California's Microelectronics Industries and Federal Technology Policy
Prepared by
Joe Nation
EAC Director
November 1995
Perhaps more than any other state, California is poised to profit from advances
in technology and from the development of high technology products and services.
High technology products are playing an increasingly important role in
the state's economic development, and federal polices can improve-or hinder-the
contribution of technology to California's economy. This is particularly
relevant to the state's microelectronics industries.
High Technology and Jobs in California
Technology, particularly electronics, is a key provider of high-wage incomes
in the U.S. and California. The American Electronics Association estimates
543,000 direct jobs in the U.S., and state job figures show that more than
200,000 of these jobs are in California. In the San Francisco Bay area
alone, an estimated 128,400 direct jobs existed in computer and office equipment,
electronic equipment, and instruments and related products.1 Other high
technology jobs exist in many other areas: aircraft design and production,
space technology, advanced transportation, biotechnology and pharmaceuticals,
and telecommunications. Many of these have strong linkages with the state's
microelectronics industries.
These high technology jobs also provide "spin-off" or indirect
employment for large numbers of Californians. For example, for the most
recent year available, the U.S. Bureau of Labor Statistics estimated more
than one indirect job was generated for each direct job in computer equipment
manufacturing and semiconductors. For some industries, such as measuring
and controlling devices, the ratio of indirect to direct jobs is nearly
two to one. In some cases, these figures may understate the number of
indirect jobs created because of recent increases in subcontracting by high
technology firms.
California also is the home to many of the world's premier research organizations
and has long been at the forefront of technology development. For instance,
California ranks in the top 10 of U.S. states in terms of research and development
fund share of gross state product.2 Similarly, the University of California
ranks only behind MIT in the number of patents awarded over the last 25
years.3
High Technology Job Growth
High technology industries are expanding at a rapid rate, and this expansion
is expected to continue for the foreseeable future. In a recent survey,
high technology firms nationwide anticipated employment growth of 4.6 percent
from June 1995 to June 1996.4
Anticipated employment growth rates in California are substantially higher
than the rest of the nation. In Northern California, for example, high
technology employment is expected to grow 9.8 percent, the highest rate
in the nation. Southern California, not far behind, is expecting 7.1 percent
growth in employment.
Anticipated employment growth rates in electronics industries are higher
in both Northern and Southern California than the national average (Table
1). For example, the national average for computer software is 10.7 percent.
Anticipated employment growth in Northern and Southern California is 12.8
and 17.5 percent, respectively. Similarly, the expected growth rate nationwide
for telecommunications employment is 8.1 percent. Employment in this industry
is expected to grow at nearly three times this rate in the north of the
state. Growth rates in California are higher in several other industries.
In fact, the growth rate is expected to be higher in both parts of the
state in six of the nation's top eight high technology industries.5
California's economy begins this period of continued rapid employment growth
with a large employment share of several of these industries. California,
with about 13 percent of the U.S. population and work force, has an 18 percent
share of national computer software employment, a 21 percent share of telecommunications
employment, a 17 percent share of lasers and optics employment, and a 20
percent share of computer hardware employment.
Table 1
Projected Employment Growth Rates in High Technology Industries, June 1995-June
1996
Industry National Northern California Southern California
Computer software 10.7% 12.8% 17.5%
Telecommunications 8.1% 23.1% 6.4%
Computer hardware 7.0% 7.9% 8.0%
Transportation 6.2% 6.7% 2.9%
Biotechnology 5.5% 6.4% 3.6%
Lasers and optics 5.3% 7.2% 10.1%
Energy related 4.3% 14.1% 18.7%
Pharmaceuticals 4.3% NA NA
Manufacturing Equipment 4.1% 14.8% 5.6%
CorpTech, "Technology Spotlight on Future Employment Trends National
Report," June 1995, and related issues.
Microelectronics Playing Key Role in Foreign Trade Expansion
Microelectronics products also are playing a key role in the rapid growth
of foreign trade in California (Table 2). Exports from California in the
2nd quarter of 1995 grew 18.7 percent above 1994 levels. Exports from the
four high technology industries in Table 2 accounted for more than 80 percent
of the net growth during this period. Exports remain essential to California's
semiconductor manufacturers and to the makers of semiconductor manufacturing
equipment, where 35 percent of sales occur overseas.
Table 2
California Exports by Industry, 2nd Quarters, 1994-1995
(in millions)
Industry 1994, 2nd Quarter 1995, 2nd Quarter Annual change
Electronic equipment 9,783 12,900 31.9%
Industrial machinery, computer equipment 9,144 10,943 19.7%
Transportation equipment 4,488 5,159 15.0%
Instruments and related products 2,847 3,222 13.2%
Source: MISER
Federal Technology Policy and California
A number of federal polices that affect high technology industries can help
or hinder California's economic recovery. The two most important involve:
· Technology development and collaboration
· Trade liberalization and other elements that will promote foreign
trade.
Technology Development and Collaboration
At least two trends are making it increasingly difficult for many businesses
to support the levels of research necessary for continued investment in
new technologies. First, some firms underinvestment in product or process
development, R&D, or capital because of its high risk and/or their inability
to appropriate the benefits of the research. Second, some firms that once
relied on federal support for defense technology research are finding that
funding has become more limited. In both cases, there is a danger that
California firms will no longer invest to a level that is beneficial to
society.
In order to mitigate this decline in technology research, firms are turning
increasingly to collaborative public-private partnerships, such as those
included in the Department of Defense's Technology Reinvestment Project
and the Department of Commerce's Advanced Technology Program. At the local
level, successful private-public partnerships include Joint Venture Silicon
Valley Network's defense and space consortium, which operates on limited
federal funding, but has successfully developed several collaborative technology
efforts.
These programs and others that support the development of pre-competitive
technologies (i.e., early-stage technologies with limited immediate commercial
value) have been identified as potential sources for expenditure reductions.
While these programs should be refined, funding for these programs should
be maintained at modest levels. In addition, remaining programs should
develop quantifiable measures of effectiveness to ensure that the investments
are worthwhile.
Trade Liberalization
The growing role of high technology products in California's export sector
suggest several steps to ensure continued success. This includes:
· Trade liberalization, particularly for some Asian markets
· The elimination of non-tariff barriers (NTBs)
· Strengthened intellectual property rights
· The relaxation of some U.S. export controls.
The passage of GATT and NAFTA, despite the Peso crisis, has helped California's
economy immensely. Continued trade liberalization is important for the
state's economy, but particularly for its microelectronics industries.
For example, electronics manufacturers indicate that Japan and China's markets
remained largely closed to many U.S. products. This is particularly harmful
in the case of Japan, which represents the single largest market for electronics
outside of the U.S. The elimination of NTBs (e.g., local content requirements,
foreign investment restrictions, burdensome customs procedures) also would
result in the expansion of California's high technology exports.
The strengthening of intellectual property provisions is perhaps more critical
to California's microelectronics industries than any other major industry,
with the possible exception of entertainment. Despite modifications in
GATT, intellectual property provisions require additional improvements.
Additional steps to enforce these provisions are critical in some of California's
largest trading partners, such as China.
Finally, the relaxation of some U.S. export controls will go far in helping
California's microelectronics industries. For example, although many California
firms are ready to go to market with existing encryption technologies that
have applications for finance, knowledge-based, and other industries, restrictive
U.S. policies prevent such action. Unless relaxation occurs at a modest
pace, California's firms risk losing the lead in the industry and in setting
international encryption standards.
Additional Steps to Enhance California's Technology Base
In addition to these two key areas, several additional problems that affect
microelectronics industries should be addressed. These include tax reform,
infrastructure improvements, credits for in-house worker retraining, and
changes in government tracking of emerging high technology industries.
The need for tax reform is related primarily to the decrease in basic research
funding discussed above and to the effects of the increasingly fast pace
of technological change on business operations. As suggested above, efforts
to increase basic research and development funding include increased public-private
partnerships. Federal policies to augment these partnerships, such as R&D
tax credits and narrowly-targeted capital gains tax reductions, would greatly
reduce this shortfall.
The increasingly fast pace of technological change on business operations
also is having a negative effect on investment in new equipment, in addition
to R&D. For example, a new semiconductor chip fabrication facility
now costs nearly $2 billion, of which semiconductor equipment and materials
comprises 80 percent. Moreover, the useful life of these plants is growing
much shorter, making it difficult, if not impossible, for firms to justify
their construction. As above, R&D tax credits and capital gains tax
reductions could increase the number of these investments. In particular,
depreciation schedules for electronic manufacturing equipment, such as semiconuctors,
should reflect their increasingly short useful lifespan.
California's microelectronics industries rely on the quality of the state's
infrastructure, particularly its airports, to succeed in building domestic
and foreign markets. Unfortunately, overall transportation infrastructure
investment in California is now 15 percent below the national average.
Furthermore, a recent state Supreme Court ruling makes it more difficult
for local jurisdictions to secure approval for improvements. A federal
infrastructure bank could assist in the state's infrastructure development.
California's high technology industries-perhaps more than any other industry-require
a high quality workforce. One particularly promising avenue to ensure this
high quality involves encouraging in-house training efforts. Studies indicate
that in-house training efforts are far more successful in terms of productivity
and income gains than other efforts, such as on the job training. Federal
incentives to train in-house should be explored and implemented if they
are cost effective.
Finally, economic development in microelectronics industries has been rapid,
but it also has been difficult to document due to archaic government accounting
techniques. For example, the extent of the strength of California's multimedia
industry clusters appears to be consistently measured incorrectly because
of outdated accounting. Steps to accelerate current changes to government
accounting provide better assessments of changes in the economy and thus
provide better information for policy decisions.
Footnotes
1Corresponding to SICs 357; 36, 38, respectively. Based on Employment Development
Department data.
2National Science Foundation, Science and Engineering Indicators, 1993.
3Ibid.
4CorpTech, "Technology Spotlight on Future Employment Trends National
Report," June 1995.
5Employment growth rate is expected to be lower than the national average
in Southern California only in telecommunications and biotechnology.