Factors Influencing the Long Term Sustainability of Entrepreneurial Technology Centers

1. Factors Influencing the Long Term Sustainability of Entrepreneurial Technology Centers Ross Gittell, Jeffrey Sohl and Edinaldo Tebaldi University of New Hampshire

2. Objective of inquiry • To provide insights into the contributing factors to economic success in technology centers over the last business cycle (approximately 1990-2003) • Explain and understand differences among USA tech centers in changes in employment and per capital income • This inquiry is a follow-up to previous study (Gittell and Sohl, forthcoming) of the experience in USA technology centers in the early 2000s economic downturn

3. USA Entrepreneurial Technology Centers • Growth in high technology goods and services explained 65 percent of the difference between USA metropolitan areas with the fastest-growing economies and the average (Milken, 1999) • How the Milken top ranked “tech poles” fared over the full course of the last business cycle and why some performed better than others is the focus of inquiry

4. Factors effecting tech pole economies during the tech downturn (Gittell & Sohl, forthcoming) • Lack of diversification in overall economic base • Limited diversity within high technology industries • High average wages • High levels of venture capital funding during the end of the boom period of the late 1990s • “Contradictions” in Tech Center Development. Some of the same factors that were negative influence in downturn over the full business cycle contributed to long-term economic growth

5. The Tech Poles ranked ordered in aggregate performance, LT and ST employment changes and per capita income change rankings. From strongest performing to weakest

6. Creative Destruction Process in the Technology Centers • The tech poles with the greatest variance (ups and downs) in employment growth had the strongest overall growth performance over the full business cycle • Among the tech poles with the greatest differential between long and short term rank all but one ranked in the top tier in employment growth 1990 to 2003 and three (of the eight among the top third) ranked among the top tier in per capita income growth. • This suggests the force of the creative destruction process in the USA tech poles

7. Groupings of the USA tech centers --from most robust to least -- over the full course of the business cycle • (1) the high tech growth centers with employment concentrations in growth sectors within high technology, such as bio-technology and health care-related industries (e.g., San Diego, Rochester); • (2) relatively recession resilient USA technology centers based in metropolitan areas with high concentrations of non-profit and technology related institutions, such as universities and governmental agencies (e.g., Raleigh,New Haven); • 3) mature tech centers vulnerable to decline emanating from lack of diversification and high costs (e.g., Silicon Valley and Boston); • (4) large metropolitan area centers lagging significantly behind in overall economic performance the other tech centers (e.g., NYC, Los Angeles, Chicago)

8. Econometric Modeling • Dependent Variables Long-term (full 1990-2003/01 business cycle) growth in: • employment • per capital income • Tested a range of explanatory variables suggested by theory and literature as effecting technology center economic growth

9. Model 1: Dependent Variable: Change in Employment, 90-03 Model 2 : Change in Personal Income, 90-01 Variable Employment, % change 1990-2003 Variable Personal Income, % change 1990-2001 Coefficient t-ratio Coefficient t-ratio Constant 0.081 0.73 Constant 0.4735 4.25 High Tech Gini 1990 0.5355 3.32 Gini Supersector 1990 0.9761 2.37 Chg in Tax burden, 90-03 -10.139 -2.15 Tax Burden 03 -3.5260 -2.82 Chg home price 83-03 -0.0014 -2.13 Venture Capital Per Worker 93 0.00014 7.01 Adjusted R-squared 0.47 Adjusted R-squared 0.43 Included observations 25 Included observations 25 Method OLS Method OLS Econometric Model Results

10. Employment growth model: Significant explanatory variables • Specialization within high tech (as measured by gini coefficient) contributed to growth of employment over the last business cycle • This is in contrast to earlier findings (Gittell and Sohl, forthcoming) that concentration within high technology contributed to pronounced employment decline during the economic downturn • Ten percent higher concentration within high tech activities in the early 1990s added approximately five percent to employment growth over the business cycle • Examples of this are tech poles with the highest employment growth 90-2003 -- Austin and Boise.. had the highest concentration of employment within high technology

11. Employment growth model • Tech poles with lower growth in state and local tax burdens also had significantly higher growth rates in employment • As the local and state tax burden increased 1 percent, the growth rate of employment decreased by approximately 10 percent • Philadelphia and Los Angeles had the lowest employment growth and were among the tech poles with the highest increase in state and local taxes

12. Employment growth… • The third significant variable was long term housing price increase, 1983 to 2002 • As the growth rate of housing price doubled the growth rate of employment decreased by approximately .15 percent • Rapid housing price increases appeared to dampen employment growth most in San Jose, San Francisco and Boston. These were the top three tech poles in housing price increase 1983 to 2003 and were among the slowest growth tech poles in employment

13. Per capita income model • The per capital income growth model identified three explanatory factors • local and state tax burden level (2003) • general (super-sector) industry specialization (1990) • venture capital flow at the beginning of the economic boom (high growth) period or 1993

14. Per capital income (pci)… • Local and state tax burden level was significant • Level was more significant than rate of increase (which was significant variable in employment model) • The pci model suggests that for each 1 percent increase in tax burden, there was approximately a 3.5 percent decline in growth rate of personal income per capital in the tech poles 1990 to 2001 • Raleigh and New Haven are examples of tech poles with high per capita income growth and relatively low state and local tax burden level

15. Per capital income.. • Super-sector employment specialization. (This was not a significant factor in the employment growth model but within high technology industries concentration was) • This finding is in contrast to earlier findings (Gittell and Sohl, forthcoming) that concentration of employment within super-sectors contributed to pronounced employment decline during the economic downturn • With every 1 percent increase in super-sector specialization (as measured by super-sector ginis) in 1990 personal income per capital increased approximately 1 percent • Silicon Valley and San Francisco both had high super-sector concentration of employment (the 4th and 2nd highest) and had the highest growth in per capital income among tech poles

16. Per Capital Income… • Venture capital $’s per worker, 1993 • This variable had no significant effect on employment growth over the full business cycle and had a negative effect on employment growth during the economic downturn (Gittell and Sohl, forthcoming)… as too much VC$ was “chasing” too few good start-up ventures • An increase of $1,000 in 1993 venture capital per worker increased personal income per capital by approximately .14 percent over the full business cycle in the tech poles • Boston, San Jose and San Francisco all ranked among the highest tech poles venture capital per worker in 1993 and had significant growth in per capital income over the business cycle

17. Insignificant factors • There were several variables suggested by the literature as affecting growth in technology centers that did not have statistically significant effect • Quality of life (as measured by Morgan and Morgan 2003) • Diversity (as measured by Florida 2002 and including foreign-born and gay percentages) • Housing prices was not significant in the per capita income model (it was in the employment model)

18. Main Finding • The Schumpterian (1934) process of creative destruction worked with strong force in USA technology centers in the 1990s and early 2000s • The core contributing factors to growth long run --such as concentration of employment in particular high technology employment sectors and high venture capital flow -- also had significant but negative effect during downturns

19. Leading examples of the creative destruction process: Silicon Valley and Boston compared to USA 1970 to 2003. Last “cycle” peak (2000) to trough (2001) was shortest

20. Factors influencing the creative destruction process and contributing to its shortening • Globalization of the economy and increased competition among cities • More rapid product life cycles.. fostered by institutional process that facilitate accelerated innovation and commercialization (e.g., University R&D, venture capital) • Accelerated process life cycles.. In the late 1990s..fast, broad and deep application of IT, Internet and now wireless technologies. USA tech centers were among “first adopters” of IT in broad range of industries but residents in other areas caught up fast… This was affected by rising education and tech know-how across the population • “Sticky” factor prices (e.g., housing and taxes) in major tech centers

21. Future Inquiry • More detailed “case” analysis of USA technology centers • This could involve inquiry over the last quarter century and even further back in time. More in-depth historical analysis should consider in detail changes in the character and length of business cycles in tech centers • Analysis of how global competition, technology change, product and process life cycles and local factor prices effect local development cycles • Consideration of whether the dynamics in technology centers outside the USA were similar to what was observed in USA tech poles in the 1990s and early 2000s

22. Future Inquiry… • The character and pace of economic change in technology centers is an important area of inquiry • Many useful insights can be gained from on-going detailed empirical study of technology centers in the USA and other nations • A challenge will be for the inquiry, and insights provided thereof, to keep pace with changes in the technology centers