Many local governments have implemented economic policies to try and make them the next “Silicon” Something. But it’s not only economic policies that matter to innovation, according to a new study. Researchers looked at social policies in the U.S., where states have considerable leeway in making their own rules. In states that legalized marijuana and gay marriage, patenting rates rose above and beyond what normal projections would have predicted. In states that implemented abortion restrictions, patenting rates fell. Moreover, in states that liberalized their social policies, new patents were more novel and impactful than average. Why? The answer seems to be that more liberal social policy results in more diverse groups of people mingling together, which produces better innovations: the findings show increases of 22% and 17% in inventors’ number of new collaborators subsequent to legalization of same-sex unions and medical marijuana, respectively. If policymakers want to foster innovation, then, it’s not enough to think about their economic policies. They also need to consider how social policies will complement their economic plans.

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Many countries and regions declare that they want to develop their own Silicon Valley and be a hub for innovation. The page for Technology Centers on Wikipedia, for example, lists no fewer than 90 places that have billed themselves as “Silicon This” or “That Valley”, hoping to emulate the Valley’s success in generating innovation. It is usually followed by a variety of policy initiatives, such as R&D tax credits, public grants for innovation, public procurement of innovation, grand innovation challenges, and support for intellectual property rights. Yet, few regions have managed to achieve the levels of innovation as seen in Silicon Valley. Why? We argue they have overlooked an important set of policies altogether. Pretty much all policy measures target the economic incentives to innovate. Instead, our research shows that social policies matter just as much — if not more.

Innovation, while an economic activity, is fundamentally a social process. In this process, people combine their ideas with those of others. This kind of interaction has fundamentally social aspects. Companies admit as much when they try to foster innovation by providing employees with ping-pong tables and happy hours, and by taking away things like enclosed offices in favor of communal workspaces. Research backs up what we know intuitively — that social interactions often provide the best breeding grounds for innovation.

But do government social policies impact innovation? To answer this question, we examined the impact of two social liberalization policies (legalization of same-sex civil unions and legalization of medical marijuana) and one anti-liberalization policy (passage of abortion restrictions) on innovation in the United States. In our context, social liberalization is defined as the easing of government restrictions. The U.S. provided a good location for this study, since states have considerable leeway in setting their own laws. We also deliberately chose multiple and contrasting policies to ensure our findings were not driven by any specific one. We measured innovation output as the number of patents granted to individuals in each state, a common measure used by both researchers and policy makers. Our sample included every single patented innovation by an inventor in the United States between 1990 and 2007.

We found that states that implemented the social liberalization policies subsequently experienced a significant increase of 5% to 6% in their innovation output. In contrast, the passage of an additional abortion restriction in a state was followed by an average 1% decline in its innovation output. The chart below shows the average effects of the legalization of same-sex civil unions and the legalization of medical marijuana on state-level innovation output over time. Social policies had a very significant impact on the rates of innovation in a state.

Of course, as we all know, correlation is not causation. Therefore, we employed various sophisticated research designs and statistical techniques to ensure that it is the policies that lead to innovation (rather than, for instance, the other way around) – details of which can be found here and in the sidebar. Moreover, the staggered implementation of these policies over time enabled us to compare the change in the innovation output of states that implemented these policies to that of other states that had not yet done so. The conclusion: Social liberalization policies at the state level significantly influence local rates of innovation.

Methodological Note To disentangle correlation and causation, we relied on a number of methods. Our main empirical strategy is based on comparing the change in the patenting rate of states that have implemented a policy to those that have not yet, while controlling for a wide range of state-level factors such as past innovation rate, state total expenditure, total business R&D expenditure, population, educated population, individual and corporate tax rates, house prices, real per capita personal income, and the political mixture of state senate and house. A major concern in our study is the direction of causality. We want to make sure that we are capturing the effect of policies on innovation and not the other way around. To address this concern, we show that the pre-legalization patenting rate of states cannot statistically predict the implementation of these policies. Moreover, we show that there is no pre-trends in innovation rate of states that have implemented these policies. The change in patenting rate of states starts approximately three years after the implementation of policies. We also show that the effects we are capturing are not the result of some underlying trends in the patenting rates of states that implemented these policies. If the results are driven by underlying trends unrelated to these policies, the actual policy dates should not matter. To test this idea, we created a bunch of fake policy dates and show that the results do not hold when we use these fake dates. The effects only show up when we use the actual policy dates. Finally, we checked for any other concurrent policies that could potentially drive our results, but couldn’t find any.

What explains the link between these policies and innovation? Our analysis suggests a two-step process. First, social liberalization policies can promote more diverse social interactions among individuals. Recent works in political science have shown that social liberalization policies influence individuals’ attitudes towards openness and diversity, inspiring higher levels of social diversity, increasing general trust, and promoting interactions between individuals with more diverse views, life styles, and racial-ethnic backgrounds. It is a tacit process and observing it is not straightforward.

However, we found supporting evidence in our setting. Individuals were more likely to work with more diverse collaborators after the implementation of social liberalization policies, and vice versa. We also found a faster circulation of knowledge within a state after the implementation of social liberalization policies, pointing to more frequent and diverse interactions among individuals. To conclude: Liberal policies caused people to work with a more diverse set of collaborators.

Subsequently, more diverse interactions, in turn, lead to more and higher quality ideas. New ideas do not come out of thin air. Rather, most innovations are the outcome of combining previously disconnected ideas. Henry Ford developed the idea behind Ford assembly lines from assembly lines of meatpacking plants. The Reebok “pump,” an athletic-shoe with an air bladder, was inspired by inflatable splints and intravenous bags. Almost all new music genres are the result of sampling and mixing previously known genres. Scientists constantly borrow ideas from each other, recombine them in new ways, and build new theories. For ideas to flow and collide, the people who hold those ideas need to meet, mingle, talk, and share. Individuals with more diverse social interactions are exposed to a more diverse set of ideas, and thus have more opportunities to produce innovations from combining previously unconnected ideas.

We found exactly that in our research: More diverse collaborations in states that implemented social liberalization policies were directly tied to higher levels of innovation. Our findings show increases of 22% and 17% in inventors’ number of new collaborators, i.e. other inventors with whom they had never worked before, subsequent to legalization of same-sex unions and medical marijuana, respectively. We also found an increase in the knowledge diversity of inventive teams after social liberalization policies. Further, innovations that were produced after the implementation of social liberalization policies were on average more novel and impactful. For measuring impact, we used an established measure based on the number of citations a patent receives from future patents. For novelty, we used another common measure based on whether a patent is assigned to two technological classes that were never been assigned together to any previous patent. Innovations that were produced after the implementation of social liberalization policies were on average more novel and impactful.

Overall, we found strong evidence that social liberalization policies trigger more diverse collaborations on the ground, which subsequently produce inventions with more novelty and impact.

For policy makers who want to stimulate innovation in their own region, our research implies that they should consider social policy as well as economic stimulus. And for executives thinking about where to locate their businesses, our study suggests that they should consider social regulations as well as business regulations.

The core insight is that the social context in which innovation takes place matters as much as the incentives for individuals and firms to invest in it. Social policies complement economic policies. The latter can create the right incentives and the former can create the right context. Social policies can become a source of regional competitive advantage. The same applies to managers who wish to promote higher levels of innovation in their companies. Building a workplace in which employees have the chance to routinely meet new people and freely share their ideas can truly unleash their innovation potential.