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Universities in the Knowledge Economy

Economic activity in the global economy has become increasingly knowledge based, and the distribution of income is shifting in favor of educated and skilled workers, innovative firms, and regions with clusters of high-technology firms. The importance of knowledge is apparent in the earnings premium received by college-educated workers, which is now at a historic high. To sustain a competitive advantage in the global economy, firms must constantly innovate and differentiate their products or lose market share to low-cost developing countries. Intangible assets such as intellectual property are increasingly visible in the balance sheets of corporations. After a century of convergence, levels of prosperity are diverging across regions, with the most prosperous locations being home to agglomerations of innovative firms and succeeding in attracting highly educated workers and their families.

As institutions of higher education and centers for advanced research, universities play an important role in determining the success of regions and nations in a knowledge economy. Advanced economies have run into diminishing returns in the accumulation of physical capital and greater labor force participation. Economists now consider knowledge creation to be the main engine for long-term economic growth. Among the four pillars necessary for a country to fully participate in the global knowledge economy, The World Bank lists a highly educated population and systems of innovation in which universities play a central part.

This portion of the Office of the University Economist’s website provides a summary of recent scholarly research on the importance of universities for the labor market success of individuals, the pace of industrial innovation, and the prosperity of cities and regions. There are five individual chapters, each containing a brief narrative summarizing important conclusions and issues and a substantive annotated bibliography.

The High Return to Education and Human Capital

Higher education is an investment that provides a very high financial return for the individual. Education is also an activity that generates positive externalities: not only does the individual benefit from being educated, but others in society benefit as well.

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Universities in the National Innovation System

The traditional role of universities in the research process was to conduct basic research, leaving industry to focus on short-term problem solving and product development. As industrial innovation has become more complex and collaborative, universities have been encouraged through government and university policies to work more closely with industry and to engage in research with more-direct commercial application.

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Innovation Clusters and the Geography of Innovation

Innovative activity is highly concentrated in space. Geographic concentration is fundamental to the innovation process itself. Innovation involves the transfer of tacit knowledge, which is by nature highly contextual and difficult to exchange over long distances. Also, innovation increasingly involves interactions between inventors, research organizations, and public agencies. Geographic clustering serves to organize this activity by creating opportunities for chance encounters, observation, and social interaction.

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Universities and Regional Economic Growth

Since 1980, governments and universities throughout the United States and other advanced countries have set up an array of initiatives to strengthen university-industry relationships and spur local economic development based on university research. There are a few cases (e.g., biotechnology) where the spatial distribution of firms has been heavily influenced by the locations and university affiliations of star university scientists. Broader evidence indicates that the particular locations of high-technology agglomerations are determined by a more complex and unique set of historical circumstances. There is, however, a general tendency for regions with a university to have a more-educated population and above-average earnings per worker.

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Traditional Economic Impact Analysis of Universities

Economic impact studies focus on the influence universities have on the local economy by being a provider of employment for faculty and staff, a purchaser of goods and services necessary for university operations, and an attraction for students and visitors who spend money in the local economy.

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D. Chen and C. Dahlman, “The Knowledge Economy, the KAM Methodology, and World Bank Operations,” The International Bank for Reconstruction and Development/The World Bank, January 2006.

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