theTEXASeconomy O’NEIL CENTER FOR GLOBAL MARKETS AND FREEDOM H SMU H THIRD QUARTER 2017 Listening for a Twang in the Innovation Economy By Richard Alm n the 1820s, waves of American how people are getting wealthy.” settlers started moving westward We live in a nation brimming with into Texas, then a sparsely entrepreneurial spirit—so the possibilities populated province of Mexico, to are mind-boggling. Americans are using growI cotton for capitalism’s first boom, history’s greatest technology tool kit to spurred by new machines for spinning produce innovations that benefit the and weaving textiles. rest of us—doctors performing remote Half a century later, railroads steamed surgery, for example. Smartphones onto Texas soil, opening the rapidly provide a platform for at least 6 million growing U.S. market to the state’s apps, some silly and others life- products, including cotton and cattle. saving. Cox pointed to Zello, an open Leaping ahead in time again, the communications app from a company automobile turned Texas’ oil into “black in Austin. When days of torrential rains gold,” the foundation of a global industry swamped Houston in August, volunteers that dominated the state economy used the app to locate and rescue through most of the 20th Century. residents stranded by the floodwaters. This historical sketch suggests that Cox turned a spotlight on emerging innovations, some arriving from far technologies that will upset existing away, have been key to Texas’ economic industries and create opportunities in development. Past is prologue, as they the next few decades. We can imagine say, and technology continues to shape self-driving cars on Texas roadways and Texas’ economic destiny—just look drones hovering in Texas skies to help at the sudden revival of the energy W. Michael Cox save lives or film movies. business due to hydraulic fracturing, or U.S. economy. Founded in the Agrarian Innovators can imagine uses for “fracking,” used to extract oil and gas Age, the country transitioned into the graphene—stronger than steel, thinner from dense rock formations. Industrial Age and then the Information than a human hair. The same goes for The third Texas Economic Forum, held Age. In the past two decades or artificial intelligence and the Internet of at SMU in September, explored Texas’ so, innovations emerging from the Things, both ways of weaving computer place in “The Innovation Economy,” with microprocessor thrust the country into technology into the fabric of everyday an emphasis on what’s happening close the fourth wave of American economic life. Cracking the DNA code allows us to to home in the -Fort Worth (DFW) progress, the Imagination Age. imagine gene-based therapies that will area. In putting on the program, the “The age you are in is defined by what lead to longer, healthier lives. O’Neil Center partnered with two other is dear—possible to have but expensive,” “This is the next big thing—a SMU Cox research groups—the Maguire Cox said. “You leave an age when what revolution that is biological rather than Energy Institute and the Folsom Institute was once dear becomes commoditized electronic,” Cox said. for Real Estate. and cheap.” After looking at these technologies, This issue of The Texas Economy The Imagination Age emerged because Cox posed a localizing question: “What summarizes the Forum’s presentations. the Internet and related technologies role will Texas play in the Imagination reduced the cost of processing, storing Age?” Will it pass us by or will we be on Imagine That! and transmitting words, images and the leading edge?” data. “Information is cheap,” Cox said. In Cox’s mind, Texas and its big W. Michael Cox, the O’Neil Center’s “What’s increasingly valuable today is metropolitan areas have reason to founding director, opened the Forum our ability to imagine what can be done be optimistic about their place in the by laying out a broad evolution of the with all the technology around us. This is innovation economy. With knowledge

Continued on page 2 H theTEXASeconomy Page 2 ubiquitous and fluid, innovation doesn’t have a natural home. It will flourish where conditions are favorable to starting and growing businesses For Texas, two trends stand out. First, the state weaned itself from dependence on oil over the past three decades, a process that required a burst of entrepreneurial energy. Texas emerged as the nation’s fourth most diverse economy, with a varied mix of companies and industries linked to America’s broad and innovative economy. Second, Texas has consistently ranked among the Top Five states in economic freedom; DFW and Houston are second and third in metropolitan area economic freedom. With relatively few obstacles to business success, Texas maintains a healthy climate for startups and attracts entrepreneurs and innovative companies from outside the state. “That bodes well for our ability to adapt and move forward in the Imagination Age,” Cox concluded.

DFW Tech Assets Duane Dankesreiter

Duane Dankesreiter, the Greater Northern Virginia in capacity. Woot! and dozens of others are now part Dallas Chamber’s senior vice president Tech-savvy workers are key to of bigger companies, but they maintain for research and innovation, began by success in the innovation economy. North Texas footprints. “The Dallas telling the Forum that his organization According to Dankesreiter, the DFW region doesn’t do a good job of telling had been busy preparing DFW’s bid labor force includes 230,000 engineers, our story, especially when it comes to for one of history’s biggest economic computer programmers, systems our successes,” Dankesreiter said. “We development prizes—technology giant analysts and other tech workers— are nose to the grindstone, getting the Amazon’s second headquarters, with its seventh among major metropolitan business done.” promise of 50,000 jobs. areas and a bit above the San Jose area, Support for entrepreneurs has been “We could win this,” Dankesreiter said. hub of legendary Silicon Valley. “Austin growing in recent years. To encourage “We have the things that matter to them.” gets the buzz about innovation and high the next generation of startups, 36 Dankesreiter didn’t reveal much tech, but Dallas has 40 percent of Texas’ business accelerators and incubators more on the secretive efforts to recruit high-tech workers,” Dankesreiter said. and 61 co-working spaces are up and Amazon, but he portrayed DFW as “Austin’s at 16 percent.” running in the DFW region. “one of the most significant high-tech The jobs testify to DFW’s deep roster of Texas higher education doesn’t get the and innovation business centers in the tech companies. Some are home-grown recognition it deserves, but Dankesreiter United States.” He brought the facts and giants—notably, Texas Instruments and considers it an asset in tech recruiting. figures to back up the assertion. GameStop. Others are the tentacles Five Texas colleges rank among U.S. To start with, tech companies seek of the biggest names in tech—, News & World Report’s Top 100 easy access to a global marketplace. Cisco, IBM, AT&T, to name just a few. computer science graduate schools. DFW Airport offers direct air links to Irving hosts ’s second-largest UT Southwestern stands out in medical 210 destinations, including 56 in foreign U.S. operation. Particularly noteworthy— research, and SMU’s Guildhall topped countries. North Texas region stands out from the standpoint of the local innovation the Princeton Review’s list of graduate as one of just nine major Internet “peering economy—are the 20-plus corporate schools for computer gaming. points”—digital transmission hubs innovation centers in DFW. As for tomorrow’s technologies, that provide the fastest speeds. With The big names have plucked some Danskesreiter says Texas is already in its Internet access and low electricity gems among DFW tech startups. the game. Hillwood Development and costs, DFW has become a “data center Electronic Data Systems (EDS), Perot Bell Helicopter are working with Uber powerhouse,” ranking second behind Systems, MetroPCS, Bottle Rocket, on applying ride-sharing technology

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From left, Bruce Bullock, Ryan Dalton, Chris Cooper, Randy DeWitt, Nick Clark, Joseph Cahoon to airborne vehicles. Texas has been as far as how much oil you’re going to Randy DeWitt, the veteran DFW area named one of 10 global finalists for Elon recover from a resource. How much restaurant entrepreneur, described Musk’s hyperloop, which promises to water to pump. On the drilling side, it his company’s new Legacy food hall take passengers from Dallas to Austin in used to take 30 days to drill a well. Now in Plano as innovation in sync with its less than 20 minutes. it’s down to 12 to 14 days. We think this times—just like casual dining (Steak & is going to come down even further.” Ale) in the 1980s and fast casual (Velvet Innovation in Action According to Cooper, the water supply Taco) after that. and recovery side of the business is ripe “I’m trying to watch what’s happening A panel led by Maguire director Bruce for innovation. “Our particular sector is in our industry, and what’s happening Bullock and Folsom director Joseph extremely fragmented with Ma and Pa is millennials like to go out in groups. Cahoon featured entrepreneurs from the operators and a lot of trucks on the They’re picky eaters.” DeWitt said. “The energy and real estate industries, who road,” he said. “It would be good for the food hall is the answer to that. It’s a gave first-hand accounts of the toils and industry and good for the environment large space with a collection of at least triumphs of starting businesses in Texas. to get these trucks off the road and 15 to 20 chef-driven food stalls offering The state has a good climate for create some efficiencies with water. a highly specialized, tightly edited menu. innovation, the entrepreneurs agreed. Water recycling is a really important Everybody gets what they want.” “There are people here who want you component as well. It’s just an economic Clark and DeWitt said their concepts’ to succeed,” said Chris Cooper, CEO of issue. I think the industry is on the verge success depended on location, Oilfield Water Logistics, a company that of solving that—in the next five years or reflecting the real-estate industry truism. serves drillers, “and they want to help maybe sooner.” The formula for co-working spaces: you no matter what.” Cahoon asked Nick Clark, founder of walkable amenities, a population of And they all saw a virtue in being small Common Desk, a co-working space, young, creative people and easy access. and entrepreneurial when going toe-to- why companies like his are thriving as For a food hall, it’s a heavy-traffic mall toe against bigger companies. “You an alternative to traditional office space with a big space to create a special have to be nimble,” Cooper said, “and in an age when technology makes ambiance where people want to gather. smaller companies can do that.” telecommuting so easy. “We still have Clark and DeWitt said they compete Bullock asked whether energy industry a demand for community,” Clark said. by customizing their properties, innovation could continue at its current “People are looking for an experience. designing each to reflect surrounding pace with oil prices at $45 to $55 a barrel. You’re not going to have an experience communities. “In Common Desk, things “There’s a lot of momentum to innovate, in your pajamas while on your Skype call are opened up a good bit more and even in this price environment,” said with the four other people who are in you’re able to breathe and experience Ryan Dalton, CFO of Parsley Energy, your meeting with you in your bedroom.” the space,” Clark said. an Austin-based firm focused on West What began with millennials and the Dalton affirmed Bullock’s observation Texas’ Permian Basin. startup community has now spread to about a new generation of young “We’re testing frack stages, frack all sectors because workers want more managers in the energy industry. “That’s spacing, well spacing, sand—you than a home office or the coffee shop. what’s really changed in the last five wouldn’t believe that the size and shape “They’re finding community working out years,” Dalton said. “There are more of a grain of sand matters in our industry of a co-working space,” Clark said. private-equity backed CEOs in the age

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range of 35 to 39 than in any other age References with a look at the entrepreneurs on bracket except for the late 50s and horseback who developed the state’s early 60s—which I think is absolutely Cox, W. Michael and Alm, Richard. cattle industry after the Civil War. astounding.” “Unlike the 1980s, Texas Keeps The “lost generation” traces back to Growing with Oil Prices Low,” The About the Author the low oil prices of the 1990s and early Texas Economy, March 2016. 2000s. “From 1988 to 2003, a 15-year Richard Alm period, there was a lull in petroleum Cox, W. Michael and Alm, Richard. Richard Alm is writer in engineering degrees—averaged about “The Imagination Age: America’s Fourth residence at the William 2,000 a year, down from 11,000 in Wave of Economic Progress.” O’Neil J. O’Neil Center for Global 1983,” he said. “We’re back up to Center Annual Report, 2016-17. Markets and Freedom 15,000 a year. Not that you have to be at Southern Methodist in petroleum engineering to be a CEO— Next issue: The Texas Economy picks University’s Cox School but it sometimes works out that way.” up the evolution of the state’s economy of Business.

CHARTING THE TEXAS ECONOMY

Texas’ Grade on Business Regulations—Not the Best, Far from the Worst

The elevator-pitch description of the 2000 2002 2004 2006 2008 2010 2012 2014 0 Texas Model: low taxes, restrained spending Regulatory Ranking: Best (1) to worst (50) and light regulation. Data on the first two are easy to come by, but measuring regulatory burdens is a herculean task. Cato Institute economists William Ruger 10 and Jason Sorens gave it a try. Looking at business regulation, they graded states on 58 policies affecting land use, la­bor markets, health insurance, occupational freedom and Florida the framework governing lawsuits. 20 The state-level index shows that Texas Virginia doesn’t impose the heavy regulatory North Carolina burdens of New York and California, but Texas it doesn’t rank with Florida, Virginia, North 30 Carolina and other lightly regulated states Ohio (see chart). The latest figures rank the Texas regulatory­ Pennsylvania regime 27th in the nation—nothing to brag 40 about. The state does well in regulating labor Illinois markets, cable TV and telecommunications and land use. Regulations on healthcare, occupational licensing­ and lawsuits are New Jersey California Texas’ weak spots. 50 New York

ABOUT THE TEXAS ECONOMY AND THE O’NEIL CENTER

The Texas Economy is an electronic publication of the William J. The center’s programs promote understanding of how capitalism O’Neil Center for Global Markets and Freedom, a research institute works among the general public, policy makers, business managers in the SMU Cox School of Business. and the next generation of business leaders. To these ends, the The center was founded in 2008 with an initial grant from William O’Neil Center teaches SMU Cox students, conducts economic J. O’Neil, a 1955 SMU business school graduate, and his wife Fay C. research, publishes economic reports, sponsors conferences and O’Neil. Its broad mission is the study of why some economies prosper educates the public through the media and speeches. and others do poorly, focusing on two critical issues for the 21st Century For more information, see our web site at www.oneilcenter.org, economic environment—globalization and economic freedom. e-mail us at [email protected], or call 214-768-4210.