Innovation is a key factor in business competitiveness, and as our economy struggles to recover, more attention is being paid to how well specific regions and states are doing at encouraging innovation. A new report from the Kauffman Foundation and the Information Technology and Innovation Foundation, The 2010 State New Economy Index, ranks the states’ attempts.

The 2010 State New Economy Index uses 26 indicators, divided into five categories -- knowledge jobs, globalization, economic dynamism, transformation to a digital economy and technological innovation capacity--to measure how well state economies match the ideal structure of the “New Economy.”

Massachusetts, Washington, Maryland, New Jersey and Connecticut are the top five states, while the bottom five were Mississippi, West Virginia, Arkansas, Alabama and Wyoming. Regionally, the Northeast, mid-Atlantic, Mountain West and Pacific regions ranked highest; 13 of the top 20 states are in these four regions. In contrast, 18 of the 20 lowest-ranking states are in the Midwest, Great Plains and the South.

Some of the factors common to states at the top include:

• An abundance of high-tech firms.

• A high concentration of managers, professionals and college-educated residents working in “knowledge jobs” requiring at least a two-year degree.

• Above-average levels of entrepreneurship.

• Institutions and residents that have embraced the digital economy.

• A solid innovation infrastructure.

• High good quality of life.

• High levels of domestic and foreign immigration of skilled knowledge workers.

How about the lowest ranking states? In general, they typically rely on natural resources or on mass-production manufacturing. They also use low costs rather than innovative capacity to gain advantage.

It’s not all bad news for the lower-ranking states, however. Technology has made it easier for businesses to relocate, start and grow outside of urban areas. So many entrepreneurial companies fleeing gridlock and congestion are likely to seek out less-congested areas in lower-ranking states in the coming years.

Want to know exactly where your state ranked? You can view the overall ranking and download the 2010, 2009 and 2008 reports at the