New economy winners and losers

NEW YORK (CNNMoney.com) -- When it comes to how U.S. states are adapting to an evolving economy, not all are created equal, according to a study released Tuesday.

Massachusetts, New Jersey, Maryland, Washington and California top the list of states that are successfully adapting to an increasingly global, entrepreneurial and innovation-based new economy, according to the 2007 State New Economy Index, released by the Ewing Marion Kauffman Foundation and the Information Technology and Innovation Foundation (ITIF).

The index measured how well states are transforming from industrial based models, which measure success by the number of big company relocations to the state, to models which create and retain high value-added, high-wage jobs.

Massachusetts held the top spot, with New Jersey and Maryland ranking second and third, respectively. Wisconsin, Vermont, North Dakota and Rhode Island made the greatest strides on the index from 2002 to 2007, while Missouri, Maine, Oregon, Arizona, New Mexico, Oklahoma and Hawaii recorded the biggest decline in the rankings over the past five years.

West Virginia, Mississippi, South Dakota, Arkansas and Alabama, were the worst, according to the index.

"The most distinctive feature of the new economy is its relentless levels of structural economic change," Carl Schramm, president and CEO of the Kauffman Foundation said in a statement. "States that have adapted to these new realities will be in the best position to see strong growth in the standard of living for their residents."

The most important driver of the new economy, according to the index, is information technology, which boosts productivity in virtually all industries.

But even the best performing U.S. states are facing tough competition from abroad. As technology makes it possible for more work to be done remotely, many developing nations are establishing the infrastructure, skilled workforce and business climate to create skilled jobs, at a much lower cost.

For example, in the past two decades, the number of industrial manufacturing relocations and significant expansions in the U.S. fell to 3,162 in 2005 from an average of 5,139 per year for 1995 to 2000.

"In order to succeed in the new global economy, states can no longer rely on a strategy of relentlessly driving down costs and providing large incentives to attract locationally mobile branch plants or offices," said Dr. Robert D. Atkinson, president of the Information Technology and Innovation Foundation and primary author of the Index.

"Rather, these states must create an environment that fosters innovation and high skills in order to help fast growing entrepreneurial firms and innovative existing firms expand."

According to the index, states at the top of the ranking tend to have a high concentration of managers, professionals and college-educated residents. The companies they worked for tend to be more geared toward global markets, both in terms of exports and the amount of foreign investments.

All the states at the top of the ranking also show above-average levels of entrepreneurship. Conversely, states ranking at the bottom of the index tend to depend on natural resources or on mass production manufacturing.

Top-ranking states also tend to be wealthier, the study found, noting a strong correlation between each state's ranking and its per capita income.

Regionally, 14 of the top 20 states are in the Northeast, Mid-Atlantic, Mountain West and Pacific regions. In contrast, 15 of the 20 lowest-ranking states are in the Midwest, Great Plains and Southern regions.

The index used 26 indicators to rank each state on the extent to which their economies are structured. It examined the degree to which state economies are knowledge-based, globalized, entrepreneurial, information technology-driven and innovation-based.

The index was released in conjunction with EntrepreneurshipWeek USA, an event celebrating entrepreneurship.

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