May 31, 2023
Colleges and local economic growth
What drives local innovation?
Source: SeanPavonePhoto
US college towns have distinct economic advantages, and many policymakers view institutions of higher learning as an essential part of jump-starting local economies through so-called innovation hubs.
But in a paper in the American Economic Journal: Economic Policy, author Michael J. Andrews finds that while establishing colleges brings local economic benefits, such as innovation, investments in other institutions can lead to similar effects.
“I hope our work leads policymakers to think about what really drives local innovation—which policies work for local innovation growth and which don't,” Andrews told the AEA in an interview.
Andrews started his research by asking whether colleges had any impact on local innovation at all. A simple comparison between non-college and college towns today would be biased by many unrelated factors, such as local resources and attitudes toward technology.
To get a reliable estimate, Andrews put together a dataset on sites chosen as candidates for the establishment of universities in the United States from the mid-nineteenth to mid-twentieth century. For many of today’s top institutions of higher learning, he was able to identify runner-up sites that were strongly considered as locations for universities that went on to be established elsewhere.
College sites and the runners-up
The chart below shows a US map of the locations of college and runner-up sites. Colleges are represented by blue triangles, and the runners-up are represented by red circles.
In rare cases, the final locations of some universities were actually chosen randomly. For instance, in 1882, the state of North Dakota drew lots on where to locate the University of North Dakota and North Dakota State University.
More typically, potential locations were surveyed and ranked, with the top site selected by interested parties. While in theory this might introduce confounding factors, in many cases the choice between the winning location and second place turned out to be as good as random.
For instance, in 1886, the citizens of Georgia wanted a technical college, but there was no consensus about where to put it. Atlanta and Macon were the primary contenders; both were railway depots in the interior of the state and were similar in many ways. A site selection committee voted 23 times without either city winning a majority. Finally, on the 24th ballot, Atlanta won over Macon by one vote. Thus, by the thinnest of margins, Georgia Tech was established in Atlanta.
In all, Andrews identified 63 as-good-as-random runner-up sites and compared their economic trajectories to the winners.
First, he found that establishing a college caused a roughly 65 percent increase in county population relative to the runner-up counties. And second, by looking at patent data from 1836 to 2010, he saw that establishing a college resulted in 62 percent more patents per year. But that wasn’t all.
“One of the things that's most exciting to me about the paper is you can actually then go a step further and try and think about why it is the case that we see these differences in innovation in places with and without colleges,” Andrews said.
I hope that this leads policymakers to think about how institutions affect the local economy and then maybe the most cost effective ways we can get those local effects. I don't presume to know the cost–benefit calculus in all cases, but hopefully this is one piece of evidence that changes the way we think about answering those questions.
Michael J. Andrews
By linking patent data to college yearbook data, Andrews found that only 12 percent of patents in a college’s county came from that college’s alumni or faculty. While this might suggest that the innovation resulting from establishing colleges largely arose by indirect means, such as knowledge spillovers from contact with educated faculty and alumni, this interpretation was put into doubt by another finding. When compared to runner-up sites that received a state institution—such as a state capital, insane asylum, or penitentiary—as a consolation to losing out on their bid, counties with colleges saw only modest gains in patenting over their counterparts.
This pattern led Andrews to the conclusion that population growth may be the most important way that colleges increase local innovation.
While institutions of higher education may be critical for pushing forward innovation on a global level, Andrews's work indicates that their local impact may be limited. For policymakers, these findings may lead to new ways of framing debates about driving local innovation and growth.
“I hope that this leads policymakers to think about how institutions affect the local economy and then maybe the most cost effective ways we can get those local effects,” Andrews said. “I don't presume to know the cost–benefit calculus in all cases, but hopefully this is one piece of evidence that changes the way we think about answering those questions.”
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“How Do Institutions of Higher Education Affect Local Invention? Evidence from the Establishment of US Colleges” appears in the May 2023 issue of the American Economic Journal: Economic Policy.