Despite dire prognoses for the state's economic future, California tops the rest of the nation in its potential to generate productivity and wealth, says UC Davis growth economist Giovanni Peri.

"Yes, we're in a down cycle," Peri says. "But what drives growth is what California has: a continued potential for innovation and the human capital gathered closely together in places such as the Bay Area."

Peri studies the patents produced between 1975 and 2000 and which regions and states in the Western world are most successful in producing them. Most of the patents, which capture new ideas, are in the biotechnology, computer and telecommunication fields.

In his research, Peri finds that new ideas that stimulate innovation and growth don't spread far, despite the advent of global communication systems.

California has averaged about 6,500 new patents per year since 1980, putting it No. 1 in the nation, Peri says. Essential to this innovation is bright, creative people in research and development who have continual face-to-face contact within the industry, Peri says.

The state's high-quality universities have been key to providing these innovators, but their highly educated researchers have come to California from all over the world. For instance the migration of scientists and engineers from Europe to the United States tripled during the 1990s to feed American industries' need for talent, Peri says.

"Compared to other states, California, by far, develops the largest number of U.S.-granted patents and spends the largest percentage of gross domestic product on research and development -- almost 4 percent, where the national average is 2.5 percent," he says.