Poverty, Innovation Capacity, and State Economic Development in the Knowledge Economy: Evidence from the U.S.

We examine poverty's effect in two ways. First, we study the relationship between poverty and capacity for innovation in the U.S. states; second, we study the combined effects of poverty and innovation capacity on U.S. state economic output and employment. Because many of the relationships among poverty, innovation capacity and economic performance are simultaneous, we employ the Arellano Bond Difference GMM estimator to estimate various models using panel data (1980–1999). The findings reveal a negative indirect effect of socio-economic need (poverty) on human and U.S. state and local financial innovation capacity, though there is no empirical link between poverty and federal financial capacity. We find no statistically significant evidence of the contemporaneous effect of poverty on state economic performance, holding innovation capacity constant. This suggests that poverty primarily affects state economic performance indirectly through reduction of innovation capacity. Overall, our findings suggest that U.S. officials ought to be concerned about the role poverty plays in diminishing their state economies' capacity to innovate.