"Kentucky and Lexington are not building the jobs or the infrastructure needed to participate competitively in the New Economy, according to recent reports from the Washington, D.C.-based Information Technology and Innovation Foundation (ITIF) and the local organization Bluegrass Tomorrow.
Kentucky is still lagging behind most states in the effort to adjust to a more knowledge- and innovation-driven economic base, as measured in the 2007 State New Economy Index, which was released last month by the ITIF and the Ewing Marion Kauffman Foundation.
The study, which ranked Kentucky 45th overall, uses 26 indicators in five general categories — knowledge jobs, globalization, economic dynamism, the digital economy and innovation capacity — to evaluate each state's preparation to compete in a more entrepreneur-driven global economy. Kentucky ranked among the bottom six states in all categories, with the exception of its 10th ranked spot in globalization, which may be attributed in part to Louisville's position as a UPS hub. The study's package export indicator, which measured the number of UPS packages exported per worker, ranked Kentucky eighth.
The 2007 State New Economy Index indicates that the lowest-ranking states, including Kentucky, Alabama, Arkansas, South Dakota, Mississippi and West Virginia, have traditionally built their economies around natural resources or mass-production manufacturing, focusing on lower costs for businesses rather than innovation abilities.
"There's a long legacy of Southern states still focusing on getting ahead through low-cost attraction," said Dr. Robert Atkinson, president of the ITIF and primary author of the Index. "That was a viable strategy for a long time and it moved the South quite far forward, but I think it's reached its limits in many ways, or at least it needs to be complemented with other strategies."
"Most of the Southern states are actually doing that now," Atkinson said, "but I think it's a question of how much emphasis is being placed on these new economic strategies versus the old ones."
Kentucky has fallen steadily in rank among state economies according to the survey, which placed Kentucky 39th overall in 1999 and 42nd in 2002. While changes in the indicators make year-to-year comparisons somewhat problematic, when considering Kentucky's performance on the new indicators added for the most recent report, Atkinson said the data suggested more than a methodological difference with Kentucky apparently slipping behind relative to other states.
At the same time, the manufacturing base in the Bluegrass is shrinking rapidly while the area has witnessed growth in the lower-wage retail sector, according to Bluegrass Tomorrow's Bluegrass Regional Economic Analysis study, released earlier this month.
The analysis reports that manufacturing employment in the Lexington metro area has fallen by 19 percent since 2000, a loss of roughly 7,000 jobs, while employment in the retail and service industry has increased almost 21 percent. As a result, manufacturing now employs less than 14 percent of the local region's workforce.
The findings of the economic analysis represent an important wake-up call for the Bluegrass, according to Steve Austin, Bluegrass Tomorrow's president and CEO.
"The world has changed underneath our feet, and we need to react better to it and we need to react quickly," Austin said.
According to Austin, this fundamental shift toward a more consumption-based economy could spell disaster for local revenues because of limitations in the region's tax policies, thus hamstringing, among other things, the region's ability to make needed New Economy investments.
"We're looking at the next ten years, and probably more, being dependent on the consumption economy to drive our regional revenues," Austin said.
And the recent trends indicate that the region can no longer hang its hopes for economic improvement on large-scale manufacturing, Austin said.
"Large-scale manufacturing for the most part is a goner in this country," he said. "Small-scale and high value-added manufacturing, at Toyota for example, that's not going anywhere for the short term, but for Lexington or Winchester to be able to land a significant factory is probably pretty far-fetched."
"We hope they do," Austin added, "and we're certainly not trying to say give up everything, the sky is falling, we're doomed. But we're just looking at state and national trends that say it's unlikely."
Leaders in the local business community and at UK are well aware of the state's economic position, but they point to recent cooperative initiatives in Lexington and across the state as promising signs of change. Joe Kelly, LFUCG's economic development officer, said he is optimistic that the state and the region will successfully navigate what he sees as a current state of transition.
"I am optimistic that we understand the implications, and I believe that there are lots of folks who are working hard every day to make (this) transition a successful one," he said.
"There is a desire to collaborate and to partner and to leverage all those best practices that we have talked about for a long time. There is a real sense of urgency about doing these things today, and it's not just a handful of people," Kelly said.
A continued focus on improving the quality of education will be the foundation, he added, along with the development of a fuller understanding of how advances in technology can improve all aspects of the region's economy.
While Kentucky's workforce education ranking of 47th in the ITIF's New Economy Index indicates there is plenty of room for improvement, it is also important to focus on helping existing firms and entrepreneurial start-ups to become more innovative or more productive, Atkinson said.
"You can't just rely on a supply-side strategy, if you will, of just supplying better workers," Atkinson said. "That's important , but you also have to do the other work of helping existing firms become more innovative."
The importance of that element has been recognized by UK, said Len Heller, the university's vice president for commercialization and economic development. One promising recent initiative in this regard is the university's newly established office of economic development, created to streamline the institution's working relationships with industry, and which recently opened offices inside the Commerce Lexington building.
Heller is also optimistic that initiatives like the venture capital investments of the local Bluegrass Angels, the university's new office of business development and increased activity at Coldstream will provide more opportunities for promising new businesses generated both from the university and elsewhere in Kentucky.
"From what I see at the university, I have never seen such a supportive administration, very aware of our need to work closely with industry and to find ways to get that done," Heller said. "We really are trying to sit at a table with industry and give all the answers they need to do business in Lexington and in the state."
As chairman of the state's STEM committee, UK President Lee Todd is also working on improving the state's economic potential through education in the New Economy-driving fields of science, technology, mathematics and engineering, Heller said.
"I think we're in a better position in this state in terms of cooperation and access to capital than we've ever been in the history of this state," Heller said.
While Kentucky's dismal rankings show that much work needs to be done, the 2007 State New Economy Index also highlights some Kentucky programs as promising initiatives, including the state's Research Challenge Trust Fund, which helps to secure advanced research equipment and attract top scientific talent. The matching grants of Kentucky's research and development voucher program were also noted for enabling smaller firms to fund academic research and technology commercialization.
And although the index's overall rankings for Kentucky are less than heartening, there are signs that the state is working to turn the ship, Atkinson pointed out. The two indicators of digital economy advances over which the government has the most control, technology in schools and the utilization of digital technologies by state government, showed better performance for Kentucky, with state rankings of 31st and 11th respectively.
"It suggests that policies are moving in the right direction in those areas," Atkinson said.
New economy index - Kentucky rankings
45th
Overall nationally
45th
Knowledge jobs nationally
Indicator Rank
- IT Professionals 36
- Managerial, Professional and Technical Jobs 43
- Workforce Education 47
- Immigration of Knowledge Workers 42
- Manufacturing Value-Added 33
- High-Wage Traded Services 40
10th
Globalization nationally
- Export Focus of Manufacturing and Services 21
- Foreign Direct investment 12
- Package Exports 8
49th
Economic dynamism nationally
- "Gazelle" Jobs 44 (annual sales revenue growth of 20 percent or more for four straight years)
- Job Churning 41(new start-ups/business failures)
- Fastest Growing Firms 25
- Initial Public Offerings 29
- Entrepreneurial Activity 42
- Inventor Patents 48
45th
Digital economy nationally
- Online Population 36
- Internet Domain Names 40
- Technology in Schools 31
- E-Government 11
- Online Agriculture 50
- Broadband Tel. 40
49th
Innovation capacity nationally
- High-tech Jobs 44
- Scientists and Engineers 46
- Patents 43
- Industry Investment in R&D 43
- Venture Capital 36
- The 2007 State New Economy Index, the Ewing Marion Kauffman Foundation and the Information Technology and Innovation Foundation (ITIF).