Report (pdf file)
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
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
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
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.