~~ iiC / w1 -BUSINESS-+ -REVIEW- Bureau of Business Research • College and Graduate School of Business •The University of Texas at Austin :-<" . . ... • ' • The Boom in High-Tech Business Services A New Impetus o Economic Development in Texas by Niles M. Hansen Leroy G. Denman, Jr. Regents Professor in Economics University ofTexas at Austin Inside: Rethinking High Tech in Texas ... 4 _, AUGUST 1998 B usiness services, also called producer services, are intermediate activities that provide inputs for the production of goods or other services, rather than directly serving final consumers. They enhance efficiency and add value at various stages ofproduction processes, both upstream (e.g., research) and down­stream (e.g., marketing) ofactual physical production. Business service inputs may be either undertaken within firms or purchased from firms that specialize in the relevant activities. Growth in the Business Services Sector Since the 1970s, firms have increasingly used outside contractors to perform service functions. Several factors have induced both manufacturing and service firms to purchase business services externally. For example, knowledge or cost considerations limit some firms from developing suffi­cient expertise to provide a particular service. This is especially the case when technology changes rapidly or when demand is nonstandardized and unpre­dictable. Similarly, some firms seek to maintain a relatively small pool ofhuman resources focused on the firms' core functions. Considerable increases in the non wage costs of labor and in the pro­tected employment status ofworkers provide an incentive to purchase labor services from external temporary em­ . . _·. ; · • • ~ • t ployment agencies. Also, specialized business-service firms increasingly are able to achieve economies of scale, which makes it more efficient for other firms to purchase their services rather than perform them internally. Defining Business Services The official Standard Industrial Classifi­cation (SIC) system, even as revised in 1987, inconsistently distinguishes among the different markets for services. The system also lacks sufficient categories in which to classify many businesses accord­ing to their real functions in the economy. Some studies treat such activities as legal services, transportation, and finance, insurance, and real estate as business services. At the two-digit SIC level, however, evidence indicates that only business services (SIC 73) and engineering and management services (SIC 87) actually consist of activities that receive most of their revenue from other busi­nesses rather than from final consumers. For present purposes, high-tech service sectors are those defined by the U.S. Bureau ofLabor Statistics. As noted in the box on page 6, they include computer and data processing services (SIC 737), engineering and architectural services (SIC 871), research and testing services (SIC 873), management and public relations (SIC 874), and sectors not Between 1988 and 1996, total nonagri­cultural employment grew at an average annual rate of3 percent. The corresponding growth rate for em­ployment in high-tech services was 8.5 percent. elsewhere classified (SIC 899). In each of these sectors the proportion of research and development employment is at least 50 percent higher than the average ofall industries surveyed. The broader business services category includes SIC 73, SIC 87, and SIC 899. Business Services Growth in Texas Between 1988 and 1996, employment in business services in Texas grew much more rapidly than total employment, and employment in high-tech business services increased even more rapidly than that in other business services. It should be noted that it is difficult to make consistent annual comparisons between more recent years and years prior to 1988 when a revised SIC code system was introduced. Between 1988 and 1996, total nonagricultural employ­ment grew at an average annual rate of 3 percent. The corresponding growth rate for employment in high-tech business services was 8.5 percent, while that for other business services was 8 percent. During the 1988-1993 period, the growth rate for high-tech business services exceeded that for other business services, but the 1993­ 1996 period shows a higher growth rate for other business services. In both periods the respective growth rates were much higher than that for total employment. Business Services Growth in Texas MSAs A great deal ofinternational evidence indicates that business services, and particularly those ofa high-tech nature, tend to be concentrated in large metropoli­ tan areas. These areas offer greater access to highly qualified labor, research centers and universities, complementary business services, and large local markets, espe­ cially the corporate headquarters that have high demands for business services. It is therefore not surprising that busi­ ness services employment in Texas is largely concentrated in the five largest Metropolitan Statistical Areas (MSAs): Houston, Dallas and Fort Worth (consoli­ dated in the present analysis), San Anto­nio, and Austin. In 1988, these five areas accounted for 63.5 percent of the state's nonagricultural employment, but they accounted for 80.5 percent ofemployment in business services and 84.8 percent of employment in high-tech business ser­vices. By 1996, the five MSAs claimed 64.6 percent of nonagricultural employ­ment, 82.7 percent ofbusiness services employment, and 86.5 percent ofemploy­ment in high-tech business services. Houston and Dallas-Fort Worth alone accounted for 69 percent of the state's high-technology business services em­ployment in both 1988 and 1996. Houston was the only area with a 1988­1996 growth rate in high-tech business services employment that was below the corresponding state growth rate: 7 .1 percent versus 8.5 percent. This was largely the result ofa pronounced decline in the growth rate between the 1988-1993 period, when Houston's 8.1 percent increase ranked second behind that of Austin, and the 1993-1996 period, when Houston's 3.9 percent growth rate ranked lowest among major MSAs and well below the state growth rate of 7 percent. In contrast to Houston, the growth rate ofemployment in high-tech business services increased in each ofthe other areas between the 1988-1993 and 1993­1996 periods. Among all areas, Austin showed the highest rate ofincrease in both periods, at 9.5 percent and 14.1 percent, respectively. In addition, Austin was the only area where the 1996 employment in high-tech business services approached that ofother business services. Also in 1996, Austin claimed the highest propor­tion of total nonagricultural employment accounted for by high-tech business services. In Austin it was 5 percent; in Dallas-Fort Worth, 4 percent; in Houston, 3 percent; and in San Antonio, 2.7 percent. Conclusion Adam Smith recognized long ago that productivity could be increased by special ization and division of labor within ) Total Nonagricultural Employment and Business Services Employment, Texas and Largest Texas Metropolitan Areas, 1988-1996 Employment Average annual change (in thousands) (percentage) 1988 1993 1996 1988-93 1993-96 1988-96 Texas total 6,676 7,481 8,256 2.4 3.5 3.0 business services 436 584 721 6.8 7.8 8.2 high tech 149 207 250 7.7 7.0 8.5 other 287 377 471 5.0 8.3 8.0 HoustonMSA total 1,453 1.665 1,814 2.9 3.0 3.1 business services 139 182 213 6.2 5.8 6.6 high tech , 51 71 80 8.1 3.9 7.1 other 88 111 133 5.2 6.6 6.4 Dallas-Fort Worth MSA total 1,915 2,085 2,343 1.8 4.1 2.8 business services 152 205 267 7.1 10.2 9.6 .high tech 53 73 93 7.8 9.0 9.6 other 99 132 174 6.7 10.6 9.5 San Antonio MSA total 505 571 636 2.6 3.8 3.2 business services 33 44 57 6.5 9.7 8.9 high tech 10 13 17 5.9 10.2 8.6 other 23 31 40 7.0 9.6 9.2 Austin MSA total 367 454 541 4.7 6.4 5.9 business services 27 43 59 12.4 12.1 15.1 high tech 13 19 27 9.5 14.1 13.7 other 14 24 32 14.3 11.1 16.1 factories. More recently it has been recognized that this phenomenon can be observed on a broader scale, within the economy as a whole. The recent rapid growth of employment in business ser­vices, and especially high-tech business services, represents economy-wide increases in specialization and division of labor, and empirical evidence indicates that this has increased productivity and incomes, both in Texas and nationally. 1 However, the major beneficiaries have been larger metropolitan areas. The extent to which other areas can become more integrated into this process remains to be seen. Note L N. Hansen, "Do Producer Services Induce Regional Economic Development?" Journal of Regional Science, Vol. 30, No. 4, 1990, pp. 465­76; and N. Hansen, "Producer Services, Productiv­ity, and Metropolitan Income," Review ofRegional Studies, Vol. 23, No. 3 1993, pp. 255-64.+ Rethinking High Tech in Texas Policy Challenges by Elsie L. Echeverri­Carroll, Ph.D. Head, Economic Development Program Bureau ofBusiness Research ­University ofTexas at Austin A widely disseminated report predicted in 1994 that "the image of a Texas economy driven by natural resources-oil, gas, and agriculture-is a thing of the past. While these resource-based industries will remain important to the state, technology­producing industries will increasingly share the spotlight."1 But, what are technology-producing industries? IfR&D is used as a proxy for technology, the oil and gas extraction industry, for example, qualifies as high technology. However, if high technology is defined as skill-intensive industries, oil and gas extraction cannot be considered high technology. These designations are impor­tant because economic development policies in the state currently favor high-tech industries. Defining "high technology" is not easy. However, one component is widely accepted: a high percentage ofboth R&D expenditures and engineers and scientists. · The assumption here is that high-tech industries, because oftheir innovative nature, spend more on R&D and employ more skilled workers than other industries on average. We use the definition that bases a high­tech designation on the percentage of engineers, engineering technicians, computer scientists, life scientists, and mathematicians employed in the industry labor force.2 We chose this definition because human skills highly correlate with other indicators of"technological" perfor­mance, such as R&D, the stock ofcapital, and information intensity. Why all the Fuss About High Technology? High technology in Texas, and in the nation as a whole, represents a small per­centage oftotal employment. This is so even in regions with a concentration ofhigh-tech industries such as Silicon Valley, where, in fact, both high-tech manufacturing and services represented less than 12 percent of total employment in 1993. In Texas, the share of high-tech employment (manufac­turing and services) relative to total employ­ment remained flat at 8 percent between 1988 and 1997. High-tech employment has a rriuch larger share in the metropolitan areas, but its share of total employment is still relatively small. In 1993, high-tech employment represented less than 12 percent of total employment in Austin, Fort Worth, Dallas, San Antonio, and Houston. Ifmost employment is still generated by industries other than high tech, then why is high technology a top priority for economic development policies? The answer is that we expect most innovations to occur in high-tech firms, especially those with a large percentage ofengineers and scientists. And innovations are the engine of growth for cities and regions. The prime example is Silicon Valley, which reinvents itself con­stantly by generating innovations that help the area develop more technologically sophisticated products and surpass compe­tition from Japanese companies and Route 128. Using utility patents as a proxy for innovations, we find that, despite the rela­tively small participation of high-tech services and manufacturing in total em­ployment in this region, Silicon Valley generates more patents than any other U.S. metropolitan area. In 1995, San Jose alone generated 2,415 patents. The Houston (1,190 patents), Dallas (1,060), and Austin (683) metropolitan areas occupied, respec­tively, the 9th, 11th, and 21st places. High-Tech Sector Growth, 1988-1997 To analyze the growth ofhigh-tech sectors in Texas, we defined as high technology those sectors employing a high percentage ofengineers and scientists. Using 1988-1997 Bureau ofLabor Statistics employment data, we reclassified high-tech industries in three groups: energy-related manufacturing, ser­ vices, and nonenergy-related manufacturing.3 In 1988, Texas had 550,704 people employed in these three high-tech sectors. This number increased to 718,689 in 1997, a gain of 167,985 new high-tech jobs. Despite the overall gain, the performance ofeach ofthe three sectors differed signi­ ficantly. Energy-related high-tech industries added only 3,270 jobs during this period and nonenergy-related high-tech manufac­ turing added 29,757 new jobs. Services, however, showed a much larger gain: 134,958 new jobs. These relative changes in employment affected the percentage participation ofeach sector within the high-tech industry. In 1988, the percentage distribution was 48 percent in nonenergy­related high-tech manufacturing, 34 percent in high-tech services, and 19 percent in energy-related high-tech manufacturing. In 1997, their respective participations were: 41 percent, 44 percent, and 15 percent. Thus, as the figure illustrates, from 1988-1997, services steadily gained participation within the high-tech industry in Texas at the expe~se ofboth energy-and nonenergy­ related high-tech manufacturing. Policy Issues Regional patterns ofgrowth in high-tech industries suggest a major revision to tradi­ tional location theory by emphasizing, in particular, the role ofgovernment investment or demand in tipping the balance toward firms in particular regions.4 As Texans pre­ pare to live in a state economy driven by high-tech sectors, policymakers should be careful in allocating resources and design­ ing policies that favor a broad rather than a narrow base high-tech industry. An impor­ tant share ofhigh tech employment is generated in high-tech services and energy­ related industries such as chemicals. In the shift from crude oil to skill­ intensive industries, policymakers have identified the supply oflabor as a key component ofgrowth for high-tech indus­ tries. It is necessary, however, to differenti­ ate between factors that define the market for technicians and those that define it for engineers/scientists. While technicians are hired mainly locally, engineers and scien­tists come mainly from other high-tech regions. The need for a good local supply of technical personnel demands technol­ogy-focused programs at community colleges, while an abundant supply of engineers and scientists will depend on how well Texas cities can compete with other cities. The factors that attract these professionals suggest the term "quality of life" and are a component ofthe positive agglomeration economies in cities. The challenge for policymakers is to maintain and expand positive agglomeration econo­mies associated with good schools, avail­ability ofamenities and green areas, good mobility within the city, safety, and the presence ofa large university that offers continuing education for engineers and scientists. The new MBA customized for Texas Instruments at the Graduate School of Business at the University ofTexas at Austin is a pioneer in this direction. Notes I. Texas Comptroller of Public Accounts, Forces of Change: Shaping the Future ofTexas. 1994. 2. A. Markusen, P. Hall, and A. Glasmeier, High tech America: The What. How, Where, and Why ofthe Sunrise Industries, Boston: Allen & Unwin, 1986. 3. Energy-related high-tech manufacturing: S!Cs 2812, 2813,2816,2819,2821,2822,2823,2824, 2835,2836, 2833, 2834,2841, 2842, 2843, 2844,2851,2861,2865, 2869, 2873,2874, 2875,2879, 2891,2892,2893, 2895, 2899, 2911. Services: SlCs 737, 871 , 873, 874, 8721. Nonenergy-related high-tech manufacturing: all other high-tech S!Cs. See E.L. Echeverri-Carrol, Japanese Style Networks and Innovations in High-Technology Firms in Texas , Bureau of Business Research and JC2 Institute, University ofTexas at Austin, 1997. We expect most inno­vations to occur in high-tech firms, espe­cially those with a lame percentage ofengineers and scientists. And innovations are the engine ofgrowth for cities and regions. Texas High-Tech Employment by Sector, 1988-1997 4. M. Oden, "From Assembly to Innovations," Planning Forum , 3: 14-30.• number of employees 350,000 300,000 250,000 __._Energy 200,000 -•-Nonenergy 150,000 --l:r-services 100,000 50,000 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, University ofTexas at wwww Austin. Subscriptions are available free upon == -­request. Views expressed in this newsletter are those of the authors and do not necessarily reflect the position of the Bureau of Business BUREAU OF BUSINESS RESEARCH Research. P.O. Box 7459 Research and service activities of the Bureau Austin, Texas 78713-7459 of Business Research focus on the ways Texas Change Service Requested industries can become nationally and globally competitive. The Bureau is policy oriented and dedicated to public service. The Bureau is located on the sixth floor of the College of Business Administration building. Editor: Lois Glenn Shrout shrout@mail.utexas.edu Assistant Editor: Sa11y Furgeson sallyf@mail.utexas.edu Sales Office: (512)471 -5179 (512) 471-1063 fax danhardy@mail.utexas.edu General: bbr@uts.cc.utexas.edu WWW http://www.utexas.edu/depts/bbr/tbr/ • Activities in High-Tech Services • • SIC 737 • • computer programming • system design · • data preparation and processing • information retrieval • computer rental and leasing • • computer maintenance and repair • • SIC 871 • • . . . • • engmeenng services • architectural services • . . • • surveymg services • • SIC 873 • • research, development, and testing services • physical and biological research testing labs SIC 874 management and managment consulting services • public relations services • facilities support management services REFERENCE-GEN LIBRARIES UNIV OF TX AT AUSTIN PCL 2.430 S5466 CAMPUS Announcement The services ofthe Bureau of Business Research are available on-line. Information about Texas indus­tries, as well as economic and demo­graphic data for the state, can be found at www.utexas.edu/depts/bbr . An order form for BBR publications may also be accessed via the web site, along with recent issues ofTexas Business Review, Texas Industrial Expansion, and ResearchNews. A valuable feature ofthe BBR web site is a collection of links that provides business and consumer information and a selection of news sources. We welcome your suggestions and comments.+