Design, innovation, and rural creative places: Are the arts the cherry on top, or the secret sauce?

OBJECTIVE Creative class theory explains the positive relationship between the arts and commercial innovation as the mutual attraction of artists and other creative workers by an unobserved creative milieu. This study explores alternative theories for rural settings, by analyzing establishment-level survey data combined with data on the local arts scene. The study identifies the local contextual factors associated with a strong design orientation, and estimates the impact that a strong design orientation has on the local economy. METHOD Data on innovation and design come from a nationally representative sample of establishments in tradable industries. Latent class analysis allows identifying unobserved subpopulations comprised of establishments with different design and innovation orientations. Logistic regression allows estimating the association between an establishment's design orientation and local contextual factors. A quantile instrumental variable regression allows assessing the robustness of the logistic regression results with respect to endogeneity. An estimate of design orientation at the local level derived from the survey is used to examine variation in economic performance during the period of recovery from the Great Recession (2010-2014). RESULTS Three distinct innovation (substantive, nominal, and non-innovators) and design orientations (design-integrated, "design last finish," and no systematic approach to design) are identified. Innovation- and design-intensive establishments were identified in both rural and urban areas. Rural design-integrated establishments tended to locate in counties with more highly educated workforces and containing at least one performing arts organization. A quantile instrumental variable regression confirmed that the logistic regression result is robust to endogeneity concerns. Finally, rural areas characterized by design-integrated establishments experienced faster growth in wages relative to rural areas characterized by establishments using no systematic approach to design.