1. No category

PLANNING FOR A HIGH TECHNOLOGY PARANA
Regional Case Study: Austin, Texas, or
How to Create a Knowledge Economy
Miller, Jonathan. Trade Section, European Commission Delegation,
Washington, DC 1999
Available online at:
http://www.austineconomy.com/RePOrtSIrePOrtS.html
ANGELOU ECONOMIC ADVISORS INC.
REGIONAL CASE STUDY: AUSTIN, TEXAS
OR
“HOW TO CREATE A KNOWLEDGE ECONOMY”
Jonathan Miller
Trade Section
European Commission Delegation - Washington, DC
For case studies on other U.S. cities, visit
www.eurunion.org/partner/regional.htm
“For years this green oasis of lakes and hills has served as a geographic and cultural
counterpoint to the flatlands, oil money, and cowboy ways of cities like
Dallas and Houston. Austin has always been the sort of town where the ‘60s never
really died, where creativity was encouraged and free spirit nurtured.’1
Fortune Magazine
INTRODUCTION
Once known as a sleepy college town of 200,000 residents in 1960 whose principal employers
were the University of Texas and the state government, the Austin region has transformed itself
into one of the most vibrant high technology regions in the U.S. with a population of almost 1
million. Austin is now a vibrant “cluster”-based economy of semiconductor, semiconductor
manufacturing equipment, computer manufacturing, and software development, attracting
numerous transplants from the likes of Samsung, Motorola, IBM, 3M, and Applied Materials and
anchored by the home-grown company of Dell Computer and other software start-ups.
How did this transformation occur? It required vision, a plan, a combination of business,
academic and government leadership and partnership to enact such a plan, an underlying
affordable high quality of life, an educated workforce, access to first class research, and a
friendly business environment. Perhaps most important is the “can-do” spirit that seems to
permeate everywhere in Austin. The Austin economic development success is the result of a
conscious policy effort to create a new base to the economy that was aggressively pursued
involving several actors working in concert to achieve a common goal. While state and local
government has had a role to play, the real driving force behind this vision seemed to spring
from the private sector through the Greater Austin Chamber of Commerce and a true visionary
named Dr. George Kozmetsky.
1
THE GREATER AUSTIN MSA
The capital of Texas, Austin is located in the Central Texas Hill County, approximately 230
miles from Mexico and less than 200 miles from 3 of the 10 largest U.S. cities (192 miles from
Dallas to its north, 79 miles from San Antonio to its south, and 162 miles from Houston to its
southeast.) The Greater Austin —San Marcos MSA (metropolitan statistical area comprising
Travis, Williamson, Hays, Bastrop, and Caldwell counties) has more than doubled in the past
two decades, growing from a population of about 538,000 in 1978 to 1.1 million people in 1998
(with the City of Austin’s population at 570,000). Over the past five years (1993 to 1998), almost
130,000 people have been added to employment totals in the area, representing a growth rate of
4.7% per annum over this period. In 1998, the economy grew at a rate of 4.6% and created
26,200 jobs (the highest growth rate in 1998 of any major Texas metro area). This compares with
a job creation total of 175,000 for the decade with an average of 5.5% growth annually. The
unemployment rate for Austin — San Marcos MSA in May 1999 was only 2.2% (compared to
4.6% for the state of Texas and 4% for the U.S.). Per capita GDP had grown from about $9,000
in 1980 to about $18,000 in 1996.
In 1999 the employment mix consisted of the following breakdown: services (30%), total
government (22%), retail trade (22%), manufacturing (13%), construction (6%), finance,
insurance, and real estate (5%), and transportation and public utilities (3%).
Services comprise Austin’s largest employment sector, with 172,800 workers and 6.6% annual
growth in 1998. This category includes both technology and non-technology services, from
engineering firms and software companies to restaurants and personal services. However, nearly
half of Austin’s service employment is in technology-related industries: software development,
semiconductor R&D, computer systems integration, software consulting, data processing,
internet related services, and technical customer support centers.
Government employment, historically the dominant force in the Austin economy, has leveled off
in recent years. While local government employment has increased somewhat, federal and state
government employment has declined. The largest employer in the Austin MSA is the University
of Texas at Austin (UT) with more than 20,000 employees. UT also contributes to the Austin
economy through spending an estimated $260 million in R&D expenditures annually. This sector
serves as a stabilizer to the rest of the Austin economy, especially the high tech sectors.
While a smaller percentage of the Austin economy, manufacturing employment has grown an
average of 6% since 1990, creating 30,000 jobs, with 70% of manufacturing employment coming
from technology companies. Four of Austin’s
2
largest manufacturers, Dell, Motorola, AMD, and Applied Materials are responsible for more
than 20,000 of those new jobs.
WHAT ROLE TECHNOLOGY?
In a state that was ranked #1 as the fastest growing high tech center in the U.S. by the
American Electronics Association, nowhere is that growth faster than in the Austin region.
At present, 1,800 technology companies employ 115,000 people in the Austin MSA, accounting
for roughly 20% of the employment base. An additional 200 low-tech and professional service
firms are major suppliers to tech companies in the area, for a total high tech employment of more
than 125,000 people.
High technology employment is further broken down as follows: semiconductors and suppliers
(22%), computers and peripherals manufacturing (31%), software development (21%), computer
services (11%), biotech/medical (5%). While the traditional strength of the semiconductor
industry has weakened somewhat due to the Asian crisis (and thereby forecasts of growth in this
cluster have diminished somewhat), the software and computer manufacturers have strong
growth potential in the next two years.
Semiconductors and Electronics
Perhaps the most important high tech sector in Austin, 75 semiconductor-related] manufacturers
employ more than 21,000 workers with another 4,000 jobs provided by 120 service firms that
supply the semiconductor industry. In a state that produces more semiconductors than even
California, the semiconductor capital of Texas is located in Austin. While only half the size of
Silicon Valley, Austin created more jobs in this cluster between 1990 and 1996. In addition, the
Austin region added more jobs in the semiconductor and electronics cluster than any other region
in the world except for Portland, Oregon during this period. This employment concentration is 7
times more concentrated than the national average, and despite occasional recessionary times,
industry employment grew nearly 10% annually from 1990 to 1996. Most of this growth has
come in the last decade through relocations of large manufacturers and R&D facilities such as
Motorola (9,000 employees), Advanced Micro Design (4,000 employees), Samsung, Sematech,
Applied Materials (the largest semiconductor equipment supplier in the U.S.), Tokyo Electron,
and Cypress Semiconductor. Major activities include wafer fabrication, assembly of
semiconductors and microprocessors, production of disk drive controllers, graphic accelerators
and integrated circuits.
Most of this growth is due to new facility expansions during the last several
Years. Although this sector has slowed somewhat due to the Asian crisis (with
Applied Materials announcing job cuts of 600 and Motorola announcing a cut of
1,000 in 1998) four new semiconductor fabrication facilities were constructed
3
during the past four years. While some economists worry that the downturn in this sector could
hurt the Austin economy, most others recognize that the Austin high tech economy can absorb
the shock, especially in the software and computers sectors. In fact, while Austin shed 2,500 jobs
in this cluster in 1998, it did not close any facilities. On the bright side, Intel has recently
announced it will build a new chip design center.
Computers/Peripherals and Electronics/Components
The Austin region has become a true leader in the computers and peripheral cluster, with
employment growth in this cluster creating more jobs than any other region in the U.S. between
1990 and 1996. This cluster is comprised of approximately 195 companies employing more than
36,500 people manufacturing personal computers, printers, monitors, and storage devices. The
biggest players are IBM (7,000 employees) and the homegrown Dell Computer (17,500
employees), the only Fortune 500 company headquartered in the Austin region. Computer and
electronics manufacturers created 6,000 new jobs in 1998 and 20,000 since 1993.
One of the important aspects of this cluster is its synergy with the semiconductor cluster. Critical
computer components, such as chips and circuit boards that go into computers, are often
produced by local firms, In addition, highly skilled workers, such as engineers and technicians,
are shared across clusters and between industry segments. Other downstream linkages include
instrument manufacturing, tool and die machinery, telecommunications equipment, and plastics
fabrication. With a strong base of suppliers and mutually reinforcing industries, this cluster can
expect to grow in the future.
Software Development
While not as established as the semiconductor and computer clusters in the Austin economy, the
software cluster has experienced phenomenal growth. While not nearly as big as Silicon Valley
and Seattle, the software sector in Austin has grown much faster than either of them at an annual
average rate of 22% between 1990 and 1996. In 1998, 650 software companies employed more
than 24,500 people in the Austin area. Leading companies include CSC Continuum, Tivoli
Systems, Pervasive Software and Trilogy Development. The sector is focused in the following
areas: Internet, gaming and entertainment, multimedia, networking, chip design and operating
systems.
In contrast to the semiconductor industry where all of the manufacturers are transplants, much of
the Austin software industry is homegrown, fueled by improving access to venture capital (and
receiving the majority of venture capital available). Software development products are highvalue local exports, with high wages and low stress on infrastructure. Software is arguably one of
the most
4
skill-intensive industries, with nearly all the added value coming from intelligence, creativity and
the entrepreneurial spirit of people.
History
For most of its early history, state government (Austin is the state capital) and the University of
Texas at Austin (the flagship institution for the UT system) dominated the Austin regional
economy. The first seeds of change were planted in 1957 when the Austin Chamber of
Commerce hired consultants from UT’s Bureau of Economic Geology to make recommendations
on how to diversify the economy. The report recommended that Austin develop light
manufacturing with a focus on the electronics industry. The first success from this plan came in
the early 1960s when IBM opened a plant to manufacture Selectric typewriters. IBM was
followed by Texas Instruments (1966), Motorola (1974), and Advanced Micro Design (1979).
One of the most influential individuals in the development of Austin’s high tech regional
economy has been Dr. George Kozmetsky. One of the co-founders of Teledyne in Silicon
Valley, Kozmetsky came to Austin in 1966 to become Dean of UT-Austin’s College of Business
Administration. Kozmetsky would go on to help create numerous high tech entrepreneurial
institutions (and companies for that matter) in the Austin area after his “retirement.” In the 1
980s he helped to create the concept of the “Technopolis Wheel” which involves the interaction
of seven major segments necessary to create a technopolis, or high technology-based city. The
segments include the university, large technology companies, small technology companies, state
government, local government, federal government, and support groups. According to
Kozmetsky, the modern technopolis links technology development with the public and private
sectors to spur economic development and promote technology diversification. The four factors
especially important to the development of a technopolis are the achievement of scientific
preeminence, the development and maintenance of new technologies for emerging industries,
attraction of major technology companies and the creation of homegrown technology companies.
The watershed event in Austin’s high tech development occurred in 1983 when the city won the
nationwide competition for Microelectronics and Computer Technology Corporation (MCC). As
the first private-sector, high technology consortium created to promote U.S. technological
leadership in electronics, MCC chose Austin over 57 cities in 27 states. An all-out collaborative
effort between Governor Mark White’s office, the University of Texas’ College of Engineering,
and the business community led by the Austin Chamber of Commerce put together a package of
incentives totaling $20 million. This included a university financed facility and laboratory leased
to MCC at minimal cost, the creation of 32 $1-million endowed chairs in engineering and natural
sciences, MCC employee offerings including fellowships and teaching positions, subsidized
home loans, and job-hunting assistance for the spouses of MCC employees. In the view of
5
many, landing MCC served as the “trigger point” for Austin’s development as a future high tech
center.
Also during this time, in 1984 3M Co. relocated the first of three divisions from Minnesota
following a successful recruitment by the same cast of players in the MCC competition. The new
facility contained in addition to marketing and administrative offices, research and development
laboratories to be staffed by hundreds of scientists and technicians.
The successful recruitment of MCC became the focal point for local leaders developing the next
phase of Austin’s economic development. In 1984-85, the Austin Chamber of Commerce
commissioned a new long-range economic plan (to replace the last plan dating back to 1957).
SRI International crafted the plan for Austin’s development over the next 10-20 years entitled
“Creating an Opportunity Economy.” The study stated, “that Austin, of all American cities, is in
a unique position to be the next center of excellence in several of the key technologies of the
future. Austin is already strong in microelectronics, computer hardware and software, and
telecommunications hardware... .Austin is also in an excellent position to take advantage of
another driving force in the transformation of the United States from an industrial to an
information society—the revolution in values and lifestyles... .[l]f Austin follows the strategies
suggested...the wealth created by both present centers of excellence and by new technologies will
spread throughout the economy creating jobs and entrepreneurial opportunities in all sectors, for
all Austinites—an opportunity economy in a uniquely livable city.”
SRI defined Austin’s future in terms of a five-sector economy, with three sectors science- and
technology-related (the other two being government and support services): research and
development (“Discovery businesses that create new knowledge”); technology manufacturing
(“companies that translate new knowledge into products or processes”); and technology-based
information (software, electronic databases and publishing, telecommunications, as the nation
evolved toward an ‘information society).
Some of the following recommendations were highlighted by SRI:
•
•
•
Strengthening and establishing new partnerships between business, government, and
educational institutions, especially the University of Texas;
Creating a climate for science and technology innovation and entrepreneurial activity by
nurturing new start-ups, creating business incubators, encouraging spin-offs, and
increasing venture capital availability;
Developing programs to attract, recruit, and grow technology information firms; and
6
•
Realigning educational institutions to provide industry-based training and adult
retraining.
The Austin region’s leaders took the recommendations to heart and created a plan to implement
them. The result was a considerable success.
The next big recruitment sealing Austin’s reputation as a high tech R&D and manufacturing
center came in 1988 with the announcement that the semiconductor research and development
consortium Sematech would locate in Austin. Created as public-private partnership between the
Federal government and the domestic semiconductor industry to stave off competition from
Japan, Sematech is credited by many to be responsible for the revival of the U.S. semiconductor
industry. The MCC experience had made the job of recruiting Sematech that much easier and
involved virtually the same cast of players, with the addition of U.S. Representative 3d. Pickle,
who represented Austin in Congress (and was chief sponsor of the federal research and
development tax credit). Pickle used his influence, along with the aid of the rest of the Texas
congressional delegation, to ensure that Sematech received the government funding it would
need to exist. The University of Texas provided the site by acquiring an existing 275,000 square
foot manufacturing facility and creating a new 92-acre university research park around it.
Despite a setback in the state legislature with a bond-funding bill necessary to build the facility,
UT saved the day by providing funds from its Permanent University Fund. In addition, Travis
County created a County Research and Development Authority, which issued $38 million in
industrial revenue bonds enabling the purchase of the UT Montopolis Research Park, the home
of Sematech. For its first nine years, Sematech received $848 million from the Federal
Government that was matched on a 1:1 ratio by the private sector. However, henceforth,
Sematech will be privately funded (and open to foreign partners).
The importance to Austin’s developing high technology economy of Sematech cannot be
overstated. Several Sematech partners (AMD, Motorola, IBM) have chip operations in Austin
and feed off of the research done at Sematech. Of further note, the semiconductor equipment
maker Applied Materials set up shop in Austin in 1990 after Sematech’s arrival. As US News
and World Report put it, “MCC and Sematech give Austin the ‘critical mass’ of high-tech
manufacturers, suppliers, and workers that allows businesses to sustain themselves—and expand.
With a large number of companies and research groups, scientists and technicians can change
jobs if they are stymied in one organization.”
What Role Entrepreneurs In The Austin Economy?
Although the primary ingredient to Austin’s high tech economy was the arrival of several big
name transplants, technology entrepreneurship has a long history
7
and has played a key role. In 1955, Dr. Frank McBee a UT engineering professor, founded
Tracor, Inc., a small defense-related R&D and manufacturing company. At its peak in the late
1970s and early 1980s, Tracor had more than 2000 employees and was Austin’s only Fortune
500 Corporation. (Tracor has since been acquired by GEC-Marconi, which was itself recently
acquired by British Aerospace.) More than 25 Austin high tech companies were later spun off
from Tracor into separate companies. One of these was the Continuum Corp., a developer of
software for the insurance industry. Continuum was recently acquired by Computer Sciences
Corp. forming one of the largest software companies in the U.S. and now known as CSC
Continuum.
Austin’s most famous entrepreneur is 33-year old Michael Dell; founder of Dell Computer Corp.
Dell is the second largest manufacturer of computers in the world and the world’s leading direct
computer systems company. Started in Dell’s dorm room at the University of Texas-Austin in
1984, Dell Computer is now the largest private sector employer in the Austin region. Dell is the
fastest growing computer manufacturing company in the world, creating 1,500 new jobs in 1995,
1,800 new jobs in 1996, more than 2,000 jobs in 1997, and 4,000 in 1998. At one point during
1998, Dell was hiring more than 200 people per week Dell accounts for 15% of the new jobs
created in the regional economy. In addition, Dell also enjoys the status of being one of the
fastest growing stocks during the last two years. The result is the creation of the more than 1,000
Dellionaires; those Dell employees who hold stock options making them worth more than a $1
million. Sales growth during this decade has averaged more than 50% each year. Dell’s strong
growth will continue to benefit the region, leading to growth in the electronics supplier base. The
company is building a new 570 acre office and manufacturing campus in northeastern Austin
with 300,000 square feet of manufacturing space already completed.
In 1998, the Austin region had 200 new technology startups, of which 70% were software
companies.
Key Factors That Led To Austin’s Development
“Can do” spirit, cooperation and synergy between private sector (led by the Chamber),
the University, and the government (local, county, and state to varying degrees).
Austin has benefited from the ability of these three key groups to work, for the
most part, together in support of a common plan and goal based on “Creating an
Opportunity Economy” to make Austin into one of the premier centers of the
world for high tech employment. The Greater Austin Chamber of Commerce has
taken the lead (among the other players) and has had a notable track record in
aggressively recruiting high tech giants to relocate new plants in Austin (3M,
AMD, Motorola, Applied Materials to
8
name a few). Even now, after Austin has achieved a certain level of development
with the focus starting to turn toward homegrown startups, the City just landed
another major addition with the announcement that CSC Continuum will build a new
complex downtown. The University of Texas has had the resources (financial and
talent) to offer significant incentives to prospective arrivals. And government was
there to provide financial incentives and attractive business environment when
necessary as well as providing the necessary salesmanship by the governor and the
mayor. They even enlisted the help of the local press such as the Austin American
Statesman, which wrote positive articles about Austin’s success story. The national
press picked up the story as well (Fortune, Business Week, the Economist, Time, US
News and World Report and Newsweek) which helped with recruitment efforts. The
result is an incredibly well networked city where people can often easily find help
and get answers to problems.
•
A top-notch research university, R&D facilities.
With an endowment second in size to Harvard’s, the University of Texas at Austin
has become of the premier research universities in the U.S. UT ranks #2 in National
Merit Scholars (behind only Harvard) and #3 in terms of doctoral degrees conferred.
Yet the university receives low state financial support and has low tuition, resulting
in only 70% of the financial resources of comparable universities.
UT actively worked to transform its College of Engineering (ECE) into a top-flight
program in the 1960s, benefiting from federal research dollars from the Dept. of
Defense’s Joint Services Electronics Program. Membership in this program
facilitated faculty recruitment and bolstered research funding. In 1983, UT laid out a
strategic plan designed to focus its research attention on the emerging areas of
computer engineering and microelectronics. Early on, UT attempted to build a
“steeple of excellence”, providing the intellectual capital necessary to develop
entrepreneurship. The result is more than 40 1$ million-endowed chairs in
engineering and science. Now, UT plays a much more active role than simply
cranking out a knowledgeable workforce of engineers through its sponsorship of
several public-private efforts. In 1995, the College of Engineering started an
executive software engineering master’s degree for professionals. A related effort is
the Software Quality Institute, also part of the ECE, which provides management
training for professional certifications. UT’s Dept. of Computer Sciences is also a
highly ranked program, with highly regarded faculty. And finally, UT’s Graduate
School of Business
9
Administration (GSB) has been very active in promoting entrepreneurship through the efforts of
Dr. Kozmetsky, the former dean. The program is rated in the Top 10 for entrepreneurship
schools by Success magazine, ahead of such notables as Harvard, Stanford, MIT, and UCBerkeley. The GSB offers four courses in the MBA program focusing on entrepreneurship, an
executive MBA program for mid-career executives, and a new nighttime MBA program catering
to full-time workers. In addition, the GSB-sponsored “Moot Corp.” business plan competition
was labeled the “Super Bowl of Business Plan Competitions” by Business Week.
In the past, technology transfer efforts within UT-Austin were haphazard. In 1995, UT-Austin
earned only $1.2 million from patent licensing revenues, versus $5 million for MIT and $39
million for Stanford. However, in 1998 the school opened an Office of Technology Licensing
and Intellectual Property designed to coordinate and promote UT commercialization efforts from
its faculty and research scientists and raise licensing revenues for the university.
Prior to 1980, R&D expenditures in Austin were less than $200 million. Now, $1.4 billion in
R&D is spent annually by the private and public sector in Austin. Research awards granted at UT
in 1996-97 totaled $241 million. Since 1990, technology patents awarded to area inventors have
doubled (from 352 to 831 in 1996). The following research and development centers provide the
biggest impact on the economy:
•
•
•
•
Sematech — public/private sector consortium which
develops new semiconductor technology and
manufacturing processes;
Microelectronics and Computer Technology Corp.
(MCC) —21 member consortium supports programs
in software technology, packaging/interconnect
computer aided design, high temperature
superconductivity, and advanced technologies;
Pickle Research Center (at UT-Austin) — houses 15
separate units involved in research in engineering,
science, and social sciences. The 1995 budget was
$72 million;
Microelectronics Research Center (at UT-Austin) $40 million research unit within the College of
Engineering conducts semiconductor research and
education;
10
•
•
3M-Austin Center — the electrical products, electronic products,
and electrical specialties R&D divisions are based here, developing
electronic control products, interconnect devices and cable and wire
products;
Southwestern Bell Technology Resources Inc. —R&D conducted in
broadband networks, intelligent networks, information technology,
and personal, wireless and portable communications.
Austin’s research and development sector serves as the wellspring of innovations, many of
which offer commercial opportunities for entrepreneurs and established companies alike.
•
Educated workforce/training
The Austin area workforce is blessed by its high level of education, which is a result
of solid primary and secondary education, strong community colleges (Austin
Community College) and a well-respected university (UT-Austin). An additional
100,000 students are educated by smaller universities and colleges in the region
which in turn has helped fuel the impressive growth. The Austin region boasts 82.3%
of its population holding high school diplomas, 34.4% with Bachelor’s Degrees, and
11.1% holding Graduate Degrees. In fact, the Austin region ranks #3 behind
Raleigh/Durham and Seattle in percentage of population holding Bachelor’s Degrees.
The Austin region is home to seven area colleges and universities with more than
100,000 students enrolled. At the top is UT-Austin, with 48,000 students, 2,000
faculty/staff, and 7,000 graduates per year (3rd largest public university in the U.S.)
UT’s primary role for the Austin regional economy is to educate highly
knowledgeable students who then form the backbone of the workforce.
The task of job training rests primarily with Austin Community
College (ACC), with a student population of 27,000. The ACC Center for Career and
Business Development is extensively involved in the development of course work
and training specifically designed for Austin industries (and not just high tech). ACC
offers programs in conjunction with more than 200 local high-tech companies. More
than 11,000 employees of local high-tech firms take classes designed to meet specific
job training needs. For example, the Semiconductor Manufacturing Technology
program has more than 400 students enrolled. In addition, several technical training
schools in the Austin region offer courses in electronics, computers, semiconductor
manufacturing and other specialized areas.
11
These cooperative efforts also extend to secondary education. ACC, in partnership
with Advanced Micro Devices (AMD) and the Capitol Area Training Foundation
(CATF), has developed a technology curriculum for local high school students. The
courses focus on electronics and provide hands-on experience for students through
internships with AMD. In an effort to address the growing needs of the school
system, Austin voters approved a school bond package of $369 million in 1996 in
order to build new schools.
The Capitol Area Training Foundation, an industry-led non-profit organization,
supports the development of a K-16 school-to-work system. Founded in 1994 by
Chamber of Commerce and the City of Austin, CATF’s mission is to develop a
skilled workforce for the Austin area and prepare youth and adults for lifelong
learning and career success. Career specialists have been placed in four Austin area
school districts in order to help with the institutionalization of a school4o-work
system in such areas as electronics, construction, public sector, health care,
hospitality/tourism and food service, criminal justice, legal, finance, and
metalworking. Over 3000 students are currently enrolled in the program. CATF also
works with ACC to assist students in the transition into post-secondary education and
works closely with employers to develop and implement industry certified workforce
initiatives.
•
Public/private entrepreneur development initiatives like ATI, IC2,
Capital Network and others
The Austin region has flourished in large part because of the ability of the three key
actors (business, government, and university) to pool the efforts and create many
innovative partnerships. One major focus of these partnership efforts has been to
develop entrepreneurship. One of the key forces behind these initiatives has been Dr.
Kozmetsky. At the top of this list is the IC2 Institute (Innovation Creativity and
Capital)~ which Dr. Kozmetsky created in 1979. Based at UT-Austin, IC ‘s research
and academic development activity focus on the issues of wealth creation and global
prosperity through science and technology commercialization. IC2 has worked with
public and private sectors in the U.S. and abroad to foster technology-based, regional
economic development and job creation. Among its many programs, it was the first
to establish a Master of Science Degree in Science and Technology
Commercialization, a graduate degree from UT-Austin geared toward working
professionals. Successful progeny of Kozmetsky/IC 2are the Austin Technology
Incubator (ATI), The Capital Network and the Austin Software Council.
12
Created in 1989, the Austin Technology Incubator was funded by UT-Austin, local industry
(Greater Austin Chamber of Commerce), Travis Country, Dr. Kozmetsky, and the City of
Austin. Whereas IC2 was a think tank, Kozmetsky created ATI as a “do-tank.” ATI’s job is to
serve as a real world laboratory for entrepreneurs by providing low-rent space and office
equipment, as well as professional assistance and access to venture capital, consulting services
and other companies for those startups which offer the most potential for growth. Entrepreneurs
learn how to develop and market innovative products in such fields as software,
telecommunications, new materials, computer integrated manufacturing, and biotechnology.
Principal criteria for admittance of new companies into the incubator include: whether it is a
technology-based product or service; the level of entrepreneurial capabilities of the developers of
the technology; ability to create jobs in Austin; ability to grow and graduate from ATI in 2-3
years; a well-written business plan; and the ability to work as part of a team. Winners of the
Moot Corp. competition are given free housing at ATI for two years and 6-8 companies are
accepted each year. ATI’s 45 graduate and 20 resident companies have created more than 1,500
jobs, generated $183 million in revenues for FY97, raised $170 million in capital, and include
five publicly-traded companies. Also housed in the same building is the newly created Austin
Multimedia Incubator, created to foster growth in multimedia products, processes and services.
Another KozmetskyllC2 creation is the Austin Software Council (ASC). A non-profit
corporation created in 1992, ASC is a coalition of more than 600 individuals and organizations
“dedicated to developing the Austin community into a world leader in the software industry” and
especially dealing with the needs of small software firms. Its mission is to expand and enhance
the professional and technical infrastructure in Austin, promote products and services based on
locally developed technologies, and establish an active network of professionals. ASC provides
networking opportunities, formal peer-group sessions, monthly programs, and resource
databases. One of its programs, ASC University, is designed to meet the specialized educational
and training needs of its members.
And finally, in order to address the needs of pairing aspiring entrepreneurs with venture capital,
Kozmetsky spearheaded the creation of The Capital Network (TCN), which is now the nation’s
largest non-profit venture capital network. TCN offers investor-to-entrepreneur introduction
services (through confidential matching), educational programs, venture capital conferences,
seminars
13
literature, software, and an extensive “know-how network” of experts and advisors.
TCN has facilitated agreements totaling more than $150 million between
participating investors and ventures and has been featured in several publications
such as Forbes, Inc. Magazine, The WSJ, and Business Week.
•
Access to venture capital
High tech growth in the Austin region has been fueled in part by an adequate supply
of venture capital. By the end of 1998, Austin’s premiere venture capital firm, Austin
Ventures, had $775 million under management and just closed out its sixth fund (with
committed capital of $320 million from institutional investors, private and public
pension funds, endowments and insurance companies). This makes it the largest VC
firm in Texas and one of the largest in the U.S. The funds are typically invested in
either information technology (software, semiconductors, and communications) or
services (communications, information, health care services) startups, with 72%
invested in Texas and 43% invested in Austin. AV also provides business services to
its clients. The state of Texas is #3 in available venture capital after California and
Massachusetts. In 1997, Texas received $693 million in capital (nearly double the
previous year) with Austin funneling $170 million into 38 local companies the same
year. In 1998, a record $200 million in venture capital was invested in local firms.
However Austin is still substantially behind Silicon Valley and Boulder Colorado in
the attraction of venture capital.
In addition, venture-banking infrastructure is developing in Austin, populated by such
Silicon Valley notables as Imperial Bank and Silicon Valley Bank who lend and
invest to high-tech startups. Imperial offers specialized financial services to rapidly
growing companies such as flexible and creative loan structuring and quick response
on credit requests. Whereas a pure venture capital firm might lose money on 3 out of
10 deals, a venture bank like Imperial cannot afford to lose money and therefore is
more prudent in choosing companies. Most of the capital Imperial provides comes in
the form of senior debt instruments and preferred stock.
The number of initial public offerings (lPOs) in Austin has increased substantially
during the past decade, with more than 70% of Austin’s 44 publicly held companies
having gone public this decade. However, this total pales in comparison to Silicon
Valley, which sees 100 lPOs in a year. Much of this lack of activity in 1998 can be
blamed on the Asian crisis and the overall lack of IPO activity nationwide.
14
•
A business-friendly tax/regulatory environment/incentives
Making much of Austin’s high-tech development possible is an underlying businessfriendly tax and regulatory environment, and a number of incentives offered at the
state and local level. The state of Texas has no income tax, business tax, or property
tax. It does, however, levy a corporate franchise tax and sales and use tax of 6.25%.
But the state grants sales and use tax exemptions for machinery and equipment
utilized in the manufacturing process. Most observers believe that since the Texas
State Legislature only meets for three months every two years, it does not have much
time to pass restrictive and onerous laws. The high tech industry is working to enact
an R&D tax credit at state level. The regulatory burden is considered to be relatively
low. The general attitude of the state is to let local government lead the economic
development efforts.
However, Governor George W. Bush has been active on the science and technology
front. In 1996, he created the Texas Science and Technology Council whose job is
to identify barriers to growth in the science and technology industries and
recommend measures to reduce such barriers. The council is composed of 26 of the
state’s leading CEOs, university and government officials and made its
recommendations in April 1998. The council recommended the following: implement
the Texas Advanced Placement Incentive Program (expand the AP program to all
Texas schools and offer more incentives to teachers and students to use AP);
implement the Texas High-Technology Curriculum for Community Colleges (which
emphasize basic math, science, and interpersonal skills, + industry-tailored courses
for technology industries); increase funding for the Advanced Research Program and
Advanced Technology Program (increase funding from current $30 million per year
to $45 million per year); adopt a franchise tax credit for research and development
activities; establish the Texas Institute of Science and Technology (privately funded
by encouraged by the state); and develop a statewide information and marketing
campaign.
The state of Texas also offers a number of incentive programs designed to make
capital more available for business expansion and relocation. Perhaps the most useful
of these is the Smart Jobs Fund, which provides grants to employers to train their
employees. Funded at $108 million over two years, the Smart Jobs Fund grants up to
$1.5 million per year to a single employer.
Grants are targeted towards those businesses that are either
small, minority-owned, located in Enterprise Zones, or located in
15
adversely affected defense-dependant communities and will reimburse costs for various
types of training including classroom based, computer based, and on-the-job training.
Other incentive programs operated by the state include the Capital Access Fund (provide
financing for businesses facing barriers in accessing capital), Texas Capital Fund
(designed to promote growth in rural non-entitlement areas), Texas Enterprise Zone
Program (promote job creation and capital investment in economically distressed areas),
Texas Leverage Fund (offers financing to communities that have passed the economic
development sales tax), Capital Certified Development Corporation (offers long-term
financing at low, fixed interest rates through SBA’s 504 Loan Program), and Industrial
Revenue Bonds (allows issuance of tax-exempt bonds to finance land and depreciable
property for manufacturing facilities).
On the local level, the most onerous tax is the property tax, which is also levied on
equipment. Therefore capital-intensive industries such as semiconductor manufacturers
are hit hard by property taxes while intellectual property intensive industries such as
software are not. However, Texas law allows local governments to offer to prospective
employers abatements from property taxes on improvements and equipment over a
period of up to ten years. Tax abatements were granted to 11 companies, including
Applied Materials and Motorola from 1998-1991, but now neither the city nor county has
a tax abatement policy in place. Tax abatement was one of the main reasons Samsung
chose Austin over Portland, Oregon. Austin can also offer favorable utility rate
agreements through its city-owned electric, water, and wastewater departments. Another
incentive includes agreements not to annex and therefore not to tax for a specified time.
However, the rate at which the City of Austin approves site plan and subdivision reviews
completed on time has declined in the last few years, raising questions about the
commitment to manage growth. While a number of code and administrative amendments
aimed at streamlining the review process have been adopted, positive results have not yet
been fully realized.
• An affordable high quality of life
Perhaps one of Austin’s greatest assets is its universally acclaimed affordable quality of
life. This is important because it defines a community’s ability to attract and hold key
personnel. Austin has always been known for its affordable cost of living. In fact, many
companies moving to Austin from other high cost areas (especially California) have
commented favorably on the relatively low real estate/housing prices in Austin. This held
true throughout much of
16
the 1980s. However, by 1996, the cost of living in Austin had increased
dramatically as a result of the phenomenal growth and demand, which has helped
to marginalize one of Austin’s greatest advantages. (According to a study done
by the U.S. Dept. of Housing and Urban Development, regions with high tech
economies are likely to have an adverse impact on low-income workers. If high
tech industries drive up the cost of living, those working in less wellcompensated industries will suffer.)
Cultural amenities are often considered by entrepreneurs, companies, and
corporate executives when making location decisions. Austin offers its citizens
lakes, hills, trails, an arts community, theatres, book stores and a vibrant live
music scene (known as the “Live Music Capital of the U.S.”) and a mostly
favorable climate (although very hot summers). However, compared to other
regions of similar size, Austin trails in the category of recreational amenities
offered.
Austin also boasts a very high quality of environment. The Environmental
Protection Agency certified that Austin, in 1995, had zero “bad” air quality days.
In addition, Austin has never had a Superfund hazardous waste cleanup site
(Superfund sites are so designated if they pose a serious threat to the environment
and community).
Challenges For The Future
Although Austin has now truly become a “technopolis” and knowledge economy known
for its high technology and high economic growth rates, many civic leaders worry about
the potential to rest on their accomplishments. Consequently, in order to refocus the
region’s efforts and build on the strategy outlined in 1985, the Greater Austin Chamber
of Commerce commissioned a new economic development strategy report. Entitled
“Next Century Economy: Sustaining the Austin Region’s Economic Advantage in the 21st
Century”, the new strategy builds on the previous one while putting a new emphasis on
developing emerging industries and social and environmental factors. The high tech
Austin economy has reached a critical mass of core industry clusters in the area of
semiconductors/electronics, computers/peripherals, and software. Community leaders are
now focusing on developing the following six emerging industry clusters of the future:
multimedia, logistics/distribution, telecommunications, music/film, transaction services,
and biotechnology. Taken together, these core and emerging industry clusters will be the
driving forces of the Austin regional economy, drawing wealth into the
17
area that flows throughout the rest of the economy. Yet the likelihood of the Austin
regional economy to continue expanding will be determined, in part, by its ability to
successfully address several challenges: a growing lack of skilled workers, infrastructure
woes, and growing social inequities.
Lack Of Skilled Workers
Although one of Austin’s assets is the high number of highly skilled workers in the
region, many companies have cited their growing needs and the dwindling availability of
such workers as a primary challenge to continued growth, especially in the areas of
skilled programmers/software engineers and senior managers. Successful strategies to
combat this problem might include increasing the supply of locally trained workers as
well as recruiting highly skilled workers from other regions (and countries). Again, much
of the local load will be borne by Austin Community College and other smaller colleges
to meet the specialized needs of companies for skill training and certain degree programs
(e~g. manufacturing engineering). The private sector will have to participate in program
design and funding (due to falling public budgets) in order to ensure success.
Infrastructure
One of the Austin region’s greatest challenges is its physical infrastructure. The region,
to date, has suffered from the lack of a true international airport. Until only a few years
ago, Austin did not have non-stop service to San Jose, California and other major high
tech centers. However the Robert Mueller Airport was closed in May 1999 and replaced
by the brand new Austin-Bergstrom International Airport (only the second new major
airport built in the U.S. this decade and built on the recently closed Bergstrom Air Force
Base.) This should help meet Austin’s growing needs for both passenger and freight
traffic.
Ground traffic congestion has increased significantly during the last decade. Austin, like
many fast growing western cities, does not have a well-developed public transportation
system that could alleviate some of the ground traffic. The result has been increased
commute times and traffic congestion. Austin hopes to receive greater proportions of
federal and state highway transportation funds and perhaps develop a light rail transit
system to alleviate ground traffic.
18
The Austin region has developed an adequate electronic/telecommunications
infrastructure, which is especially important as Internet and electronic commerce grows.
Compared to Seattle, the Austin region has more than double per capital Internet hosts.
However, while high-bandwidth commercial Internet access in Austin is available,
movement to expand bandwidth to residential areas lags behind other metropolitan areas.
Cable-based Internet access is not yet available, but could be in the near future.
The City of Austin is also hard at work to ensure that economic development does not
pass by Austin’s downtown for the periphery. In addition, the city, in order to preserve
Austin’s livability and natural resources while providing for economic growth, launched
the Smart Growth initiative in February 1998. This initiative will focus on the following
8 categories: restoring community and vitality to the urban core; protecting the character
of existing neighborhoods; providing a greater certainty in the development process (i.e.
streamlining it); protecting environmental quality; rewarding developers with profitable
products, financing, and flexibility; decreasing vehicle congestion by providing
alternative modes of transportation; creating a town-centered transit- and pedestrianorientation; and making efficient use of public money and increasing the tax base.
One of the first examples of the Smart Growth initiative in Austin is the announcement in
December 1998 of a new downtown revitalization development project. The commercial
part would be anchored by CSC Continuum (the world’s 3fli largest software developer),
who will build a three six-story office building on three blocks for 3000 employees. In
addition, a new City Hall and Public Plaza would be constructed, along with residential
housing and retail shops. The CSC portion of the project is estimated to generate over $5
million in annual tax revenue.
Social Inequities
Despite increases in average wages and per capita incomes, the Austin region suffers
from a relatively high poverty rate and a large white/nonwhite income disparity.
Although Austin’s poverty rate has steadily fallen over the last few decades, the decline
has not been dramatic. Austin’s high poverty rate stands in stark contrast to its low
unemployment rate and claims of industry regarding the lack of workers. The poor have
not been able to consistently benefit from Austin’s dynamic job market. In addition, the
central city (like many U.S. cities nationwide) of Austin has suffered, to a lesser extent
than comparable cities however, from growing disparities of job opportunities with the
region’s fast growing outlying
19
areas. Finally, Austin has the highest racial income inequality of all comparable regions
in the U.S. The average income of non-whites compared to whites is just above 60%.
Austin’s challenge will be to target minority communities for improvements in
education, training, housing, and small business development.
BIBLIOGRAPHY
Angelou Economic Advisors, “Austin Metro Area: Economic and Technology Forecast 19992000” 1999.
“Austin’s Opportunity Economy: A Model for Collaborative Technology Development,” by
Susan E. Engelking, Staats Falkenberg & Partners of Austin, as published by the New Academy
of Sciences, April 1996.
“The Austin/San Antonio Corridor: The Dynamics of a Developing Technopolis” Raymond W.
Smilor, George Kozmetsky, and David V. Gibson, 1987.
ICF Kaiser, “Next Century Economy: Sustaining the Austin Region’s Economic Advantage in
the 21stCentury,~ 1998.
SRI International, “Creating an Opportunity Economy,” April 1985.
The Perryman Group, “The Perryman Economic Forecast: Short-term Outlook for
The United States, Texas, and the Austin-San Marcos MSA,” FaIl 1998.
Rapp, Jim, “The Austin Miracle,” TechWeb, 6 February 1998.
(Plus numerous other sources including interviews)
Greater Austin Chamber of Commerce - httn://www.austin-chamberorq/
City of Austin - http://www.ci.austin.tx.us/
Austin Software Council - httn://www.austinsoftwarecouncilorq/
IC2 - http://www.utexas.edu/depts/ic2/main html
The Capital Network - http:/Iwww.thecapitarnetworkcom,
Angelou Economic Advisors - http://www.anpelou-econ.com/
State of Texas - http://www.state.tx us/index html
20