American manufacturing employment has been on the decline since the late 1970s. Offshoring—moving production overseas to lower costs—together with productivity and technological improvements like artificial intelligence and automation, have contributed to a significant downturn in manufacturing employment in the US.[1] As such, more states have shifted their focus from traditional industries, like manufacturing, to innovation-driven sectors.
While innovative technologies in advanced manufacturing are helping increase the number of US-produced goods, manufacturing jobs are not being replaced at the rate in which they were lost. In 1970, 18 million workers had jobs in the manufacturing sector, accounting for 31% of private employment. The market share was as little as 9.7% in 2023.[2] To replace employment and strengthen their economies, states find themselves competing with one another to draw entrepreneurs and develop the next technology hub. Almost every state is taking a multifaceted approach to attract innovation and tech dollars, employing a different combination of research and development (R&D) incentives and venture capital (VC) funding.
Of the existing VC and R&D state-offered business incentives, shown broken down by program type in Figure 1, 58% are targeted toward organizations involved in research and development. Tax incentives comprise 66% of all research and development incentives and are the primary vehicle for states promoting R&D. Grants are the second most popular, accounting for 27% of the available incentives.
Figure 1: R&D State Business Incentives by Program Type
Naturally, the most common way for states to incentivize venture capital is through encouraging equity investment, which constitutes over 45% of VC incentives in the US. Figure 2 shows that the remaining VC incentives are distributed somewhat evenly among the other program types: tax, grants, and loans. Equity investments are usually offered to startups themselves while other program types are available for venture capitalists to encourage investment into new companies of all stages.
Figure 2: VC State Business Incentives by Program Type
States incentivize R&D and VC with different program types because of each business’s distinct needs. R&D tax credits are known to be effective at drawing innovation: a National Bureau of Economic Research working paper found that R&D tax credits are linked to a 20% increase in the rate of new startups in an area over 10 years.[3] Tax credits spur that steady, long-term growth, while equity investments are intended to create more immediate results. Helping startups efficiently access direct funding can increase their chances of commercializing, especially when a business is in the “valley of death” phase, where startups face high operating expenses but have not yet generated revenue.
Alaska, Missouri, and South Dakota are the only states that do not currently offer business incentives designed specifically for startups or research and development. Conversely, Puerto Rico is the only US territory that offers incentives, providing one R&D tax program and two R&D grant programs. On average, a US state offers three VC or R&D incentives. Five states—Oklahoma, Arkansas, Massachusetts, Connecticut, and North Dakota—provide at least double the country’s average number of programs.
Table 1: Number of VC and R&D Incentives Offered by State
Table 2: Number of Incentives of each Program Type Offered by State
By avoiding a one-size-fits-all approach, each state can tailor its incentives to target specific types of businesses and startups. States, then, do not need to directly compete with one another because they are pursuing different kinds of research and venture capital. Consequently, businesses with high levels of research and development can shop around to find the best sites for innovation, while startups can choose the state with the best ecosystem in which to begin operations and consolidate financial support.
Are you an entrepreneur or researcher? Are you interested in moving to a new location or establishing your business at an innovation hub? If so, C2ER’s State Business Incentives Database can help you find a state whose incentives best align with your organization’s goals and funding needs.