fluctuated in recent years but has remained consistently very low relative to the minority share of the region’s total population. In 2015, for example, only 10.7% of all businesses were minority-owned, while non-white populations comprised 32.1% of the region’s total population.

All of the metrics we tracked related to Business Dynamism indicate that metro Milwaukee is underperforming when compared to its peers. Perhaps most concerning is the region’s low ranking in business survival relative to other metro areas, including its low ratio of business births to deaths. Addressing the region’s low rate of minority business ownership also appears to merit prioritization.   

A number of new organizations and facilities have been created in recent years to support entrepreneurship and business acceleration in the Milwaukee area. Together, those efforts show that area economic development leaders recognize the region's relatively poor performance when it comes to startup activity and are developing new initiatives to boost performance. Their effectiveness should be closely monitored. 

Economic Outputs

Shifting the regional economy toward a greater focus on knowledge and innovation should lead to stronger economic outputs in general.

Gross domestic product (GDP) is once such economic output. GDP measures the value of all finished goods and services produced within an area. Adjusted for inflation, metro Milwaukee’s GDP rose steadily between 2005 and 2015 to just over $102 billion.

The value of metro Milwaukee’s annual global exports is an indicator of the competitiveness of the goods and services produced in the region in an increasingly globalized economy. The value of the region’s exports rose in nominal terms for several years following the Great Recession but has declined somewhat over the past several years. That flattening of global exports followed a statewide and national trend.

The ultimate goal of economic development efforts is to increase local prosperity by creating jobs and boosting incomes. After dropping significantly during the recession, metro Milwaukee’s total employment has bounced back to above pre-recession levels.

Both per capita and median household incomes have risen in the Milwaukee metro area by more than 14% since 2005, though that growth has not kept pace with inflation, which rose by roughly 21% during the same period.

Our region’s productivity (GDP), global exports, and median income are in line with our peers and the nation as a whole. Meanwhile, total employment has increased in metro Milwaukee since the Great Recession, but has grown at a slow rate compared with many of our peers.

Observations

Overall, our analysis paints a mixed picture for our regional economy and yields the following observations:

  • Metro Milwaukee’s talent pool is strengthening and is competitive with our peers.

  • Our region is underperforming in business development and survival.

  • Capital formation remains an area of concern for the region.