States that once could dangle their low costs of doing business to lure industry from other states have suddenly faced competition from even lower-cost places like China and Southeast Asia. Many have been scrambling to catch up, with ever-growing packages of tax incentives and grants — so much so that critics have fretted about “an economic war between the states,” as the organization Good Jobs Now calls it.

But while states scramble, the ground has shifted beneath them. The economic development contest is changing.

Traditional economic development efforts have focused on leveraging money, in one guise or another. Some states had lower costs and lower taxes to brag about — money. Some emphasized helping new industry by building roads and water and sewers — money. Some tried to make up for high costs by offering various grants and tax breaks — in other words, money.

But in what economists have taken to calling “the knowledge economy,” it turns out that the key asset states must now deploy is, actually, knowledge.

That’s what we found in a four-month look at the impact higher education institutions and systems are having on the economic revitalization of states and regions around the country. A just-published report from the Rockefeller Institute of Government summarizes what we learned — and the title, A New Paradigm for Economic Development, sums it up.

We found that universities and higher education systems in various states are engaged in an impressively wide-ranging array of economic and community development programs.

There are many examples of high-tech, university-based research being rolled out into commercialization — in California, in Wisconsin, in Texas, at the College of Nanoscale Science and Engineering at the University at Albany, State University of New York, and elsewhere. In 2008, the most recent year for which a full count has been compiled, colleges and universities in the U.S. created 542 new companies and issued 2,821 patents.

But it’s not all about cutting-edge research.

North Carolina State University, for example, is building a glittering new campus that includes high-end labs and other research facilities, but that also trains janitors — that is to say, it teaches entry-level employees in pharmaceutical facilities how to maintain the clean-room standards required in biomanufacturing. Meanwhile the University of Memphis is driving a new master plan to revitalize the city’s downtown. Western Michigan University deployed lab and office space to help keep top-flight scientists in Kalamazoo when a pharmaceutical company closed its research facility in town.

The University of Cincinnati is leading efforts to improve the local schools. Public and private universities in Georgia collaborate on providing small but critical amounts of seed money to help faculty members start small businesses. Small business development centers operated by universities in most of the states provide advice on everything from accounting to marketing to computer networking. North Carolina’s community college system offers employers free programs to upgrade the skills of their workers.

The common thread that runs through all these diverse efforts is knowledge. It is knowledge that creates new products and services and industries; that makes workers more productive; that makes society work better. Universities and higher education stand on a foundation of knowledge, and they are putting it to use for their states and their communities.

Where does this leave the traditional economic development packages of tax breaks, incentives, infrastructure and the like? Without doubt, these will play a continuing role. But putting knowledge at the center of economic development may help states make the most cost-effective use of those traditional incentives. That, in turn, may cause states to shift to universities some of the money they are now putting into direct business incentives.

After all, in the innovation economy of the future, the businesses that will have staying power and growth potential will be those most dependent on knowledge – on research, new ideas, new technologies, new processes, upgraded skills for their workers. If a business doesn’t need those things, is it a state’s best bet for the long run? And if it does need those things, aren’t higher education systems the key to delivering them?

One symbol of this paradigm shift is on Fifth Street in Atlanta. There, on the Georgia Tech campus, is a building that houses Georgia’s state Department of Economic Development, the headquarters of the state’s Quick Start job-training program, the economic development offices of the state’s utilities, and Georgia Tech’s own business assistance programs.

Think about that. When Georgia is trying to recruit a new business, the one place they must take them is literally on a university campus. It’s an idea we expect will catch on.

An earlier version of this article originally appeared on Stateline.org.