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April 25, 2013
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Quarterly Edition of Illinois Innovation Index Analyzes Region’s Building Blocks of Innovation

Innovations from companies across the state fuel economic growth, creating new goods and services that are faster, cheaper, and better than what came before. Capital and research investments are central to these efforts. The 2013 Quarter 1 edition of the Illinois Innovation Index provides the most recent data on four of these building blocks of innovation—academic research and development (R&D), venture capital investment, loans to small businesses, and broadband business connections—that help turn promising ideas into novel products and processes. GO TO 2040recommends improving data and information systems on innovation so that policymakers, investors, and business leaders can make better-informed decisions.The Index -- a collaborative effort between CMAP and the Chicagoland Chamber of Commerce, Illinois Science and Technology Coalition, and World Business Chicago -- tracks a broad set of metrics to measure the innovation economy of the region and state.

Rebound from Recession
Together, the Index's four capital indicators help illustrate metropolitan Chicago's rebound in innovation investments following the most recent recession. This rebound is most notable in venture capital investments and lending to small businesses, which both experienced sharp funding declines in the region between 2007-09. Since that time, annual venture capital investments in the region have rapidly increased from a low of near $300 million in 2009 to $1.3 billion in 2011. Indeed, the Index notes that the 111 regional companies funded by venture capital last year was more than twice the annual average from 2006-10.

Like venture capital investments, lending to small businesses plummeted during the recession but has recently picked up, although at a slower rate compared to other capital indicators. In 2011, small businesses in metropolitan Chicago received loans totaling nearly $7 billion to finance expansion and innovation efforts, an increase over the last three years but still below pre-recession numbers. Future innovations in the region will rely in part on the availability of both venture capital and small business loans that provide needed resources to finance the development and commercialization of a promising idea. The continued expansion of these two building block indicators can help bolster the next generation of regional innovations.

Lending to regional small businesses has recovered from the recession's downward pull yet still trails prior levels.
Source: Illinois Innovation Index, 2013.

In addition to capital investments, regional innovation infrastructure can help novel ideas flourish. The other two indicators featured in the quarterly index gauge the region's standing in two of the most prominent innovation measures: academic R&D expenditures and broadband infrastructure. Like the capital indicators, academic R&D at local universities has expanded by $63 million between 2010-11 for an increase of nearly four percent. Further, business broadband connections across the state grew above the national average, increasing 232 percent between 2009-11. The uptake in these measures mimics the two capital indicators; all four show regional progress since the recession in rebuilding the foundation to support future innovations.

Challenges Ahead
While the region's recovery in capital and research indicators is promising, the same indicators show the region underperforms compared to other metropolitan areas in innovation funding. For example, the Chicago region is the nation's third largest metropolitan area -- yet with $1.7 billion in academic R&D in 2011, the region ranked eighth nationally, trailing much smaller areas such as Baltimore and Durham, North Carolina. A key challenge moving forward is how to maintain and augment innovation in the region's existing investments in the wake of increased federal budgetary constraint.

While the private sector funds venture capital investments, the quarterly Index's other three indicators -- academic R&D, lending to small businesses, and broadband infrastructure -- all rely on sizable investments from federal agencies. For example, private broadband infrastructure has been supported by substantial federal investments, including $7.2 billion to expand broadband access across the country. The federal Small Business Administration facilitates lending and improves access to capital for small firms. Its 7(a) Loan Program helps more small firms obtain financing for expansion activities. Like other states, Illinois receives the majority of academic R&D funding from the federal government. As these three vital building blocks of innovation all rely in part on considerable federal support, they are vulnerable to the uncertainty and possible cutbacks in federal innovation funding.

Academic research and development funding by source, 2011

Like other states, Illinois receives the majority of academic R&D funding from the federal government.
Source: Illinois Innovation Index, 2013.

Responding to Changing Innovation Investment Dynamics
Analysis in the quarterly edition of the Index provides strategies that can help metropolitan Chicago build off its rebound in innovation indicators, even with lingering federal budget uncertainty. To offset any future decline in federal support, metropolitan Chicago could focus on increasing business contribution to academic R&D -- businesses in Illinois currently fund only four percent of total academic R&D, a lower rate than many of the nation's other top states.

In North Carolina -- home to the nation's largest technology park connecting firms to university research -- businesses fund academic research at a rate three times higher than that in Illinois. But, as the Index points out, there are promising models as well within the region on how to diversify innovation funding streams. To better-attract private firms to invest in university-based R&D, the Index spotlights the Illinois Institute of Technology's (IIT) Interprofessional Projects Program (IPRO). As IIT has a larger proportion of its R&D funded by the private sector than both the state and national average, its model may be applicable for the rest of the Chicago region. In the IPRO program, private companies such as Motorola and the manufacturer A Finkl & Sons sponsor a team of students to tackle a real-world challenge facing the firms. Linking university curricula with industry needs enables private firms to see how their investment in academic research has direct relevance to improved business operations. This provides a stronger incentive to fund future research. A similar model fostering private investment in academic research tailored to specific and practical industry challenges could help insulate the region somewhat from any future declines in federal support.

In addition to diversifying funding sources through more industry collaboration, metropolitan Chicago should continue to build off its specializations so that the region has a strong innovation base independent of fluctuating funding streams. The Index's most recent data on academic R&D points out regional specializations in life sciences and math/computer sciences. These technology-rich fields have broad cross-industry applications, with particular relevance for health care, information technology, and manufacturing. The region's specializations both support a large swath of the regional economy and grant a competitive advantage compared to peer areas. As innovation funding streams continue to be pressured by budgetary concerns, the region should focus on sustaining and prioritizing capital and research investments in those very specializations that enhance our region's competitive edge.

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