Complete Report (pdf file)

Executive Summary

Among states and cities that actively recruit businesses to relocate, high technology firms are coveted. There is good reason for this. First and foremost, the high technology industry offers high quality jobs. High technology firms often offer high wages, attractive benefit packages and opportunities for advancement. In addition, high technology firms tend to be export oriented and make important contributions to the balance of trade. For states like Arizona that have a dynamic and growing high technology cluster, information on high technology businesses is important to guide policy decisions and educate the public about the nature and contributions of this industry.

This study represents is an in-depth look at the economics of high technology businesses. The study included use of existing secondary data available from government sources (the most recent year available was usually 1992) and use of information from a survey of firms in the high technology industry (information from this survey was for 1994).

High technology appears to be a lot like 'quality': people know it when they see it, but it is not easy to define. A large number of alternative definitions were identified during the course of this study. Some of the important characteristics used in these definitions include a high percentage of employees working as engineers, scientists, mathematicians and computer specialists, a high percentage of total sales spent on research and development, a high level of product sophistication, a high percentage of sophisticated components in the product or service, and high employment growth rates. Some studies arbitrarily selected certain sectors as 'high technology.'

In this study, a consensus approach was used to identify manufacturing sectors (i.e., a sector was included if it was identified under five or more different high technology definitions as being high tech) and professional judgment was used to identify service sectors. The sectors included a variety of chemicals, aircraft, missiles, ordnance and engines, computers, communications equipment and electronic components, scientific instruments (all of SIC 38), computer software and services and physical research services.

Under this definition, there were over 95,000 high technology jobs in Arizona in 1994. The largest employer is the electronic component and computer sector (46,545 jobs). The next largest are aircraft and missiles (18,597 jobs), instruments (16,903 jobs) and computer and research services (10,779 jobs). The high technology industry paid $4.36 billion in employee compensation in 1994 and generated $5.931 billion in value added (i.e., direct contribution to Gross State Product). The industry paid an estimated $250 million in state taxes. In addition, the high technology industry exported an estimated $5.369 billion in goods and services from Arizona in 1994. In terms of percent of state totals, the high technology industry directly provided 4.8 percent of all jobs in the state, it generated 6.8 percent of total Gross State Product and provided 63 percent of total foreign exports from Arizona in 1994.

Through the multiplier effect (i.e., through purchases made in Arizona by high technology businesses and their employees), the high technology industry had a total economic impact of 180,261 jobs (9 percent of Arizona's employment), $6.498 billion in employee compensation and $9.546 billion in total value added (11 percent of Arizona's GSP). High technology firms purchased many products and services from each other (estimated at $1.79 billion). The total tax revenue impacts of the industry were $609 million.

The high technology industry in Arizona paid an average of $45,800 in employee compensation (this includes wages and all benefits). The average payroll per employee in the high technology industry is $38,376 which is 75% higher than average payroll per employee across all Arizona industries. In addition, high technology firms spent an average of $900 per employee on training in 1994. The high technology workforce contains a significant share of Ph.D. scientists and engineers in the state. Overall, 35 percent of all employees in the industry have a four-year college degree or higher.

High technology firms make substantial investments in research and development. On average, high technology firms spend from 6 to 8 percent of total sales on research and development. More than 28 percent of the survey firms spend 13 percent or more of total sales on research and development. Twenty percent of the high tech workforce is involved in research and development. Approximately 87 percent of research funding came from internal sources. Another 10 percent came from the U.S. Department of Defense.

The high technology industry grew rapidly in Arizona from 1972 to 1987. Employment nearly doubled and real payroll increased at a rate of 5.6 percent per year. The total number of establishments more than tripled. However, high technology declined in Arizona from 1987 through 1992. Employment fell by 11 percent and payroll by 13 percent. 1992 was the trough of a recession in Arizona and it also marks the beginning of declining defense spending. From 1992 to 1994, the high technology industry regained much of what it had lost during the last recession. Employment grew almost 13 percent and payroll increased by slightly more than this from 1992 to 1994.

The high technology industry has grown significantly in importance as a share of Arizona's economy, even during the 1987 to 1992 period. Several high technology sectors are better represented in Arizona than in the U.S. as a whole. These well-represented sectors include electronics and electronic components, where employment in Arizona is 31 percent higher than it is for the entire U.S.; aircraft and parts which is 24 percent higher; guided missiles, space vehicles and parts which is 43 percent higher; search and navigation equipment (23 percent higher) and process control instruments (95 percent higher). Employment in other high technology sectors in Arizona tends to be lower than for the nation as a whole.

Arizona's high technology industry is very export oriented. While only 7 percent of high technology sales were made in Arizona, 59 percent were to the rest of the U.S. and 34 percent were to foreign customers in 1994. Europe and Asia (particularly Japan) were the most important foreign markets for Arizona's high technology exports.

Arizona's high technology industry depends on the U.S. Department of Defense for approximately 25 percent of its total sales. Approximately two-thirds of all high technology sales are custom-made for the buying firm. The high technology industry's largest customer typically represents 24 percent of total sales and the five largest customers average 49 percent of total sales. These figures indicate that high technology firms are highly dependent on orders of a few large buyers. This is especially true for aerospace and missiles, instrument and chemical manufacturers.

As mentioned earlier, Arizona's high technology firms buy from and sell to each other in significant amounts. The survey results indicate that 48 percent of surveyed firms purchase from the 14 largest high tech firms and 53 percent sell to the 14 largest high tech firms in Arizona. Almost one-third of the survey firms indicated that one or more of the 14 largest high technology firms was one of their five largest customers. Buyer-seller relations are not the only type of relationship that exists between high technology firms. Thirty-five percent of surveyed firms purchase important components that are available from only one supplier located outside of Arizona. Another 32 percent are involved in joint research and development ventures and 26 percent share development or engineering resources with firms outside of Arizona. With other firms located in Arizona, 20 percent share development or engineering resources, 20 percent are involved in joint research and development ventures and 15 percent of the surveyed high technology firms buy key inputs available from only one seller.

Some of the risks and challenges that Arizona's high technology industry faces are related to continuing declines in defense spending and the significant amount of buying and selling that goes on within the industry. One risk of dependence on defense contracts is fluctuations in numbers of jobs depending on the number and type of defense contracts won. As overall defense spending levels off or declines, those high technology firms most dependent on defense contracts are likely to shrink, go out of business, look for alternative markets for their products, or begin diversifying their product line.

The high technology industry as a whole is very dynamic. New high technology sectors are emerging even as others face declining or more competitive markets. A challenge faced by the state is to encourage the emergence of new high technology sectors, particularly through availability of venture capital and support of research and development and at the same time maintain a business environment that allows mature sectors to retain their competitive edge. Another risk of relying too heavily on any one industry is that a downturn in that industry can be devastating to the entire state economy. This is especially true for industries that do have strong buyer-seller relationships with local firms outside of the industry. So, while strong buyer-seller relations between high technology firms and other firms in the state can have important benefits during growth periods, during contractions they can lead to serious declines in total economic activity.

Arizona Department of Commerce should track high technology employment carefully and should consider a survey of firms every five years. What happens in the high technology industry has serious implications for the availability of high-skill, high-paying jobs in Arizona.