-BUSINESS-+ -REVIEW- Bureau of Business Research • College and Graduate School of Business • The University of Texas at Austin ;,, ,'" ' , . , Austin Sui Generis? The Strength and Resilience of the High-Tech Complex ) by Dr. Michael Oden Visiting Lecturer Community and Regional Planning Program University ofTexas at Austin JANUARY 1998 S ince the late 1980s, the growth ofthe Austin regional economy has outpaced that ofother medium-sized high-tech centers, such as Raleigh-Durham, Phoenix, and Colorado Springs. 1 From 1988-1994, high-tech manufacturing employment in the Austin region grew by a remarkable 56 percent, while employment in the com­puter and data processing services in­creased by more than 100 percent. Austin's economic expansion was based on four private sector growth drivers: com­puter and office equipment, electronic and electrical equipment, software, and research and engineering services. Each sector showed rapid employment growth, a strong regional export posture as measured by industry location quotients, and robust growth in the number ofestablishments. Despite this impressive performance, questions linger about the stability and dynamism ofthis high-tech complex. With employment in the computing and micro­electronics industries only one-fifth that of the San Jose-San Francisco complex and one-half that of Dallas-Fort Worth, Austin remains a second-tier center. In addition, the prominent microelectronics manufac­turing industries are dominated by large firms headquartered outside the region. Measures of Regional Dynamism How strongly anchored are Austin's major high-tech manufacturing and service firms to local suppliers, research institu­tions, and labor markets? Are Austin firms , ·, , and research organizations generating product innovations that will lead to major sales expansions for local establishments? Are local firm start-ups or expansions playing a greater role in the regional growth process? To answer these questions, the author and his students analyzed secondary data on the region and surveyed key informants · at 24 high-tech firms. 2 These included ten manufacturing firms in the electronic components and computer and office equipment industries; two large firms with a mix of manufacturing, research, and software activities; and twelve firms in the computer service and software sectors. Eight firms had fewer than 100 employees; ten, between 100 and 1,000 employees; and six, more than 1,000. While not statistically representative, the survey encompasses the broad mix ofAustin high­tech firms by sector and size, and nearly 60 percent of the region's high-tech workers were employed by the firms interviewed. Interviews were also conducted at five major university and private research centers and a number ofeducation and training institutions, venture capital firms, and local business associations. The Importance of the Region to the Competitive Position of Major Firms Large, externally owned firms dominate Austin's high-tech manufacturing. Three firms-Motorola, IBM, and Advanced Micro Devices (AMD)-employ close to Ofthe 24 companies interviewed, 7 4 percent reported that major investment decisions were made by management at their Austin opera­tions, suggesting that local decision mak­ing was crucial in ongoing operations. 21,000 people. Research revealed that these firms were much more than branch assembly or processing facilities. For example, the Oak Hill complex serves as world headquarters for Motorola's commu­nications and advanced consumer tech­nologies, microcontroller technology, and microprocessor and memory technologies groups. A sprawling north Austin campus houses one ofIBM's major regional R&D centers and units involved in designing work stations and pioneering software products. And although their next genera­ tion microprocessors are designed else­ where, AMD's local Fab-25 facility is the pilot plant for their latest K-6 generation and the locus ofstate-of-the-art develop­ ment of fabrication process technology. Ofthe 24 companies interviewed, 21 conduct research and development in their Austin facilities. Nearly 75 percent had increased their local R&D spending in the last five years. Moreover, 74 percent reported that major investment decisions were made by management at their Austin operations, suggesting that local decision making was crucial in ongoing operations. The importance oflocal supplier­ customer relationships to the firms' business operations is a more complicated issue. Circumstantial evidence points to an increasing basis for local interfirm trade within the high-tech manufacturing seg­ ment. The growth ofthe special industrial machinery industry, for example, is related to the emergence offirms producing semiconductor manufacturing equipment, a key input into electronic components. There is, in addition, a basis for forward linkages from electronic components into the electronics-intensive communications equipment, computer, and medical instru­ ments and supplier industries. The signifi­ cant 50 percent increase from 1988-1994 in the number ofhigh-tech manufacturing establishments provides more circumstan­ tial support for increasing integration. These structural data offer less support for strong backward linkages to suppliers ofmore conventional materials and manu­ factured inputs. Not surprisingly, firms with fewer than 100 employees relied much more on the local market, with a small majority reporting that more than half of their sales were to other companies in the region. However, a strong local supply base does not seem to be a significant factor in the operations oflarger high-tech firms. Local linkages and interfirm networks did seem to offer firms regional competi­tive advantages in three important areas. First, firms producing microprocessors and other electronic devices reported close relationships with local producers or representatives of small and large process equipment makers. Three of the largest semiconductor equipment makers, Applied Materials, Lam Research, and Tokyo Electron, have major operations in the area, with Austin being the major manufacturing center ofApplied Materials. Small and large equipment producers and the original equipment makers (OEMs) each stated that local relationships were both important and intensive. Anecdotal interview information suggested that firms only commit signifi­cant resources to networking in transac­tions involving technology-intensive, highly customized goods or services that have a potentially significant impact on product development or business operations. The second important local linkage was between companies and local research and development institutions. Strong science and engineering departments at the Univer­sity ofTexas at Austin (UT) and major successes in recruiting public and private R&D institutions in the 1980s created a rich regional research base. MCC, Sema­tech, and the UT-based Microelectronics Research Center (MRC) are all engaged in applied research on semiconductor materi­als, design, or process technology, and UT's J.J. Pickle Research Campus lists 20 research units active in engineering, basic sciences, and the social sciences. Thirteen of the 24 firms had formal relationships with one ofthese research facilities, ten large or medium-sized firms had relation­ships with more than one ofthese centers, and several other firms reported more informal or intermittent relationships. The third important anchor to Austin­ based high-tech firms is the broader services and indirect benefits ofthe Uni­ versity ofTexas. Firms reported that UT, ) Austin's High Technology Industry Structure SIC* Industry Employ­ment 1988 Employ­ment 1994 Location quotient 1988 Location quotient 1994 # of establish-men ts 1988 # of establish-men ts 1994 High-tech manufacturing 21,975 34,292 100 149 355-Special industry machinery 202 938 0.33 1.38 3 7 357-Computer/office equipment 3,565 3,018 3.07 3.23 28 27 366-Communications equipment 1,080 1,340 1.21 1.46 9 14 367-Electronic components/accessories 12,926 25,861 6.75 11.86 26 51 372-Aircraft/parts l,772 147 0.84 0.08 2 382-Measuring/ controlling devices 1,717 1,422 1.66 l.36 24 32 384-Medical instruments/supplies 713 1,566 0.96 l.38 9 16 High-tech services 12,634 19,215 838 1,401 737-Computer/data processing services 2,938 5,981 1.26 1.46 204 492 7389-Business services (nee) 1,192 3,457 0.8 1.43 169 258 871-Engineering/ architectural services 6,386 7,065 2.37 2.02 372 521 873-Research/testing services 2,118 2,712 1.72 1.46 93 130 Supplier industries 2,228 3,888 75 108 281-Industrial inorganic chemicals 2 70 0.01 0.19 4 308-Miscellaneous plastics products (nee) 668 1,116 0.31 0.38 27 37 335-Nonferrous rolling/drawing 135 502 0.24 0.82 2 3 344-Fabricated structural metal products 690 805 0.49 0.49 28 46 349-Miscellaneous fabricated metal products 349 639 0.37 0.57 9 10 362-Electrical industrial apparatus 384 756 0.65 1.15 8 8 * Standard Industrial Classification. Source: Based upon County Business Patterns data as compiled and estimated by Andrew lsserman, Reg ional Research Institute. University of West Virginia. 3 January 1998 Evidence suggests that Austin's major high-tech facilities are important centers ofresearch and prod­uct development and are, in certain key ways, embedded in the region's supplier and research base. with a large faculty and more than 100 research centers, is a rich source of techni­cal information, consulting, employee training, and highly skilled workers. All the firms interviewed reported that the university is an important site for hiring, but the large and medium-sized firms indicated that the majority oftheir highly skilled technical and professional workers are hired from outside the region. Taken as a whole, this evidence suggests that Austin's major high-tech facilities are important centers ofresearch and product development and are, in key ways, embed­ded in the region's supplier and research base. The university also provides many direct and indirect benefits absent in areas not hosting a major research university. Evidence of Increasing Local Innovation Secondary information and the survey suggest that Austin may be evolving into a major center ofnew product innovation. The amount of important collaboration among firms and local research facilities is increas­ ing. For example, two generations ofthe Power PC microprocessor originated at Somerset, a local microelectronics con­ sortia that includes IBM, Motorola, and Apple, based on new RISC architecture. IBM research labs have also pioneered new soft­ ware products, most notably OS2. Indeed, the region's complex has developed an edge as the key design and production center oflntel alternatives, with the Power PC, AMD's K-5 and K-6 chips, and OS2 and Unix software competing on different terms for product applications currently dominated by the Intel-Microsoft combine. Austin has also become a major center for personal computer production based on the revolutionary organizational innova­ tions ofhomegrown Dell, which provides the latest generation platforms at competi­ tive prices by avoiding retail overheads and adopting an extreme low inventory, just-in­ time production system. This particular organizational system benefits from spatial proximity ofmarketing, customer support, and production: Dell's operations are much more concentrated in the region than those of rivals pursuing a different strategy. The remarkable increase in patents registered in the Austin MSA underscores the growing fertility of the region's public and company research base. A little more than 200 patents were registered in 1988, but by 1996, the number had increased to nearly 900, almost double the registrations ofRaleigh-Durham and Boston (some Route 128 companies are not included). Austin's large companies remained the primary source ofpatent registrations with Dell, AMD, IBM, and Motorola account­ing for 61 percent ofthe regional total. The expansion oflocal venture capital financing is a final indicator of innovative­ness and local high-tech company growth. Until the late 1980s virtually no local venture capital base existed in the region. Small high-tech companies began to lure small venture investments in the early 1990s. Total venture investment in Austin grew to $40 million by 1995, increasing by 65 percent to $66 million by 1996. By 1997 Austin claimed eleven venture capital firms. The rapid growth of venture invest­ment is a strong indirect indicator of vibrant small company formation, again suggesting that the growth process is becoming more endogenously driven. It must be noted, however, that Austin's venture investments remain minuscule compared to the $2.29 billion invested in 552 Silicon Valley companies in 1996. The Growth of Spin-off and Start-up Companies One-fourth ofthe companies surveyed were spin-offs of larger corporations, while 57 percent reported that firms had been founded by ex-employees. A number of spin-off firms trace their roots to the region's major research establishments. MCC spin­ offs include Evolutionary Technologies, a software development company with 130 employees. Larger research-oriented manufacturing firms have also generated spin-offs, including PST Technologies, a $10 million company founded by a former AMD employee, and Radian and SPEC, two in a long line ofTracor spin-offs. Extremely high growth in the number of relatively small establishments suggests considerable momentum in the software Texas Business Review 4 January 1998 and data processing sector. In addition to Unix and OS2 specialists, a number of smaller companies are competing in rapidly growing segments such as network server software, Internet applications, and multi­media. The most successful homegrown software company, Tivoli Systems, a 330­person firm, was started by former IBM employees. In turn, expatriots from Tivoli founded Dazel, another software firm, in a process typifying a regionally based gene­ sis ofnew related technology companies. Conclusion The construction of Sematech and a decade ofuneven but strong growth elevated Austin into the ranks ofsignifi­cant second-tier high-tech cities by the late 1980s. With an attractive blend of classic locational advantages and a unique R&D base, the region has continued to attract major high-tech manufacturing and service firms over the last decade. But a number of indicators presented here suggest this latest growth stage is qualitatively differ­ent, and the Austin complex has become much more than an advanced manufactur­ing or technical branch plant nexus. Mapping specific companies and their functional specializations to the region's high-tech industries shows that the major­ity oflarge Austin firms are engaged in high-end research and product develop­ment activities. While still nowhere near the scale of a Silicon Valley, evidence sug­gests that the Austin high-tech complex has gained innovative momentum in micro­electronics, computers, and software and offers specific economies ofagglomeration that anchor large firms to the region. Notes 1. The Austin-San Marcos MSA (Bastrop, Caldwell, Hays, Travis, and Williamson counties) is the main regional designation referred to in this article. It is a reasonably good approximation ofan "economic" region defined by commutable distances to workplaces and density patterns. 2. The study was conducted within the Commu­nity and Regional Planning Program at the University ofTexas at Austin. I would like to thank the members ofthis research seminar including Matthew Cunningham, Joelle Labrosse, Michael Leach, Maureen Meridith, Dana Merkin, Chris Moore, and Bergan Norris for their primary research on local linkages and the embeddedness of large high-tech establishments, which forms a main part of this article.+ Apace with Progress Texas Business Review in 1997 December Why Are Small Technology Firms in Texas Not Competing? Dr. Elsie L. Echeverri-Carroll Texas in the Information Age, Dr. Sharon Strover and Kyle Nicholas October The Internet and Manufacturing, Gary Chapman Teleworking: Some Texas Initiatives, Dr. Zeny S. Panol August Market Opportunities for Recycling in Texas Manufacturing Industries, Dr. Mina M. Dioun By-Product Synergy: A Strategy for Sustainable Development, Andrew T. Mangan June Has Texas Become a Net Importer ofEnergy Resources? Dr. Jay Zarnikau Renewable Energy in Texas, John Hoffner April Texas Manufacturing Plants that Export, Brent McElreath and Branner Stewart High-Technology Networks and Exports in Texas, Drs. Elsie L. Echeverri-Carroll, Niles Hanson, and Lynn Hunnicutt February Long Term Trends in Manufacturing Employment, Dr. Charles P. Zlatkovich The Austin complex has become much more than an advanced manufacturing and technical branch plant nexus. 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 Austin. Subscriptions are available free upon request. Views expressed in this newsletter are those ofthe authors and do not necessarily reflect the position of the Bureau ofBusiness Research. Research and service activities ofthe Bureau - - BUREAU OF BUSINESS RESEARCH P.O. Box 7459 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 ofthe College of Business Administration building. Editor: Lois Glenn Shrout shrout@mail.utexas.edu Assistant Editor: Sally 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/ Office ofTechnology Licensing and Intellectual Property (OTL) OTL facilitates the transfer of technology developed at the University ofTexas at Austin to the private sector for commercialization and public benefit. Currently, more than 70 technologies are' available for licensing through OTL, i_ncluding: The Foveated Imaging System (FIS) greatly reduces the transmission bandwidth of video or still images. 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