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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO OCTOBER 2000 NUMBER 158 Chicago Fed Letter Midwest prospects and the new economy Much of the credit for the U.S’s recordbreaking economic expansion and productivity surge has been attributed to technological advances, particularly within information technology (IT) industries or in the application of these technologies to other industry sectors. While the so-called new economy is benefiting all U.S. regions, the level and character of IT/high-tech (IT/HT) development varies widely from one region to another. This Chicago Fed Letter examines regional measures of IT/HT presence and their implications for regional growth. Measuring IT/HT regions A look at the history of U.S. regional growth shows that IT/HT presence has been a poor indicator of the future growth and success of regional economies. During the high-tech boom of the 1980s, most regions sought to emulate the computer hardware boom in California’s San Jose area and the Route 128 area of Boston, as well as the aerospace activity of Southern California. However, tech-intensive regions such as the Boston area and defense-laden Los Angeles foundered badly in the late 1980s and early 1990s. At the same time, a few new areas such as Austin, Texas, and Sioux City, Iowa–Nebraska, proved successful in emulating computer hardware success. Other regions proved highly successful in unexpected ways. For example, a partially unforeseen boom in computer software boosted the Seattle and Denver regions. And the lowertech Midwest astounded everyone with its competitive revival in old-line manufacturing. Later in the 1990s, Los Angeles successfully filled a demand for entertainment content in video, cable television, 1. AEA employment measures, 1998 and on the Web, even as its aerospace indusHT workers HT employment Region per 1,000 Region (000s) try continued to languish. All of these Mountain 60 Pacific 962.2 success stories involved New England 43 South Atlantic 758.5 technology, especially Pacific 38 Mid Atlantic 659.9 Southwest 28 Midwest 555.4 information technoloSouth Atlantic 27 Southwest 450.5 gy. But the high-tech Plains 27 New England 355.2 measures of yesteryear Mid Atlantic 26 Mountain 324.6 offered little if any Midwest 22 Plains 309.6 insight into future Southeast 15 Southeast 135.6 regional success and Source: American Electronics Association. failure. To improve the predictive power of IT/HT measures, we defined by AEA. While the Midwest need to examine whether the existremains the most manufacturing-ining measures adequately capture tensive region in the U.S., it has a technology’s far-reaching impact (relatively) higher concentration of across many sectors of the economy. its services in high-tech categories than of its manufacturing. What have been the most common indicators of regional high technology? A commonly used definition is the production of those high-tech goods and services, such as computers and telecommunication services, that practically everyone would consider to be high tech. For example, the widely reported American Electronics Association (AEA) study classifies industries—both service industries and manufacturing—as being high tech and tabulates the concentration of employment within U.S. regions. According to their definition, the Mountain region had the highest intensity of its work force in high-tech industry categories, accounting for approximately 6% of its total nonfarm employment in 1998, followed by the New England and Pacific regions.1 The Midwest ranks eighth out of the nine Census districts in the concentration of total jobs classified as high tech, although it ranks fourth in absolute number of jobs (see figure 1). The region accounts for over 16% of the nation’s total payrolls, yet just over 12% of jobs in high-tech industries as Among Midwest states, Illinois had the highest number of high-tech jobs, 218,000, ranking fourth in the AEA study behind California, Texas, and New York, and slightly ahead of Massachusetts. Illinois has become one of the lesser states in overall manufacturing concentration—both high tech and otherwise—but it achieves a strong high-tech concentration due to the Chicago area’s high concentration in communications services industries. The Chicago area is not alone in its high-tech concentration. A recent study estimated that U.S. metropolitan areas accounted for 94% of the nation’s IT/HT output in 1999, exceeding their 80% share of overall income and total employment. Technology and ideas flow most readily among companies, entrepreneurs, and workers who reside and work in proximity. Apparently, older cities, as well as new ones, may thrive in the new economic landscape—as New York City’s successful “silicon alley” collection of software and Internet configuration/content firms illustrates. Importantly for regional policymaking, the well-documented tendency of high-tech regions to perpetuate themselves—due to the spatial proximity of similar and complimentar y activities—is strong. IT/HT workers tend to gravitate toward existing urban concentrations of IT/HT activity because they are most likely to hear of better job opportunities in such places and to be more mobile in transitioning from job to job. Entrepreneurs find it advantageous because “new ideas are in the air,” because the specialized support services such as venture capital are proximate, and because it is easier to find specialized workers. This means that the San Jose–Silicon Valley phenomenon is unlikely to be easily replicated. Nonetheless, some spatial spread of the new economy along a subset of industries and dimensions is now taking place. As the new economy has evolved toward information transmission, development of information content, and application of new technologies to old-line industries, certain segments of the service sector have become high-growth sectors, displacing some of the former importance of hardware manufacturing and systems software production. The software applications boom was the initial manifestation of this trend, followed by businesses producing informational content and systems for the trading of information and goods/services over the World Wide Web. As evidenced by the booming Internet configuration and application sectors in the economies of San Francisco, Los Angeles, New York, and Chicago, information technology has begun to move out of the domain of a small number of large hardware and software companies to business consulting companies, old economy adapters of new technologies, and entirely new companies or industries that seek to exploit the value added of the Internet. Industry or activity? The rapid evolution of new industries arising from technological change points up deficiencies in analyzing the regional presence 2. MEDC employment measures, 1998 of the new economy based on particular inHT workers HT employment dustries. Although Region per 1,000 Region (000s) there are the obvious New England 97 Midwest 1,950.7 high-tech goods and serPacific 92 Pacific 1,713.1 vices, such as digital Midwest 91 South Atlantic 1,550.1 phones and wireless Southwest 75 Mid Atlantic 1,272.3 Mid Atlantic 73 Southwest 933.6 web services, there are Mountain 71 Plains 663.8 also many hybrid Plains 69 New England 652.2 industries, as well as South Atlantic 66 Mountain 566.4 old-line industries now Southeast 63 Southeast 464.3 undergoing technologiSource: Michigan Economic Development Corporation. cal transformation, for example, management consulting, some types of retail, new logistics management out of nine to third, largely due to businesses, and manufacturing of the heavy Midwest presence in autostandard products using advanced motive production (figure 2). processes. The auto industry also demonstrates One notable example for the Midwest how defining a region’s tech intensity is the automobile industry. At first by its concentration of entire indusblush, we might not think of motor tries rather than by industrial activities vehicles as high-tech goods. But can sometimes be misleading. That modern vehicles are equipped with is because the various activities that a range of high-tech devices, such as take place within a single industry on-board computers that monitor sector are often distinct in their degree the function of the engine, sensors of reliance on technology, as well that detect when one wheel is slipas disparate in location. Consider ping and transfer power to another, research and development (R&D) and global positioning systems that activity, which gives an indication as provide driving directions. So, too, to the amount of technology that goes auto manufacturing has pioneered into a product. While an emphasis production processes such as “juston R&D in defining high-tech indusin-time” auto assembly and supply tries may make sense on a national chain management. However, the scale, it may be less useful at the automobile industry is not included regional level. This is because producin the AEA’s compilations. tion is not necessarily located where product development takes place. A recent study by the Michigan EcoThus, much of the auto industry’s nomic Development Corporation R&D continues to take place in the (MEDC) and the Michigan AutomoMidwest, especially in Michigan, while tive Partnership points out just how automotive production has clearly sensitive such estimates can be. The decentralized to other states, such study uses a more comprehensive as Kentucky, South Carolina, and definition of high-tech industries Tennessee, as well as to other counderived by the U.S. Department of tries. Therefore, Michigan’s argument Labor that includes the automobile for inclusion of the auto industry and aerospace industries. (The Labor as a technology producer may be Department definition of high tech valid, whereas such an argument for is based in large part on research and Tennessee may be less so. development performed by an industry.) When the more comprehensive Both the rapid evolution of industries definition is used, Michigan’s ranking and the problems of defining the highin high-tech employment jumps from tech industries suggest that broader seventeenth in the nation to fourth. or cross-industry indicators of regional At the same time, the Midwest region’s economy IT/HT may be insightful. employment concentration rank in In contrast to its low AEA rankings high-tech industries rises from eighth by IT/HT employment, Michigan spends more on R&D for each dollar of gross state product than any other state, helping the Midwest to rank third among U.S. regions (see figure 3). In addition to the R&D intensity by location illustrated above, it is often instructive to look at the occupational intensity of regions across all industries for those occupations that 3. Industry R&D spending, 1997 Region Pacific New England Midwest Mid Atlantic Mountain South Atlantic Plains Southwest Southeast R&D per $1,000 GSP 31 28 23 21 19 17 12 9 5 Region Pacific Midwest Mid Atlantic South Atlantic New England Mountain Southwest Plains Southeast Note: GSP is gross state product. Source: National Science Foundation and the U.S. Bureau of Economic Analysis. tend to be associated with technological pursuits and activities. For example, according to National Science Foundation estimates, the Midwest ranks seventh in the concentration of scientists and engineers (figure 4). Patent data may also add insight to a region’s production of new ideas across all of its industry sectors and activities. The Midwest states were issued 16,049 patents in 1999 (figure 5), or 17% of the national Total R&D ($000s) total. Only the Pacific region, with 25%, had 41,834 a higher share. One 29,249 caveat to these data is 27,617 23,289 that not all ideas and 12,999 processes are patent8,767 ed, possibly because 7,983 their usefulness is not 6,250 2,110 outlived by the patent process gestation or because their proprietary nature may be easily preserved without formal patenting. 4. Scientists and engineers, 1997 Region New England Pacific Mid Atlantic Mountain South Atlantic Plains Southwest Midwest Southeast Per 1,000 workers 120 107 94 85 82 76 72 72 55 Region Total (000s) Pacific South Atlantic Mid Atlantic Midwest Southwest New England Plains Mountain Southeast 1,974.6 1,912.7 1,646.8 1,537.2 888.8 803.1 723.7 669.7 407.7 Source: National Science Foundation. 5. Patents by region, 1999 Region Pacific New England Mountain Midwest Mid Atlantic Plains South West South Atlantic Southeast Patents per $bil. GSP 16 16 14 12 12 11 9 8 5 Note: GSP is gross state product. Source: United States Patent Office. Region Pacific Midwest Mid Atlantic South Atlantic South West New England Mountain Plains Southeast Total patents 22,442 16,049 15,341 10,647 7,707 7,387 6,527 5,686 2,211 Finally, there is a wide body of opinion that the source of the new economy’s success lies not with tech intensity and leadership per se, but rather with the underlying characteristics of the U.S. economic system and its regional variants. With highly developed and specialized capital markets, new ideas can make their way to market, and the rewards of risk and innovation can accrue to their originators, thereby encouraging progress and change. Entrepreneurship is the buzz-word of the day, but behind this phenomenon, a fertile infrastructure of institutions, law, and culture makes possible rapid growth from new technologies, as well as growth that arises from changes in consumer preferences, behavior, and firm/industry organization. Deregulation of the old-line telephone industry, beginning in the 1970s, paved the way to today’s entirely revamped telecommunications industry. More recently, the deregulation of electric power in some states, combined with new technologies of fuel cells and gas turbines, is sparking new industry growth. How, then, can we measure and identify entrepreneurial activity and climate by region? As a measure of activity, investment flows may be the most inclusive and broad indicator, namely those of the venture capital industry which funds early stage industries and innovations before such businesses approach highly structured equity markets. Accordingly, regional policymakers now eagerly track the trends in placement of venture capital as an indicator of the emergence of new industrial activity. The Midwest is sharing in a surge of such investment (figure 6). Even so, this surge appears to be little more than part of a national phenomenon; the Midwest’s share of such investments is not gaining on other regions (figure 7). Still, who can say what new industries or industry segments may arise from Midwest placements of venture capital? Michael H. Moskow, President; William C. Hunter, Senior Vice President and Director of Research; Douglas Evanoff, Vice President, financial studies; Charles Evans, Vice President, macroeconomic policy research; Daniel Sullivan, Vice President, microeconomic policy research; William Testa, Vice President, regional programs and Economics Editor; Helen O’D. Koshy, Editor; Kathryn Moran, Associate Editor. Chicago Fed Letter is published monthly by the Research Department of the Federal Reserve Bank of Chicago. The views expressed are the authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Articles may be reprinted if the source is credited and the Research Department is provided with copies of the reprints. Chicago Fed Letter is available without charge from the Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834, Chicago, Illinois 60690-0834, tel. 312-322-5111 or fax 312-322-5515. Chicago Fed Letter and other Bank publications are available on the World Wide Web at http:// www.frbchi.org. ISSN 0895-0164 and related productivity revival, have refocused regional policy percent 0 75 150 225 300 leaders to thinking Pacific about how to position Southwest their regions to thrive Mid Atlantic in the new economy. Southeast As past experience Mountain and technology rankMidwest New England ings suggest, there are Plains no easy answers as to South Atlantic which regions will Source: PriceWaterhouseCoopers. succeed or how they should focus their policies and resources. Looking at how tech7. Venture capital, 1997 nology is changing the global marketplace, Dollars per Total Region $10,000 GSP Region ($mil.) regional policymakers may do well to consider Pacific 37 Pacific 5,075 what role technology New England 31 New England 1,469 and entrepreneurial Mountain 13 South Atlantic 1,369 South Atlantic 10 Mid Atlantic 1,125 climate play in their Mid Atlantic 9 Southwest 744 home economies. How Southwest 9 Mountain 630 can a region’s human Plains 7 Midwest 542 and physical assets, inMidwest 4 Plains 393 Southeast 4 Southeast 168 dustrial concentrations, and business environNote: GSP is gross state product. Source: PriceWaterhouseCoopers. ment be parlayed into a successful economy going forward? We believe that because of the inherent adConclusion vantages of proximity for some IT/ Technological change continues to HT activities, not all regions can behave startling implications for the nacome the hotbeds of rapid new econtional economy, as well as for states omy growth that they hope to be. and regions. Currently, the IT boom, 6. Growth in venture capital, 1997–99 However, the new economy has many dimensions, offering alternative avenues for regional growth and development. In setting a course for successful adaptation to a changing economic landscape, each region may benefit from identifying, and then further developing, its own particular assets and opportunities. —Richard Kaglic Economist —William Testa Vice president and director of regional programs 1 The regions discussed in this article are defined as follows: Midwest—IL, IN, MI, OH, and WI; New England—CT, MA, ME, NH, RI, and VT; Mid Atlantic—NJ, NY, and PA; South Atlantic—DC, DE, FL, GA, MD, NC, SC, VA, and WV; Southeast—AL, KY, MS, and TN; Southwest—AR, LA, OK, and TX; Plains— IA, KS, MO, MN, ND, NE, and SD; Mountain— AZ, CO, ID, MT, NM, NV, UT, and WY; and Pacific—AK, CA, HI, OR, and WA. Return service requested Public Information Center P.O. Box 834 Chicago, Illinois 60690-0834 (312) 322-5111 FEDERAL RESERVE BANK OF CHICAGO Chicago Fed Letter PRESORTED FIRST CLASS MAIL US POSTAGE PAID CHICAGO, IL PERMIT 1942
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