BLUEPRINT FOR A HIGH-TECH CLUSTER for a high-tech cluster the case of the microsystems industry in the southwest by ross c. devol august 8, 2000 policy brief number 17

BLUEPRINT FOR AHIGH-TECH CLUSTERTHE CASE OF THE MICROSYSTEMSINDUSTRY IN THE SOUTHWEST

BY ROSS C. DEVOL

August 8, 2000

P O L I C Y B R I E F

Number 17

BLUEPRINT FOR AHIGH-TECH CLUSTER

THE CASE OF THEMICROSYSTEMS INDUSTRY

IN THE SOUTHWEST

August 8, 2000

ByRoss C. DeVol

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Blueprint for a High-Tech Cluster Milken Institute - August 8, 2000

ACKNOWLEDGMENTS

This study is based upon a preliminary draft which was delivered asa presentation at the 2nd Annual Conference on the Southwest as aRegion of Innovation on June 27, 2000, in Albuquerque, New Mexico,“Making the Southwest the Foundry for the Microsystems Industriesof the Future.” I would like to thank Sandia National Laboritories forcommissioning this study and their support.

I also wish to thank Milken Institute staff Steve Jing, John Catapano,and Frank Fogelbach, who provided valuable research assistance.

Copyright © 2000 by the Milken Institute.

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EXECUTIVE SUMMARY

Technology and knowledge-driven innovation are critical to wealthcreation and overall economic vibrancy in our New Economy. Whereclusters of emerging technologies form will play a key role indetermining economic winners and losers of the first half of the 21stcentury. As economic activity becomes more knowledge-based, thoseregions with leading clusters will experience greater economicgrowth. Because knowledge is generated, transmitted and sharedmore efficiently in close proximity, economic activity based on newknowledge has a high propensity to cluster within a geographic area.

This paper offers a blueprint for developing regional high-techclusters using the case of the microsystems industry in the SouthwestUnited States. It discusses development strategies for high-techclusters in general, then for the microsystems industry in particular.Finally, it sets out specific actions required to establish a microsystemscluster in any given region.

Microsystems is a newly formed, evolving collection of technologiesincluding micro e l e c t ronics, MEMS (Micro E l e c t ro M e c h a n i c a lSystems), and optoelectronics. These microscopic smart devices canmonitor, sense, think, act and communicate their information in orderto provide dynamic feedback systems. Microelectronics is an excitinga rea and may provide an important bre a k t h rough in chipminiaturization technology. An emerging application area is genechips and related DNA analysis tools. Radio Frequency MEMS couldrevolutionize cellular phone and other wireless applications byreplacing classical microwave circuit receivers. Optoelectronics is aseries of technologies that could vastly expand the bandwidth of ourcommunications capabilities at a minimal investment.

The geographic winner of these convergence technologies andinnovations has not been determined and is not preordained. TheSouthwest has considerable research and innovation competencies,but has several geographic competitors. Key challengers areMichigan, Central New Jersey, the Boston area, Greater Dallas,Southern Florida, and, perhaps its most formidable, Silicon Valley.First-mover advantages in forming new industry clusters thatrelegate established technologies into near obsolescence, i.e.potentially disruptive technologies such as microsystems, could belong enduring.

Milken Institute - August 8, 2000 Blueprint for a High-Tech Cluster

Technology andknowledge-driveninnovation are criticalto wealth creation andoverall economicvibrancy in our NewEconomy.

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Where clusters ofemergingtechnologies formwill play a key role indetermining economicwinners and losers ofthe first half of the21st Century.

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As economic activitybecomes moreknowledge-based,those regions withleading clusters willexperience greatereconomic growth.

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INDUSTRY CLUSTERS AND TECHNOLOGY GROWTHThe spatial dimensions of economic activity are becoming aninteresting field of inquiry after many years of dormancy. Clusteringarises from businesses and workers seeking geographic proximitywith others engaged in related activities like seaport cities of ancienttimes. Increasing returns lead to competitive advantages, as in, themore that is produced, the cheaper it is to make.

Research shows that the adoption of new innovations declines withgeographic distance from the source of the innovations. The bottomline is that centers of innovation give their host regions a distinctcompetitive advantage. Clusters are agglomerations of interrelatedindustries that foster wealth creation in a region, principally throughthe export of goods and services beyond the region. Industry clustersare geographic concentrations of sometimes competing, sometimescollaborating firms, and their related supplier network. Clustersdepict regional economic relationships — local industry drivers andregional dynamics — more richly and aptly than do standardindustrial methods.

A whole host of elements must be in place to set the stage for theformation of high-tech clusters. Research facilities engaged in cutting-edge work are important preconditions to the creation of high-techclusters. “Cost-of-doing business” measures are important for high-tech firms, especially in manufacturing. Low business costs may notbe as critical in determining the location of firms in the informationage as they were in the industrial age, but they can prove to be acomparative advantage in determining where a new tech clusterdevelops and whether it achieves critical mass. Other factors arebecoming more vital to cluster success. They include access to atrained/educated workforce, close proximity to excellent educationalfacilities and research institutions, an existing network of suppliers,the degree of technology spillovers, availability of venture capital,climate and other quality-of-place factors, and the general cost ofliving, especially home prices.

High-tech industries are playing a vital role in gauging theperformance of the U.S. economy. Further, they are determiningwhich metropolitan areas and states are achieving superior economicgrowth or falling behind. Success in creating high-tech clusters is nowthe distinguishing determinant of regional vitality. As evidence, two-thirds of the total-output growth differences among metros could beexplained by the concentration of technology and its growth over thepast decade.


Clustering arises frombusinesses andworkers seekinggeographic proximitywith others engagedin related activitieslike seaport cities ofancient times.

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Centers of innovationgive their host regionsa distinct competitiveadvantage.

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Success in creatinghigh-tech clustersis now thedistinguishingdeterminant ofregional vitality.

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SOUTHWEST TECHNOLOGY CLUSTER PERFORMANCEThe Southwest has been successful in developing technologycompetencies and clusters of technology firms and their relatedsupplier infrastructure. Growth has occurred in a wide group of high-tech industries in the region’s metropolitan areas. Te c h n o l o g ygrowth, however, has been concentrated in manufacturing. Theregion is a low-cost production site with high quality-of-placerankings and is improving its workforce skill sets. To a large extent,the Southwest’s technology growth is attributable to attracting themanufacturing technology production facilities of firms such as Intel,Phillips, Raytheon, and Motorola, among others.

Research and development activities of these firms are typicallylocated outside the Southwest, although one instance of indigenous(self-contained) technology growth is the telecommunication servicesindustry in Denver.

The Southwest had seven of the 50 fastest-growing metros ranked onhigh-tech gains. Colorado had four metros in the top 50 list.

SOUTHWEST MICROSYSTEMS: TECHNOLOGIES TOAPPLICATIONSThe Southwest has grown as a center of technology importance overthe past decade, but the region’s development has been unbalanced.Many metros’ technology performance has been based upon one ortwo clusters. Many of these clusters rely heavily upon governmentcontracting, which can be cut with devastating local impact.Colorado’s high-tech clusters are diversified and will make them lesssusceptible to the vagaries of any one industry or a government-dependent cluster.

The Southwest needs to diversify its technology clusters and move toan indigenous, entrepreneurial, venture capital cluster-developmentmodel. Microsystems may be just the technology to build suchclusters because it is a potentially massive, disruptive technology thatcan allow the region to leapfrog to a next-generation developmentmodel.

RESEARCH TO INNOVATION: COMPETENCIES ANDCHALLENGESThe research and innovation capacities of a region are critical tobuilding a new industry cluster from a breakthrough technology suchas microsystems. A new cluster can be formed by importing firms that


The Southwest hadseven of the 50fastest-growingmetros ranked onhigh-tech gains.

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The Southwest needsto diversify itstechnology clustersand move to anindigenous,entrepreneurial,venture capitalcluster-developmentmodel.

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The research andinnovation capacitiesof a region are criticalto building a newindustry cluster froma breakthroughtechnology such asmicrosystems.

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have commercialized the technology elsewhere, but the regions inwhich the basic research and development activities were performedhave a distinct advantage in building a cluster that “sticks.”

Regional innovation capacity stems from the strength of the basicinnovation infrastru c t u re, the specific conditions supportinginnovation in the emerging cluster, and degree of interaction betweenbasic infrastructure and cluster-specific conditions. The Southwest’sresearch capacities in microsystems are substantial, but its innovationperformance must be improved. The size of the public research anddevelopment (R&D) budget is important, but this budget must bearcommercial fruit.

From a research and innovation capacity perspective, the Southwesthas substantial competency. The region is home to many nationallaboratories, public/private laboratories, and re s e a rch centersaffiliated with universities. This gives the Southwest a high level ofpublic R&D funding, scientists and engineers relative to theworkforce, and patenting opportunities. The region scores well onhuman-capital capacity, has relatively low business costs, andgenerally favorable quality-of-place attributes. Ve n t u re capitalplacement is an important later-stage measure of commercializationactivity. Nevertheless, with the exception of Colorado, the Southwestis lagging behind in venture capital availability.

BUILDING A SOUTHWEST MICROSYSTEMS CLUSTERThe set of variables that matter to development of regional high-techindustries can be placed into three broad groups: public policy,comparative location benchmarking, and social infrastru c t u redevelopment. State and local governments, public policies, and theinteraction between private and public sectors are crucial for thegenesis, expansion, and fortification phases of high-techdevelopment.

R e s e a rch centers and institutions are undisputedly the mostimportant factor in incubating high-tech industries. These facilitiesspawn the technical capability and the scientific research activitiesthat train and educate skilled labor critical in expanding andre i n f o rcing the dominance of a high-tech industry re g i o n .F u r t h e r m o re, venture capital or risk-based financing must beavailable to fully support the commercialization of research, while thelong-term economic growth strategy must include public and privatev e n t u res that establish and maintain the leading edge re g i o n a lresearch centers and educational institutes.


Regions in which thebasic research anddevelopment activitieswere performed have adistinct advantage inbuilding a cluster that“sticks.”

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Regional innovationcapacity stems fromthe strength of thebasic innovationinfrastructure, thespecific conditionssupporting innovationin the emergingcluster, and degree ofinteraction betweenbasic infrastructureand cluster-specificconditions.

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Development ofregional high-techindustries can beplaced into threebroad groups: publicpolicy, comparativelocation bench-marking, and socialinfrastructuredevelopment.

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Tax rebates and incentives are a good tool in laying the foundation,particularly by helping smaller entrepreneurs set up basic operationalbases. Government’s function should be, at most, to jump-start theprocess. In terms of investment, providing a readily available laborpool is probably the best investment that state and local governmentcan make.

In addition to the physical infrastructure, economic developmentpolicy must include building a cultural and social environment.Establishing local public and private trade groups and affiliations issound policy in promoting the exchange of ideas, trade information,and public awareness of the development.

MICROSYSTEMS DEVELOPMENT STRATEGIESBuilding microsystem clusters has to be based upon true technologytransfer programs from basic to applied research, and ultimately,commercialization in the private sector. Some of these technologiescould be commercially viable in less than five years, but most willre q u i re additional time to develop successful products in themarketplace. Their incubation periods will be much longer than thoseneeded to turn a new e-commerce idea into a business.

The following points identify and expand upon specific actions thatmust be taken to develop a microsystems cluster.

■ Technology transfer policies should be made part of researchfacilities’ charters

The Southwest’s microsystems research infrastructure is substantial,but to achieve successful commercialization of these technologies, itmust be better leveraged. To fully exploit the commercial potential ofthis laboratory research, the federal government may need to adjustsome of the technology transfer rules.

Another important element in the development strategy is to enablescientists and other researchers to license their output to the privatesector, become part-time consultants to private firms, and in somecases, to move into the private sector themselves to developcommercial applications. The leadership of the research facilitiesmust be actively involved in promoting a new commercial focus forits research and mentoring opportunities for scientists who desire tobecome entrepreneurs. Scientists will need assistance in developingbusiness plans, approaching venture capitalists, and basicmanagement.


Building microsystemclusters has to be basedupon true technologytransfer programs frombasic to appliedresearch, and ulti-mately, commercial-ization in the privatesector.

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To fully exploit thecommercial potential ofthis laboratory research,the federal governmentmay need to adjust someof the tech-transferrules.

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Another importantelement in thedevelopment strategy isto enable scientists andother researchers tolicense their output tothe private sector,become part-timeconsultants to privatefirms, and in somecases, to move into theprivate sectorthemselves to developcommercialapplications.

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■ Create public/private organizations to foster commercializationsuccess

The region should establish a vision for the future and create ablueprint for meeting its goals and objectives through broad-basedstrategic planning. Economic organizations can act as a catalyst inlaying the foundation for nurturing and expanding technologyventures in newly forming or semi-established clusters by bringingtogether policies, programs, and resources from both the private andpublic sectors.

■ Avoid competing spheres of influence

Regional imperatives must be preeminent in the planning andexecution of tech-directed economic development. Inefficient effortscan result in failure and squander a unique opportunity to develop anindigenous, entre p reneurial-based microsystems cluster in theSouthwest.

■ Team with microsystems application industries for joint-development

The most promising application industries — communications,biotechnology and biomedical, and electronics — may help in thecommercialization of microsystems technology. These establishedSouthwest clusters could be key partners for the labs and universitiesinvolved in microsystems research.

■ Invest state-controlled funds in venture capital pools

To develop commercial microsystem-based products, the availabilityof venture capital must be improved. As prototype commercialproducts are created, better access to venture capital funds will benecessary to bring them to the market. Venture capitalists often followthe “smart” money and not the most promising deals. In other words,if angel investors are present, venture capital will ensue.

The problem is how to get this risk-based capital process started inareas like New Mexico.

■ Educate wealthy local investors about the advantages ofpooling resources to develop angel funds

Angel-type investors typically invest in early rounds of financing.Pools of angel investors can often be found in greater number whereentrepreneurs have successfully built their own companies. Thesesuccessful entrepreneurs become “angels” in turn, translating theirpassion into helping others build new enterprises.


Economic organi-zations can act as acatalyst in laying thefoundation fornurturing and expand-ing technologyventures in newlyforming or semi-established clusters bybringing togetherpolicies, programs, andresources from boththe private and publicsectors.

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The most promisingapplication industries— communications,biotechnology andbiomedical, andelectronics — may helpin the commercial-ization of micro-systems technology.

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To develop commercialmicrosystem-basedproducts, theavailability of venturecapital must beimproved.

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■ Lifelong learning is essential for rapid skill set updates inmicrosystems

Workforce training is a critical element in preparing a microsystemseconomic development strategy. While the early stages focus ontraining and support for high-end researchers, as commercializationp ro g resses, the focus will have to shift to developing skilledtechnicians to work in production facilities.

■ Create entrepreneur programs at universities and encouragebusiness “incubators” in the region

Rates of entre p reneurship in many of the metro areas in theSouthwest are low. These skills are generally developed throughexperience in the private sector, but many universities are developingentrepreneur programs. Both bachelor’s and master’s programs areavailable at some universities.

■ Communicate and promote the microsystems strategic planboth inside and outside the region

As collaborative organizations form or existing networks are used todevelop a strategic plan for microsystems, an effective means ofcommunicating the effort must be initiated. This communicationsplan should explain why the particular location believes that it candevelop a microsystems cluster.

■ Monitor microsystems objectives and goals on an ongoingbasis

Developing a microsystems cluster is a dynamic, long-termprocess. It requires constant adjustments to changes in internaland external conditions. Short-term and long-term benchmarksshould be implemented to monitor and complement the statedobjectives.


Workforce training isa critical element inpreparing amicrosystemseconomicdevelopment strategy.

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While the early stagesfocus on training andsupport for high-endresearchers, ascommercializationprogresses, the focuswill have to shift todeveloping skilledtechnicians to work inproduction facilities.

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Developing amicrosystemscluster is adynamic, long-termprocess.

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INTRODUCTION

Technology and knowledge-driven innovation are critical to wealthcreation and overall economic vibrancy in our New Economy. High-technology industries are central to assessing the economicperformance of countries and regions. The clustering of technology isf o rcing us to adopt new methods of evaluating the health ofmetropolitan and state economies. Aregion’s future economic successis linked to its ability to translate research into innovations that resultin new technology firms being established and grown. Relativestandards of living in regions are directly tied to whether they excel,muddle through, or fail to expand as centers of technology. Whereclusters of emerging technologies form will play a key role indetermining economic winners and losers of the first half of the 21stcentury.

The Southwest (Arizona, Colorado, New Mexico and Utah) has aunique opportunity to capitalize on its core research and innovationcompetencies and become a primary location for an importantemerging technology industry cluster: microsystems. The UnitedStates is well positioned to be a leading center for microsystemsapplications, but our technological preeminence is not locked inbecause Europe and Asia have significant capabilities in these areas(Detlefs 1999). The advantage will belong to those who are able toconvert these competencies into commercially viable products andcapture global markets.

Microsystems is a newly formed, evolving collection of technologies,including micro e l e c t ronics, MEMS (Micro E l e c t ro M e c h a n i c a lSystems), and optoelectronics. These microscopic smart devices canmonitor, sense, think, act and communicate their information in orderto provide dynamic feedback systems (Martinez 2000).

These enabling technologies have been developed at nationallaboratories, universities, and corporate research labs across theUnited States. Many of the leading centers are located in theSouthwest. In addition to the Southwest’s wide research base, it hasimportant clusters of some key industries to which microsystemstechnology will be applied. Electronics, communications equipment,biomedical, biotechnology and telecommunications are importantapplication areas.

Other locations are battling for leadership in forming microsystemsclusters. The University of Michigan is one of the leading MEMSresearch centers in the nation. The State of Michigan is implementing


High-technologyindustries arecentral to assessingthe economicperformance ofcountries and regions.

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The clustering oftechnology is forcingus to adopt newmethods of evaluatingthe health ofmetropolitan and stateeconomies.

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A region’s futureeconomic success islinked to its ability totranslate research intoinnovations thatresult in newtechnology firmsbeing established andgrown.

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innovative economic development strategies to supportcommercialization activities. Central New Jersey’s key asset is LucentTechnologies’ micromechanical research program at Bell Labs. LucentTechnologies recently purchased Chromatis for $4.8 billion. BocaRaton, FL is a major activity center where a firm was recentlya c q u i red for $3.25 billion. The Boston area is an importantmicrophotonics location with innovative firms such as SycamoreNetworks and Coretek.

Silicon Valley is a hotbed of activity in optical switching technologies.As evidence, Nortel Networks recently purchased Silicon Valley start-up Xros for $3.25 billion. Xros has a promising switching technology,but it is commercially untested. Recent Hewlett-Packard spinoffAgilent Technologies unveiled a prototype switching devise earlierthis year, then witnessed its stock take off by 47 percent, increasing itsmarket capitalization by $23 billion.

There are many regions vying for leadership, but microsystems end-use industries give the Southwest potential collaborators that mightassist in turning these microsystems competencies into industryclusters. Application industries might help microsystems “stick” inthe Southwest. The challenge for the leaders in the Southwest is tomove quickly before another region uses a previous historicalaccident to make it happen there. Technological developments areoccurring at a more rapid pace in today’s knowledge-based, globaleconomy. First-mover advantages in forming industry clusters ofpotentially disruptive technology such as microsystems could be longenduring. The Southwest should use its comparative advantages toreach the “tipping point” before someone else.

INDUSTRY CLUSTERS: APRIMER

ASCENDANCY OF THE CLUSTER PARADIGMThe spatial dimensions of economic activity are becoming aninteresting field of inquiry after many years of dormancy. Standardmacroeconomic analysis would lead us to believe that economicactivity occurs on a continuous, homogenous plane. The reality isquite different: space is central to understanding how an economyworks. Economic geography — or the study of location in space —has been largely neglected, not because people weren’t interested inthe subject, but because we didn’t really have the tools to examine the


The Southwest hasmany regions vyingfor leadership, butmicrosystems end-useindustries give theSouthwest potentialcollaborators thatmight assist inturning thesemicrosystemscompetencies intoindustry clusters.

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First-moveradvantages informing industryclusters of potentiallydisruptive technologysuch as microsystemscould be longenduring.

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The spatialdimensions ofeconomic activity arebecoming aninteresting field ofinquiry after manyyears of dormancy.Space is central tounderstanding howan economy works.

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topic in much quantitative detail (Fujita, Krugman and Venables1999).

Since the late 1980s, there has been renewed interest in “neweconomic geography,” mainly because of new statistical tools. If wereally lived in a world of constant returns, we would not see the highlevel of specialized economic activity within regions that we do. Thisclustering results from businesses and workers seeking geographicproximity with others engaged in related activities. Increasing returnslead to competitive advantages, as in, the more that is produced, thecheaper it is to make. Such externalities, or what an economist mightcall agglomeration effects, typically arise from three primary sources:labor-force pooling, supplier networks, and technology spillovers.

These externalities play a particularly important role in the case ofhigh-tech industries (see Table 1). The initial presence of one researchfacility may lead to others being established nearby and, ultimately,to the clustering of businesses. As more firms either move into or arestarted in a location, they make the location more attractive forsubsequent firms. High-tech industry clustering fosters a pooledlabor force of workers that possess industry-specific skills. Workersbenefit by having the opportunity to move next door to anotherposition. Firms benefit by having an available pool of workers nearbywith the industry-specific skills that they require (DeVol 1999).

A local high-velocity labor market can result in technology spillovers.New process and product innovation within a cluster can be sharedthrough informal relationships. As labor migrates between firms, ex-colleagues generate labor-market networks through informal contact.


Externalities, or whatan economist mightcall agglomerationeffects, typically arisefrom three primarysources: labor-forcepooling, suppliernetworks, andtechnology spillovers.

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These externalitiesplay a particularlyimportant role in thecase of high-techindustries.

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Table 1Agglomeration and Dispersion Forces in Competition

Agglomeration or Centripetal Forces

• Labor-Force Pooling

• Supplier Networks

• Technology Spillovers

Dispersion or Centrifugal Forces

• Immobile Factors

• Supply-Side Factors

• Demand-Side Factors

These informal relationships lead to new ideas being transformedinto innovations and new companies. This process keeps technologyclusters dynamic and adaptive, constantly striving to stay ahead ofothers.

To create international comparative advantage in an information-agee c o n o m y, clustering innovative activity is imperative. This isespecially true for leading developed countries since their economicperformance is driven by high-value-added industries. At a timewhen globalization was thought to be the preeminent economictheme, it is somewhat paradoxical that the study of the region is animportant area for understanding the success of nations.

Perhaps the best indicator of regionalism’s ascendance is that policymakers from Jerusalem to Kuala Lumpur are busy trying to cloneSilicon Valley. Geographic clustering of technology industries iscritical to the relative rate of regional growth within the U.S. andaround the globe. Ironically, just when globalization seemed to beforcing convergence among national economies and cheap, versatilecommunications seemed to threaten the inherent advantages of doingbusiness in one place versus another, localities are becoming morerelevant.

The speed of change is accelerating rapidly. As more economicactivity is knowledge-based, those regions with leading clusters willexperience greater economic growth. Because knowledge isgenerated and transmitted more efficiently in close pro x i m i t y,economic activity based on new knowledge has a high propensity tocluster within a geographic area (Audretsch 1998). Research showsthat the adoption of new innovations declines with geographicdistance from the source of the innovations (Keller 2000). The bottomline is that centers of innovation give their host regions a distinctcompetitive advantage.

CLUSTERS DEMYSTIFIEDA common misperception of clusters is that they are based upon asingle industry. One industry might be the core of a cluster, butwithout its partners, it may not endure for long. Clusters areagglomerations of interrelated industries that foster wealth creationin a region, principally through the export of goods and servicesbeyond the region. Industry clusters are geographic concentrations ofsometimes competing, sometimes collaborating firms, and theirrelated supplier network (DeVol 1997).


At a time whenglobalization wasthought to be thepreeminent economictheme, it is somewhatparadoxical that thestudy of the region isan important area forunderstanding thesuccess of nations.

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Ironically, just whenglobalization seemedto be forcingconvergence amongnational economiesand cheap, versatilecommunicationsseemed to threaten theinherent advantages ofdoing business in oneplace versus another,localities are becomingmore relevant.

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As more economicactivity is knowledge-based, those regionswith leading clusterswill experience greatereconomic growth.

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Clusters depict regional economic relationships — local industrydrivers and regional dynamics — more richly and aptly than dostandard industrial methods. An industry cluster differs from thetraditional definition of an industry group because it represents anentire value chain of a broadly defined industry sector from suppliersto end products, including its related suppliers and specializedinfrastructure (Henton 1999).

Supplier networks are key to the success of clusters and fosteringsustained agglomeration processes. Clusters are interconnected bythe flow of goods and services. This flow is stronger than the onelinking them to the rest of the local economy. Cluster membersinclude both high- and low-value activities.

HOW DO HIGH-TECH CLUSTERS FORM?A whole host of elements must be in place to set the stage for theformation of high-tech clusters (see Table 2). The dynamics of high-tech clustering follow a predictable pattern. Many of the factors thatattract high-tech companies are the same as those that attract


A whole host ofelements mustbe in place toset the stage forthe formation ofhigh-techclusters.

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Table 2What Factors Attract and Substain High-Tech Industries?

Existing High-Tech Presence

Traditional Cost-of-Doing Business Measures

• Tax Structure

• Compensation Costs

• Space Costs

• Capital Costs

• Business Climate

Specific to High-Tech

• Proximity to Excellent Research Institutions

• Access to Venture Capital

• Educated Workforce

• Network of Suppliers

• Technology Spillovers

• Climate and “Quality of Life”

traditional industries. How much weight is given to each locationfactor depends upon the specific high-tech industry. The major divideis whether it is a manufacturing or service industry (DeVol 1999).

R e s e a rch facilities engaged in cutting-edge work are importantpreconditions to the creation of high-tech clusters. High-tech regionalclusters such as Silicon Valley and Austin owe much of theirprosperity to research centers and universities where top scientistsand re s e a rchers can release their creative energ y. Knowledge-intensive graduates form new innovative firms where they applycutting-edge research that can be converted into commercially viableproducts.

“Cost-of-doing business” measures are important for high-tech firms,especially in manufacturing. Tax rates or incentives, compensationcosts, land and office costs, energy costs, capital costs, and firms’perception of the general business climate are key cost-of-doingbusiness considerations. Still, as we move to a knowledge-basedeconomy, their relative importance is diminishing.

Other factors are becoming more vital to cluster success. They includeaccess to a trained/educated workforce, close proximity to excellenteducational facilities and research institutions, an existing network ofsuppliers, the degree of technology spillovers, availability of venturecapital, climate and other quality-of-place factors, and the generalcost of living, especially home prices.


Research facilitiesengaged in cutting-edge work areimportantpreconditions to thecreation of high-techclusters. High-techregional clusters suchas Silicon Valley andAustin owe much oftheir prosperity toresearch centers anduniversities where topscientists andresearchers canrelease their creativeenergy.

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TECHNOLOGY GROWTH

MATTERS TO THE SOUTHWESTThe contribution of technology to economic growth has been debatedsince the time of the classical economists. Today, growth theorists arein agreement that technological change and innovation are significantdeterminants of long-term economic growth. High-tech industries areplaying a vital role in gauging the performance of the U.S. economy.Further, they are determining which metropolitan areas and states areachieving superior economic growth or falling behind.

TECHNOLOGY IN THE NATIONAL ECONOMYHigh-tech industries account for an ever-increasing share of nationaleconomic output. A compelling case can be made that high-techindustries are boosting the long-term growth potential of the U.S.economy. In essence, they are allowing the New Economy to develop.High-tech industries are therefore essential for analyzing long-termg rowth trends and monitoring business-cycle developments.Acceleration in technological advances and innovation in computers,


Technological changeand innovation aresignificantdeterminants of long-term economicgrowth.

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High-tech industriesare determiningwhich metropolitanareas and states areachieving superioreconomic growth orfalling behind.

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High-tech industriesare therefore essentialfor analyzing long-term growth trendsand monitoringbusiness-cycledevelopments.

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Figure 1U.S. High-Tech GDP vs. Low-Tech GDP

communications equipment, electronics, other high-tech products,and services is raising demand in these sectors at an acceleratingpace.

F i g u re 1 displays an end-use demand measure of high-techmanufacturing and services. It quantifies the technology industries’rising contribution to economic growth. In the 1980s, the high-techsector grew roughly twice as fast as the overall economy. Since the1990-91 recession, however, growth in the high-tech sector has beenfive times as large as growth in the aggregate economy. Over the pastfour years, growth in high-tech products and services averagednearly 25 percent, lifting the GDP growth rate by 2.0 percentagepoints. This is why technology industries are critical in assessingregional economic performance.

One of the most difficult tasks in analyzing high-technologyindustries is defining which set of industries to include in thedefinition. The definition will vary depending upon the researchinterests and data availability across a number of dimensions. Ourprimary re s e a rch interest is in determining the individualcontributions of high-tech industries to the relative economicperformance of metropolitan areas and states. For these reasons, thefocus is on the value of output for industries that may be consideredhigh technology. Manufacturing industries such as drugs, computersand equipment, communications equipment, and electro n i c


Over the past fouryears, growth in high-tech products andservices averagednearly 25 percent,lifting the GDP growthrate by 2.0 percentagepoints. This is whytechnology industriesare critical in assessingregional economicperformance.

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One of the mostdifficult tasks inanalyzing high-technology industriesis defining which setof industries to includein the definition.

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Our primary researchinterest is in deter-mining the individualcontributions of high-tech industries to therelative economicperformance ofmetropolitan areas andstates.

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Table 3High-Tech Leads All Industries

GIO*, Compound Annual Growth Rate, 1975-99

Percent

1. Computer & Data Processing Services 11.7

2. Electronic Components and Accessories 10.9

3. Communications Equipment 10.5

4. Motion Pictures 7.4

5. Computer & Office Equipment 7.2

6. Drugs 5.4

7. Telephone Communications Services 4.7

8. Medical Equipment, Instruments, and Supplies 4.7

9. Research & Testing Services 4.3

10. Engineering & Architectural Services 3.1

11. Measuring & Controlling Devices 2.4

12. Total for United States 2.4

13. Aerospace 0.0

14. Search & Navigation Equipment -0.8

*Gross Industry OutputSources: Milken Institute, RFA

components, and service industries such as communications services,computer and data processing services, and research and testingservices are included (see Table 3).

The industries in Table 3 are among the fastest growing in the UnitedStates. The three industries with the most rapid growth — computerand data processing services, electronic components, andcommunications equipment — all are vital information technologyindustries. To be included in this list, an industry needed to spend anabove-average amount of revenue on R&D and employ an above-industry average number of technology-using occupations. Over thepast 20 years, these industries have almost doubled their share ofvalue of industry output in the United States to nearly 11 percent.Technology services, at 5.8 percent of national output, are larger thantechnology manufacturing.

HIGH-TECH’S ROLE IN REGIONAL ECONOMIESSuccess in creating high-tech clusters is now the distinguishingdeterminant of regional vitality. To study the importance of high-techindustries in explaining the relative economic growth across 315metropolitan areas (metros), a series of statistical approaches wasapplied. The power of high-tech industries in determining the relativeeconomic growth of metros is high and the relationship is robustacross most dimensions. In the case of high-tech output, the relativemetro growth index is created by comparing growth in metros


Success in creatinghigh-tech clusters isnow thedistinguishingdeterminant ofregional vitality.

■ ■ ■

In the case of high-tech output, therelative metro growthindex is created bycomparing growth inmetros relative to thenational average from1990 to 1998. This isthe period in whichhigh-tech’s musclebecame so obvious.

9

Figure 2Metro Growth Explained by High-Tech

Actual vs. Predicted (Cross-sectional)

relative to the national average from 1990 to 1998. The focus is on the1990s because this is the period in which high-tech’s muscle becameso obvious.

In this statistical model, we “explain” the relative-output growthindex of a locality by 1) the relative growth of high-tech output, and2) an index of concentration of high-tech activity in 1990. As Figure 2suggests, two-thirds of the total-output growth differences amongmetros could be explained by these two factors alone.

How can high-tech industries, which comprise 11 percent of thenational economy, explain such a large proportion of differences ineconomic growth between metros? High-tech industries have aconsiderable direct economic impact on regional economies, but theancillary businesses, networks and systems that grow up aroundthem are vital to a complete synthesis.

Because of the high-value-added production in high-tech industries,and the greater demand for high-skilled labor, these industriescompensate their employees well. For example, extensive use of stockoptions in high-tech industries is a powerful incentive. The indirecteffect from high-tech industries on regional economies is substantial.

As clusters develop, a supplier network is formed. The demand forlocally produced professional services with specialized knowledge —for example, legal or financial services — expands. These highlycompensated occupations further stimulate local economies. Thisstems from non-high-tech firms and their employees, in turn,purchasing more local goods and services due to higher businesssales and greater income gains. Another important channel throughwhich high-tech industries promote growth locally is by the in-migration of knowledge workers and their families. These effects canlead to a virtual circle of positive feedback, with advantages leadingto greater advantage (DeVol 1999).

CONCLUSIONSHigh-tech industry clusters are determining which metropolitanareas are succeeding or failing. Without growth in high-tech sectors,metros and the states in which they are located risk being left behind.In order to foster high-tech growth, regions must understand whatlocation factors are important to high-tech firms. It is imperative forlocal economic development officials and business leaders to promotehigh-tech expansion and cluster formation, or they risk substandardeconomic growth in the future. Although high-tech is not the onlydevelopment strategy to pursue, it will be the key distinguishingfeature of regional vitality as we enter the new century.


High-tech industrieshave a considerabledirect economicimpact on regionaleconomies, but theancillary businesses,networks and systemsthat grow up aroundthem are vital to acomplete synthesis.

■ ■ ■

As clusters develop, asupplier network isformed. The demandfor locally producedprofessional serviceswith specializedknowledge expands.

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Although high-tech isnot the onlydevelopment strategyto pursue, it will bethe keydistinguishing featureof regional vitality aswe enter the newcentury.

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SOUTHWEST TECHNOLOGY

CLUSTER PERFORMANCE:SUCCESSES AND

SHORTCOMINGSThe Southwest has been successful in developing technologycompetencies and subsequent clusters of technology firms and theirrelated supplier infrastructure. The region’s metropolitan areas haveexperienced growth in a wide group of high-tech industries.Technology growth, however, has concentrated in manufacturing.The region is a low-cost production site with high quality-of-placerankings and is improving its workforce skill-sets. To a large extent,the Southwest’s technology growth is attributable to attracting themanufacturing technology production facilities of firms such as Intel,Phillips, Raytheon, and Motorola, among others. Research anddevelopment activities are typically located outside the Southwest,although one instance of indigenous (self-contained) technologygrowth is the telecommunication services industry in Denver.

Table 4 depicts the Southwest metros high-tech industry growthrelative to the national average. The Southwest had seven of the 50fastest-growing metros ranked on high-tech gains. Colorado had fourmetros in the top 50 list. Albuquerque, NM experienced the fastestgrowth in high-tech output in the nation during the 1990s. Thisgrowth is almost entirely attributable to electronic components andaccessories, primarily dependent on the Rio Rancho Intelsemiconductor facility. Las Cruces has been near the bottom of the listin terms of high-tech growth.

Yuma, AZ ranked ninth in high-tech growth, but once again, duealmost entirely to one firm. Much of Phoenix’s overall economicsuccess is based upon the expansion of high tech. Motoro l a ’ ssemiconductor components group is based in Phoenix. Electroniccomponents and accessories output growth averaged over 10 percentin the 1990s. Phoenix once again displays a familiar pattern: one high-tech industry accounting for the growth. Tucson and Flagstaff, AZranked near the middle of metros on high-tech growth in the 1990s.Salt Lake City, UT ranked 102nd on high-tech output growth over thelast decade. Provo-Orem, UT placed 52nd on that same measure.

Colorado has been among the top five states in high-tech growth overthe past decade. It had four metros, including its largest, Denver, in


The Southwest has beensuccessful indeveloping technologycompetencies andsubsequent clusters oftechnology firms andtheir related supplierinfrastructure.

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Technology growth,however, hasconcentrated inmanufacturing. Theregion is a low-costproduction site withhigh quality-of-placerankings and isimproving its workforceskill sets.

■ ■ ■

Research anddevelopment activitiesare typically locatedoutside the Southwest,although one instanceof indigenous (self-contained) technologygrowth is thetelecommunicationservices industry inDenver.

11

the 50 fastest-growing on the basis of high-tech. Colorado Springs’high-tech growth performance was 55 percent faster than the nationalaverage. Colorado Springs has a diverse high-tech base with manyclusters promoting growth. Denver has been one of the fastestgrowing major metros in the country in high-tech industries. Most ofthe growth has been in high-tech services of telecommunications andcomputer and data processing. Greeley has witnessed strong growthin computers, electronics, and computer and data processing services,helping place it 42nd overall in high-tech growth. Boulder-Longmonthas experienced gains across several high-tech industries as well.

In an attempt to measure which high-tech clusters really matter, acomposite measure of technology importance was derived. Theconcentration of high-tech manufacturing and services can be amisleading measure by itself. America has many cities that aredominated by one or two firms. In order to build a better index ofhigh-tech magnets we weighted the concentration of high-technologyoutput figures by the metro region’s percentage of the overallnational output of high-tech goods and services. Silicon Valley


Colorado Springs’high-tech growthperformance was 55percent faster than thenational average.

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In an attempt tomeasure which high-tech clusters reallymatter, a compositemeasure oftechnologyimportance wasderived.

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America has manycities that aredominated by oneor two firms.

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Table 4Four Corners High-Tech Metros, by Growth

Relative High-Tech Real Output Growth, 1990-98

U.S. RelativeRank Growth*

1. Albuquerque, NM 4.37

9. Yuma, AZ 1.95

19. Phoenix-Mesa, AZ 1.71

28. Colorado Springs, CO 1.55

38. Denver, CO 1.47

42. Greeley, CO 1.44

47. Boulder-Longmont, CO 1.39

52. Provo-Orem, UT 1.35

56. Santa Fe, NM 1.32

100. Fort Collins-Loveland, CO 1.10

102. Salt Lake City-Ogden, UT 1.10

144. Tucson, AZ 0.97

164. Flagstaff, AZ 0.92

237. Pueblo, CO 0.73

256. Grand Junction, CO 0.69

285. Las Cruces, NM 0.57

*Relative Growth in high-tech real output is equivalent to metro output indexed to 1990then divided by U.S. index. A metro with a value of >1 grew faster than the national averagefrom 1990 to 1998.

Sources: Milken Institute; RFA

is three times more important than the second-ranking metro, Dallas.Boston, Seattle, and Greater Washington, D.C. score high on thisindex of technology importance.

The Southwest has several technology centers that score highly in thenational context. Surprising to many, Albuquerque, NM ranks 7th inthis composite measure of technology clusters and 3rd in importanceof high-tech output to the local economy. Of course, Intel, Phillips andother electronics firms place it there. The high-value-added of Intel’sRio Rancho plant boosts Albuquerque’s position, probably beyond itsproper placement. Additionally, research and testing services areimportant to Albuquerque.

Phoenix-Mesa scores 12th on this technology center measure. Itssuccess, while dramatic, has been based upon an electronics cluster.Electronics is the only high-tech industry that is more concentrated in


The Southwest hasseveral technologycenters that scorehighly in the nationalcontext.

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Table 5Four Corners Tech Pole Rankings, 1998

Share U.S. Number ofTech- High-Tech High-Tech High-TechPole Composite Location Output Employment LQsRank Index* Quotient (percent) (thousands) Over 1**

7. Albuquerque, NM 4.98 3.55 1.40 35.7 3

12. Phoenix-Mesa, AZ 2.60 1.46 1.78 120.3 1

19. Denver, CO 1.81 1.39 1.30 90.6 3

27. Boulder-Longmont, CO 1.12 2.89 0.39 31.9 9

40. Tucson, AZ 0.67 1.83 0.37 24.0 5

42. Colorado Springs, CO 0.58 1.85 0.32 29.0 9

56. Salt Lake City-Ogden, UT 0.38 0.90 0.42 49.4 7

77. Provo-Orem, UT 0.17 1.49 0.11 13.9 3

102. Fort Collins-Loveland, CO 0.10 1.09 0.09 10.4 5

103. Flagstaff, AZ 0.10 1.89 0.05 1.4 1

148. Santa Fe, NM 0.03 0.82 0.04 3.0 3

206. Greeley, CO 0.01 0.49 0.02 3.8 1

230. Las Cruces, NM 0.01 0.45 0.01 1.6 2

252. Yuma, AZ 0.00 0.34 0.01 1.4 1

279. Grand Junction, CO 0.00 0.28 0.01 5.5 1

304. Pueblo, CO 0.00 0.14 0.01 0.84 0

*Composite Index is equivalent to the percent of national high-tech real output multiplied by the high-tech real output locationquotient for each metro.

**The Location Quotient (LQ) equals % output in metro divided by % output in the U.S. If LQ>1.0, the industry is moreconcentrated in the metro area than the U.S. on average.

Sources: Milken Institute; RFA

Phoenix than the national average (see Table 5). Denver ranks 19th inimportance as a technology center in the nation. It has three high-techclusters that place it among the leaders — all in services. Boulder-Longmont and Colorado Springs, CO are in the top-50 technologycenters. For medium-sized metros, this is an impressive ranking.What is even more unique is that both Boulder and Colorado Springshave nine high-tech industries out of a possible 14 with aconcentration above the national average.

Tucson’s 40th ranking as a technology center is attributable to guidedmissiles, space vehicles, and search and navigation equipment.Tucson ranks first in concentration in this cluster category in thenation. Salt Lake City, UT ranks 56th as a tech center and has sevenindustries that are more concentrated than the national average.Provo-Orem, UT, Fort Collins-Loveland, CO, Flagstaff, AZ, and SantaFe, NM rank in the upper half of metros in the country as technology-production centers.


What is even moreunique is that bothBoulder and ColoradoSprings have ninehigh-tech industriesout of a possible 14with a concentrationabove the nationalaverage.

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14

SOUTHWEST MICROSYSTEMS:TECHNOLOGIES TO

APPLICATIONSThe Southwest has grown as a center of technology importance overthe past decade, but the region’s development has been unbalanced.Many metros’ technology performance has been based upon one ortwo clusters. Many of these clusters rely heavily upon governmentcontracting, which can be cut with devastating local impact —witness the damage that Southern California’s economy suffered dueto defense downsizing and the collapse of the aerospace industry inthe early 1990s. Colorado’s high-tech clusters are diversified and willmake them less susceptible to the vagaries of any one industry or agovernment-dependent cluster. The Southwest needs to diversify itstechnology clusters and move to an indigenous, entrepreneurial,venture capital cluster-development model.

Microsystems may be just the technology to build such clustersbecause it is a potentially massive, disruptive technology that canallow the region to leapfrog to a next-generation development model.The geographic winner of these convergence technologies andinnovations has not been determined and is not preordained. TheSouthwest has many core competencies that could be keycomparative advantages. One of the Southwest’s key advantages atthe starting line for microsystems cluster formation is the highconcentration of many of the most promising applications industries.

Microelectronics is an exciting area and may provide an importantbreakthrough in chip miniaturization technology. Microelectronicscould permit an entire system on a chip and significantly reducebattery consumption of electric devices such as portable PCs. It couldlead to the shrinkage of most electronic equipment. Integratedmicroelectronics and MEMS systems could potentially change thesemiconductor industry (Joseph, Terry and Grace 1997). Several largefirms and start-ups are working on this technology, but it is still in theresearch and development phase.

The Southwest has two of the most important electronic componentsclusters in the nation — in Albuquerque and Phoenix — and severalsmaller ones that are experiencing growth above the national average.The firms in these clusters have a commitment to their regions andare potential collaborators in developing and commercializing thesetechnologies.


The Southwest hasgrown as a center oftechnologyimportance over thepast decade, but theregion’s developmenthas been unbalanced.

■ ■ ■

Colorado’s high-techclusters arediversified and willmake them lesssusceptible to thevagaries of any oneindustry or agovernment-dependent cluster.

■ ■ ■

Microsystems may bejust the technology tobuild such clustersbecause it is apotentially massive,disruptive technologythat can allow theregion to leapfrog toa next-generationdevelopment model.

15

In the case of Albuquerque, the impact of its electronics cluster on itseconomy is greater than any other metro in the nation. The electronicsindustry employs 10,000 in the Albuquerque area. Figure 3 is a bubblechart displaying the size of the value of production in electronics, thelocation quotient (importance to the locale relative to the nationaleconomy) and how fast the clusters in the Southwest are growingrelative to the national average. Phoenix’s electronics industry is 3rdin value of output and 7th on concentration in the nation and employsabout 43,000 people.

Optoelectronics is a series of technologies that could vastly expandthe bandwidth of our communications capabilities at a minimalinvestment level relative to the alternative of laying massive amountsof new fiber. The optical switching of signals, filtering, modulatingand other communication applications could improve vastly(Robinson 1998). Optical switching technologies, which ro u t einformation in the form of light, as opposed to current systems thatconvert light into electrons, are among the hottest communication —systems applications. Photonics over fiber is the wave that will carrynetworking technology ahead. Electrons were useful, but photonswill likely rule. The optical-to-electrical-optical transfer of signalscould move to optical-to-optical.


Optoelectronics is aseries of technologiesthat could vastlyexpand thebandwidth of ourcommunicationscapabilities at aminimal investmentlevel relative to thealternative of layingmassive amounts ofnew fiber.

■ ■ ■

16

Figure 3Southwest Electronic Components Clusters

The capacity of electronic switches is being outpaced by theexponential capacity additions of fiber optic cables. This rapidlyapproaching electronic bottleneck must be alleviated. Microphotonicscould reshape the global communications infrastru c t u re bypermitting lightening quick delivery of bandwidth-hoggingapplications, such as video-on-demand, around the globe (Fairley2000).

The Southwest does not have any communications equipmentclusters among the top ones in the nation, but it does have severalmetros experiencing rapid growth. Phoenix has the largest clusterand it grew 60 percent faster than the national average since 1990.Denver is the second-largest communication center in the region (seeFigure 4).

Besides communications equipment firms, telecommunicationservices could provide research and development funding as well ascollaborate with optoelectronics. Telecommunications firms will havea great interest in Radio Frequency (RF) MEMS for cellular phone andother wireless applications. These ultra-miniature applications couldreplace classical microwave circuit receivers. The ultimate goal is tohave on-chip RF MEMS devices with a complete RF systemintegrated on a single chip (Grace 2000).


The Southwest does not have anycommunicationsequipment clustersamong the top ones inthe nation, but it doeshave several metrosexperiencing rapidgrowth.

■ ■ ■

The ultimate goal is tohave on-chip RF MEMSdevices with a completeRF system integratedon a single chip.

17

Figure 4Southwest Communication Equipment Clusters

Denver anchors the telecommunications cluster in the Southwest andranks 4th in the nation in concentration of this industry. Denveremploys 23,000 individuals in telecom services. Colorado Springs,Salt Lake City, and Phoenix are important centers fortelecommunications as well (see Figure 5). Colorado Springs has seengrowth in this industry six times faster than the national average.

Biotechnology and biomedicine are likely to be importantmicrosystems application areas. Medical devices implanted in thehuman body, such as pacemakers, could not only monitor the patientmore accurately, but also be able to adjust the activity level or the flowof substances into the body. An emerging application area is genechips and related DNA analysis tools. Gene chips may be createdallowing the decoding of DNA sequences up to 1,000 times fasterthan possible with current methods. These miniature chips couldconduct tests on humans in minutes, identifying genes anddetermining a predisposition to particular illnesses such as cancer(Brown 1997).

Biotechnology and biomedicine may mean to the first half of the 21stcentury what electronics and computers meant to the second half of


Biotechnology andbiomedicine arelikely to be importantmicrosystemsapplication areas.

■ ■ ■

Miniature chips couldconduct tests onhumans in minutes,identifying genes anddetermining apredisposition toparticular illnessessuch as cancer.

18

Figure 5Southwest Telecom Services Clusters

the 20th century. The electronic and computer breakthroughs willallow massive amounts of genetic information to be decoded andprocessed. It is here that we are likely to see a fusing of theinformation and biotechnology/biomedical industries into apowerful technological and global economic force. This suggests animportant market opportunity for microsystems applications (DeVol2000).

The Southwest has several key biotech clusters. Albuquerque has thel a rgest biotechnology cluster output in the region with aconcentration more than three times the national average. Boulder’sbiotechnology concentration is four times greater than the nationalaverage. Salt Lake City’s biotechnology industry has experiencedrapid growth. Other metros with strong growth include Provo-Orem,Tucson, Fort Collins, and Yuma (see Figure 6).

The biomedical industry is relatively more important to Flagstaff thanany other metro in the country. Flagstaff’s concentration is 100 timeslarger than for the national average. It is important to keep inperspective that Flagstaff is a small metro, however. Salt Lake City’s


We are likely to see afusing of theinformation andbiotechnology/bio-medical industriesinto a powerfultechnological andglobal economic force.This suggests animportant marketopportunity formicrosystemsapplications.

■ ■ ■

19

Figure 6Southwest Biotechnology Clusters

biomedical cluster is four times more important to it than the nationas a whole. Denver, Tucson, Provo-Orem, and Albuquerque all have aconcentration above the national average (see Figure 7).


20

Figure 7Southwest Biomedical Clusters

RESEARCH TO INNOVATION:COMPETENCIES AND

CHALLENGESThe research and innovation capacities of a region are critical tobuilding a new industry cluster from a breakthrough technology suchas microsystems. A new cluster can be formed by importing firms thathave commercialized technology elsewhere, but those regions inwhich basic research and development activities take place have adistinct advantage in building a cluster that “sticks.” Knowledgederived from basic re s e a rch can be applied to innovation andconverted into economic value more effectively within the location ofits development.

Microsystems research capacities are substantial in the Southwest,but the innovation performance must be improved. Regionalinnovation capacity stems from the strength of the region’s basicinnovation infrastructure, specific conditions supporting innovationin an emerging cluster, and degree of interaction between the two(Porter and Stern 1999). The size of the public re s e a rch anddevelopment (R&D) budget is important, but this budget must bearcommercial fruit in the Southwest.

From a research and innovation capacity perspective, the Southwesthas substantial competency. The region is home to many nationallaboratories, public/private laboratories, and re s e a rch centersaffiliated with universities. This gives the Southwest a high level ofpublic R&D funding, scientists and engineers relative to theworkforce, and patenting opportunities. The region scores well onhuman capital capacity, has relatively low business costs, andgenerally favorable quality-of-place attributes. Nevertheless, venturecapital placement is an important later stage measure ofc o m m e rcialization activity. With the exception of Colorado, theSouthwest is lagging behind in venture capital availability.

RESEARCH CAPACITYFederal R&D commitments to the Southwest are high relative to otherstates. The national labs in the region account for much of thisfunding. New Mexico ranked 11th in federal R&D obligations in 1997at $1.9 billion. The more meaningful comparison is federal R&D percapita where New Mexico’s $1,100 vaults it to number one in thenation (see Figure 8). Per capita federal R&D for the U.S. is roughly


Those regions inwhich basic researchand developmentactivities take placehave a distinctadvantage in buildinga cluster that “sticks.”

■ ■ ■

Regional innovationcapacity stems fromthe strength of theregion’s basicinnovationinfrastructure, specificconditions supportinginnovation in anemerging cluster, anddegree of interactionbetween the two.

■ ■ ■

With theexception of Colorado,the Southwest islagging behind inventure capitalavailability.

21

Academic R&D canfoster industry-relatedresearch that istransferred to theprivate sector and istherefore animportant measure ofinnovation capacity.

■ ■ ■


22

Figure 8Federal R&D Per Capita, 1997

$250. The Department of Energy’s Sandia National Labs and LosAlamos receive the bulk of this funding.

Colorado is near the top in federal R&D funding. It ranks 14th in totalobligations and is in the top 10 in funding per capita. The NationalRenewable Energy Laboratory (NREL) in Golden, CO is a majorrecipient. NREL administrative offices are in Denver. Arizona ranks22nd in federal R&D obligations, but is below the national average ona per capita basis. Utah’s $320 million in federal R&D obligationsranks it 28th and is near Arizona’s per capita.

Academic R&D can foster industry-related research that is transferredto the private sector and is therefore an important measure ofinnovation capacity. Academic R&D in the Southwestern states placesthe region in the middle of the pack. Colorado ranks the highest at18th with academic R&D of $425 million. Arizona, Utah and NewMexico rank 21st, 28th, and 29th, respectively. On a per capita level,they score better, but in the case of academic R&D, how theinvestment dollars are allocated is the indicator. In New Mexico, 42percent of R&D is funneled into engineering as opposed to 16 percentfor the nation. Utah devotes more to engineering as well. Arizonareceives a larger percentage devoted to the physical sciences relative

to the national average. Colorado devotes twice the nationalproportion to environmental sciences.

Industry R&D adds to the knowledge base of local industry throughnew product innovation and can be a key driver of the region inwhich it is performed (Atkinson, Court and Ward 1999). Coloradoranks highest in the Southwest on industry R&D ($2.3 billion) at 16th,followed by Arizona at 17th, New Mexico at 21st and Utah at 28th.New Mexico has the highest industry R&D per capita in the region at$760, substantially above the national average of $560, which places itamong the top five in the country. Colorado ranks above the nationalaverage on a per capita basis as well. Table 6 presents a detailedbreakdown of the research capacity categories.

MICROSYSTEMS-SPECIFIC RESEARCH CAPACITYThe microsystems-specific research capacity of the Southwest issubstantial. Sandia National Laboratories has many outstandingresearch programs in the microsystems arena. Sandia has been at theforefront in the design and manufacture of microelectronic devicesand semiconductors, developing smaller, lighter and more reliableweapons command and control systems (Sandia NationalLaboratories 1999). These capacities certainly impactedAlbuquerque’s ability to convince Intel to build the Rio Ranchosemiconductor facility.


23

Table 6Research & Innovation Capacity

Arizona Colorado New Mexico Utah U.S.

Federal R&D, 1997Amount ($ Mil) 732 1,340 1,933 320 68,424Rank 22 14 11 28

Industry R&D, 1997Amount ($ Mil) 1,854 2,248 1,310 1,027 150,329Rank 17 16 21 28

Academic R&D, 1997Amount ($ Mil) 377 427 219 234 23,740Rank 21 18 29 28

SBIR* Awards, 1990-1998Number 614 1,390 686 423 35,413Rank 16 6 15 21

Patents Issued, 1998Number 1,514 1,750 343 666 80,287Rank 17 14 36 26

*Small Business Innovation ResearchSource: NSF

The microsystems-specific researchcapacity of theSouthwest issubstantial.

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In cooperation with Lockheed Martin, Sandia has developed sensorsfor robots under a cooperative R&D arrangement. Sandia holds thepatents, but they have been licensed for use. Sandia is working onmicromachines integrating chemical and physical sensors, opticaldevices and other parts on a silicon device no larger than a grain ofsand. Sandia has work underway on a chemlab chip that will have theintelligence to “know” where it is at any time. Sandia also has theCenter for Compound Semiconductor Technology that focuses onphotonic and micro e l e c t ronic applications for compoundsemiconductors.

The University of New Mexico houses the Institute of AdvancedMicroelectronics under the umbrella of the Microelectronics ResearchC e n t e r, established by NASA in 1995. Potential commerc i a lapplications of its research include digital television, data storage,medical diagnostics, instrumentation and communications.

The Physical Science Laboratory, the research and development andtest evaluation organization of New Mexico State University,provides support to government and private industry in Las Cruces.Los Alamos National Laboratory has been active in developing a newtype of magnetoencephalography (MEG) sensor based upon theSuperconducting Imaging Surface. It is exploring commercializationof several biomedical applications technologies developed from brainimaging. This may be important in detecting and treating cancers.

The Air Force Research Laboratory MEMS Test Bed is located inColorado. The University of Colorado at Boulder has the MEMSGroup undertaking important research. UC at Boulder also has itsCenter for Integrated Plasma Studies. Arizona has the Arizona StateUniversity Wind Tunnel Complex focused on MEMs re s e a rc h .Arizona State also has its Life Sciences Electron Microscopy Facility.

INNOVATION CAPACITYSmall-business innovation research awards (SBIR) are a key measureof innovation capacity, and, here, the Southwest shines. Cumulativelyfrom 1990 to 1998, Colorado ranks 6th, New Mexico 15th, Arizona16th, and Utah 21st. But on a per capita basis, New Mexico’s SBIRawards were 390, three-times the national average. Colorado’s wasclose behind at 350 per capita. Utah and Arizona were both above thenational average.

Patenting activity is an important intermediate gauge of movingre s e a rch from the lab into commercial products (Hicks 2000).Southwestern states score highly on patenting activity — the


Sandia is working onmicromachinesintegrating chemicaland physical sensors,optical devices andother parts on a silicondevice no larger than agrain of sand.

■ ■ ■

Commercialization ofseveral biomedicalapplicationstechnologiesdeveloped frombrain imagingmay be important indetecting and treatingcancers.

■ ■ ■

Patenting activity is animportant intermediategauge of movingresearch from the labinto commercialproducts.

24

exception is New Mexico. Colorado ranks 14th in the nation inpatents issued to state residents in 1998, Arizona 16th, Utah 26th andNew Mexico a disappointing 36th. Patents per million of populationin Colorado were 480, as opposed to 300 for the U.S. as a whole. BothUtah and Arizona were substantially above the U.S. average as well.New Mexico was below the U.S. average at 200 per million people.New Mexico’s poor ranking on patenting activity is especiallydisconcerting because of its stellar performance in both federal andindustry-funded R&D.

Venture capital (VC) placement is a significant later-stage measure ofcommercialization activity. VC is critical in incubating and sustainingan entrepreneurial-based high-tech cluster. Venture capital fundingrepresents a small share of the overall capital markets, but its truevalue cannot be measured in dollars. Venture capital prods businessgrowth at the critical early stages. Venture capitalists provide muchmore than financing. VCs assist in business plan development,become board members, lend management skills, suggest strategicpartnerships and alliances, assist in expansion plans, and can bring inkey talent where needed.

By financing new ideas, venture capitalists are catalysts instrumentalin building a cluster as they provide the means for new firms to beformed. Venture capital’s highest returns are to the regions wherethey invest. The regional return is not what motivates a venturecapitalist, but by maximizing the returns to the VC, the entire region’seconomic performance is enhanced. Without a well-functioningventure capital infrastructure, a regional technology cluster may notdevelop. Silicon Valley’s extensive venture capital network is one ofits greatest assets and distinguishes the region from all others.

Ve n t u re capital activity is an excellent way to assess whetherfinanciers have confidence in the new ideas and entrepreneurialinfrastructure of a region. Many ideas for innovative products orservices can be funded and developed internally at existing firms, butthe innovator’s enthusiasm may not be shared by seniormanagement, or the financing infrastructure may not be present in aresearch laboratory environment. Traditional sources of financing canbe difficult to obtain as these innovators attempt to embark on theirown paths. In many respects, VCs are the glue that holds thecommercialization effort together. If a VC is willing to place a seriesof bets on innovative ideas, it suggests that the risk-adjusted rate ofreturn in a region is expected to be high.

There are many ways of measuring the role of venture capital in theSouthwest’s technology clusters. Regardless of how you measure VCinvestment, Colorado is an outstanding performer and the three other


Venture capitalfunding representsa small share of theoverall capitalmarkets, but its truevalue cannot bemeasured indollars.

■ ■ ■

By financing newideas, venturecapitalists arecatalysts instrumentalin building a clusteras they provide themeans for new firmsto be formed.

■ ■ ■

Venture capitalactivity is an excellentway to assess whetherfinanciers haveconfidence in the newideas andentrepreneurialinfrastructure of aregion.

25

A more indicativegauge of venturecapital performance isto benchmark itrelative to someeconomic output orresearch capacitymeasure. VCinvestment as apercent of total R&Dmeasures regionalsuccess in translatingbasic research into apipeline of potentialcommercial productsand services.

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states in the region are lagging behind. It clearly illustrates thedifficulties that New Mexico, Arizona, and, to a lesser extent, Utah,a re having in moving to an entre p reneurial-based technologydevelopment model. More ominously, it displays how littlecommercial success is likely over the next several years.

Colorado had VC funding placements of $1.7 billion in 1999, rankingit 5th in the nation. Arizona ranked 22nd, Utah 25th, and New Mexico45th in the nation in VC placements in 1999 (see Table 7). Incomparison, California dwarfed all other states in VC placements lastyear at $20.7 billion, or 43 percent of all placements in the nation. Thebulk of those funds were invested in Silicon Valley firms.

A m o re indicative gauge of venture capital performance is tobenchmark it relative to some economic output or research capacitymeasure. VC investment as a percent of total R&D measures regionalsuccess in translating basic research into a pipeline of potentialcommercial products and services. This measure displays Colorado’simpressive performance. In 1999, Colorado had 22 cents of VCinvestment per dollar of total R&D. The national average was 9.6cents of VC investment per dollar of R&D. Arizona was slightlybelow the U.S. average with VC placements of 7.7 cents per dollar ofR&D. Utah had 6.1 cents and New Mexico a dismal one-half of onecent. The ratio of VC investments relative to patents tells a similarstory: Colorado has a lot in the commercialization pipeline. Utah andArizona had VC investments relative to patents roughly one-half thenational average and New Mexico’s was one-sixth the nationalaverage.

The final measure, and most important, is the ratio of VC investmentas a percent of the size of the local economy. This displays theultimate commercialization capacity of a region. VC investment


26

Table 7Venture Capital Investment

Arizona Colorado New Mexico Utah U.S.

VC Investment ($ Millions) 298.00 1,739.20 9.00 259.60 48,046.00

VC Investment,As Percent of GSP, % 0.21 1.22 0.02 0.04 0.50

VC Investment,As Percent of Total R&D, % 7.70 22.00 0.40 6.10 9.60

VC Investment Per Patent Issued,($ Thousands) 111.00 368.00 35.00 116.00 239.00

Source: Milken Institute; Venture Economics; WEFA; NSF

relative to Gross State Product (GSP) in Colorado is more thandouble the national average at 1.2%, one of the highest in the nation.Utah’s VC investments relative to GSP was less than the nationalaverage and Arizona’s was less than one-half the national ratio. NewMexico’s VC placements relative to GSP barely register on a chart (seeFigure 9).

HUMAN CAPITAL CAPACITYRetention or attraction of knowledge-intensive human capital(through in-migration) is essential to the formation and growth ofhigh-tech clusters. Human capital is one of the most importantdeterminants of economic performance in metropolitan areas andstates today. Because most U.S. regions can no longer compete on alow-skill, low-cost formula, they must compete globally on the basisof new ideas, new products, new markets, and productivity growth(Kotkin and Siegel 2000).

Without high levels of human capital, it would be impossible tocompete in high-value-added technology industries. As evidence,metros with the highest ratio of workers aged 25 and above relativeto the size of the labor force that hold at least a bachelor’s degree


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Retention orattraction ofknowledge-intensivehuman capital(through in-migration) is essentialto the formation andgrowth of high-techclusters.

■ ■ ■

Human capital is oneof the most importantdeterminants ofeconomicperformance inmetropolitan areasand states today.

■ ■ ■

Without high levelof human capital, itwould be impossibleto compete in high-value-addedtechnology industries.

Figure 9Venture Capital, As Percent of GSP

experienced higher rates of economic growth from 1980 through 1998.The superior economic performance of knowledge-intensive metroswas statistically significant from those metros with below averageeducational attainment (Gottlieb and Fogarty 2000).

The Southwest scores fairly well on educational attainment at thebachelor’s level, but it is in the high-end technical Ph.Ds where itexcels in several states. The Southwest has 12 out of 16 metros with anabove-U.S.-average ratio of workers with a bachelor’s degree orgreater relative to the population aged 25 or older (see Table 8).Boulder-Longmont, CO has the highest concentration of its laborforce with a bachelor’s or greater (47.9 percent) in the Southwest andis in the top five in the country. The University of Colorado andassociated research activities assists its ranking. Santa Fe, NM ranks2nd with 40.4 percent of its adult population with a bachelor’s degree.It has many artisans and creative people, but Los Alamos boosts itsranking quite dramatically.


The Southwest scoresfairly well oneducationalattainment at thebachelor’s level, but itis in the high-endtechnical Ph.Ds whereit excels in severalstates.

■ ■ ■

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Table 8Educational Attainment for Four Corners Metros

Population 25 Years and Older, 2000

Bachelor’s Degree Advanced or Greater Degree

(thousands) (percent) (thousands) (percent)

Albuquerque, NM 122.7 28.1 47.2 10.8

Boulder-Longmont, CO 88.9 47.9 34.5 18.6

Colorado Springs, CO 92.3 28.8 30.6 9.5

Denver, CO 447.6 33.9 133.0 10.1

Flagstaff, AZ 18.6 26.5 6.5 9.2

Fort Collins-Loveland, CO 54.3 34.7 19.1 12.2

Grand Junction, CO 16.0 20.4 4.8 6.1

Greeley, CO 22.5 21.2 7.4 7.0

Las Cruces, NM 25.5 24.9 9.0 8.8

Phoenix-Mesa, AZ 498.4 25.3 151.0 7.7

Provo-Orem, UT 47.1 25.7 13.7 7.5

Pueblo, CO 15.6 17.2 5.3 5.8

Salt Lake City-Ogden, UT 189.2 25.9 53.4 7.3

Santa Fe, NM 39.2 40.4 16.2 16.7

Tucson, AZ 143.9 27.0 52.2 9.8

Yuma, AZ 13.5 15.8 4.9 5.8

US (1998) 43,840.0 23.9 13,750.0 6.5

Sources: Milken Institute; U.S. Bureau of the Census

Fort Collins-Loveland, CO has the next highest ratio of collegegraduates relative to the size of the labor force at 34.7 percent. Denverhas fueled much of its economic growth through its ability to attractknowledge workers and employ them in its technology clusters.Denver now has 33.9 percent of its workforce with a bachelor’sdegree or better, up five percentage points over the past decade.Colorado Springs ranks 5th in the region with 28.8 percent of itsworkforce with a bachelor’s degree or higher. Albuquerque, Tucson,Flagstaff, Las Cruces, Phoenix, Provo-Orem, and Salt Lake City allscore above the national average on this measure as well.

Several Southwestern metros score highly on the percentage of thelabor force with an advanced degree (master’s or Ph.D.). Boulder-Longmont has the highest share of its labor force with an advanceddegree at 18.6 percent and ranks among the national leaders. Santa Feis 2nd in the region at 16.7 percent of its labor force with an advanceddegree. Fort Collins-Loveland is 3rd in the region at 12.2 percent,Albuquerque is 4th, and Denver is 5th on the percent of their laborforce with an advanced degree. Several other metros have a higherpercentage than the national average.

High-end scientific and technical talent energizes research-basedcompanies and industries, and it is here that the Southwest reallyexcels. New Mexico has the highest ratio of doctoral scientists anddoctoral engineers relative to the labor force in the country at 0.8percent, or one out of 140 (see Table 9). Colorado scores second in theregion at 0.4 percent of doctoral scientists, or one out of 160, rankingit substantially higher than the national average of one out of 260.Colorado scores better than the national average on doctoral


Several Southwesternmetros score highlyon the percentage ofthe labor force withan advanced degree(master’s or Ph.D.)

■ ■ ■

High-end scientificand technical talentenergizes research-based companies andindustries.

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Table 9Educational Attainment for Four-Corners States

Population 25 Years and Older, 2000

Bachelor’s Degree Advanced Doctoral Doctoral or Greater Degree Scientists (1997) Engineers (1997)

thousands percent thousands percent thousands percent thousands percent

Arizona 748.9 24.0 240.2 7.7 5.6 0.2 1.8 0.1

Colorado 838.4 31.1 259.5 9.6 10.5 0.4 1.8 0.1

New Mexico 260.4 23.9 99.2 9.1 6.4 0.8 2.1 0.3

Utah 297.1 24.6 84.3 7.0 4.0 0.4 1.4 0.1

US (1998) 43,840.0 23.9 13,750.0 6.5 483.2 0.3 97.1 0.1

Sources: Milken Institute; U.S. Bureau of the Census

engineers relative to its workforce, too. Utah measures slightly betterthan the national average on the basis of doctoral scientists, butmatches the national average on doctoral engineers.

COST OF DOING BUSINESSLow business costs may not be as critical in determining the locationof firms in the information age as they were in the industrial age, butthey can prove to be a comparative advantage in determining wherea new tech cluster develops and whether it achieves critical mass. Aregion can change its industrial structure over time through its abilityto attract investment in newly emerging industries, such asmicrosystems. Factors that determine firm and individual locationchoices include: cost-of-doing-business measures — wage rates, taxrates, capital costs, and energy costs — along with labor force skills,access to markets, and increasingly, quality of life issues (DeVol 1997).

The cost of doing business explains a large proportion of long-termregional growth disparity in the United States. Our research indicatesthat relative wages is the dominant cost-of-doing-business measurefor most traditional firms. Disparity of wages explains much ofmanufacturing’s migration from the Northeast and Midwest to theSouth and West. However, for energy-intensive firms, relative wagerates play a less important role, while electricity and natural gas costsincrease in relative importance in firm site-selection criteria.

The capital and labor tax structure influences whether a region retainsits existing industries and firms, and attracts new investment.Holding all other factors constant, such as the innovation capacity oftwo locations, a firm will locate in the one where business costs arelower and their employees’ standard of living is higher.


Low business costsmay not be as criticalin determining thelocation of firms inthe information age asthey were in theindustrial age, butthey can prove to be acomparativeadvantage indetermining where anew tech clusterdevelops and whetherit achieves criticalmass.

■ ■ ■

The cost of doingbusiness explains alarge proportion oflong-term regionalgrowth disparity inthe United States.

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Table 10Cost of Doing Business

(US Ave. = 100) Arizona Colorado New Mexico Utah

Relative Wage Rate 97.0 103.0 84.0 86.0

Relative Tax Burden 103.1 76.8 125.4 99.3

Relative Electricity Cost 118.0 93.0 99.0 79.0

Relative Office Lease Cost 98.0 88.5 62.8 70.9

Relative Industry Lease Cost 81.6 93.0 98.7 87.1

Overall Composite Index 99.7 94.1 91.3 85.7

Source: Milken Institute; WEFA; CB Richard Ellis; Grubb & Ellis

The Southwest has comparative advantages in several business-costareas. Three of the four states have wage rates below the nationalaverage, even when adjusted by the mix of the industries (see Table10). Colorado’s wage rate is 3 percent above the national average.Arizona’s is 3 percent below the national average. Utah is 14 percent,and New Mexico is 16 percent below the national average.

Tax burdens in these states are disparate. The tax burden is defined asstate and local taxes relative to total personal income. New Mexico’sis 25 percent above the national average and Colorado’s is 23 percentbelow the national average. The tax burden in Utah and Arizona isnear the national average. Electricity costs are all below the nationalaverage in the Southwest with the exception of Arizona. Arizona’selectricity costs are 18 percent above the national average. Utah isvery competitive on electricity costs at 21 percent below the nationalaverage. Office lease rates are below the national figure for all fourstates, especially in New Mexico and Utah. Industrial lease rates areless than the national average in New Mexico and Colorado, butsubstantially so for both Utah and Arizona.

By applying weights to the above cost factors, a total cost-of-doing-business index was created. All four southwestern states are below


Tax burdens in thesestates are disparate.The tax burden isdefined as state andlocal taxes relative tototal personal income.

■ ■ ■

By applying weightsto the above costfactors, a total cost-of-doing-business indexwas created.

■ ■ ■

All four southwesternstates are below thenational average onbusiness costs

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Figure 10Cost of Doing Business, Composite Index

the national average on business costs (see Figure 10). Utah scoresbest with overall business costs 14 percent less than the U.S. average.New Mexico’s business costs are nine percent below the nationalaverage, Colorado’s are six percent less than the correspondingnational figure and Arizona’s match it. Low business costs are acomparative advantage for the Southwest that must be exploited inhelping a microsystems cluster develop.

QUALITY-OF-PLACEAs firms try to attract top-level managers, scientists, engineers, andother technicians, quality-of-place is crucial to their success. Quality-of-place (climatic conditions and other geographical characteristics,commute time, violent crime rates, air quality, housing costs, statespending on education per student, and other measures) willincreasingly affect future location decisions.

We are entering the age of human capital, a period in which firmsmerely lease knowledge assets and location decisions are increasinglybased upon quality-of-place factors that are important to attractingand retaining this most vital economic asset. Locations that areattractive to knowledge assets will have a distinct advantage overthose that are not.


Quality-of-place willincreasingly affectfuture locationdecisions.

■ ■ ■

We are entering theage of human capital,a period in whichfirms merely leaseknowledge assets andlocation decisions areincreasingly basedupon quality-of-placefactors that areimportant toattracting andretaining this mostvital economic asset.

■ ■ ■

Locations that areattractive toknowledge assetswill have a distinctadvantage over thosethat are not.

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Figure 11Quality-of-Place Ranking(out of 315 U.S. metros)

RankingNumber

Boulder-Longmont, CO 74

Greeley, CO 75

Denver, CO 83

Fort Collins-Loveland, CO 85

Provo-Orem, UT 102

Colorado Springs, CO 106

Salt Lake City-Ogden, UT 113

Pueblo, CO 123

Yuma, AZ 130

Tucson, AZ 145

Santa Fe, NM 164

Phoenix-Mesa, AZ 169

Flagstaff, AZ 170

Albuquerque, NM 178

Las Cruces, NM 181

Sources: Milken Institute; Money.com

Utilizing data from a variety of sources, we have created an overallcomposite measure of quality-of-place for the Southwest metros. TheSouthwest scores fairly well overall, but several metros’ positions arediminished by either high crime rates or low environmental scores(see Table 11). Five of the top six highest-ranking metros on quality-of-place in the region are in Colorado. Boulder was 1st, Greeley 2nd,Denver 3rd, Fort Collins 4th, and Colorado Springs 6th on quality-of-place rankings. Phoenix and Albuquerque’s relatively low scores areattributable to crime and pollution factors. On the other measures,both Phoenix and Albuquerque score fairly well.

Quality-of-place considerations will be important to the developmentof a microsystems cluster in the Southwest. Low commute times,housing prices, and high recreation attributes give the region a keyadvantage in attracting young, bright people.


Quality-of-placeconsiderations will beimportant to thedevelopment of amicrosystems clusterin the Southwest.

■ ■ ■

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BUILDING A SOUTHWEST

MICROSYSTEMS CLUSTERAs a reference point for building a microsystems cluster in theSouthwest, it is helpful to identify the general factors, and thenattempt to craft a specific set of guidelines. In light of the tremendousopportunity for employment creation and income gains by buildingand growing clusters, a technology-based economic developmentstrategy must be carefully formulated.

TECHNOLOGY DEVELOPMENT FACTORSTable 12 is a checklist of the set of variables that matter todevelopment of regional high-tech industries. These factors are sortedinto three groups: public policy, comparative location benchmarking,and social infrastructure development. Each factor was rated basedupon its importance at diff e rent stages of regional economicdevelopment and their effectiveness in helping establish a regionalhigh-tech cluster. All factors in the table are interrelated, hence theintegral nature of those factors make the role of local government animportant function in the development process.

State and local government, public policies, and the interactionbetween the private and public sectors impact the genesis, expansion,and fortification phases of high-tech development (Sternberg 1996).Nonetheless, due to the high-tech industry’s unique characteristics,government’s role is also limited. Overly active governmentintervention and public policy may be counter productive andharmful to the long-term development of high-tech industries.

Research centers and institutions are indisputably the most importantfactor in incubating high-tech industries. Furthermore, the technicalcapability and scientific research activities train and educate skilledlabor that will be critical in expanding and reinforcing the dominanceof regional high-tech industries. The federal government had anunintended impact on the formation of high-tech clusters around thecountry through its placement of research centers and grants. To fullysupport the commercialization of research, venture capital or risk-based financing must be available. Public/private ventures that aimto establish and maintain the leading edge regional research centersand educational institutes are critical in devising a long-termeconomic growth strategy. The success of Raleigh-Durham-ChapelHill, NC represents one such success.


In light of thetremendousopportunity foremployment creationand income gains bybuilding and growingclusters, a technology-based economicdevelopment strategymust be carefullyformulated.

■ ■ ■

State and localgovernment, publicpolicies, and theinteraction betweenthe private and publicsectors impact thegenesis, expansion,and fortificationphases of high-techdevelopment

■ ■ ■

Research centers andinstitutions areindisputably the mostimportant factor inincubating high-techindustries.

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In the initial stages of high-tech manufacturing development, allother factors being equal, low-cost regions have a distinct advantage.The dispersal of high-tech manufacturing and processing away fromTech-Pole regions such as Boston has intensified. As technologyapplications are broadly adapted, standardized forms of high-techmanufacturing can be moved to low-cost locations. Proximity tosuppliers and markets is less relevant today as communication andshipping costs fall. If initial low-cost regions cannot establishagglomeration as their location costs rise, they can easily besuperceded by other locations.

Low-cost is not a sustainable comparative advantage in high-techindustries. Since the new high-tech economy is a global-based systemand about mobility of operations, a high-tech company can movefrom one region or country to another in a relatively short period oftime.


In the initial stagesof high-techmanufacturingdevelopment, allother factors beingequal, low-costregions have a distinctadvantage.

■ ■ ■

The dispersal of high-tech manufacturingand processing awayfrom Tech-Poleregions such asBoston hasintensified.

■ ■ ■

Low-cost is not asustainablecomparativeadvantage in high-tech industries.

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Table 12High-Tech Development Factors

Inception Growth Fortification

Public Policy

Tax Incentives • • • •

Public Investment • ••

Commercialization of Ideas • •• ••

Comparative Location Benchmarking

Cost Factors •••

Research Institutions ••• ••• •••

Skilled or Educated Labor Force •• ••• •••

Venture Capital Availibility • •• •••

Transportation Center •

Proximity to Supplies & Markets •• • •

Social Infrastructure Developments

Attending Changing Needs •• •••

Re-education & Training Facilities ••• •

Public/Private Partnerships ••• •• •

Establishing Trade Groups, & Affiliations ••• •••

Housing, Zoning, & Quality of Life •• •• •••

••• Critical

•• Very Important

• Important

Tax rebates and incentives can hence be a good tool in laying thefoundation, particularly by helping entre p reneurs set up basicoperational bases. Government entities should be cautious indistinguishing and recognizing the orientation of such policy,however. Government’s function should be, at most, to jump-start theprocess. Providing a readily available labor pool is probably the bestinvestment that state and local governments can make.

The process of establishing a high-tech economy is complex andmulti-faceted. Its evolution is totally dynamic, and in many aspectsself-guiding. Developing a regional culture that is amenable tochange, growth and building a society open to new ideas is the mosteffective strategy for government to both attract and expand high-tech industries.

Economic development policy must adjust to being about the culturaland social environment as well as physical infrastru c t u re .Establishing local public and private trade groups and affiliations issound policy for promoting the exchange of ideas, trade information,and public awareness of the development. Attending to the needs oflocal firms and newcomers alike will help the region attract thedesired skilled labor.

MICROSYSTEMS DEVELOPMENT STRATEGIESWe can draw on the above list of tech-development strategies to craftone specifically for the Southwest microsystems case. Buildingmicrosystem clusters must be based upon true technology transferfrom basic to applied research, and ultimately, commercialization inthe private sector. It is a daunting long-term process, but the rewardscould be immense. Some of these technologies could be commerciallyviable in less than five years, but most will require additional time todevelop successful products in the marketplace.

COMMERCIALIZATIONThe microsystems research infrastructure in the region is substantial.For successful commercialization of this research, it must be betterleveraged. The following points identify and expand upon specificactions that must be taken to develop a microsystems cluster.

■ Technology transfer policies should be initiated to make it partof research facilities’ charters

One obstacle that needs to be addressed is the top-secret status ofmany research programs at the laboratories in the region. The federal


Providing a readilyavailable labor poolis probably the bestinvestment that state and localgovernments canmake.

■ ■ ■

Developing a regionalculture that isamenable to change,growth and buildinga society open to newideas is the mosteffective strategy forgovernment to bothattract and expandhigh-tech industries.

■ ■ ■

Economicdevelopment policymust adjust to beingabout the cultural andsocial environment aswell as physicalinfrastructure.

36

government may need to adjust some of its technology transfer rulesto exploit the commercial potential of the research at the labs. Appliedresearch programs have been established between government labsand the private sector, but more must be created and additionalresources devoted to them.

The culture at many research facilities and universities in the regionmust likewise be adjusted to emphasize commercial applications,beyond re s e a rch for the sake of re s e a rch. Scientists and otherresearchers must be encouraged and given support in licensing theirresearch to the private sector, becoming part-time consultants toprivate firms, and moving to the private sector themselves to developc o m m e rcial applications (Thomasian 2000). They may needmentoring in developing business plans, approaching venturecapitalists, and basic management. Of the more than 16,000 U.S. R&Dlaboratories, there are probably 200-300 with significant potential tocontribute to public domain science, innovation, and re g i o n a leconomic development (Crow and Bozeman 1998). Many R&D labsin the Southwest have significant commercialization potential, but thedoors must be unlocked. The leadership of the research facilities mustbe actively involved in promoting a new commercial focus.

■ Create public/private organizations to foster commercializationsuccess

Public/private collaborations are critical to developingc o m m e rcialization facilities for microsystems. State and localgovernment officials must partner with economic developmentofficials, universities, corporations, civic organizations, and angelinvestors to garner support. This could be an important component of“tipping” the commercialization effort quickly. Broad-based strategicplanning will enable the region to establish a vision for the future andcreate a blueprint for meeting its goals and objectives. Incentiveprograms such as property tax abatements, employment-creationcredits, equipment-investment tax credits, and government seedfunds must be devoted to the effort.

An economic catalyst organization can bring together policies,programs, and resources from both the private and public sectors tolay the foundation for nurturing and expanding technology venturesinto newly forming or semi-established clusters (Newman 1999). Agreat example is the UCSD CONNECT program which serves as aneconomic catalyst in bringing the nascent San Diego technologyindustries together (Palmintera 2000). Organizations similar to thisare forming in the region. They are The Next Generation EconomyInitiative in Central New Mexico, and the Arizona Optics IndustryAssociation formed in 1992 to bring the members of Tu c s o n ’ s


One obstacle is thetop-secret status ofmany researchprograms at thelaboratories in theregion.

■ ■ ■

Many R&D labs inthe Southwest havesignificantcommercializationpotential, but thedoors must beunlocked.

■ ■ ■

Public/privatecollaborations arecritical to developingcommercializationfacilities formicrosystems.

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Commercializationcenters require timeto mature andestablish the region asa commercialdeveloper of newtechnologies.

■ ■ ■

Competing spheres ofinfluence are the keypotential pitfall.

■ ■ ■

When stakeholdersfeel that theirperspective ondevelopment is notgiven sufficientconsideration, theywithdraw or evenimpede the effort.Regional imperativesmust be preeminentin the planning andexecution of tech-directed economicdevelopment.

fledgling cluster together. Members of the Arizona Optics IndustryAssociation bid together to acquire large contracts that they are notqualified to bid on individually.

■ Avoid competing spheres of influence

Commercialization centers require time to mature and establish theregion as a commercial developer of new technologies. It may takefive, 10, or even 15 years before a recognizable return is released froma commercialization center. The IC2 Institute and later the AustinTechnology Incubator served as technology-development catalysts tomake Austin a thriving center for high-tech ventures in the late 1990s.Much of this work was initiated in the early and mid-1980s.

Competing spheres of influence are the key potential pitfall. Whenstakeholders feel that their perspective on development is not givensufficient consideration, they withdraw or even impede the effort.Regional imperatives must be preeminent in the planning andexecution of tech-directed economic development. Inefficient effortscan result in failure and squander a unique opportunity to develop anindigenous, entre p reneurial-based microsystems cluster in theSouthwest.

■ Team with microsystems application industries for joint-development

Corporations and other businesses are often excellent sources ofcommercial research funding and may serve as collaborators form i c rosystems development. The most promising applicationindustries — such as communications, biotechnology andbiomedicine, and electronics — may help in the commercialization ofm i c rosystems technology. These established Southwest clustersrepresent key potential partners for the labs and universities. Forexample, in the 1970s, Xerox’s PARC in Palo Alto, CA conducted thetype of R&D that led to the formation of such well-known technologyfirms as Apple and Sun Microsystems. Currently, the Kendall Squarearea of Cambridge, MA is building a six-story biotechnology researchand commercialization center with public and private funds. Thislocation will provide great proximity to two important neighbors: theMassachusetts Institute of Technology and Harvard.

VENTURE CAPITALDevelopment of commercial microsystem-based products requiresi m p roved access to venture capital. As prototype commerc i a lproducts are created, more venture capital funds will be necessary to

38

bring them to the market. Colorado is the only state in the Southwestwith a sizeable venture-capital community. But, venture capitalistsare not likely to show up until others exhibit an interest in funding thec o m m e rcialization process. Ve n t u re capitalists often follow the“smart” money and not necessarily the most promising deals. Inother words, if angel-type investors are there in large numbers, moreventure capital will show up.

The problem is how to get this risk-based capital process started inareas like New Mexico. Even though most venture capital funds comef rom insurance companies, pension funds, and universityendowments, the venture capitalists that manage these funds arealready involved in large, fast-growing high-tech clusters (Melnickand Waits 2000).

■ Invest state-controlled funds in venture capital pools

Many states in the region have already given authority to statepension funds to invest in venture capital funds. Some argue thatventure-capital fund investment is too risky for public-sector funds.However, most studies have shown that well-diversified portfolios ofventure capital investments have a higher risk-adjusted rate of return.Existing state programs on the books should be used and legislationenacted to increase the percent of state-controlled funds that can beinvested in venture funding.

New York is underwriting an ambitious new program on closing theventure-capital gap. The state will place $250 million from its $120billion pension fund as venture capital. These investments are forsmall companies — most targeted for technology firms in upstateNew York. Professional venture capital fund managers will select thefirms for investment and manage the relationship (Swope 2000). Asimilar program is under way this year in Oregon, and others arecrafting their own.

■ Educate wealthy local investors about the advantage of poolingresources to develop angel funds

Angel-type investors typically invest in the early rounds of financing.A pool of angel investors is greater where more entrepreneurs havesuccessfully built their own companies. After developing a company,many entrepreneurs find that their passion is helping others buildnew enterprises and decide to become “angels.” Iowa has aninnovative program underway. Iowa’s program attempts to be moreneutral in implementation. Rather than inject state money intov e n t u re-capital markets, Iowa is playing matchmaker betweenprivate investors and entrepreneurs. Iowa believes that it has plenty


Venture capitalistsoften follow the“smart” money andnot necessarily themost promising deals.

■ ■ ■

Existing stateprograms on thebooks should be usedand legislationenacted to increasethe percent of state-controlled funds thatcan be invested inventure funding.

■ ■ ■

After developing acompany, manyentrepreneurs findthat their passion ishelping others buildnew enterprises anddecide to become“angels.”

39

of wealthy individuals who would be interested in investing in localstart-ups, but don’t know where to begin. Iowa has hosted severalevents for these budding “angels” to train them in the process. Angelsare encouraged to participate in bimonthly forums called VentureNetwork of Iowa where entrepreneurs make their pitch.

ONGOING EDUCATIONOngoing education of varying degree and type is an essential elementat each stage in the evolution of high-tech clusters. Skill set updates,entrepreneur programs, higher education and widespread edificationof community, government and collaborative organizations all enterinto the mix for successfully sustaining long-term clusterdevelopment.

■ Lifelong learning is essential for rapid skill set updates inmicrosystems

Workforce training is one of the most critical elements of preparing am i c rosystems economic development strategy. The early focusshould be on providing the necessary training and support for high-end researchers, but as commercialization progresses, the focus willneed to shift to developing skilled technicians that can work in aproduction facility. A community that does not institute a workforcedevelopment plan that ensures microsystems workers have thecorrect skills cannot hope to achieve long-term success, even if manyof the essential planning strategies are implemented in other keyareas. These programs should include the community colleges withaccredited two-year associate degree programs.

■ Create entrepreneur programs at universities and encouragebusiness “incubators” in the region

Rates of entre p reneurship in many of the metro areas in theSouthwest are low. These skills are generally developed throughexperience in the private sector, but many universities are developingentrepreneur programs (Edwards 1999). Both bachelor’s and master’sp rograms are available at some universities. The University ofSouthern California has developed a unique master’s program forstudents who want to become entre p reneurs. Raising thesophistication of entrepreneurs in the region will help attract venturecapital. Many for- p rofit business incubators are opening in anattempt to narrow the entrepreneur skills-gap in regions. idealab! inPasadena, CAdeveloped the first successful business incubator. It hasspun off more than 30 companies.


A community thatdoes not institute aworkforcedevelopment planthat ensuresmicrosystems workershave the correct skills,cannot hope toachieve long-termsuccess, even if manyof the essentialplanning strategiesare implemented inother key areas.

■ ■ ■

Raising thesophistication ofentrepreneurs in theregion will helpattract venture capital.

■ ■ ■

As collaborativeorganizations form orexisting networks areused to develop astrategic plan aneffective means ofcommunicating theeffort must beinitiated.

40

■ Communicate and promote the microsystems strategic planboth inside and outside the region

As collaborative organizations form or existing networks are used todevelop a strategic plan for microsystems, an effective means ofcommunicating the effort must be initiated. This communicationsplan should explain why the particular location believes that it candevelop a microsystems cluster. The plan should highlight there s e a rch capacities, discuss programs to improve innovationcapacities, share efforts to foster additional venture capital funding,and emphasize other factors such as quality of place and businesscosts. This communication effort should be both within and outsidethe region.

■ Monitor microsystems objectives and goals an on ongoingbasis.

Developing a microsystems cluster will be a dynamic, long-termprocess. It will require constant adjustments to changes in internaland external conditions. Short-term and long-term benchmarksshould be implemented to monitor and complement the statedobjectives.


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ABOUT THE AUTHOR

Ross C. DeVol is the Director of Regional and Demographic Studies at theMilken Institute. He oversees the Institute’s research efforts on the dynamics ofcomparative regional growth performance, focusing on their implications foreconomic, business, labor, and political actors. He is recognized as an expert onthe New Economy and how regions can prepare themselves to compete in it. Hisinterests lie in the quantification of those factors that determine the relativeeconomic success of regions, particularly in the United States. He is examiningthe effects of information technology, international trade, education and labor-force skills training, cost of doing business, early-stage financing and quality-of-life issues on the geographic distribution of economic activity.

D e Vol completed a significant study in July 1999, “America’s High-Te c hEconomy: Growth, Development, and Risks for Metropolitan Areas” — anexamination of how clusters of high-technology industries across the countryaffect economic growth in those regions. He is the co-author of “America’sDemography in the New Century: Aging Boomers and New Immigrants asMajor Players.” And in 1998, he published a study that was widely quoted in themedia — a report on how the Asian financial crisis was affecting California’se c o n o m y, especially technology firms in Silicon Va l l e y. He created theForbes/Milken Institute “Best Places for Business and Careers” rankings that wasa cover story on the Forbes May 29, 2000 issue.

Prior to joining the Institute, DeVol was senior vice president of WEFA, Inc.(formerly Wharton Econometric Forecasting), where he supervised theirRegional Economic Services group. DeVol supervised the respecification ofWEFA’s regional econometric models and played an instrumental role on similarwork on its U.S. Macro Model originally developed by Nobel Laureate LawrenceKlein. He was the firm’s chief spokesman on international trade.

DeVol has appeared on national television and radio programs to discuss avariety of economic topics. He is frequently quoted in printed media such as TheWall Street Journal, Investor’s Business Daily, Los Angeles Times, Forbes, The IndustryStandard, and many others. He is a columnist for Real Estate Southern Californiaand Zone News.

DeVol received his M.A. in economics from Ohio University.

1250 Fourth Street • Santa Monica, California 90401Phone (310) 998-2600 • Fax (310) 998-2627 • E-mail [email protected]

www.milkeninstitute.org

Documents

BLUEPRINT FOR A HIGH-TECH CLUSTER for a high-tech cluster the case of the microsystems industry in the southwest by ross c. devol august 8, 2000 policy brief number 17