Regional Economic Indicators: Innovation

Innovation

New ideas and technologies help produce high-quality goods and services that keep metropolitan Chicago competitive in today's global marketplace.  Innovation is spurred by both the private sector and local academic institutions.

Venture Capital

What

The number of venture capital deals conducted in Illinois, a majority of which are in metropolitan Chicago.

Why it matters

Innovations in new goods, services, processes, and technologies drive economic growth.  Some of these innovations reach the commercial market through new business startups.  These newly created firms can face substantial costs for researching, developing, and marketing new products or services.  In these instances, investors can support high-risk, potentially high-growth startup companies through venture capital funding.

Leading venture capital regions such as New York, Los Angeles, and northern California (which encompasses the San Francisco Bay Area, including Silicon Valley) account for an increasing share of the nation’s venture capital deals.  Illinois’ share of national deal making has more than doubled since 2002 but continues to lag peers.  Lower rates of deal making can limit the establishment, retention, and attraction of high-growth firms in the region.

Total number of venture capital deals in select regions, 2017

Venture capital plays an important role in the business startup process by providing support to businesses before they are financially sustainable or able to access traditional funding streams.  Venture capital investing is often a high-risk, high-reward endeavor because startup companies fail at high rates.

Therefore, such investments tend to finance innovative ideas and companies in high-growth sectors.  Popular industries for venture capital activity include software, biotechnology, media and entertainment, information technology services, and computers and peripherals.  These industries have relatively low up-front capital costs and they attract the majority of venture capital, while industries with higher up-front costs, such as manufacturing, attract a smaller portion.

Investment in venture-backed companies only equates to 0.2 to 0.3 percent of U.S. gross domestic product each year, yet venture capital-backed firms employ more than 10 percent of the private sector workforce.  The National Venture Capital Association estimates that every $1.00 of venture capital invested between 1970-2010 yielded $6.27 in revenue.  This underscores the sizable economic benefits that venture capital investment can bring to regional economies.

The venture capital funding process generally occurs in four stages.  Each stage provides financing for different purposes, with earlier investments posing higher risks for investors and later stages posing less risk as the company finds stability.

The first stage of funding, known as the “seed” stage, occurs when a new concept or product is under development but not fully functional or vetted.  Companies in this stage generally seek financing from angel investors or venture capital firms to conduct proof-of-concept research and development.  After developing a proven prototype of their product or service, startups seek “early-stage” funding to support further development and build on initial commercial sales.  An “expansion” funding stage typically follows with working capital for company growth, marketing, and major product revisions.  Firms eventually use “later-stage” funding (including leveraged buyouts) to finance major expansions or prepare the business for an initial public offering.

Nowhere in the U.S. is the value of venture capital more apparent than in northern California.  The region’s concentration of tech workers and other “knowledge spillovers” has made it a magnet for venture capital funding.  In 2017, northern California captured an estimated $30 billion in venture capital -- more than 40 percent of the national total.

National trends

National venture capital deal making peaked in the late 1990s before falling substantially during the dot-com bust of the early 2000s.  In 2017, venture capital firms conducted an estimated 5,400 deals nationwide.  While still substantially lower than the deal totals for the late 1990s, recent increases in deal making activity demonstrate the continued rebound of venture capital activity following the 2007-09 recession.

The average investment amount per venture capital deal has increased substantially since 2013, suggesting a more favorable market for investment.  In 2017, the average investment amount per deal in Illinois surpassed its pre-recession peak for the first time since 2010, when e-commerce company Groupon raised a massive round of funding.  The average venture capital investment in Illinois in 2017 grew substantially to $12.8 million, nearly closing a recent gap with the national average of $13.6 million.  The volatility of Illinois’ average investments helps to show how national business cycles and even single deals can have an outsized effect on venture capital funding in the region.

Average investment per venture capital deal in millions, 2002-17

Local and peer region trends

Since the early-2000s, Illinois has accounted for a relatively small but increasing share of U.S. venture capital deals, growing from 1.1 percent in 2002 to 2.8 percent in 2017.  Due to data limitations, metropolitan-level data are not available for the Boston or Chicago regions; however, the vast majority of venture capital deals in each state originate in their respective metropolitan areas.  Northern California has experienced recent declines in its share of national venture capital deals as other peer regions such as New York City have seen near continuous increases in deal making activity.  By comparison, such activity in Illinois has remained relatively stagnant since 2011.  In 2017, four peer regions attracted more than 60 percent of total venture capital funding in the U.S.

Peer region shares of national venture capital deals, 2002-17

About the Data

Because venture capital deals are agreements between two private parties, no public data source captures venture capital activity.  The data presented in this analysis are produced by Thomson Reuters and published by PricewaterhouseCoopers (PwC) and the National Venture Capital Association.  The data reported represent a “best guess” of venture capital activity by region and state.  It is important to note that annual average total funding amounts can be skewed by a small number of high-value deals.  PwC does not track data for the Chicago region.  This analysis uses Illinois estimates in lieu of regional data.  CMAP cannot verify that dollar amounts for prior years have been adjusted for inflation.

The data presented here should be viewed as a partial snapshot of innovation and venture capital activity.  The data do not address issues such as what percentage of firms receiving funding succeed or fail, or what percentage of firms remain viable or exceed their growth expectations.  Furthermore, some regions may experience higher rates of funding and deal activity but also experience higher startup failure rate.  Some regions may excel at producing a large number of “niche” startups, while others may produce a smaller number of startups with greater growth potential.

The geographies used in this analysis are defined by PwC: New York City (metropolitan New York City, including northern New Jersey, and Fairfield County, Connecticut); Los Angeles (southern California, excluding San Diego and including the Central Coast and San Joaquin Valley) and northern California (Bay Area, including Silicon Valley and coastline).

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Patents

What

The total number of utility patents, also known as “patents for inventions,” issued by the U.S. Patent and Trademark Office.

Why it matters

High levels of patenting generally indicate a talented regional workforce and businesses with a strong capacity to conduct research and development.  These ideas can generate significant value.  Research has found that U.S. workers in industries with higher than average levels of intellectual property and patenting earn 46 percent more than those in other industries do, despite no significant difference in education levels.  In 2017, the Chicago metropolitan statistical area produced 4,077 utility patents -- well above its prior peaks.

U.S. utility patents granted in the Chicago metropolitan area, 2000-17

The invention of new products and services enhances the competitiveness of our region’s industries.  Patents can play a special role in encouraging innovation by granting inventors exclusive rights to use or license an invention for a set period of time.  These rights help businesses capitalize on their investments in research and development and provide a competitive edge in the marketplace.

National patenting trends

In 2017, the U.S. Patent and Trademark Office granted nearly 319,000 patents.  Increased levels of research and development expenditures and a surge in information technology innovation have fueled a 90 percent growth in patenting since 2009.

Foreign inventors are playing an increasing role in the U.S. patent landscape, with more than half of all patents granted to businesses and individuals outside of the U.S in 2017.  Our nation's size and wealth lead foreign inventors to file for patents in the U.S., which often presents the highest commercial potential for their invention.  Reforms to the nation’s patent law passed in 2011 also made it easier and less costly for foreign inventors to file for U.S. patents.  This has the potential to expand the inventions available for foreign product and business development in the U.S.

U.S. utility patents granted, 1966-2017

Patenting in peer regions

More than 95 percent of U.S. utility patents are granted to individuals and businesses located in metropolitan regions.  The most active region for patents in the last decade has been the San Francisco-San Jose area (which includes Silicon Valley), accounting for 195,087 total patents over the past decade. Chicago patents between 2008-17 increased 85 percent -- a period of considerable growth that has nonetheless lagged other peer regions.  During the same decade, San Diego increased 194 percent, and Seattle increased 143 percent.  Major patenting centers also saw substantial gains, such as San Francisco-San Jose (126 percent), Boston (115 percent), and Los Angeles (90 percent).

Top ten patent producing metropolitan regions, 2008-17

Patent production trends tend to vary by metropolitan area because the number of patents depends primarily on regional industry composition.  For example, Boston’s high rate can be attributed to its burgeoning biotechnology cluster, while Seattle’s aerospace cluster drives patent production.  State-level patent data show that Illinois is a strong performer in computer and peripheral equipment and basic chemicals industry patenting.  (For a more fine-grained analysis, see CMAP’s Policy Update on patenting in Illinois manufacturing.)

Patenting strategies vary by industry and type of product.  Regions with specializations in industries such as computers and electronics have seen significant growth in recent years.  These industries have a propensity for higher patent production in order to attract licensees and generate revenue.  Patent production in other industries, such as beverage and tobacco or wood products, has been slower.  These industries frequently choose not to patent to protect trade secrets.

 

Region's top patent seekers

Much of the Chicago region’s patent activity originates in the information technology sector, and, like most metropolitan areas, a handful of key players account for a sizable portion of the region’s total patents.  In 2017 the region’s top patent-producing business was IBM, followed by Google, Motorola Mobility, and Bally Gaming, which manufactures equipment and games for casinos.  Individuals accounted for the largest number of patents issued, with 372 granted in 2017.

Chicago metropolitan statistical area top patent sources, 2017

About the Data

PatentsView -- with support from the Office of Chief Economist in the U.S. Patent & Trademark Office (USPTO) -- provides data on U.S. utility patents issued annually.  USPTO determines a patent’s origin by using the home or business address of the primary inventor.  Data and analysis for this indicator focus exclusively on utility patents --  also known as a patent for invention -- referred to throughout simply as patents.  The Chicago metropolitan statistical area encompasses 14 counties, including Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry, and Will counties in Illinois, Kenosha County in southeast Wisconsin, and Jasper, Lake, Newton, and Porter counties in northwest Indiana.

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STEM Occupations

What

Employment in science, technology, engineering, and mathematics fields in the seven-county Chicago region.

Why it matters

The demands of many professions are becoming increasingly complex as technology drives innovation and growth in today’s economy.  Workers employed in science, technology, engineering, and mathematics (STEM) occupations play a significant role in fostering new ideas that lead to economic growth.  As of 2017, STEM occupations represented 12.5 percent of metropolitan Chicago’s total jobs, higher than proportions in Los Angeles and New York but lower than those of Boston and Washington, D.C.  Yet, growth in STEM occupations in the Chicago region has lagged rates in peer regions.

STEM jobs as a proportion of all jobs in select regions, 2017

STEM Employment in the Chicago Region

Workers in STEM fields drive the creation of new technologies and ideas, which in turn spur economic growth.  Data show that scientists and engineers apply for patents at a rate eight times higher than the national average.  STEM workers’ propensity to innovate also can lead to the creation of new goods, services, and jobs.

In 2017, metropolitan Chicago was home to more than 559,000 STEM jobs. The region’s proportion of STEM jobs increased by 1.4 percentage points between 2001-17, accounting for 12.5 percent of total employment.

Regional STEM employment has closely followed national economic trends, increasing during 2003-07 then decreasing significantly from 2008-09 due to the most recent recession.  Beginning in 2010, STEM employment in the region has steadily recovered and added nearly 58,000 additional jobs above its pre-recession peak.

STEM employment in the Chicago region, 2001-17

 

Since 2001, STEM occupation growth in the region has been much slower than in peer metropolitan areas.  Between 2001-17, the total number of STEM jobs in the region grew by 17.5 percent, slightly over one-half the growth rate in Washington, D.C. (31.2 percent) and lagging behind Boston (25.8 percent), New York (25.4 percent), and Los Angeles (19.0 percent).

STEM occupation growth in select regions, 2001-17

 

Although the U.S. is a leader in the field of scientific innovation, standardized tests show that many students perform poorly in STEM subjects relative to students in other developed nations.  The U.S. also lags in producing graduates with core STEM degrees, such as natural science or engineering.  Mediocre STEM student performance in the U.S. has garnered increasing attention in recent years and has led to the passage of education reforms aimed at enriching STEM curriculum at the federal level.  Many of the fastest growing and highest paying career fields require STEM skills, and providing students with adequate STEM educations will help prepare them for the demands of future occupations.

About the Data

Economic Modeling Specialists International (Emsi) data are used to estimate total STEM employment in the seven-county CMAP region.  STEM employment reported here uses 2018 Standard Occupation Code (SOC) data corresponding to STEM occupations as classified by the federal SOC Policy Committee in 2010.

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