How High Tech Is Redefining Texas' Economy
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federal reserve I SSUE 3MAY/JUNE 1997 thwe u s o tt ss e c y onom bank of dallas SILICON PRAIRIE How High Tech Is Redefining Texas’ Economy HE HISTORYs OF Texas lies in cattle and oil. But increasingly, the future of the state is becoming linked with the ever- evolving high-tech industry. Texas is home to firms such as Dell Computer, Texas Instruments and Compaq Computer, among others. In addition to these homegrown high-tech com- panies, a number of out-of-state firms that produce high-tech Tequipment and services have already established themselves in Texas or are planning to do so. For instance, California-based Intel, the country’s largest maker of computer chips, recently announced that it will build a $1.3 billion plant in Fort Worth; Motorola, based in INSIDE Schaumburg, Illinois, is Austin’s largest private employer; and Nortel, based in Toronto, employs 6,500 workers in Richardson. Why is Texas so attractive to high-tech firms? What does the expansion of Why Social Security high tech mean for the state’s economy and future growth? Should Be Privatized The EMU: A Groundbreaking The High-Tech Wave Is a National Trend Monetary Experiment Nationally, high tech has become an important segment of Texas Faces the economy, employing 9.1 million workers.1 In 1994, the produc- Tight Labor Market tion of computers and electronic and telecommunications equipment accounted for roughly 6.2 percent of Chart 1 the country’s total output (measured in High-Tech Employment Shares, 1995 gross domestic product), up from 4.8 percent in 1990. By comparison, motor vehicle output accounted for only 1.1 percent of U.S. output in 1994. More- over, during the current expansion, the high-tech sector has increasingly con- tributed to the growth of the national economy. For instance, business spend- ing on computers contributed roughly 36 percent to growth in gross domestic product last year. By comparison, con- tributions from the housing and auto- mobile industries, traditional drivers of the economy, were –1 and 9 percent, respectively. The high-tech sector is expected to continue expanding into the next century. In-Stat, a company 5% to 8% 2% to 4.9% that provides information to the elec- 0% to 1.9% tronics industry, forecasts 5.6 percent growth in worldwide semiconductor sales this year and 31 percent growth by 2001. The forecast is based on ex- states with the highest number of high- compared with 5 percent nationally. pectations of strong growth in demand tech jobs in 1995 (California, New York, Last year, a downturn in the semicon- from end-use markets, including con- Texas, Illinois and New Jersey), Texas ductor industry had a noticeable impact sumer products, communications prod- and Illinois have seen increases in high- on the Texas economy. The downturn ucts and computers. tech employment during the 1990s, was primarily due to a global oversup- while high-tech jobs have declined in ply of dynamic random access memory California, New York and New Jersey. chips (DRAM) –which account for about Texas Has Been a Major Player High-tech employment has grown more 33 percent of the total semiconductor than twice as fast in Texas as it has in market. The oversupply resulted from (And Beneficiary) the nation during the 1990s.3 slower personal computer demand and the stockpiling of memory chips, as In the High-Tech Boom firms expected a huge memory upgrade High-Tech Growth– to Windows 95 that never materialized. Historically, Texas has been known In addition, a vast amount of new DRAM for its cowboys, oil barons and real But Also Vulnerability fabrication capacity came on-line. As a estate tycoons. But in recent years, the result, from November 1995 to June state’s image has changed. Texas is now Much of the expansion of Texas’ 1996, the average DRAM sales price fell regarded as home to computer wizards high-tech sector is due to growth in four 60.2 percent and unit shipments fell and technical engineers. Although Texas specific industries: computers, telecom- 7.6 percent, according to In-Stat. still has more oil and gas rigs and farm- munications equipment and services, Texas firms responded to the semi- land than any other state, it now ranks computer chips (or semiconductors) and conductor industry downturn with second (behind California) in computer- computer-related services.4 As Chart 2 layoffs, hiring freezes and plant con- and telecommunications-related high- shows, each of these industries has struction slowdowns. This put a damper tech employment, with roughly 290,000 a larger presence (in terms of total on the state’s economic growth last workers.2 employment) in Texas than in the year, with high-tech manufacturing While increasing rapidly, the high- nation as a whole. While many states employment growing only 3 percent, tech industry in Texas is still only would be hurt by a downturn in any following 7.8 percent growth in 1995.5 slightly larger in the state than it is one of these four industries, Texas Nevertheless, high-tech manufacturing nationwide. Chart 1 shows this by rank- could be affected slightly more because still expanded at a faster pace than ing U.S. states in terms of the share of of the prominence of these industries in non-high-tech manufacturing industries. high-tech employment to total state the state’s economy. Had other high-tech sectors suffered employment. However, Texas has bene- For example, Texas has a large share a downturn as well, Texas could fited significantly from the high-tech of semiconductor employment. Semi- have fared much worse. But growth in expansion at the expense of some of conductor firms account for 12 percent computers, computer services and its northern counterparts. Of the five of the state’s high-tech employment, telecommunications helped keep over- Page 2 Southwest Economy May/June 1997 all high-tech growth positive in Texas addition to these high-tech giants, in 1996. scores of smaller companies have also This year, the semiconductor indus- expanded in Texas or made the state try has turned around and firms are their home. Why are high-tech compa- hiring again. Furthermore, the industry nies so taken with the Lone Star State? will soon play an even larger role in the There are many reasons that high- state’s economy. For example, Samsung tech firms, as well as other types of will begin staffing its $1.3 billion facility businesses, find Texas an attractive place later this year, and Intel expects to for relocation, expansion or start up. eventually employ as many as 5,000 These factors include the state’s central employees at its future plant in Fort location and proximity to Mexico, easy Worth, which is slated to start construc- access to commuter and cargo trans- Historically, Texas tion this summer. portation, a relatively low cost of living and relatively low real estate prices, has been known for access to colleges and universities, and its cowboys, oil What’s So Special About Texas? the state’s business climate. High-tech firms have also been barons and real Texas owes its high-tech presence to attracted to Texas because other high- many factors, one of which is the state’s tech firms are already doing business estate tycoons. pioneering history in high tech. Texas there. Industry concentration, or clus- Instruments has been around since the tering, benefits firms in several ways. But in recent years, 1950s, and Electronic Data Systems Clustering creates a pooled labor mar- (EDS) was among the first firms to offer ket for workers with industry-specific the state’s image data processing services. In addition, skills. Both firms and workers benefit the state’s defense giants made innova- from a pooled labor market—the firm has changed. Texas tions in communications technology finds workers with special skills and is now regarded as that are now being used in the private the worker benefits from increased job sector, and NASA’s presence in Houston availability and opportunity. Clustering home to computer spurred the creation of many high-tech also benefits firms by increasing the companies that provide the space availability of industry suppliers and wizards and center with services and equipment. services, which may make an industry Further, Texas has long been a leader more efficient. Finally, because infor- technical engineers. in the research- and development- mation flows more easily locally than intensive oil and gas, chemicals and over longer distances, industry clusters petroleum refining industries. generate technological spillovers—or More recently, Texas has gained new benefits that result from knowledge players in its high-tech sector. Some of sharing between nearby firms.6 A good the larger firms with operations or example of an industrial cluster at headquarters in Texas include Compaq work is the Richardson–Plano “telecom Computer, Cyrix, DSC Communica- corridor,” which is home to more than tions, Ericsson, Nokia, MCI, Samsung, 400 high-tech firms, including some PrimeCo and Applied Materials. But in of the world’s largest telecommuni- Chart 2 Components of High-Tech Employment, 1995 Texas United States Computers and Computers and office equipment office equipment 9% 7% Other high tech Semiconductors 29% Semiconductors 5% 12% Other high tech Telecommunications 50% equipment and services 23% Telecommunications equipment Computer services and services Computer services 22% 28% 15% Federal Reserve Bank of Dallas Page 3 climate includes tax burdens — a cate- Table 1 Survey Results gory where Texas ranks relatively low. In addition, utilities, home prices, and Factor in location decision Average score* office and apartment rents are relatively Trained/educated workforce 1.33 lower in Texas than in other parts of Business environment 1.73 the country, making workers and com- Cost of living 1.87 panies better off here than in more Close proximity to colleges or universities 1.93 expensive states.