February 2000
Federal Reserve Bank of Dallas

Talking Tech in Texas

The technological changes accompanying the digital economy would seem to render location increasingly irrelevant. Yet high-tech executives know successful companies continue to develop near each other. Silicon Valley is not the only concentration of high-tech firms in the U.S.—Dallas and Austin have gained nationwide recognition as places of not only high-tech promise, but power. Economists explain firms' decision to locate close to their competition with the concept of clusters. Businesses and governments are using cluster analysis to identify and magnify the location-specific sources of success. This presentation provides an overview of high-tech cluster theory, discusses the development of tech clusters in Dallas and Austin, and explains Texas' cluster-support initiatives at the state and local level.

High-Tech Cluster Theory
Clusters are not simply a geographic concentration of companies. They include suppliers, customers, and specialized service providers. They extend to manufacturers of complementary products. Educational institutions, trade associations, and government and regulatory agencies are part of the cluster's environment. Clusters are not unique to any one industry, and are present in both rural and urban areas. Although Silicon Valley is the poster cluster of the digital economy, firms in other industries tend to locate near their competition. Hollywood in motion pictures, Detroit in auto manufacturing, and Wall Street in financial services are examples of clusters. Yet several recent studies assert that high tech may have a greater tendency to cluster than other industries.

Clusters develop spontaneously when surrounded by the right resources. Knowledge, specialized labor, and capital enable companies to expand and new ventures to form. Cluster growth is a self-reinforcing cycle. As one company's success brings new suppliers or inspires cooperation with local institutions, other companies are drawn to the area.

The forces that lead to clustering include the attraction of nearby suppliers and customers, access to individuals with specialized skills and knowledge spillovers. When one firm makes an investment to develop a new product or process, a portion of the knowledge generated may be transmitted, or spill over, to competitors, through the informal networks or job-hopping of employees. In Silicon Valley, 25 percent of its highly skilled workers change jobs each year.

These forces encouraging clusters are opposed by forces resulting from the cluster's success. Rapidly growing firms can draw down the pool of qualified job seekers in a region and experience labor shortages. Incoming job seekers and firms can draw down the supply of housing and land, driving up costs. The pace of growth can surpass the region's ability to upgrade its transportation infrastructure, resulting in congestion. The centrifugal forces do not necessarily lead to a cluster's decline; they may slow its growth and encourage new clusters elsewhere. Mention Austin's rapid high-tech growth to one of its cab drivers, and he will tell you Austin is growing because so many people are fed up with the rising cost of living and congestion in Silicon Valley.

The Milken Institute recently investigated the growth of high tech in metropolitan regions throughout the United States, and identified "tech-poles" based on a combination of employment and output measures. San Jose, Silicon Valley's metropolitan area, was named the nation's number one tech-pole. Much to the chagrin of Boston's Route 128, the Milken Institute designated Dallas the number two tech-pole. Los Angeles, Boston, Seattle and Washington, D.C. complete the top six list. Economist Annalee Saxenian predicted Boston's culture of secrecy, self-sufficiency and risk aversion would prove detrimental to Route 128's growth. She noted Silicon Valley, on the other hand, increases knowledge spillovers. Firms in Silicon Valley encourage informal networks and collaborative efforts that generate the innovations crucial to rapid growth.

Texas Tech Clusters
In Texas, Dallas and Austin are noteworthy for their Silicon Valley-style success.

Several recent studies identify Dallas as a digital dynamo. Dallas has the third largest number of high-tech jobs in the country, after San Jose and Boston. Dallas added more high-tech jobs than San Jose between 1990 and 1996. Dallas' number two tech-pole designation is partially attributed to telecommunications.

The Dallas Fed recently asked telecom businesses in and around Richardson's Telecom Corridor when and why they located in the region. Their responses reveal the development of perhaps the most dense and diverse telecom cluster in the world.

In 1978, MCI received permission to use its microwave technology to compete with AT&T in the provision of long-distance telephone service. MCI located an engineering division near two of the only companies brave enough to supply MCI—DanRay and Collins Radio of Richardson. Shortly thereafter, Nortel of Canada purchased DanRay and named Richardson its U.S. headquarters. The court-ordered breakup of AT&T accelerated the cluster's growth by opening the market to new service providers who needed more suppliers. In 1984, Fujitsu of Japan arrived to supply MCI its microwave technology and established its U.S. headquarters in the region, as did Ericsson of Sweden. During 1987 and 1988, both AT&T and GTE located headquarters in the region to take advantage of its central location.

After the global trend toward telecom privatization began, Alcatel of France purchased Rockwell's Network Transmission Systems Division (formerly Collins Radio) and located its U.S. headquarters in Richardson in 1991. That same year, SBC established its wireless headquarters in the region. Nokia of Finland established a joint venture with Fort Worth's Tandy in 1992, and the Richardson Chamber of Commerce trademarked the name Telecom Corridor. In 1994, the Technology Business Council became Texas' first industry group of that nature. Shortly thereafter, PrimeCo, a wireless service joint venture, sought a central location and strong local market for its service. A branch of Lucent, formerly AT&T's engineering division, arrived in 1996. Also in 1996, Samsung of Korea moved its global cellular phone headquarters to Richardson to join the well-established telecom cluster.

Texas Instruments supplies the telecom industry with digital signal processors. But TI's role in the cluster can be traced back to the 1970s, when it helped establish the University of Texas at Dallas as a graduate school for its 20,000 engineers. UTD is developing the first accredited Telecommunications engineering bachelor of science degree in the United States, in addition to its master of science degree program. Collin County Community College also offers telecom training.

These companies' combined regional employment exceeds 60,000, not including TI. A more complete picture would include start-up suppliers and specialized legal and accounting firms that have emerged to support the region's striking mix of manufacturing and service providers, domestic and foreign firms, and national-level headquarters. The development of telecom in the Dallas area is striking for its spontaneity and limited public sector involvement.

Austin's transformation into a Texas technopolis seems to have followed a more deliberate approach. A recent report commissioned by the Greater Austin Chamber explained Austin's evolution in three transitions. In the 1970s, Austin leaders recognized the area's need to diversify from an economy based primarily on government and education, and efforts were made to attract high-tech branch plants of companies such as IBM and Motorola. The second transition of the late 1980s added research and development capabilities. Industry consortia Microelectronics and Computer Technology Corporation (MCC) and Sematech, as well as applied research at IBM, Motorola and 3M, helped forge Austin's competitive advantage in high tech. Austin is now transitioning toward a cluster-based economy.

The Greater Austin Chamber identified three core clusters: semiconductors and electronics, computers and peripherals, and software. Five emerging industries have the potential to become core clusters in Austin: logistics and distribution, biomedical products, film and music, multimedia and transaction services.

Some of Austin's technopolis roots trace back to IC 2 (shorthand for innovation, creativity and capital), a think-teach-do tank devoted to technology commercialization. Dr. George Kozmetsky, founder of Teledyne, developed IC 2 in the 1970s as part of the University of Texas at Austin. IC 2 joined forces with the Greater Austin Chamber of Commerce, the City of Austin and private businesses to found the Austin Technology Incubator (ATI). Since 1989, ATI has graduated 49 companies that created 1,900 jobs in Austin. The City of Austin's new Austin Multimedia Incubator shares space with ATI and follows its model. ATI also houses the Austin Software Council. The Capital Network, the largest and most successful seed capital network of its kind in the United States, is another IC 2 spinoff.

The stories of Austin and the Telecom Corridor have common threads that show the sources of Texas' success. Skilled labor, central location, and low costs of living and doing business attract outside firms and encourage local entrepreneurs to stay. Success breeds success, as firms are more likely to join well-established regions. Local educational institutions recognize emerging clusters and develop programs to support firms' labor needs. And organizations such as the Chamber of Commerce and individuals with vision help identify successful industries and ways to facilitate their growth.

Supporting Texas' Tech Clusters
To support Texas tech cluster growth, local and state initiatives are emerging similar to those at work in Silicon Valley and California.

Joint Venture: Silicon Valley Network helps establish community goals, measures progress, and identifies solutions. Joint Venture describes itself as "a nonprofit organization that brings together Silicon Valley leaders from business, government, education and the community to identify and to solve issues affecting the region. Joint Venture's mission is to enable all people in Silicon Valley to succeed in the new economy." Joint Venture produces an Index of Silicon Valley to provide economic and quality of life information. In 1998, 2,000 community members participated in developing a comprehensive set of goals including economic, environmental and societal issues. The index also tracks progress toward those goals.

Richardson's Telecom Corridor Technology Business Council established eJobs, an Internet resource that features links to web sites of more than 130 companies and enables job seekers to electronically submit resumes to multiple companies with one mouse click. The council also developed STARTech, a for-profit technology incubator home to 17 start-ups and a $4 million venture capital seed fund. The incubator attracted participation of large local firms as technology stakeholders, who anticipate a return on their initial investment.

Austinites seek to achieve Silicon Valley success while avoiding Silicon Valley syndrome, which includes a lack of local workers and widening digital divide. In 1999 and 2000, Austin entrepreneurs sponsored 360 Summit, bringing together 300 individuals from business, government and education to identify problems and seek solutions. In 1999, the University of Texas took a beating for its lack of evening MBA courses, which it now offers. To help local residents acquire the skills needed to participate in Austin's new economy, UT's IC 2 conceived the EnterTech Project. EnterTech is a collaboration of more than 70 employers, educators, community organizations and government agencies whose purpose is to identify entry-level opportunities and develop basic job skills for low-entry workers or welfare recipients.

These local initiatives are primarily private-sector driven, although they involve local government officials. Recognizing the importance of tech clusters to Texas' economic development, state government officials are asking what government should do to facilitate cluster growth. State government should continue efforts to improve the general business environment and upgrade infrastructure. It can also enhance education at all levels and develop training programs targeted at the labor needs of industry clusters. Government can also help identify clusters, collect data, and convene cluster participants. Most importantly, government can search out and remove barriers to cluster growth it may have indirectly created. Once appropriate policies and regulations can quickly become outdated and can slow or stop growth of rapidly developing new industries.

California Governor Pete Wilson appointed the California Economic Strategy Panel in 1994. The panel's 1996 report, "Collaborating to Compete in the New Economy," included an analysis of the clusters that make up California's economic base and a discussion of the policies that support cluster development. Twenty local jurisdictions have since conducted their own cluster analyses and revised local policies accordingly.

In Texas, the state comptroller's office's economic research group has begun regional cluster analyses. Carole Keeton Rylander's e-Texas initiative includes an e-Government Task Force that will identify ways to employ electronic commerce technologies and strategies from the private sector to improve the way the state serves its individual and corporate constituents.

Lieutenant Governor Rick Perry recently appointed the Advisory Council on the Digital Economy to help Texas create a long-term vision for technology growth, utilization and job creation. The group will work with Mr. Perry's Special Commission on 21st Century Colleges and Universities on workforce development issues. The Council will issue a report by January 2001.

The state government recognizes it cannot force clusters to grow, but it can remove barriers to growth, such as inappropriate regulations and insufficient infrastructure. These more open channels of communication between cluster participants bode well for Texas high-tech growth.

Conclusion
In the digital economy, location matters more because knowledge matters more. The Internet delivers information and communication between anyone, anywhere, anytime; that was the very reason it developed. Yet people still effectively share knowledge through face-to-face communication and frequent, spontaneous opportunities for interaction industry clusters provide. As Tom Peters explained to George Gilder, "Technology is great, but humans like to schmooze."

—Meredith M. Walker

About In Depth This article is based on a presentation by Meredith M. Walker, economist, Research Department, Federal Reserve Bank of Dallas. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.