New economy: a guide for Arizona

              ARIZONA



POLICY



CHOICES



The N e w E c o n o m y : A G u i d e f o r A r i z o n a



OCTOBER 1999



What Happened to the Old Economy Anyway ,

I t 's not that the old economy is dead. R a t h e r, i t 's fractured into two parallel realities that c o e x i s t . O n e piece keeps plugging away, f i r m l y anchored in the habits, va l u e s, a n d practices o f five years ago. I t boasts a sense of order and rationality; i t celebrates the merits of hard w o r k and professional mastery. T h i n k of the flagship industries of the Industrial R e v o l u t i o n ? h u g e car companies, g i a n t general contractors, c o a s t - t o - c o a s t hotel chains, e n o r m o u s industries employing millions of people?all of which still play by the old rules. T h e other piece is driving today's growth. B o r n of technology, p r o p e l l e d by technology, p r o m i s i n g ever more technology, t h i s new economy embraces discontinuities, e x p l o i t s disconnec ts, thrives on chaos, creates new connections, and celebrates the secrets of creativity a n d mystery. I t 's the part of the economy that's migrated from the labs and the cubicles of a few companies to the front pages of every newspaper and into the living rooms of millions o f workers. I t 's not about a few millionaire software geeks anymore: I t 's about us, a b o u t o u r future and everyone's future?a future in which a potent concoction of computers, a g r e a t idea, a small team, a line to the Web, a sprinkling of capital, a n d a willingness to take a leap of faith is enough to rewrite the rules of an entire industry. I t 's about a future in w h i c h the boundaries between industries are easily dissolved, w h e r e work makes all the d i f f e r e n c e, a n d where the cliched advice to "follow your bliss" i s only half a cliche?and half a business plan. C a l l it "irrational exuberance," b u t whatever the name, i t 's more than an i n e x p l i c a b l e bounce that's attached itself to the stock market. T h e new economy today is a l i v e, w e l l , a n d, c o u r t e s y of the Web, c h a n g i n g everything it touches. S t a t e of the New Economy, Fa s t Company, S e p t e m b e r 1999



OCTOBER 1999 Publisher R o b Melnick, P h . D. M o r r i s o n Institute for Public Policy



ARIZONA

A P C Series Editor J o h n Stuart Hall, P h . D. S c h o o l of Public Affairs Editors N . J o s e p h Cayer, P h . D. S c h o o l of Public Affairs N a n c y Welch M o r r i s o n Institute for Public Policy Co n t r i b u t o r s M a r y Jo Waits M o r r i s o n Institute for Public Policy J o h n Stuart Hall S c h o o l of Public Affairs W i t h Assistance From R e b e c c a Gau M o r r i s o n Institute for Public Policy R y a n Johnson M o r r i s o n Institute for Public Policy C h r i s t i n a Kinnear M o r r i s o n Institute for Public Policy C h e r y l e n e Schick M o r r i s o n Institute for Public Policy K a r e n Leland M o r r i s o n Institute for Public Policy W i l l i a m Fulton To m Rex C e n t e r for Business Research K a r e n C. H e a r d C h a l k Graphic Design C o v e r Illustration ? 1999 John Nelson

J o h n Nelson is a nationally known artist w h o lives in Tempe, A r i z o n a . H i s donation o f the cover artwork is appreciated. T h i s document is copyrighted ?1999 by the Arizona Board of Regents for and on behalf of Arizona State University and i t s Morrison Institute for Public Policy.



POLICY



CHOICES



The New Economy: A Guide for Arizona Table of Contents

We l c o m e to the New Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R o b Melnick, M o r r i s o n Institute for Public Policy N e w Economy Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M a r y Jo Waits, M o r r i s o n Institute for Public Policy



4 6



Te c h n o l o g y is a Given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 G l o b a l i s m is Here to Stay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 K n o w l e d g e Builds Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Pe o p l e Are the Most Important Raw Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 T h e r e's No Such Thing as a Smooth Ride . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 C o m p e t i t i o n is Relentless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 A l l i a n c e s Are the Way to Get Things Done . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 P l a c e Still Matters -- B u t for Different Reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30



M a k i n g Public Policy Choices for People and Places . . . . . . . . . . . . . . . . M a r y Jo Waits, M o r r i s o n Institute for Public Policy



35

35



I m p l i c a t i o n s for Policy Makers: Th e Nuts and Bolts of Operating in the New Economy. .



I d e a s for Supporting People and Places in the New Economy . . . . . . . . J o h n Stuart Hall, S c h o o l of Public Affairs N a n c y Welch, M o r r i s o n Institute for Public Policy



39



Table of Contents



>WELCOME

4



Welcome to the "New Economy"

J u s t as the industrial revolution and fundamental changes in work and communication profoundly shaped t h e economy of the previous century, w e have been building up to our current topsy turvy economic and s o c i a l environment for a while now. O u r 's just happens to be the 21st century version of a new economy. A n d now, w e -- a n d especially our children--need ways to describe the new economy and decide how t o help the most people get the most benefit from it. I n a sense, t h a t 's what this publication is about--describing the changes in the way we do things compared t o the recent past. A n d, w h i l e some of these changes may seem to have "snuck up" o n us, t h e y are now very a p p a r e n t . U s i n g computers to send our mail, s a t e l l i t e s to conduct our business, a n d global to describe the c o m m u n i t y in which we live and work are pretty well accepted these days. W h e t h e r or not we realized it at t h e time, w e have been working hard at creating the conditions, s t a n d a r d s , a n d expectations in which we n o w operate. N o w, w e need to wake up and smell the coffee we've b e e n brewing. I t is an oversimplification to describe the new economy as a technology revolution, s o m e t h i n g that is m o s t l y driven by and affects business. C l e a r l y, n e w technologies and business practices are central to the c o n c e p t of a new economy. H o w e v e r, t h a t 's the easy part to understand. T h e bigger challenge is to grasp-- and then develop strategies to take advantage of--how public policies in the new economy can most positively a f f e c t people and places. T h e New Economy: A Guide for Arizona i s meant to help Arizonans do just that. T h e New Economy i s the third publication in the Arizona Policy Choices s e r i e s . S t r o n g opinions and significant data marked the previous volumes on state tax cuts and growth. T h e New Economy i s no different. H e r e one of the state's best-known policy analysts, M o r r i s o n Institute Acting Director Mary Jo Waits introduces y o u to the new economy. T h e descriptions of the new economy's characteristics, t h e presentation of economic data, a n d a discussion of implications for policy makers provide a firm foundation from which t o consider the new economy's meaning for Arizona. T h e work of John Stuart Hall, S e r i e s Editor for Arizona Po l i c y Choices a n d School of Public Affairs Professor, r o u n d s out this guide with examples of public policies a n d programs that are relevant responses to the new economy. T h e examples were selected because they provide valuable pointers, a n d represent public decisions t h a t have produced (or have the potential to produce) prosperity for local people and places. T h e examples p r o v i d e a starting point from which to think through the kind of public policies that could benefit Arizona's p e o p l e and places in the new economy. T h e y range from ideas that address the importance of education in a fast-paced, t e c h n o l o g y - o r i e n t e d economy to others that recognize the value of making quality of life a w a y to attract and keep the most talented workers. I n some cases, p o l i c i e s and programs were included b e c a u s e they implicitly acknowledge and address the fact that the new economy--if left to its own d e v i c e s -- w i l l produce both "haves" a n d "have nots." T h e publication's data are intended to answer some of our readers' q u e s t i o n s about Arizona and the n e w economy. I t is important to note, h o w e v e r, t h a t the world is just now beginning to determine what the r i g h t measures of a new economy are. A s both an evolutionary and revolutionary process, t h e new economy w i l l ultimately produce its own set of buzz words, a c r o n y m s , a n d legitimate comparison measures. Fo r now, w e present a combination of descriptive facts and figures that, o u t of necessity, r e l a t e to both the old and t h e new economies.



Arizona Policy Choices: The New Economy



Some readers may think that the new economy is not really new at all. Pe o p l e who work in a worldwide b u s i n e s s environment, u s e the latest technology tools, a n d think the fast lane is the only route have already b e e n experiencing the new economy first hand. B u t , t o the vast majority of people and public decision makers, t h e circumstances of the new economy are daunting. Fo r better or worse, i t really is a new world. I n the case of the new economy, A r i z o n a is--like it or not--in an enormously competitive arena. A r i z o n a l e a d e r s have to make tough public policy choices in light of new economic realities. T h e s e decisions will lay t h e economic, e d u c a t i o n , a n d social foundations for the future and will in large part determine whether or n o t our state's people and places prosper. Pa s t volumes of Arizona Policy Choices p r e s e n t e d choices in the p u b l i c a t i o n that were drawn from the experience and wisdom of experts. T h i s year, w i t h this topic, i t s e e m e d like a good time to change that tradition and involve as many Arizonans as possible in the r e a l work of understanding and suggesting choices. C a u t i o n : D o not read on unless you are prepared to take some responsibility for Arizona's future! This i s not the issue to "sit out." A r i z o n a needs your ideas for public policies that will best take advantage of this h i s t o r i c opportunity. M o r r i s o n Institute for Public Policy and Arizona State University invite you, y o u r friends, a n d colleagues to get involved in the development of the state's choices. C o n t a c t Morrison Institute by telephone, m a i l , o r e-mail for the Participate in the New Economy p a c k e t . I t is hoped that all types of professional organizations, n e i g h b o r h o o d associations, s c h o o l s , a n d community organizations will suggest v i s i o n a r y policy options for Arizona in the new economy. P a r t i c i p a t e in the New Economy h a s all of the i n f o r m a t i o n you will need to contribute to this wide-open process. A r i z o n a n s ' i d e a s on how our people and p l a c e s can prosper in the new economy will be formally presented to the state's business and political leaders i n January 2000 and will be critical to making this new economy of benefit to everyone.



R o b Melnick M o r r i s o n Institute for Public Policy S c h o o l of Public Affairs C o l l e g e of Public Programs A r i z o n a State University ( 4 8 0 ) 965-4525 voice ( 4 8 0 ) 965-9219 fax ( 4 8 0 ) 965-6404 T h e New Economy R e s p o n s e Line nielle@asu.edu w w w. a s u . e d u / c o p p / m o r r i s o n



Welcome to the "New Economy"



5



>CHARACTERISTICS

6



New Economy Characteristics

T h e r e is a joke going around the Internet these days called "13 Ways To Recognize You've Had Too Much of the `90s." I t is a familiar list to anybody attempting to contend with the peculiar personal habits that have emerged over the last decade as people have tried to run an intimidating new maze of gizmos and p o s s i b i l i t i e s . T h e list includes laugh-lines like:



? Yo u try to type your password on your microwave. ? Yo u e-mail your son in his bedroom to tell him dinner's ready and he e-mails you back: " W h a t 's for dinner?" ? Yo u speak with a stranger in France every day but you haven't said hello to your next-door neighbor

yet this year.



? Yo u arrive in your driveway and use your cell phone to see if anybody is home.

T h e r e is no denying these lines are funny. B u t one of the reasons they get a laugh is that they show how q u i c k l y and how fundamentally daily life is changing because of what has come to be known as "the new e c o n o m y. " I t is a world in which the pace and tone of life have changed dramatically. A n d it is a world in w h i c h the geographical, e c o n o m i c , a n d cultural relationships that we have known all our lives are being t r a n s f o r m e d in ways we couldn't have predicted even a few years ago. I n other words, t h e new economy is d e f i n i n g what life in the 21st Century will be. What exactly does it mean to be part of the new economy? What are its distinguishing c h a r a c t e r i s t i c s ? Is the n e w economy about technology or is it about knowledge? Should w e be anxious or excited? How do we shift, f o c u s , a n d rethink public policy to prepare for the future? Th e goal of this Arizona Policy Choices i s to increase the understanding of our citizens and policy makers a b o u t the new economy, a n d to clarify the kinds of choices that must be made to ensure that Arizona's busin e s s e s , r e s i d e n t s , a n d communities participate in and benefit from it. I f the changing economy has revealed a n y t h i n g, i t is that businesses, p e o p l e , a n d places cannot be successful by being what they once were. B u t w i t h the right focus and right policies, a l l three can create new ways to compete and prosper.



The Eight Building Blocks of the New Economy

The term "new economy" i s a shorthand way of saying that our economic structure is undergoing s u c h f u n d a m e n t a l change t h a t we are entering an entirely new era of economic relationships and economic g r o w t h . G l o b a l markets, t e c h n o l o g i c a l advances, o r g a n i z a t i o n a l innovations, c h a n g i n g competitive relationships--all these factors have altered our economy so much in the last decade or so that somebody " b e a m e d down" t o the millennium from 1985 would barely recognize what is going on today. S o fundamental is this change that many leading economic thinkers, s u c h as Massachusetts Institute of Te c h n o l o g y economist Lester Thurow, a r g u e that we have not seen this kind of "new economy" f o r more than a century--since the railroad and the telegraph created the same kind of quantum economic leap. T h e world h a s gotten much smaller very quickly. L o n g - s t a n d i n g barriers to getting things done have fallen away o v e r n i g h t . We a l t h has been created at an astonishing rate--and the long-term movement toward more w e a l t h creation shows little sign of slowing down. A s Thurow pointed out in Building Wealth, i n 1982 there w e r e 13 billionaires. To d a y there are almost 200.1



Arizona Policy Choices: The New Economy



But what are the building blocks of this new economy? To lay the foundation for a discussion of policy c h o i c e s, i t is important to review the key characteristics of the new economy. I n particular, t h e new economy h a s eight important characteristics t h a t all of us must bear in mind as we think about how to adjust. T h e s e are: 1 . Te c h n o l o g y is a given 2 . G l o b a l i s m is here to stay 3 . K n o w l e d g e builds wealth 4 . Pe o p l e are the most important raw material 5 . T h e r e 's no such thing as a smooth ride 6 . C o m p e t i t i o n is relentless 7 . A l l i a n c e s are the way to get things done 8 . P l a c e still matters--but for different reasons

1



L e s t e r C. T h u r o w, " B u i l d i n g Wealth," T h e Atlantic Monthly, J u n e 1999.



And the world goes round and round and round and round. And the world goes round and round.

Fr e d Ebb



New Economy Characteristics



7



Technology is a Given

Mention the new economy and most of us automatically think of technology. S p e c i f i c a l l y, w e think of ever-fancier and more sophisticated g a d g e t s : l a p t o p computers, c e l l phones, AT M m a c h i n e s , p a l m - s i z e d scheduling organizers. A n d w e also think of the fabled companies that manuf a c t u r e these products and their components-- I n t e l , M o t o r o l a , H e w l e t t Packard--as the foundation o f this new economy. B u t the new economy is not simply about the c r e a t i o n and sales of new technology. I t 's about h o w we use technology to alter every aspect of o u r life--and, e s p e c i a l l y, h o w all businesses have b e e n fundamentally changed by it. A s Harvard B u s i n e s s School professor Michael Porter says, " To d a y there is no such thing as a low-tech indust r y. T h e r e are only low-tech companies." I n other w o r d s , "a n y company in any industry," a s Porter puts i t , c a n be more productive and more competitive by u s i n g technology well. 2 Fo r example, a metal casting firm uses computera i d e d manufac t u r i n g technology to cut costs, s a v e energy, a n d reduce waste. A surgeon uses l a s e r s to perform more, b e t t e r, a n d cheaper operat i o n s . A business consultant uses a laptop and cellular phone to do more work and stay connected t o clients while on the road. A bookstore uses the I n t e r n e t to increase orders from customers around t h e world. O n e success story after another in the w o r l d of business teaches us that technology is n o t an end in itself, b u t the means to productivity g a i n s , r e v e n u e growth, a n d better connections. J u s t as important in the long run, h o w e v e r, i s t h e way that the Internet and information technology a l l ow us to revolutionize not only the way we manuf a c t u r e products, b u t also the way we connect them t o the rest of the world. I n c r e a s i n g l y, t h e value of t e c h n o l o g y -- a n d its ability to change our lives-- d e p e n d s on the way we use it to connect with one a n o t h e r . A s a n e x a m p l e , K e v i n K e l l y, W i r e d m a g a z i n e editor and author of "New Rules for the N e w Economy," p o i n t s out that the very first fax m a c h i n e built in 1965 "was worth nothing. Z e r o . " W h y ? There was no one to fax to. B u t , h e adds, " T h e second fax machine to roll off immediately m a d e the first one worth something. T h e r e was s o m e o n e to f a x t o . " 3 E v e r y s u b s e q u e n t f a x m a c h i n e made all the ones previously m a n u f a c t u r e d m o r e valuable. T h i s idea is called the "network e f f e c t " -- t h e value of a unit rises with the numb e r of units in use. M u l t i p l y the network effect of f a x machines by about a billion, a n d you begin to u n d e r s t a n d why the Internet is changing our e c o n o m y so fundamentally. I t is best, t h e n , t o not just think of "technology" i n abstract terms, b u t to consider simultaneously t e c h n o l o g y advances, t e c h n o l o g y users, a n d techn o l o g y benefits--all of which together are likely to d e f i n e coming economic eras as the Information A g e fades into distant memory.

2



M i c h a e l E. Po r t e r, " C l u s t e r s and the New Economics of Competition," H a r v a r d Business Review, N o v e m b e r / D e c e m b e r 1998. K e v i n Kelly, " N e w Rules for the New Economy," W i r e d , S e p t e m b e r 1997.



3



SMART THOUGHT

Nobel Prize-winning economist Robert Solow has said that we see computers everywhere except in the productivity statistics. T h a t productivity m e a s u r e s do not seem to show any impact from new computer and information technologies has been labeled the `productivity paradox.' Ye t t h e real reason for the productivity paradox may lie in the fact that the U.S. e c o n o m y is neither fully in the old mechanized economy nor yet i n the new digital economy. T h e animating force in the old economy was the desire to mechanize goods production and handling. A n d this e f f o r t has paid off handsomely. B u t now, m e c h a n i z a t i o n has run its course as the predominant driver of productivity. U n t i l recently, i t has p r o v e n difficult to introduce the kinds of productivity-enhancing technologies in many service industries that are used in manufacturing... M a k e no mistake, a p p l i c a t i o n of information technology does improve productivity. S i n c e the 1970s, p r o d u c t i v i t y has grown about 1.1 percent for sectors that have invested heavily in computers and approximately 0.35 percent for sectors that have invested less heavily. " E x p l a i n i n g the Productivity Paradox," T h e New Economy Index, N o v e m b e r 1998



8



Arizona Policy Choices: The New Economy



Arizona and Technology

? A r i z o n a ranked 11th among the 50 states-- b u t only sixth among ten western states 4-- a s a "digital economy," m e a n i n g the overall use o f technology in the state.5 ? A r i z o n a had the fourth highest number of comm e r c i a l Internet domain names (".com") per f i r m . A c c o r d i n g to the Progressive Policy I n s t i t u t e, t h e number of domain names indic a t e s the extent to which firms have created an i d e n t i t y for themselves on the World Wide Web, a n d thus its importance to them. ? A r i z o n a compared favorably t o other states ( 1 4 t h of 50) on the percentage of adults w i t h Internet access and in the utilization o f digital technologies by government ( 1 3 t h of 50).6



Arizona and High-Tech Jobs

W h i l e new technologies are being used in most sectors of the economy, t h e y are basic to some i n d u s t r i e s . H o w these "high-technology" i n d u s t r i e s a r e defined varies from study to study. I n America's H i g h - Te c h Economy: G r o w t h , D e v e l o p m e n t , a n d R i s k s for Metropolitan Areas p u b l i s h e d in July 1 9 9 9 , t h e Milken Institute, a nonpartisan economic r e s e a r c h institute, r e f e r r e d to14 sectors in manufact u r i n g and services as "high-tech." ( S e e Figure 1)



? I n Arizona, 7 . 8 percent of private-sector e m p l o y m e n t was in these 14 sectors i n 1996, c o m p a r e d to 6 . 2 percent nationally. A r i z o n a h a s a much higher concentration of employm e n t than the national average in four hight e c h sectors: ? e l e c t r o n i c components and accessories (mostly semiconductors in Arizona) ? a i r c r a f t and parts ? g u i d e d missiles, s p a c e vehicles, a n d parts ? s e a r c h , d e t e c t i o n , a n d navigation instruments a n d equipment ? I n the ten other high-tech sectors, A r i z o n a's e m p l o y m e n t share was the same as or less than t h e national average. T h u s , t h e state's hight e c h n o l o g y activities are concentrated in a f e w manufacturing sectors.



In 20 years, life will finally live up to our movie-driven fantasies. You' l talk to your watch l to get on the Internet. Your glasses will be able to recognize people's faces and tell you their names even when you

4



can t recall who those ' people are!

M i c h i o Kaku, V i s i o n s : H o w Science Will Revolutionize the 21st Century

5



We s t e r n states include: A r i z o n a , C a l i f o r n i a , C o l o r a d o, I d a h o , N e v a d a , N e w Mexico, O r e g o n , Te x a s , U t a h , a n d Washington. T h e State New Economy Index: B e n c h m a r k i n g Economic Tr a n s f o r m a t i o n in the States, P r o g r e s s i v e Policy Institute, Wa s h i n g t o n , D. C . J u l y 1999. I b i d.



6



Technology is a Given



9



? B e t w e e n 1991 and 1996, A r i z o n a employment i n the five high-tech service sectors jumped 5 5 percent, a n increase of m o r e than 18,500 j o b s . G a i n s were par t i c u l a r l y large in the computer and data processing services sector. A t the same time, w h i l e employment rose in six o f the nine high-tech manufacturing sectors, l a r g e employment declines in computer equipm e n t , c o m m u n i c a t i o n s equipment, a n d aircraft c a u s e d o v e r a l l high-tech manufac t u r i n g e m p l o y m e n t to fall 8 percent, a decrease of 6 , 5 0 0 jobs. ? A r i z o n a had the 12th highest proportion of h i g h - t e c h n o l o g y jobs in the nation (fifth in the W e s t ) according to the Progressive Policy I n s t i t u t e's (PPI) slightly different definition of h i g h - t e c h n o l o g y. P P I counted 5.3 percent of all A r i z o n a jobs in 1997 as high-tech, c o m p a r e d to 4 . 5 percent nationally.



? Fr o m the perspective of the gross state product ( G S P ? v a l u e added in production by the labor a n d property located in the state), t h e e l e c t r o n i c s and instruments sector led Arizona's g r o w t h b e t w e e n 1986 and 1997 7 w i t h a 15 percent annual average increase. A s seen in Fi g u r e 2, n o other major industry grew nearly a s fast. T h e annual average increase in total G S P was 4.6 percent.



Three Arizona Metros and High-Tech

? A c c o r d i n g to the Milken Institute 8, Tu c s o n r a n k e d 22nd and Phoenix 30th a m o n g 315 m e t r o p o l i t a n areas i n high-tech concentration ( t h e relative size of high-tech in the local economy compared to the U.S. a v e r a g e, b a s e d o n 1998 output data). F l a g s t a f f ranked 20th, t h a n k s primarily to one major employer. A l l t h re e metros placed in the top 25 in high-tech m a n u f a c t u r i n g concentration, b u t none were i n the top 25 in high-tech services. T h e Tucson a r e a had an above average concentration in f i v e of the 14 high-tech sec t o r s , b u t the P h o e n i x area was above average only in electronic components. ? B a s e d on t o t a l size of the high-tech industry, t h e Milken Institute ranked P h o e n i x 13th, t h e o n l y Arizona city in the top 50 nationally on t h i s measure.



HIGH-TECHNOLOGY: Electronics and Instruments* Aircraft and Space Vehicles* Communications OTHER: Balance of Manufacturing* Construction Transportation Wholesale Trade Retail Trade FIRE** Services -4 -2 0 2 4 6 8 10 12 14 16



Inflation-Adjusted Annual Average Percent Change United States Arizona



* Electronics and Instruments, and Aircraft and Space Vehicles, are manufacturing industries. They were subtracted from total manufacturing, leaving "Balance of Manufacturing." ** Finance, Insurance, and Real Estate S o u r c e : U.S. Department of Commerce, Bureau of the Economic Analysis.



? P h o e n i x ranked 12th and Tucson 40th w h e n b o t h size and concentration were considered. O n this composite measure, t h e top five metros -- S a n Jose, D a l l a s , L o s Angeles, B o s t o n , a n d S e a t t l e -- s c o r e d from two to nine times higher t h a n Phoenix.



7



A r i z o n a 's economy traditionally has been very cyclical. T h u s , g r o w t h rates are often far higher than the U.S. a v e r a g e during e c o n o m i c expansions, b u t during recessions, A r i z o n a suffers as m u c h as the rest of the nation. B e c a u s e of this cyclicality, t h e latest data in this report usually are compared to 1986, a similar p o i n t in the prior business cycle. T h e timing of the business cycle i n Arizona is almost the same as the national average. A m e r i c a's High-Tech Economy: G r o w t h , D e v e l o p m e n t , a n d Risks for Metropolitan Areas M i l k e n Institute, S a n t a Monica, C a l i f o r n i a , J u l y 1999.



8



10



Arizona Policy Choices: The New Economy



The Mixed Productivity Message

Te c h n o l o g y and productivity figure prominently in every discussion of the new economy. B u t the mess a g e about the two is not always clear. Fo r example: ? B e t w e e n the late 1940s and 1973, U . S . p r o d u c t i v i t y growth averaged 2.8 percent per year. S i n c e then, t h e annual average gain has been o n l y 1.1 percent. P r o d u c t i v i t y advances in manufacturing have averaged 2.8 percent per y e a r since 1973, m a r g i n a l l y above the average o f the prior 25 years. T h u s , t h e markedly lower overall gains result from stagnation in the services i n d u s t r i e s as a whole (though measurement d i f f i c u l t i e s may result in an understatement of growth). ? D u r i n g the past three years, p r o d u c t i v i t y g r o w t h in the U.S. h a s been relatively high, a v e r a g i n g close to 2 percent per year. H o w e v e r, i t is too early to state that productivity growth i s accelerating and will continue to do so. S t r o n g e r periods of growth occurred in the late 1 9 7 0 s and mid-1980s, o n l y to be followed by y e a r s of weak gains. A s the economy becomes m o r e and more digital, c h a n g e s may be seen m o r e broadly across the economy.

HIGH-TECHNOLOGY: Electronics* Instruments* Aircraft and Space Vehicles* Communications OTHER: Balance of Manufacturing* Construction Transportation Wholesale Trade Retail Trade FIRE** Services

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000



Dollar Value of GSP per Employee United States Arizona



* Electronics, Instruments, and Aircraft and Space Vehicles, are manufacturing industries. They were subtracted from total manufacturing, leaving "Balance of Manufacturing." ** Finance, Insurance, and Real Estate S o u r c e : U.S. Department of Commerce, Bureau of the Economic Analysis.



The great thing about technology is that it forces us to figure out the world from scratch. In so doing, it gives us a chance to rediscover what' really important. s So maybe the 21st century won' turn your world t upside down. Maybe it will turn that world right side up.

T i m Bernes-Lee Fa s t Company, S e p t e m b e r 1999



Productivity in Arizona' s High- ech Sectors T

? Pr o d u c t i v i t y (represented by GSP per employee) was higher in 1997 in each of the high-technology s e c t o r s than the overall Arizona figure of $ 4 8 , 5 0 0 . ( S e e Figure 3) ? GSP per employee in Arizona's electronics and instruments sector skyrocketed a n inflationa d j u s t e d 500 percent between 1986 and 1997, c o n s i d e r a b l y above the sizable national gain of 172 percent and far above the Arizona alli n d u s t r y figure of 12 percent. I n c r e a s e s in the a i r c r a f t and space vehicles sector and in the c o m m u n i c a t i o n s sector were close to the alli n d u s t r y average. Pr o d u c t i v i t y declines occurred i n construction, s e r v i c e s , a n d the less technol o g i c a l sectors of the manufacturing industry.



Technology is a Given



11



Globalism is Here to Stay

If there is one aspect of the new economy besides t e c h n o l o g y that most everyone understands, i t is g l o b a l i s m . Co m p a n i e s, c o n s u m e r s, a n d communities c a n now gain access to capital, g o o d s , i n f o r m a t i o n , a n d technology from around the world, o f t e n with t h e click of a mouse. J u s t as important, "g l o b a l i s m" f i n d s companies searching worldwide for new markets for products and services, n e w places to l o c a t e facilities, a n d new sources of workers. A n d like technology, g l o b a l i s m is a far more i n t e g r a l part of our economic life than we typically realize. For example, the globalization of the economy i s n' t just a matter of shipping goods around the w o r l d. S e r v i c e s are now a dominant factor in the w o r l d as well as the American economy, a n d the g l o b a l i z a t i o n of services is a major economic o p p o r t u n i t y.9 M o r e than one quarter of U.S. e x p o r t s a r e in the service sector. K n o w l e d g e - b a s e d services, a t which the United States excels, a r e especially i m p o r t a n t -- a n d the Internet is creating new opport u n i t i e s that were hard to imagine just a decade a g o. Fo r example, o n l i n e brokerages like E*TradeTM o r Charles Schwab are just as accessible from S i n g a p o r e or South Africa as they are from the U n i t e d States. E v e n companies that don't target world m a r k e t s still must contend with globalization. A s foreign producers become more efficient, t h e y c a n sell their products in the United States at a l o w e r price. A s U.S. c o n s u m e r s choose the cheaper i m p o r t s , U . S . c o m p a n i e s in the affected sector must e i t h e r adjust or close down. M a n y businesses, w o r k e r s , a n d policy makers s t i l l see open markets as a threat. T h e y point to c l o s e d plants, j o b losses, a n d widening wage i n e q u a l i t y as evidence for concern. T h e y see workers a r o u n d the world willing to take on skilled jobs, s u c h as software engineering, f o r far less pay than m i d d l e - c l a s s Americans. T h e r e is some truth to these anxieties, o f c o u r s e . Fr e e trade does threaten some established s e c t o r s of the American economy. B u t arguing a b o u t free trade versus protectionism in the n e w economy is fundamentally pointless. I n an economy based on the constant and instantan e o u s exchange of information without regard for geography, g l o b a l i s m is a deeply embedded c h a r a c t e r i s t i c . T h e basic question is not whether to a c c e p t globalism or not. T h e question, a s Claude S m a d j a of the World Economic Forum has pointed o u t , i s "how to manage the implications of the globalization process and turn it into a historical o p p o r t u n i t y for greater wealth creation and distribu t i o n , i n t o a tool for larger integration in the world e c o n o m i c system." 10

9



T h e U.S. h a s a positive trade balance in services ($83 billion in 1 9 9 8 ) . B u t , i m p o r t s of goods g r e a t l y exceed exports (by $247 billion in 1998). C l a u d e Smandja, " L i v i n g Dangerously," T i m e , Fe b r u a r y 22, 1 9 9 9 .



10



SMART THOUGHT

G l o b a l i z a t i o n is surely one of the most powerful and pervasive influences on the nation, b u s i n e s s e s , w o r k p l a c e s , c o m m u n i t i e s , a n d lives at the e n d of the twentieth century. T h e American century is coming to an end. T h e world century is beginning. A n d for American business and communities to prosper in a global economy, t h e standards to meet and the groups to join are the `world class.' ` Wo r l d class' i s a play on words s u g g e s t i n g both the need to meet the highest standards anywhere in order to compete and the growth of a social class defined by its ability t o command resources and operate beyond borders and across wide territories. R o s a b e t h Moss Kanter, Wo r l d Class: T h r i v i n g Locally in the Global Economy



12



Arizona Policy Choices: The New Economy



Arizona in the Global Market

? A r i z o n a experienced a huge increase in inflation-adjusted e x p o r t s b e t w e e n 1 9 9 1 and 1 9 9 7 . N e a r l y doubling in six years, e x p o r t s per e m p l o y e e rose from 22 percent below to 22 p e r c e n t above the national average (See Figure 4 ) . I n 1998, h o w e v e r, t h e Arizona figure fell 25 p e r c e n t , c o m p a r e d to a national drop of only f o u r percent, p u t t i n g Arizona again below the n a t i o n a l average. ? U n f o r t u n a t e l y, s t a t e trade data report only o n goods. E x p o r t s of services are not measured a t the state level, b u t roughly t w o - t h i r d s of A r i z o n a's goods exports come from just three s e c t o r s , e a c h of which generally is included in h i g h - te c h n o l o g y (See Figure 5). The electronics i n d u s t r y alone accounted for more than 40 percent of Arizona's exports in 1998. N a t i o n a l l y, o n l y a little more than one-third of exports of g o o d s come from these three sectors. ? I n 1992, 2 1 percent of Arizona manufacturing j o b s w e r e d e p e n d e n t on exports, n i n t h in the n a t i o n and fifth in the West, a c c o r d i n g to the P r o g r e s s i v e Policy Institute.

F I G U R E 4:



Va l u e of Exports per Employee in Arizona and the U.S. 1991-1998

7000 6000 5000 1998 Dollars 4000 3000 2000 1000 0 1991 1992 1993 1994 United States 1995 1996 Arizona 1997 1998



S o u r c e : U.S. Department of Commerce, International Trade Administration and U.S. Department of Labor, Bureau of Labor Statistics.



F I G U R E 5:



H i g h - T e c h n o l o g y Exports Share of Total Exports?Arizona

75



70



Percentage



65



60



55



50 1993 1994 1995 1996 1997 1998



Note: High-tech exports are defined as those from the electric and electronic equipment, transportation equipment, and scientific and measuring instruments sectors. S o u r c e : U.S. Department of Commerce, International Trade Administration.



Worldwide exports in 1998 were $6.5 trillion. The U.S. accounted for almost one-sixth of worldwide service exports, and one-eighth of worldwide exports of merchandise.

Clearinghouse on State International Policies, J u n e / J u l y 1999



Globalism is Here to Stay



13



Knowledge Builds Wealth

In a rapidly changing global economy, i d e a s matter more than ever before. To d a y wealth is c r e a t e d by research, b y discovery, a n d by innovat i o n . T h e New Economy Index, p u b l i s h e d by the P r o g r e s s i v e Policy Institute in Washington, D. C . , r e p o r t s that "research and technological innovat i o n account for more than two-thirds of per capita e c o n o m i c growth." 11 T h i s kind of success almost always begins with a n idea--whether it's the notion that Americans w i l l pay $2.50 for a fancy cup of coffee or that they w i l l buy used goods via an online auction house. A n e c o n o m y driven by knowledge, r e l a t i o n s h i p s , a n d services relies more on intellectual assets ( r e s e a r c h , i n t e l l e c t u a l proper t y, a n d customer relationships) and less on the physical assets ( b u i l d i n g s , t r a n s p o r t a t i o n , a n d machinery) which w e r e so important to the industrial age. S o m e of the hottest and most dynamic compan i e s and industries today have relatively few physical a s s e t s . I n s t e a d, t h e y draw their market value and b u s i n e s s base from "intangibles, " s u c h as great p r o d u c t design, i n t e l l e c t u a l property, m a r k e t i n s i g h t , m a n a g e m e n t know-how, a n d strong cust o m e r relationships. e B a y is a good example of how i n the new economy "market value accrues fastest f o r those who travel lightest." T h i s Internet auction c o m p a n y has almost no physical assets, b u t when it w e n t public last September, t h e market valued it at $ 1 . 8 8 billion--almost double the value of Sotheby's, t h e esteemed old-line auction house. 12 O f course, a good idea and marketing savvy a l o n e cannot assure success in the new economy. B e c a u s e of its reliance on technology, t h e new e c o n o m y also depends more than its predecessors o n research and development. Th e instant billionaires c r e a t e d by the new economy's stock offerings can o f t e n obscure the fact that these great economic l e a p s are grounded in technological innovation t h a t has taken years or even decades to ripen. W i r e d e d i t o r Kevin Kelly notes that Microsoft's profits were negligible for ten years, u n t i l personal c o m p u t i n g began to take off in the mid-1980s. Fe d e r a l Express and makers of fax machines experie n c e d a similar trajectory, a c c o r d i n g to Kelly: y e a r s o f marginal success, t h e n "surging skyward in a b l a s t " s o m e t i m e during the mid-1980s. A n d Kelly c h a r a c t e r i z e s the Internet as "a lonely cultural b a c k w a t e r for two decades" b e f o r e , a r o u n d 1991, t h e "global tally of hosts suddenly mushrooms, e x p o n e n t i a l l y arcing up to take over the world." 13 T h e subtle point of these examples is that the s e e d s fo r t o d a y 's n e w e c o n o m y we r e p l a n t e d decades ago. E x p e r t s warn that even as t h e new economy has emerged, i nv e s t m e n t in the fundamentals of innovation capacity--research and d e v e l o p m e n t -- h a s actually been flat or falling.14 I r o n i c a l l y, t h e Internet and the Web browser were b o t h conceived and developed with government d o l l a r s . B u t all federal investments in research s h r a n k at an average annual rate of 2.6 percent in c o n s t a n t dollars between 1987 and 1995.15

11



R o b e r t D. A t k i n s o n and Randolph H. C o u r t , T h e New Economy I n d e x : U n d e r s t a n d i n g America's Economic Transformation, P r o g r e s s i v e Policy Institute, Wa s h i n g t o n , D. C . N o v e m b e r 1998. R i c h a r d M. M e l n i c o f f, " T h e Economy: I t 's Later Than You Think," O u t l o o k , A n d e r s e n Consulting, J u n e 1999. W i r e d, o p . c i t . D a v i d Gergen, " N o time for complacency," U . S . N e w s & World R e p o r t , M a r c h 29, 1 9 9 9 . T h e New Economy Index, o p . c i t .



12



13 14



15



SMART THOUGHT

The new economy is generating benefits very unequally. W h i l e many people in the U.S. a r e now registering impressive gains, m a n y others are n o t . O n e in six central cities has an unemployment rate of 50 percent or more above the national average (of 4.5%), a c c o r d i n g to the U.S. D e p a r t m e n t of Housing and Urban Development. A n d, a s economist Frank Levy has explained, t h e past two decades of economic change have i n f l i c t e d a heavy blow on less-educated men and women. T h e i r paychecks have suffered the greatest impact, a n d now they will have to struggle f o r the educational resources to make sure that their children don't repeat the cycle. T h e r e f o r e, t h o s e on the wrong side of the educational d i v i d e will find it harder and harder to climb from low income to high income.



14



Arizona Policy Choices: The New Economy



Research and Development in Arizona

? P r i v a t e - s e c t o r R&D a s a p e r c e n t a g e of GSP w a s 1 . 3 percent in Arizona in 1995, l e s s than t h e n a t i o n a l average of 1.8 percent. A r i z o n a ra n ke d 23rd nationally a n d seventh in the West i n private R&D, a c c o r d i n g to the Progressive Po l i c y Institute. B u s i n e s s e s provide more than t w o - t h i r d s of all R&D funding. I n d u s t r y R&D e x p e n d i t u r e s have been rising as a percentage o f the gross domestic product. ( S e e Figure 6) T h e increase has been concentrated on develo p m e n t , w i t h little change in applied and basic r e s e a r c h spending. H o w e v e r, i n d u s t r y support o f basic and applied research at universities h a s increased. ? A r i z o n a ranked 15th (sixth in the West) in per c a p i t a federal R&D spending in 1995. T h e s t a t e 's rank was 19th ( f i f t h in the West) in per capita federal R&D expenditures at d o c t o r a t e - g r a n t i n g universities.16 As noted, f e d e r a l support for non-defense research and d e v e l o p m e n t as a percentage of GDP has been d r o p p i n g, e s p e c i a l l y since 1993. ( S e e Figure 6) T h e s e declines have mostly been in federal g o v e r n m e n t expenditures for basic and applied r e s e a r c h in the private sector. Fe d e r a l spending a t universities for basic and applied research h a s increased slightly.



2 1.8 1.6 1.4 Percentage of GDP* 1.2 1 0.8 0.6 0.4 0.2 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997



Total Industry *Gross domestic product S o u r c e : Progressive Policy Institute, The New Economy Index.



Total Federal



F I G U R E 7:



P a t e n t s Granted per Capita in Arizona and the U.S. 1986-1998

400



350



300 Number Per 100,000 Residents



250



200



150



100



Patents in Arizona

The number of patents issued is a common i n d i c a t o r o f new product innovation. A f t e r generally rising t h r o u g h the 1980s and 1990s, t h e per capita numb e r of patents issued in the state jumped in 1998. ? T h e number of patents per capita in Arizona h a s varied over time from 6 percent less to 12 p e r c e n t more than the national average s i n c e t h e mid-1980s. ( S e e Figure 7) In 1998, 1 , 5 1 4 p a t e n t s were granted in Arizona according to t h e O f f i c e fo r Pate n t a n d Tra d e m a r k I n f o r m a t i o n 's A p r i l 1 9 9 9 r e p o r t , U n i t e d States Patent Grants by State, C o u n t y , a n d M e t r o p o l i t a n Area.



50



0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 United States Arizona



S o u r c e : U.S. Patent and Trademark Office, Technology Assessment and Forecast Program, and U.S. Department of Commerce, Bureau of the Census.



Brawn earns little and brains much. For individuals here are three words of advice: Skills, skills, skills.The economic prospects of those without skills are bleak. What we now see falling real wages for those without skills is going to continue .

L e s t e r C. T h u r o w, A t l a n t i c Monthly, J u n e 1999



16



1 9 9 8 Development Report Card for the States, C o r p o r a t i o n f o r Enterprise Development, Wa s h i n g t o n , D. C . 1 9 9 8 .



Knowledge Builds Wealth



15



? B a s e d on patents-issued-per-worker, A r i z o n a r a n k e d 16th nationally in 1997. Fo u r western s t a t e s , C a l i f o r n i a , C o l o r a d o, I d a h o, a n d Utah, h a d higher figures, a s reported in T h e State N e w Economy Index.



M O D E L 1:



M a k i n g Arizona Prosper: A Model of the State's Economy

Global Economy

$



Ex



Ne



w



Export-Driven Industries



po rts



Arizona' Capacity for s Innovation

? A r i z o n a h a s an a b o v e average capacity for i n n o v a t i o n , r a n k i n g 18th nationally, a c c o r d i n g t o the Progressive Policy Institute. H o w e v e r, i t s r a n k in the West was eighth. To calculate the c a p a c i t y for innovation, t h e institute combined 1 ) the share of jobs in high-tech industries; 2 ) scientists and engineers as a share of the w o r k f o r c e ; 3 ) the number of patents relative to t h e size of the workforce; 4 ) industry R&D as a s h a r e of GSP; 5 ) venture capital invested as a s h a r e of GSP.



Low % of State's Employees



e.g. Semiconductors Aerospace Biomedical Copper Computer equipment Knowledge



High Value Added



$

Linkage Industries e.g. Business services Transportation Metals Distribution



Medium % of State's Employees



Products/ Services



Medium Value Added



$

e.g. Retail Hotels Real estate Construction



Population-Driven Industries



High % of State's Employees



Products/ Services



Low Value Added



A Model of Arizona' Economy s

M o d e l 1 illustrates why innovation is so important a n d how various industries' c o n t r i b u t i o n s to A r i z o n a's economy differ. E x p o r t - d r i v e n industries s e l l their products and services primarily to busin e s s e s outside of Arizona and individuals who are n o t state residents. T h e value added (measured as e a r n i n g s per employee) in this group of industries i s 45 percent above the state's total and marginally higher than the national average. E x p o r t activities represent about 12 percent of A r i z o n a employment and 17 percent of earnings. W i t h Arizona having a low concentration of all manufacturing industries except for three hight e c h sectors, e x p o r t - d r i v e n industries in Arizona a c c o u n t for about 20 percent less of the overall e c o n o m y than the national average.

Population Growth Tourists



L i n k a g e industries a r e those that are intermed i a t e between export-driven and population-driven i n d u s t r i e s . T h e value added here is equal to the a v e r a g e for all Arizona industries, b u t far below the n a t i o n a l average for such industries. T h i s group m a ke s up 26 percent of the overall state economy b a s e d on both employment and earnings, a s h a r e higher than that nationally. P o p u l a t i o n - d r i v e n industries i n c l u d e retail t r a d e, m o s t services, g o v e r n m e n t , c o n s t r u c t i o n , r e a l e s t a t e , a n d similar sectors. T h e s e industries' v a l u e a d d e d is below the all-industry average for the state. T h i s group's share of the state's e m p l o y m e n t is 62 percent, c o m p a r e d to 57 percent of earnings. Po p u l a t i o n - d r i ve n activities a r e somewhat more common in Arizona than the n a t i o n a l average.



16



Arizona Policy Choices: The New Economy



The "Soft" Side of High-Technology

K n o w l e d g e - b a s e d industries involve more than t e c h n o l o g y manufacturers and computer and electronic hardware. S o f t w a r e and communications s e r v i c e s , f i n a n c i a l services, i n n o v a t i o n services (the c o m b i n a t i o n of technical and professional fields s u c h as engineering services and management cons u l t i n g ) , a n d healthcare technology are also part of t h e knowledge package. Ta b l e 1 shows the concent r a t i o n of employment in five knowledge-industry c l u s t e r s across 14 states. A n employment concent r a t i o n above 1.1 means that the area's share of the s t a t e's jobs is at least 1.1 times higher than the n a t i o n a l average and indicates a potential competi t i v e strength for the state. A r i z o n a has just one a r e a of strength, c o m p u t e r / e l e c t r o n i c s . I n contrast, M i n n e s o t a 's computer/elec t r o n i c s , h e a l t h c a r e technology, a n d financial ser v i c e s clusters are concentrated at 1.82, 1 . 3 9 , a n d 1.13 respectively. T h u s , M i n n e s o t a has three industry clusters with e m p l o y m e n t concentrations at least 1.1 times a b o v e the national average. B a s e d on this analysis, A r i z o n a's links to the knowledge economy are not a s strong as in other leading technology states.

AZ CA CO FL IL MA MI MN NC NJ NY PA TX WA



TABLE 1:



Knowledge Industry Employment Concentrations

Software/ State Communication Services Computer/ Electronics Healthcare Technology Innovation Services Financial Services No. of Clusters above 1.1



0.87 1.32 1.84 0.93 0.89 1.51 0.73 0.90 0.67 1.61 0.99 0.80 1.12 1.04



1.96 2.15 1.90 0.75 0.94 2.14 0.24 1.82 0.66 0.64 0.76 0.65 1.28 0.89



0.59 1.50 1.22 0.96 1.02 1.97 0.78 1.39 0.99 2.25 1.12 1.07 0.71 0.76



0.97 1.21 1.39 0.91 1.01 1.63 1.06 0.65 0.59 1.13 1.02 1.24 1.11 1.09



0.79 0.93 0.99 0.96 1.23 1.67 0.74 1.13 0.58 1.39 1.85 1.10 0.85 0.83



1 4 4 0 1 5 0 3 0 4 2 2 3 0



S o u r c e : Index of the Massachusetts Innovation Economy, 1998.



Some of our best people are those who studied literature and the classics, and who later received business training . These people tend to understand the array of forces at work in organizations, and they approach decisions in a very well-rounded way My advice to young people is to . avoid the urge to focus too early Learn to appreciate . literature history and art That kind of knowledge will help . , you in your career and it will help you lead a richer life . ,

R a j a t Gupta, M c K i n s e y & Co.



Knowledge Builds Wealth



17



People Are the Most Important Raw Material

For generations, t h e basis of our industrial economy w a s raw materials. O u r previous technological a d v a n c e s permitted us to extract and manipulate t h e s e raw materials to create new products. A n d o u r economic system was organized around the g e o g r a p h y of these raw materials--where they w e r e found, w h e r e they were manipulated, a n d w h e r e the resulting products could be sold. T h i s system relied far more on brawn than on b r a i n s . O f course, r e s e a r c h e r s , e n t r e p r e n e u r s , a n d o t h e r "knowledge" w o r k e r s had to devise the syst e m s and the machines that made the industrial e c o n o m y possible. B u t most people were employed i n actually carrying these ideas out--in mines, o n a s s e m b l y lines, o n transportation systems. A n d b e c a u s e the business systems of the industrial age w e r e based on predictability and replicability, t h e a v e r a g e worker did not need a high level of skill to g e t the job done. Today, all that has changed. In the new economy, b r a w n is of secondary importance. N o w a d a y s o n l y about 20 percent of our workers spend their d a y making things. T h e other 80 percent work in other jobs that require them to move things, p r o c e s s or generate infor m a t i o n , e n g a g e in r e s e a r c h and design, o r provide services to people. E v e n workers engaged in manufac t u r i n g are b e c o m i n g "knowledge workers," b e c a u s e they must u n d e r s t a n d systems, t e c h n o l o g y, a n d sophisticated m a t t e r s of supplies and markets far more than their a s s e m b l y line predecessors. A l l this means that individuals are more i m p o r t a n t than ever before in business success -- e s p e c i a l l y people who can think creatively about s o l u t i o n s to the problems their companies face in a f a s t - c h a n g i n g global marketplace. M a n y companies a r e reorganizing themselves from top to bottom-- f l a t t e n i n g their hierarchies and reversing traditiona l business concepts to recognize that the brain of e v e r y single employee is important in making the c o m p a n y successful. I n this context, i t is easy to see how power in business shifts from hierarchical companies to i n d i v i d u a l employees who have the right skills and e d u c a t i o n . A n d it is also easy to see that companies a n d communities that can create or attract such w o r k e r s have a long-term competitive advantage. S o some people matter more in the new economy. U n f o r t u n a t e l y at the same time, t h e gap between t h e "knowledge haves" a n d the "knowledge haven o t s " i s growing. U s i n g Santa Clara County, C a l i f o r n i a (home to S i l i c o n Valley) as a surrogate for the new economy, t h e top ten occupations in terms of job growth fall m a i n l y into two categories: h i g h - w a g e, h i g h - t e c h k n o w l e d g e workers (e.g., c o m p u t e r and electrical e n g i n e e r s ) and low-wage, l o w - s k i l l e d ser v i c e workers (e.g., j a n i t o r s , w a i t e r s , r e c e p t i o n i s t s ) . T h i s g r o w t h trend in both high- and low-skilled jobs i s expected to continue, m e a n i n g, w i t h o u t interv e n t i o n , w e are at risk of becoming a two-tiered s o c i e t y : a n over class of highly compensated people v e r s u s an under class of dead-ended, d i s s a t i s f i e d p e o p l e with little chance of advancing.



SMART THOUGHT

W i n n i n g companies don't just hustle or out-muscle the competition. T h e y out-think t h e competition. B u s i n e s s today is about brains, n o t b r a w n . I t 's about how many ideas you generate, n o t how many factories you own. A n d ideas come in many shapes and sizes. E v e r y so often, a company will invent a breakthrough. B u t there's a day-to-day side to competing in ideas: C a n your marketing people in Seattle quickly m a k e use of a presentation that wowed a client in Savannah? Can a programmer with a problem in Los Angeles quickly tap the expertise of colleagues in Austin? Fa s t Company, S e p t e m b e r 1999



18



Arizona Policy Choices: The New Economy



Leaving Farms and Factories

T h e new economy is a high-tech, s e r v i c e s , a n d o f f i c e economy. A s seen in Figure 8, j o b s of these t y p e s have grown in importance throughout the U . S . w h i l e factory and farm jobs have declined as a s h a r e of total employment.

F I G U R E 8:



E m p l o y m e n t by Type of Job, United States 1959 and 1995

1959

O f f i c e and services 59.5%* Fa c t o r y and farm 39%

High-Skilled Services 9%



Arizona s Office Workers '

? A p p r ox i m a t e l y 1 8 . 5 percent of all Arizona jobs w e r e in offices in 1997, s l i g h t l y less than the n a t i o n a l average. A r i z o n a ranked 26th among t h e states a n d sixth in the West, a c c o r d i n g to t h e Progressive Policy Institute. A r i z o n a w a s s o m e w h a t b e l o w average in the share of managerial, p r o f e s s i o n a l , a n d technical jobs ( 2 4 . 5 % of all jobs). T h e state ranked 24th n a t i o n a l l y and fifth in the West on this measure i n T h e State New Economy Index.

Office 31% Low-Skilled Services 20%



Farm 5%



Factory 35%



1995

O f f i c e and services 79%* Fa c t o r y and farm 21.4%

High-Skilled Services 16%



Education and Arizona' s Workforce

? Th e educational attainment of Arizona's total w o r k i n g - a g e population is about average c o m p a r e d to the rest of the nation. H o w e v e r, e d u c a t i o n a l attainment is b e l o w average a m o n g young adults a n d above average in the p r e - r e t i r e m e n t and retirement age groups (See Fi g u r e 9). Fo r example as shown in Figure 9, A r i z o n a n s , a g e s 20 to 24, a r e less likely than t h a t age group nationally to have either a high s c h o o l diploma or a bachelor's degree. ? Fu r t h e r m o r e , t h e educational attainment of t h o s e growing up in Arizona is lower than t h a t amoung people growing up elsewhere. T h e state has a lower-than-desired high school g r a d u a t i o n rate of 74.3 percent, a s reported in 1 9 9 6 by the Arizona Department of Education. I n contrast, t h e educational attainment of t h o s e migrating to Arizona is relatively high. N o n - n a t i v e s comprise a larger proportion of o l d e r age groups, i n comparison to younger a g e groups. T h i s explains the upward trend in e d u c a t i o n a l attainment by age.

Office 41% Low-Skilled Services 22%



Farm 2%



Factory 19%



*Figures may not total 100% due to rounding. S o u r c e : Progressive Policy Institute, The New Economy Index.



F I G U R E 9:



E d u c a t i o n a l Attainment Difference Between A r i z o n a and the U.S. by Age Group, 1990

8 6 4 Percentage Points 2 0 -2 -4 -6 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 At Least a High School Diploma The line at zero represents the national average. At Least a Bachelor's Degree



S o u r c e : U.S. Department of Commerce, Bureau of the Census.



Computers don' have ideas ... t people do.

Fa s t Company, S e p t e m b e r 1999



People Are the Most Important Raw Material



19



? D u r i n g April 1999, A r i z o n a students in grades 2 - 1 1 took the Stanford 9 achievement test. A s r e p o r t e d in The Arizona Republic, s t u d e n t s s c o r e d higher on the test for the second year in a row in each of its three areas, r e a d i n g, m a t h , a n d language. H o w e v e r as shown in Table 2 a c h i e v e m e n t remains just average or below, e s p e c i a l l y in language, i n all areas in virtually a l l grades. ? A r i z o n a ranked 12th in the nation in 1990 18 ( b u t o n l y sixth among ten western states) on the P r o g r e s s i v e Policy Institute's weighted measure o f educational attainment, w h i c h includes the r e t i r e m e n t - a g e population.



? M a ny adults in Arizona are working to improve t h e i r skills. Fo r example, e n ro l l m e n t in adult basic e d u c a t i o n , w h i c h includes English as a Second L a n g u a g e instruction, g re w three times as fast as e n ro l l m e n t nationally between 1990 and 1995, a c c o r d i n g to the 1997 edition of the U.S. D e p a r t m e n t of Education's Digest of Education S t a t i s t i c s . Th i s rate remains strong even after a c c o u n t i n g for Arizona's population growth.



Education for Arizona s ' New Economy

F e w would question education's relationship to success in the new economy. A c c o r d i n g to F u t u r e w o r k , a new study from the U.S. D e p a r t m e n t o f Labor, 2 0 years ago the average college graduate e a r n e d 38 percent more than the average high s c h o o l graduate. N o w, t h e college graduate earns 7 1 percent more. R e a l weekly earnings for those w i t h less than a high school diploma fell from $462 i n 1979 to $337 in 1998. I n addition, t h e three fastest g r o w i n g occupations, a c c o r d i n g to the Bureau of L a b o r Statistics, a r e all computer-related and r e q u i r e at least a bachelor's degree. A n d, t h e y all h a v e much higher than average earnings. 19 M a n y look at the amount of public resources d e v o t e d to education as an indicator of a state's c o m m i t m e n t to a quality labor force. Fi g u r e 10 illust r a t e s spending between the school years 1985-86 a n d 1995-96, a n d shows the relationship between A r i z o n a 's spending and the U.S. a v e r a g e . O n e hundred percent represents the U.S. a v e r a g e . I n 1 9 8 5 - 8 6 for example, o n education Arizona spent a b o u t 89 percent as much as the U.S. a v e r a g e . ? Ar i zo n a's per pupil spending i n the elementary and secondary system was more than 20 percent b e l o w the national average i n 1995-96, n e a r l y 1 0 percentage points lower than in 1985-86. T h e 1995-96 inflation-adjusted figure was the l o w e s t in ten years. ? U s i n g a slightly different definition, A r i z o n a's 1 9 9 6 - 9 7 per pupil figure w a s 2 5 percent less t h a n t h e national average, r a n k i n g 4 7 t h n a t i o n a l l y a n d ninth in the West.

18



TABLE 2:



S t a n f o r d Achievement Test Results 1 9 9 8 - 1 9 9 9 School Year

P r e s e n t e d by Percentile*

Grade Reading Math Language



2 3 4 5 6 7 8 9 10 11



50 47 54 51 54 53 54 43 42 44



51 49 54 54 59 55 54 57 49 52



40 51 49 44 44 54 49 39 44 42



*The percentile compares Arizona students with the rest of the nation. For example, the 50th percentile means that Arizona students performed the same as 50 out of every 100 students who took the test nationally, or at the national average. S o u r c e : T h e Arizona Republic, w w w . a z c e n t r a l . c o m / n e w s / e d u c a t i o n / s c h o o l s c o r e s /



F I G U R E 10:



Per Pupil Spending, Primary and Secondary S c h o o l s in Arizona Compared to the U.S.

90 $6,000



87



$5,600 1995-96 Dollars



Percentage



84



$5,200



81



$4,800



78



$4,400



75 1985-86 1987 1988 1989 1990 1991 1992 1993 1994 1995 1995-96 Dollars Ratio to U.S.



$4,000



S o u r c e : National Center for Education Statistics, Digest of Education Statistics 1998.



D a t a from the 1990 U.S. C e n s u s are used here because of their reliability in comparison to more recent estimates. Fu t u r e w o r k : Tr e n d s and Challenges for Work in the 21st C e n t u r y, U . S . D e p a r t m e n t of Labor, S e p t e m b e r 1999.



19



20



Arizona Policy Choices: The New Economy



? S p e n d i n g per full-time-equivalent pupil i n A r i zo n a fo r higher education w a s m o r e than 2 0 percent below the national average i n the 1 9 9 5 - 9 6 school year.

Percentage of Work Force



F I G U R E 11:



S c i e n t i s t s and Engineers as a Percentage of the U.S. Workforce

5 4.5 4



Arizonans Working in Science and Technology

Te c h n o l o g i c a l innovation is cited again and again a s one of the key drivers of the new economy. A s t r o n g engineering and scientific workforce plays a n important part in creating new knowledge, p r o d u c t s , a n d services. S c i e n t i s t s and engineers h a v e been a growing percentage of the national w o r k f o r c e as the number of graduates has i n c r e a s e d, e s p e c i a l l y since 1993 (See Figure 11). S t i l l , t h e demand for such specialties is exceeding t h e supply. I n the United States, s c i e n c e and engineering m a j o r s have held nearly steady for the last 20 years a t about 32 to 33 percent, d o w n from nearly 36 percent in the late 1960s. S c i e n c e and engineering m a j o r s as a share of all graduate degrees have held s t e a d y since 1990 at 23 percent of master's degrees a n d 64 percent of doctoral degrees. T h e number of s c i e n c e and engineering graduate degrees awarded i s small compared to bachelor's degrees, w i t h the n u m b e r of enrolled graduate students dropping in 1 9 9 5 and 1996. ? A r i z o n a ranked 22nd a m o n g the states in 1 9 9 6 in the p e r capita number of science and e n g i n e e r i n g graduate students, a c c o r d i n g to t h e Corporation for Enterprise Development. I t s rank in the West was fifth. ? A r i z o n a does not compare favorably on the p e r c e n t a g e of scientists and engineers i n the w o r k f o r c e, r a n k i n g 3 0 t h nationally a n d eighth a m o n g ten western states in 1995, a c c o r d i n g to T h e State New Economy Index. ? A r i z o n a h a s a relatively high percentage of the nation's electronic technicians, b u t it h a s a l o w percentage of chemists, s p a c e scientists, a n d mathematical scientists ( S e e Figure 12).



3.5 3 2.5 2 1.5 1 0.5 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997



S o u r c e : Progressive Policy Institute, The New Economy Index.



F I G U R E 12:



High-Technology Employment A r i z o n a Share of U.S. Employment by Occupation, 1997

Electronic Technicians Electronic Engineers Physicists, Astronomers ALL OCCUPATIONS Computer Engineers Computer Programmers Aeronautical Engineers Biological Scientists Chemical Engineers Chemists Space Scientists Mathematical Scientists 0 0.5 1 1.5 2 2.5 3



Arizona Percentage of U.S. Employment S o u r c e : U.S. Department of Labor, Bureau of Labor.



Fo r example in 1997, t h e percentages refer to b e t w e e n 250,000 and 500,000 U.S. w o r k e r s e m p l o y e d nationally in each of the categories o f electronic technicians, e l e c t r o n i c engineers, computer engineers, and computer programmers. E m p l o y m e n t in each of those categories in A r i z o n a ranged from 4,000-8,000. I n contrast, l e s s than 10,000 were employed nationally, a n d f e w e r than 200 in Arizona, i n each of the categories of physicist and astronomer, s p a c e s c i e n t i s t , a n d mathematical scientist.



People Are the Most Important Raw Material



21



There' No Such Thing as s a Smooth Ride

In the new economy, c o m p e t i t i o n is constant, c h a n g e is rapid, a n d survival depends on resilience. I n other words, t u r b u l e n c e is the norm. T h e r e are n o times of stability. E v e n in good times, t h e r e is g o i n g to be a lot of "out with the old, i n with the n e w. " To thrive, i n other words, c o m p a n i e s will need t o be in a never-ending state of transformation, p e r p e t u a l l y creating fundamental change. L i k e globalization, c o n s t a n t turbulence creates a sense of uncertainty and increases economic risks f a c i n g workers, c o m p a n i e s , a n d even industries. Ye t i t is a basic tenet of capitalism that such turbulence i s good. A n d as the new economy has emerged, t h i s r u l e has proven to be true once again. Ye a r s ago, e c o n o m i s t Joseph Schumpeter w a r n e d that progress requires the destruction of t h e old as well as the creation of the new. H e t e r m e d this process "creative destruction." W i r e d e d i t o r Kevin Kelly s i m p l y calls it "churn." " C h u r n t o p p l e s the incumbent and creates a platform ideal f o r more innovation and birth," 20 K e l l y says. T h a t is, a n economy that embraces dynamism is one in which I n t e l and Microsoft (and the personal computer) c a n topple IBM (and the mainframe). I t is no accident -- a s Lester Thurow has pointed out--that of the 25 l a r g e s t companies in America in 1960, o n l y six r e m a i n e d on that elite list in 1997.21 I n the U.S., n e w t e c h n o l o g i e s , n e w organizations, n e w processes, a n d new jobs constantly replace old ones. S t a n f o r d University economist Paul Romer sees t h i s kind of change and growth linked together in t h e new economy in much the same way that risk and re t u r n are linked in the stock market. Le a n - a n d - m e a n f i r m s , s t r o n g competition, a n d dynamic markets b e g e t high growth and high incomes, b u t low job s e c u r i t y. C o nv e r s e l y, l a r g e organizations with stable e m p l o y m e n t , s t a b l e markets, a n d stable competition b e g e t higher job security, b u t lower incomes and f e w e r consumer choices. T h e basic point is that although some suffer f r o m t h i s kind of churning, m a n y more benefit. To d a y 's unemployment rate of 4.2 percent is the l o w e s t in 29 years. 22 A n d the upsurge in jobs comes m o s t l y from new emerging companies, n o t Fortune 5 0 0 ones. E m p l o y m e n t in this latter group actually d e c l i n e d 3.6 percent annually between 1991 and 1 9 9 5 . 23 E v e n with many jobs in manufacturing and o f f i c e s being displaced by technology, m o r e jobs a r e being created than the underlying technology i s destroying. O f t e n , t h e new jobs are also better j o b s . Fo r example, d e s p i t e the loss of 234,000 highp a y i n g manufacturing jobs in 1998, r o u g h l y 1.5 million high-paying service jobs were created in i n d u s t r i e s such as insurance, t e l e c o m m u n i c a t i o n s , a n d computer services. 24

20 21 22 23 24



W i r e d, o p . c i t . " B u i l d i n g Wealth," o p . c i t . T h e New Economy Index, o p . c i t . I b i d. J o h n Berlau, " M o r e than just flipping burgers," B u s i n e s s Daily, M a r c h 23,1999.



SMART THOUGHT

Memo to the folks in Silicon Valley: Yo u will have good jobs for 20 more years. B y 2020, t h o u g h , c o m p u t e r chips will be cheaper than bubbleg u m wrappers, a n d PCs will be in museums. A l r e a d y, w e can put tens of millions of transistors in a piece of silicon the size of a fingernail. B u t t h e trend toward smaller and smaller transistors can't go on forever. S o o n we'll start etching on molecules. A whole new generation of computers w i l l emerge: D N A computers, p r o t e i n computers, q u a n t u m - d o t computers. S i l i c o n Valley will become the Rust Belt of the new economy. M i c h i o Kaku, V i s i o n s : H o w Science Will Revolutionize the 21st Century



22



Arizona Policy Choices: The New Economy



Job Growth and Churn

T h e Progressive Policy Institute reports that g a z e l l e s -- c o m p a n i e s with annual sales revenue g r o w t h of 20 percent or more for four straight y e a r s -- w e r e responsible for 70 percent of the n e t new jobs created in the U.S. b e t w e e n 1993 a n d 1996, e v e n though they accounted for only f i v e percent of all companies. ? A r i z o n a ranked third in 1997 in gazelle s h a r e of total employment ( 1 7 . 7 % ) . F i v e of t h e top six states nationally were in the West, i n c l u d i n g Nevada, O r e g o n , U t a h , a n d California, i n addition to Arizona. ? T h e Progressive Policy Institute created a measure of "job churn" b y adding the number o f business starts and failures and dividing by t h e number of companies in each state. A t 3.3 p e r c e n t , A r i z o n a ranked fifth in the U.S., w i t h h i g h e r figures recorded in three of Arizona's b o r d e r i n g states. Fu r t h e r, i n comparison to the U . S . i n 1997 Arizona had more business starts than the national norm. But, business failures also w e r e just slightly above the national average. ? A v e r a g e establishment size (in number of e m p l o y e e s ) has climbed more in Arizona than t h e national average in recent years. T h e perc e n t a g e of very small establishments (less than t e n employees) has decreased in Arizona, w i t h a rise in the percentage of firms with 10 to 49 employees. T h u s , w h i l e A r i z o n a once had a relatively large number of ver y small businesses, t h i s no longer is the case.

F I G U R E 13:



Contract and Temporary Workers in Arizona and the U.S. 1988-1996

4 3.5 Percentage of Total Employment 3 2.5 2 1.5 1 0.5 0 1988 1989 1990 1991 1992 1993 Arizona 1994 1995 1996



United States



S o u r c e : U.S. Department of Commerce, Bureau of Economic Analysis.



Business executives, like military generals, are often chided for always being well-prepared to fight the last war. In the face of new economic phenomena and trampled traditions, it will not work to redouble your efforts, essentially aiming to do all the same things you' e v always done, but better.

R i c h a r d Meinicoff A n d e r s e n Consulting eCommerce Line of Business



A Growing Contingent Workforce in Arizona

Another indicator of the new economy's turbulence is the growing number of workers who previously held permanent positions in a company, but now work on a c o n t r a c t or temporary basis, w i t h their employer b e i n g the help-supply agency (See Figure 13). I n 1 9 9 6 , n e a r l y four percent of Arizona's workers were contract or temporary workers. In less than a decade, this percentage had more than doubled.



There's No Such Thing as a Smooth Ride



23



Competition is Relentless

In America's "golden era" a f t e r World War II, o u r n a t i o n's economic success depended partly on the f a c t that huge sectors of our economy, s u c h as aeros p a c e , p u b l i c utilities, a n d transportation, w e r e e s s e n t i a l l y sheltered from true competition. B u t t o d a y there is no immunity from competition. G l o b a l i z a t i o n , d e r e g u l a t i o n , a n d information t e c h n o l o g y have stripped away economic security f r o m virtually every sector of the economy. B y reducing the "barriers to entry" i n most business sectors, t h e new economy h a s completely a l t e r e d the very nature of competition. I n the p a s t , m o s t American businesses faced a limited n u m b e r of competitors who were easily identified w i t h i n their own industries. To d a y, m o s t businesses a r e assaulted by a virtually limitless number of comp e t i t o r s coming at them from all over the world. T h e numbers alone are striking. I n 1965, f o r e x a m p l e , I B M had 2,500 competitors in all its markets; b y 1992, i t faced 50,000 competitors.25 M o r e significant than the numbers, h o w e v e r, i s the u n p r e d i c t a b i l i t y of competition. T h e potent combin a t i o n of globalization, te c h n o l o g y, a n d deregulation h a s eliminated all kinds of barriers to competition -- f i n a n c i a l , g e o g r a p h i c a l , l e g a l . I n s u r a n c e agents, f o r example, o n c e viewed competition as a local m a t t e r. T h e y battled with each other for local clients. To d a y, a local insurance agent must compete with foreign companies, banks, and agent-less competitors t h a t do business entirely by virtual means. Fo r most businesses, t h e newest and most a g g r e s s i v e competitors are usually companies t h a t weren't even in the same business just a f e w years ago. Te l e p h o n e companies, I n t e r n e t c o m p a n i e s , a n d entertainment companies compete h e a d to head for the emerging telecommunications m a r k e t -- o f te n without really knowing what products o r services they will be selling if they win the comp e t i t i o n . A n d in the world of e-commerce, b u s i n e s s g i a n t s are often attacked and even toppled by s t a r t - u p firms whose success simply couldn't be a n t i c i p a t e d . I n plotting out its strategy for the 1 9 9 0 s , d i d Hallmark foresee the advent of digital g r e e t i n g cards from Blue Mountain Arts.com? Did B a r n e s & Noble envision Amazon.com? T h e s e companies become competitive not only b y e-commerce, b u t also by using the Internet to f i n d their customers. Fi r m s now have access to vast a m o u n t s of information about markets, p r o d u c t s , demographics, tastes, and ideas which makes it easier a n d quicker for more of them to enter new markets. J u s t - i n - t i m e information also allows firms to tailor p r o d u c t s and services they deliver to suit individual c u s t o m e r s ' i n t e r e s t s . T h e same technology gives m o r e consumers the ability to obtain a great deal of i n fo r m a t i o n about the benefits and prices of various p r o d u c t s and services. B u y e r s now have enormous p o w e r and buying options that they didn't have b e f o r e because they can use their new-found information to put pressure on firms to lower costs o r boost quality--making it that much easier for t h e m to be fickle. I n competing with each other, c o m p a n i e s i n c r e a s i n g l y find they are racing the clock and e v e n competing with themselves. To stay ahead, m o r e and more companies are setting internal standards or benchmarks that force them to be p r o a c t i v e in evolving technology and shortening t i m e to market. F o r example, N e t s c a p e has a standard of introducing a new product every six m o n t h s . S t a r b u c k s opens 300 new stores a year. 3 M d i c t a t e s that 25% of its revenues every year will c o m e from new products, a n d Intel adds a new fabrication facility to its operations approximately e v e r y nine months. 26

25 26



T h e New Economy Index, o p . c i t . K a t h l e e n M. E i s e n h a r d t and Shona L. B r o w n , " T i m e Pacing: C o m p e t i n g in Markets That Won't Stand Still," H a r v a r d Business R e v i e w, M a r c h / A p r i l 1998.



SMART THOUGHT

It's a fact. I n most industries, n e w c o m e r s are creating much of the new wealth. C i s c o, A m a z o n . c o m , S t a r b u c k s , C h a r l e s Schwab, A m e r i c a Online, T h e Gap, M C I WorldCom, D e l l , S o u t h w e s t Airlines, S A P ? t h e s e companies didn't even exist a generation ago. Ye t by May 1999, a s Gary Hamel r e p o r t e d in his Harvard Business Review a r t i c l e "Bringing Silicon Valley Inside," t h e i r combined market capitalization had grown to nearly $ 8 0 0 billion. A n d they are hardly unique. I n industry after industry, u n o r t h o d o x start ups are challenging complacent incumbents.



24



Arizona Policy Choices: The New Economy



Challenges to Continue in Coming Years

W i l l i a m F. M i l l e r is a legendar y figure in the d e v e l o p m e n t of Silicon Valley, a n d remains a leading b u s i n e s s thinker. H i s description of competitive c h a l l e n g e s in the next decade (See Figure 14) s h o w s that the new economy will not be any easier t o master in the next ten years.

F I G U R E 14:



Competitive Challenges from 1997 to 2010

Deregulation New Modes of Competition Niche Competition Industry Consolidation



Competing for New Economy Investment

Ve n t u re capital is particularly important to new econo my businesses, s p u r r i n g growth and supporting co m p e t i t i ve n e s s at critical stages. N a t i o n a l l y, ve n t u re c a p i t a l investments totaled more than $13 billion in 1 9 9 7 and are growing. Fi g u r e 15 shows where the i nve s t m e n t s went in the second quarter of 1999. ? I n 1997, Ar i zo n a r a n k e d 15th in venture capital i nve s t m e n t s per worker a n d 13th in venture c a p i t a l invested as a percentage of GSP. 27 O n b o t h measures, A r i z o n a ranked fifth in the West. ? T h e 1999 Arizona Venture Capital Impact S t u d y, p r e p a r e d by The Zermatt Group on b e h a l f of a coalition of Arizona universities, p u b l i c agencies, a n d leading businesses estimated that v e n t u r e capitalists invested a b o u t $122.2 million in the state in 1997. I n the s e c o n d quarter of 1999 a l o n e , t h e P r i c e w a t e r h o u s e C o o p e r s Money Tree Survey r e p o r t e d that $ 6 1 million in venture capital w a s invested in Arizona firms. ? I n i t i a l public offerings (IPOs) are another source o f funds for growing companies. I n 1997, A r i z o n a r a n k e d 23rd ( s e v e n t h in the West) in t h e value of IPOs a s a percentage of GSP, b u t t h e figure was well below the national average, a c c o r d i n g to the Progressive Policy Institute.



New Technology International Competition Human Resources Challenges Customer Demands 0% 20% 40% 2010 S o u r c e : William F. Miller, Stanford Computer Industry Project. 60% 1997 80% 100%



F I G U R E 15:



Venture Capital Investments by Industry, U.S.

Industrial Pharmaceuticals Semiconductor/Equipment Electronics/Instruments Computers & Peripherals Biotechnology Medical Instruments/Devices Healthcare Distribution/Retail Consumer Business Services Software/Information Communications 0 5 10 15 20 25 30 35 40



Percent of Total Investment, Second Quarter 1999



S o u r c e : PricewaterhouseCoopers MoneyTree Survey, September 14, 1999.



F I G U R E 16:



Business Establishment Trends in Arizona and the U.S. C o m p a r i s o n of 1995 to 1994

Net Change Births



The Dynamics of Business

Fi g u r e 16 illustrates the continual changes in busin e s s establishments (and thus in employment) in A r i z o n a and the U.S. d u e to competition and other f a c t o r s . 28 Ta k e n as a whole, t h e numbers underscore t h e changes that happen from year to year.

27 28



Deaths Net Expansions



Expansions



Contractions 0 5 10 15 20 25 30 35



Number in 1995 as a Percent of 1994 Figure United States Arizona



T h e State New Economy Index, o p . c i t . A n establishment is a separate physical location at which business i s conducted. S o m e companies, s u c h as grocery chains, h a v e many establishments.



S o u r c e : U.S. Department of Commerce, Bureau of the Census.



Competition is Relentless



25



Alliances Are the Way to Get Things Done

Maybe the most fundamental shift in business t h i n k i n g -- a logical one, g i v e n the significance of n e t w o r k i n g -- i s the shift away from self-reliance t o w a r d a new model that places more value on a l l i a n c e s . A s Michael Porter says, "e x t e n s i v e vertical i n t e g r a t i o n may once have been appropriate, b u t c o m p a n i e s today must forge close linkages with b u y e r s , s u p p l i e r s , a n d other institutions." 29 A m i d the melee of new economy transformat i o n s , c o m p a n i e s and even communities a r e findi n g they cannot isolate themselves b y continuing t o count on their size, r e p u t a t i o n , a n d integration t o win in the global marketplace. A t the same time, t h e rapid advances in information technology, k n o w l e d g e work, a n d the "network economy" m a k e s u c h alliances much more likely to succeed than in t h e past. A n d alliances permit companies to stay " l e a n and mean" a n d respond quickly to new o p p o r t u n i t i e s , w h i l e maintaining access to the s k i l l s and expertise they need. H e r e, t h e computer industry provides the best e x a m p l e . A s analysts Jon Hagel and Marc Singer p o i n t out, t w e n t y years ago the computer industry w a s dominated by huge companies like IBM, B u r r o u g h s , a n d Digital Equipment. A l l were thought t o be unassailable because of their size, r e p u t a t i o n , a n d vertical integration. B y the 1990s, t h e behemoths h a d been flattened by the likes of Apple, I n t e l , M i c r o s o f t , S u n , a n d Adobe. N o n e of these companies c o u l d match the old giants for size and vertical integration. B u t they were brilliant at organizing t h e m s e l v e s for speed, c r e a t i v i t y, f l e x i b i l i t y, a n d e s p e c i a l l y networking. To g e t h e r the "new" c o m p u t e r c o m p a n i e s created "tightly coordinated webs of s p e c i a l i z e d companies" t h a t together could quickly p r o d u c e complementary products and services c a p a b l e of challenging a big company's vertical p a c k a g e . I t would be impossible to imagine, f o r e x a m p l e , e i t h e r Microsoft or Intel succeeding w i t h o u t the other.30 T h e big companies which have stayed on top h a v e done so by splitting apart, p a r i n g down, a n d f i n d i n g their own alliances--in other words, b y acting as if they were small and nimble. S o m e high-tech giants, l i k e Hewlett-Packard for example, a r e casting off activities/products that are irrelevant t o the company's main business so that executives c a n focus their energies full time on the company's c o r e competencies. T h u s , t h e y now rely more on o u t s i d e companies to perform important auxiliary o r complementary functions for them. B u t the whole idea of partnerships extends f a r beyond the idea of simply pairing up with s i m i l a r or complementary companies. M a n y c o m p a n i e s collaborate with universities in order t o foster new ideas and new technology for businesses. O t h e r s ally with suppliers in a way that c a n help enhance product and service value, u n c l o g b o t t l e n e c k s , a n d reduce errors in supply chains. S t i l l o t h e r s foster close relationships with customers in order to provide early insight into shifts in d e m a n d and needs. A n d appropriate to the new economy, n o a l l i a n c e is permanent. T h e best matches are fluid a n d elastic, c h a n g i n g as new opportunities and p r e s s u r e s arise. T h e secret to success, e x p e r t s say, i s not just to align once but to do so over and o v e r again to gain competitive advantage. I n d e e d, y e s t e r d a y 's competitor may be the best c h o i c e for today's partner.

29 30



" C l u s t e r s and the New Economics of Competition," o p . c i t . J o h n Hagel and Marc Singer, " U n b u n d l i n g the Corporation," H a r v a r d Business Review, M a r c h / A p r i l 1999.



SMART THOUGHT

Today many large corporations that became prominent in the "old economy" a r e also forming new alliances for growth and competitive a d v a n t a g e s . T h e headlines of the business press tell the story. A l l i e d S i g n a l merges with Honeywell, Wo r l d C o m buys MCI, C o m p a q buys Digital. A n d then, t h e r e are the mergers to create "monster" f i n a n c i a l institutions. I s there a scenario in which the new century is about "bigness," h u g e c o m p a n i e s dominating every industry, l i m i t i n g consumers' c h o i c e s to a few banks, c a r makers, a n d pizza makers? MIT's Lester Thurow suggests t h a t , "s o o n e r or later, f i r m s will either be global players or they will be niche players."



26



Arizona Policy Choices: The New Economy



Players, Partners and Relationships

Yesterday's Competitor/ Today' Partner s

T h e reality of shifting alliances and relationships is s h o w n in the illustration of the connections among a who's who in technology. T h i s diagram first a p p e a r e d in the October 26, 1 9 9 8 issue of Fortune m a g a z i n e . ( S e e The Partnerships)

Marimba Active Software Pivotal Software Netscape Calico Epiphany Obix Verisign Conentric Network Intuit Macromedia



T h e Partnerships

Sun Microsystems Intraware Onsale Amazon.com



@Home



America Online Sportsline USA



Excite



Preview Travel



Collaboration Among Firms

T h e Progressive Policy Institute's N e w Economy I n d e x p r o v i d e s another indicator that alliances are o n the rise. A s Figure 17 shows, t h e number of techn o l o g y alliances formed in the United States annua l l y has grown dramatically during this decade.

Number of Alliances Founded Per Year 250 225



Java Companies



Internet Companies



S o u r c e : Fortune, October 26, 1998.



F I G U R E 17:



Industry Technology Alliances ? United States



Clusters Foster Collaboration

I n 1990, M i c h a e l Porter brought the idea of industry clusters into the limelight with his book C o m p e t i t i v e Advantages of Nations. H i s work s h o w e d : 1 ) Regions can only be as competitive as t h e i r industries; 2 ) In terms of competition, f i r m s f i n d it advantageous to be close to their suppliers, c u s t o m e r s , a n d other firms that produce similar or r e l a t e d goods and services. T h i s type of location, w h e n it is supported by interaction and networks, g i v e s firms the ability to transact business more cheaply and easily, r e s o l v e problems more e f f i c i e n t l y, g e n e r a t e a pool of specialized workers a n d technology, a n d learn earlier and first-hand a b o u t new and best practices. C o m p a n i e s that are "c l u s t e r e d " a r e more likely to form alliances a n d networks among suppliers, c o m p e t i t o r s , u n i v e r s i t i e s , a n d research institutions.



200 175 150 125 100 75 50 25 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



S o u r c e : Progressive Policy Institute New Economy Index, 1998.



In the new world of business, if you want to compete aggressively , you have to collaborate generously.

Fast Company, S e p t e m b e r, 1 9 9 9



Alliances Are the Way to Get Things Done



27



C L U S T E R MAP 1:



Arizona and Clusters

A r i z o n a was one of the first states in the nation to focus on clusters as the centerpiece of its e c o n o m i c development strategy. I n d u s t r y clusters

Marketing Services



S o f t w a r e Development and Support

E x p o r tOriented Sectors



Software Publishers



Software Integrators



Software Services



Suppor t Sectors



Interface Designers



Content Providers



Contract Programmers



a r e best understood as concentrations in one place o f competing, c o m p l e m e n t a r y, a n d interdependent f i r m s and industries that create wealth, e x p o r t , a n d s h a r e needs for common talent, t e c h n o l o g y, a n d o t h e r resources. Ty p i c a l l y, c l u s t e r s cross over multiple j u r i s d i c t i o n s . C l u s t e r Map 1 shows the three key c o m p o n e n t s of a cluster, u s i n g the emerging softw a r e cluster as an example.



Community Infrastructure



Education, Training



Professional Associations



Information Infrastructure



Internet Service Providers



TABLE 3:



A r i z o n a Cluster Organizations and Activities

Co-build foundation Co-purchase



O r i g i n a l l y, e i g h t clusters were designated in A r i zo n a . Fo u r more clusters were identified as emergi n g in importance. A variety of cluster organizations t h r o u g h o u t the state encourage firms to interact and co n d u c t business in addition to developing a shared v i s i o n and learning from each other. Ta b l e 3 highlights Arizona's clusters and their a c t i v i t i e s . A t one end of the spectrum ("co-inform"), i n f o r m a t i o n sharing is the only activity. I n the middle of the range of cluster activities, t h e r e are s a l e s and purchasing relationships and collective m a r k e t i n g projects. A t the spectrum's most develo p e d end, m o r e complex types of relationships e x i s t f o r joint research and development efforts. Fi r m s work together to build specialized foundat i o n s important to the cluster as a whole ("co-build f o u n d a t i o n" ) . Fo r example recently, m e m b e r s of the h i g h - t e c h cluster successfully worked to change the A r i zo n a Board of Regents' t e c h n o l o g y transfer policy. N o cluster is doing just one activity, b u t information s h a r i n g is the most common.



Cluster



Affiliate Organization



High-technology (aerospace & information)* Food, fiber, natural products Environmental technology Minerals & mining Software Tourism Bioindustry Optics Transportation Business services Senior living



Arizona High-Technology Industry Cluster Agri-Business Council of Arizona Environmental Technology Industry Cluster (ETIC) Arizona Mining Association Arizona Software Association/ Center for Software Excellence Arizona Office of Tourism Arizona Bio Industry Cluster Arizona Optic Industry Association, Inc. None Inactive Office in Arizona Department of Commerce



xxx xxx xxx x xxx xxx xxx xxx x x



Co-produce



Co-market



Co-inform



Co-learn



x



xx x x



x xx



xxx



x



* Aerospace and information merged into one cluster for organizational purposes. S o u r c e : M o r r i s o n Institute for Public Policy, J u n e 1998.



28



Arizona Policy Choices: The New Economy



David doesn't always beat Goliath. The key to success is not so much size as it is speed and flexibility. Survival in this Darwinian world is about the "fast beating the slow" s not the small



beating the big



ays the CFO of Cisco Systems, a company that sells about 80% of the networking gear that powers the Internet.

Fa s t Company, S e p t e m b e r 1999



B Place Still Matters ut for Different Reasons

Because the world is being joined into a single economic unit, w h e r e goods, m o n e y, t e c h n o l o g i e s , a n d ideas can be quickly moved from place to p l a c e, l o g i c holds that place and proximity should d i m i n i s h in importance. Ye t today, l o c a l factors a c t u a l l y matter more, n o t less. " I f location matters less, w h y, t h e n , i s it true t h a t the odds of finding a world-class mutual-fund c o m p a n y in Boston are much higher than in most a n y other place?" a s k s Harvard's Michael Porter. " W h y could the same be said of textile-related comp a n i e s in North Carolina and South Carolina, o f h i g h - p e r f o r m a n c e auto companies in southern G e r m a n y, o r of fashion shoe companies in northern I t a l y ? " H i s answer: s u c c e s s f u l firms are frequently c o n c e n t r a t e d in particular cities and states within a n a t i o n because "something about these locations p r o v i d e a fertile environment for firms in these particular industries." 31 C h o o s i n g the best place to do business nowadays requires much more than just observing w h i c h communities have the best geography and t h e cheapest costs. I n the network economy, c o m p a n i e s must locate the brains of their business i n a location that will provide them with a critical m a s s of competitors, s u p p l i e r s , a n d customers; a s t r o n g talent pool, u n i q u e institutions; a n d d e s i r a b l e quality of life. K n o w i n g how to create c o m p e t i t i v e advantage out of these local factors i s becoming strategically important for both c o m p a n i e s and communities. Pa r t of this competitive advantage lies strictly i n business-oriented networks. F o r example, i n r e g i o n s where specific industries concentrate, a competitive advantage can emerge if universities, t r a d e associations, a n d similar institutions develop t o serve those industries. P r o x i m i t y to competitors, s u p p l i e r s, a n d customers can also provide companies w i t h special access, c l o s e r relationships, b e t t e r i n f o r m a t i o n , p o w e r f u l incentives, a n d other advant a g e s their rivals elsewhere may not have. 32 A n d part of the competitive advantage lies in p e r s o n a l preferences. I t 's much easier for companies t o attract and keep top-notch talent in communities w i t h a high quality of life because highly-sought a f t e r workers will choose to live in high-amenity a r e a s . A n d the notion of "quality of life" i s changing a s well. A s the Starbucks phenomenon reveals, m o s t A m e r i c a n s have a yearning for neighborhood-scale p l a c e s where they can feel connected to their community. I n d e e d, m a n y would say that Starbucks i s the quintessential Silicon Valley networking p l a c e -- w h e r e members of the "wired society" ( e n t r e p r e n e u r s , t e c h i e s , v e n t u r e capitalists, a n d o t h e r professionals) gather, e x c h a n g e information, a n d close deals. A r c h i t e c t s and urban planners are talking a b o u t the same phenomenon in their fields. M o r e a n d more companies are asking for "accidental" m e e t i n g places (coffee bars, p a r k s , r e c r e a t i o n r o o m s ) in their facilities. U r b a n planners are seeing a renewed interest in spaces and mixed-use developments that are conducive to human intera c t i o n . T h e r e is no doubt that the Internet will i m p r o v e and accelerate all sorts of relationships. B u t proximity and face-to-face communication are l i k e l y to remain important factors in economic and s o c i a l systems in the new economy.

31 32



" C l u s t e r s and the New Economics of Competition," o p . c i t . I b i d.



SMART THOUGHT

"The best cities are places where businesses and people learn better and develop faster than they otherwise would because they are centers o f the three Cs--the key global assets of concepts, c o m p e t e n c e, a n d connections. B y concentrating on a particular asset, c i t i e s can become p re e m i n e nt in one of three generic ways: a s thinkers, m a k e r s, o r traders," a n d thus have a special talent that enables them to play successfully on t h e world stage, w r i t e s Rosabeth Moss Kanter, i n her book World Class. Fo r example, t h e Boston area, w i t h its abundance of universities, i n n o v a t o r s , a n d entrepreneurs, e x c e l s as a "thinker." S p a r t a n b u r g - G r e e nv i l l e, S o u t h Carolina, a n international manufacturing center with a h i g h rate of foreign investment and a skilled workforce, e x c e l s as a "maker." T h e Miami area's success as a "trader" g r o w s from skills in forging a l l i a n c e s to move goods and services in international markets.



30



Arizona Policy Choices: The New Economy



A Supportive Environment

Factors important to making places attractive to h i g h - t e c h n o l o g y, n e w economy industries are different from those important to more traditional e c o n o m i c activities, w h i c h have focused heavily on the costs of doing business. H i g h - t e c h n o l o g y co m p a n i e s prefer to locate close to research institut i o n s, s u c h as major universities, a n d where a hight e c h presence already exists. T h e y are concerned a b o u t the availability of quality education and the c o m m u n i t y 's quality of life (See Table 4). ? A r i z o n a n o w has a strong high-tech presence i n a few sectors i n a few places. O v e r a l l , h o w e v e r, t h e state's high-tech presence is narrow g e o g r a p h i c a l l y and sectorally. S i m i l a r l y, b o t h A r i z o n a State University a n d the University of Arizona a r e " R e s e a r c h I" i n s t i t u t i o n s . B u t o t h e r w i s e, f o r a state with nearly five million r e s i d e n t s , A r i z o n a has relatively few university c a m p u s e s and other research institutions. T h e factors important to high-technology operations c h a n g e over the life cycle of the companies (See Ta b l e 5). T h e presence of research institutions a n d a skilled and educated work force consist e n t l y are among the most important factors. A r i z o n a generally compares favorably on the tradit i o n a l cost-of-doing-business measures. B e c a u s e of c l i m a t e and the natural environment, A r i z o n a g e n e r a l l y is perceived to have a positive quality of l i f e . H o w e v e r, o n some other aspects of quality of l i f e , A r i z o n a does not fare as well.

TABLE 4:



H i g h - Te c h n o l o g y Location Factors

Existing High-Tech Presence Traditional Cost-of-Doing Business Measures



? ? ? ? ? ? ? ? ? ? ?



Tax Structure Compensation Costs Space Costs Capital Costs Business Climate



Specific to High-Tech



Proximity to Excellent Research Institutions Access to Venture Capital Educated Workforce Network of Suppliers Technology Spillovers Climate and Quality of Life



S o u r c e : M i l k e n Institute, A m e r i c a's High-Tech Economy, 1 9 9 9 .



TABLE 5:



F a c t o r s Important to High-Technology Industries By Phase of High-Tech Development

Inception Growth Fortification



Public Policy Tax Incentives Public Investment Commercialization of Ideas Comparative Location Benchmarking Cost Factors Research Institutions Skilled or Educated Labor Force Transportation Center Proximity to Supplies & Markets Social Infrastructure Developments Attending Changing Needs Re-education & Training Facilities Establishing Trade Groups, & Affiliations Housing, Zoning, & Quality of Life 3=Critical 2 2=Very Important 2 3 3 2 1=Important 3 1 3 3 3 3 2 1 2 1 1 3 3 3 3 3 1 1 2 1 2 2



S o u r c e : M i l k e n Institute, A m e r i c a's High-Tech Economy, 1 9 9 9 .



Places where entrepreneurs are starting and growing companies have a similar list of resources: 1) universities , 2) skilled labor pool 3) airports 4) nice places to live, , , and 5) positive entrepreneurial climate. However , Anna Lee Saxenian, University of California Berkeley says , , it is not enough to have just the ingredients; the important part is the recipe for how the ingredients fit together . Dynamic regions also have processes that leverage their assets to serve the economy .

E n t r e p r e n e u r i a l Hot Spots, C o g n e t i c s



Place Still Matters



But for Different Reasons



31



F I G U R E 18:



Capital Spending per Capita R a t i o of Arizona to United States

200 190 180 170 Percentage 160 150 140 130 120 110 100 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996



Infrastructure for People, Places and the New Economy

? To provide the physical infrastructure for a rapidly g r o w i n g population, A r i z o n a 's per person capital spending has been above the national ave ra g e. Fi g u r e 18 shows that the state's capital s p e n d i n g has declined from far above average t o only moderately above average. ? T h e Government Information Technology A g e n c y (GITA) is now responsible for telecomm u n i c a t i o n s in state agencies. T h e agency s p e a r h e a d s everything from creating standards a n d coordinating purchasing to developing o n l i n e services in public agencies. G I TA has h e l p e d Arizona to come a long way quickly in i n f o r m a t i o n technology. Fo r example, t h e state r e c e n t l y won two awards from the National A s s o c i a t i o n of State Information Resource E x e c u t i v e s in electronic commerce for its m o t o r - ve h i c l e transactions program and process f o r information technology investments. G I TA's 1 9 9 9 Strategic Plan set ambitious directions for i n f o r m a t i o n technology in education, f a m i l y h e a l t h and safety, e c o n o m i c prosperity, q u a l i t y o f life, a n d good government. ? A r i z o n a is actively pursuing deregulation of t e l e p h o n e service and other regulatory issues t h a t will help to make telecommunications i n f r a s t r u c t u r e more available. A t this time, m o r e t h a n 100 Internet Service Providers (ISPs) mean t h a t online access is available in every county. H o w e v e r, a c c e s s remains uneven.



S o u r c e : U.S. Department of Commerce, Bureau of the Census.



If the class divide of the industrial economy was between capital and labor or managers and workers the class divide , of the emerging information economy could well be between cosmopolitans and locals. Cosmopolitans are rich in three intangible assets, three Cs that translate into preeminence and power in a global economy: concepts the best and latest knowledge and ideas; competence the ability to operate at the highest standards in any place anywhere; and connections the best relationships which , provide access to the resources of other people and organizations around the world.

R o s a b e t h Moss Kanter, Wo r l d Class: T h r i v i n g Locally in the Global Economy



32



Arizona Policy Choices: The New Economy



A s described in The Changing Face of the Software C l u s t e r in Arizona, b u s i n e s s people in the state are a n x i o u s for more and better telecommunication s e r v i c e s . Fo r example: " T h e view of local (Phoenix m e t r o ) software executives is that telecommunic a t i o n s services are either not available, s l o w l y i n s t a l l e d or very expensive relative to competitor r e g i o n s . T h i s perceived lack of telecommunications i n f r a s t r u c t u r e places Arizona firms at a distinct disadvantage relative to other regions. I n fact, a c c o r d i n g to tests conducted by Keynote Systems, i t ` t a k e s longer to surf the Web from Phoenix than f r o m other parts of the country' a n d that `Phoenix w a s at or near the bottom more times than not over t h e past few months' ( T h e Arizona Republic, 4 / 5 / 9 9 ) . K e y n o t e Systems explains the slowness as a result o f growth in Web use outpacing expansion and u p g r a d i n g of cables and other equipment needed t o connect to the Internet. A l s o, c o m p a ny executives i n t e r v i e w e d for this report commented on the slown e s s of response time to install telecommunication s e r v i c e s to their businesses." 34

All Numbers = % Telephone Computer Internet Use

*Non-Hispanic



TABLE 6:



P e r c e n t a g e of Telephone, C o m p u t e r, a n d Internet Use in U.S. H o u s e h o l d s

Total 94.0 42.1 26.2 White* 95.7 46.6 29.8 American Indian* 83.4 34.3 18.9 Hispanic 89.3 25.5 12.6 Black* 87.8 23.2 11.2 Asian PI* 95.6 55.0 36.0



S o u r c e : Fa l l i n g through the Net: D e f i n i n g the Digital Divide, J u l y 1999. U . S . D e p a r t m e n t of Commerce, N a t i o n a l Telecommunications and Information Administration.



Community Information Infrastructure

A c c e s s to technology plays a big part in people's k n o w l e d g e of and comfort with it. A n d places need p e o p l e with technology skills. A s shown in Table 6, t e l e p h o n e s are almost universal in the U.S., b u t c o m p u t e r s and Internet access are not, a c c o r d i n g to t h e most recent survey of technology use by the N a t i o n a l Telecommunications and Information A d m i n i s t r a t i o n . I n addition, r e s i d e n t s of urban areas a r e more than twice as likely as those in rural areas t o have Internet access. T h o s e over age 55 and u n d e r age 25 are the least likely to own a computer o r use the Internet. O f all households, t h o s e heade d by single females are least likely to use the I n t e r n e t on a home computer. T h o s e who use the I n t e r n e t outside their homes tend to use it at work o r go to a K-12 or other school, l i b r a r y, o r someone e l s e's house. A l s o, t h e s e users tend to access the I n t e r n e t for information or to take courses at a h i g h e r rate than those who use the network at h o m e . L i b r a r i e s , s c h o o l s , a n d community centers a r e important access points for those without comp u t e r s at home or work. 35



Technology Infrastructure in Arizona Schools

O n e indicator of how well students are being prepared for the new economy is the use of techn o l o g y in schools. T h e Progressive Policy Institute c r e a t e d a measure based on three factors: 1 ) the p e r c e n t a g e of classrooms wired for the Internet; 2 ) teachers with technology training; 3 ) schools w i t h more than 50 percent of teachers having s c h o o l - b a s e d e-mail accounts. ? A r i z o n a s c o r e d below the national average, r a n k i n g 33rd a n d eighth among ten western s t a t e s on technology use in schools.



34



T h e Changing Face of the Software Cluster in Arizona, C o l l a b o r a t i v e Economics, A u g u s t 1999. Fa l l i n g Through the Net: D e f i n i n g the Digital Divide, N a t i o n a l Telecommunications and Information Administration, J u l y 1999.



35



Place Still Matters



But for Different Reasons



33



A Smaller Smarter Faster Wealthier World , , ,

B o i l down the eight building blocks of the new economy, a n d they reveal that we are building a wholly different kind of world--one that is smaller, s m a r t e r, f a s t e r, a n d wealthier. I t is smaller because the world is being joined into a single economic unit, a n d technology allows vast a m o u nt s of information to be shared instantly and inexpensively among many people in many locations. S m a l l , n i m b l e new companies are transforming the way business is being done, s n a t c h i n g market share f r o m their bigger, e s t a b l i s h e d rivals. T h e r e is a shift away from mass production and mass markets to niche p r o d u c t i o n and customer relations. J u s t - i n - t i m e inventory has replaced large warehouses full of product a n d tiny Web sites are replacing large stores. Fi r m s are clustering into hub cities and regions where they can b e near their competitors, s u p p l i e r s , a n d customers, a n d where they can easily access specialized talent, i n s t i t u t i o n s, a n d networks. M a ny people are leaving big companies and either joining much smaller companies o r going into business for themselves as entrepreneurs, c o n t r a c t workers, f r e e l a n c e r s , o r temps. I t is smarter because we have accumulated a vast amount of technological and scientific knowledge s i n c e as recently as the 1960s. M o s t of us have received more formal education than our parents and grandparents. M o r e workers than e v e r before are expected to "think for a living" a n d the prospects of those who cannot look bleak. C h a n g e h a s become constant. C o m p a n i e s are no longer trying to do everything on their own; i n s t e a d they are working together and playing to each other's strengths. A company's value is increasingly tied to its intellectual capital. I n t e l l e c t u a l assets serve to differentiate communities as well; t h e presence of top-notch g o v e r n m e n t , u n i v e r s i t y, a n d industry research centers helps attract and develop high-growth industries, e n t r e p r e n e u r s , a n d venture capital. I t is faster because the pace of technological change is quickening and goods, m o n e y, t e c h n o l o g i e s , a n d ideas can be quickly moved from place to place. T h e marketplace is demanding speed. T h e r e is constant pressure to shorten the time it takes to create a n e w product or service, t o launch a new business, o r to enter a new market. S u c c e s s f u l organizations display a healthy discomfort with the status quo. T h e y detect emerging trends quickly, t h e y make intelligent decisions rapidly, a n d they turn strategy into action much faster than ever before. T h e Internet business m o d e l , w i t h fewer hard assets, a direct pipeline to customers, a n d flat organizational structure, o f fe r s a new l e ve l of speed and operational efficiency for those who master it--and huge dislocations for those who do not. I t is wealthier because new technology and nimble new competitors have driven revenue growth, j o b growth, a n d higher living standards. T h e r e are more opportunities to become wealthy than ever before. M a n y workers have reached the p o i n t where they enjoy enviable incomes, l i v i n g, a n d working conditions, a n d their ranks can continue to g r o w. H i g h e r - w a g e jobs are growing faster than low-wage jobs. Tr a d e boosts both national wealth and job g r o w t h . N e w wealth is coming from the growing dominance of services, t o o ; m a n y service jobs, p a r t i c u l a r l y t h o s e found in sectors that have grown the fastest--finance, c o m m u n i c a t i o n s , h e a l t h , p r o f e s s i o n a l services--pay more than many manufacturing jobs.



34



Arizona Policy Choices: The New Economy



>POLICY CHOICES



Making Public Policy Choices for People and Places

Pe o p l e and places play important roles in the new economy. B u t what does the new economy mean for t h o s e same people and places? How can communities, c i t i e s , r e g i o n s , a n d states meet the challenges posed b y the new economy? What will be required to ensure that both people and places are not left behind i n the new economy? Pe o p l e matter a great deal in the new economy--but they have to be prepared to be knowledge w o r k e r s . T h i s means bridging the gaps and creating quality educational opportunities s o that all stud e n t s have the right tools to enter the workforce. I t also means making sure young children are ready to s t a r t school and that more children stay in school. I t means providing flexible ways for adults to continue t h e i r education throughout their lifetimes. P l a c e s also matter a great deal--but not in the way they used to. P r o x i m i t y to raw materials and markets is not as important as it used to be. W h a t matters far more is creating communities where people w a n t to live and work and where cutting-edge companies want to cluster and can grow. T h i s means f i n d i n g ways to provide and protect a good quality of life in all communities. I t means making sure transp o r t a t i o n , t e l e c o m m u n i c a t i o n , a n d all other facets of the new economy infrastructure are present. A n d it m e a n s making sure that both "intellectual capital" ( v e n t u r e capitalists, e d u c a t o r s , s c i e n t i s t s , e n g i n e e r s ) and "s o c i a l capital" ( t r a d e associations, i n f o r m a l networks, c i v i c associations) are available in the communities w h e r e new economy companies want to locate.



Implications for Policy Makers: The Nuts & Bolts of Operating in the New Economy

J u s t as a CEO would want for his or her company, p o l i c y makers will want their state, r e g i o n , o r city to fit in, b e in step, a n d not be left behind in a smaller, s m a r t e r, f a s t e r, a n d wealthier world. H e r e are ten lessons from t h e world of business that are vitally important to the public sector in the new economy.



10 Things Business is Learning That Government Needs to Know

1 . B e Fast I n the new economy, t i m e is the most important variable--it is what drives everything else. T h e business w o r l d 's notion of "just in time" i s giving way to the "zero time" c o n c e p t , m e a n i n g that when something needs t o happen, i t happens immediately. I n the new economy, g o v e r n m e n t must also make changes quickly if it i s to be relevant, u s e f u l , a n d powerful. Po l i c y makers who take years haggling over how to fix problems risk m a k i n g their state or city powerless in the new economy. H i g h e r education institutions that are slow to r e s p o n d to industry needs risk becoming irrelevant, a s industry looks elsewhere. A s the argument goes, i f y o u don't do it and your competition does, y o u are out in the cold. 2 . G e t the Best A s k a large global company about the most serious problem in their industry and a common answer is "the b a t t l e for talent." G ove r n m e n t is in the same boat. J u s t as with business, g e t t i n g "the best" d o e s not just refer t o the rank-and-file employees, b u t also to top policy makers. B u t in the new economy, t h e "best" e m p l oye e d o e s n't just mean a smart one--it also often means a good citizen. Co n t e x t Integration, a Massachusetts-based we b - s o l u t i o n s company, l o o k s for people that fit the SWAN profile: " S m a r t , h a r d - Wo r k i n g, A m b i t i o u s, a n d N i c e. " 36 T h e first three criteria are easy enough for most organizations, b u t it is the fourth one that is often ove r l o o k e d. Th i s can be dangerous in a new economy where competing aggressively also means collaborating g e n e r o u s l y. S o, w h a t does "nice" m e a n ? One manager at Context Integration says: " N i c e people don't just look o u t for themselves. T h e y don't try to act like the smartest person in the room. T h e y are team players."

36



C h u c k Salter, " i d e a s . c o m , " Fa s t Company, S e p t e m b e r 1999.



Making Public Policy Choices for People and Places



35



3. I n s i s t on Excellence Yo u have to be world class to compete with world class. Fo r m e r McKinsey & Co. c o n s u l t a n t Johannes Ziegler t h i n k s the nature of competition in the new economy is like playing chess: " I f you have a decent IQ, y o u can p r a c t i c e and become the champion of your local chess club. B u t if, a l l of a sudden you have to compete a g a i n s t a world-class player like Garry Kasparov, y o u won't stand a chance." 37 A c c o r d i n g to Ziegler, t h i s is n o w happening to a lot of companies--they don't have the organizational IQ to be world competitors. H o w c a n you gauge an organization's competitiveness IQ in the new economy? For a business, t h e questions are s i m p l e : I s it selling the same old products? Failing to meet deadlines, a g a i n ? Missing big market opportunities? R e m a r k a b l y, n e a r l y identical questions can also be asked of governments: A re they selling the same old policies a n d programs? Are they failing to meet deadlines (mental health, s c h o o l finance, a i r quality) again? Are they m i s s i n g big opportunities (open space preservation, t e l e c o m m u n i c a t i o n s infrastructure)? 4 . L o o k to Core Competencies A c c o r d i n g to the new economy strategists, "e v e r y t h i n g we do, w e have to do world class, s o we can't do e v e r y t h i n g. We have to focus." I t is a lesson that applies to cities, r e g i o n s , a n d states as well as companies. E v e r y community has a set of assets that affects its economy, q u a l i t y of life, a n d sense of community. G o v e r n m e n t controls some of these assets (public schools, f o r example), w h i l e others are driven primarily by t h e private sector (i.e., t h e availability of business finance), a n d still others are the result of geology and g e o g r a p h y (desert environment and warm weather). T h e question is: w h a t is core and what is not? C o m m u n i t i e s , l i k e businesses, c a n learn a lot by engaging their customers (citizens) in the process of identifying core capabilities. H o w e v e r, k e e p in mind that not all of the ideas about community competencies w i l l mesh. W h e n ideas do not mesh, a community faces choices. S o m e choices will be made willingly by the p o l i t i c a l leadership or the voters, w h i l e other choices will be forced by inaction. T h e bottom line, h o w e v e r, i s that it is not a good idea to leave too many outcomes to chance. Fo r one thing, s t i c k i n g with core comp e t e n c i e s that fit with the old economy will not help competitiveness in the new economy. 5 . B u i l d Up, D o n' t Tear-Down Fo r a long time, i t 's been popular to call on government to "be more like business." B u t considering how the s u c c e s s f u l business model has changed in the last ten years, i t might be wise to reconsider what this mantra m e a n s . Fo r one thing, t h e era of squeezing corporate profits through slash-and-burn downsizing is largely o v e r. W h y ? Because companies have learned they cannot escape the crush of competition with one strategy a l o n e. I n the new economy, s t ay i n g competitive requires a mix of strategies, a n d in that mix are often strategies t o build-up quality, va l u e, s p e e d, a n d talent. A s k recently-named Hewlett-Packard CEO Carly Fiorina what is o n her mind as she steps into her chief executive role, a n d chances are that she is thinking much more about h o w to "build-up" r a t h e r than "tear down" t h e company, e v e n though she was brought on board largely to m a k e painful amputations. Pa r i n g down is the easier part, b u t it is not the end game. T h e harder and much m o r e critical part is finding ways to differentiate the organization from competitors on other factors such as c o n c e p t s, c o m p e t e n c i e s, a n d connections and gain a new reputation as B-I-W (best in world). T h i s business m o d e l sounds like a good one for government to follow--build up capabilities that make a region or state a p l a c e where businesses and people can learn better and develop faster than they otherwise would.



37



" H o w to get smarter," Fa s t Company, S e p t e m b e r 1999.



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Arizona Policy Choices: The New Economy



6. P u m p Up Technology Technology has made our world smaller and faster. And while much of the private sector is furiously repositioning i t s e l f around technology, t h e public sector has not been as fast. Th e public sector's first challenge is to levera g e w h a t technology offers in terms of cost-cutting, c u s t o m e r service, i n f o r m a t i o n , a n d connectivity. I n S p a i n , f o r example, c i t i z e n s now tap into their unemployment and disability benefits through the Internet. I n Singapore, a l l sorts of government services, i n c l u d i n g marriage licenses, c i t i z e n s h i p applications, a n d coll e g e applications are available on the Web. T h e technology issue for governments, h o w e v e r, i s not just about n e w service delivery and information or about getting computers in one agency to talk to those in another a g e n c y. T h e significant challenge for government involves how to be strategic with planning, f i n a n c i n g, a n d d e v e l o p m e n t of the technology infrastructure so it meets the needs demanded by growth and the expect a t i o n s of residents and businesses. Fo r example, g o v e r n m e n t s have plenty to gain from "smart highway" t e c h n o l o g y that analyzes and speeds traffic, b u t few are willing to pay for it. 7 . C u s t o m e r s are the Bottom Line " M a ny people believe that we have entered the Age of the Internet. Ac t u a l l y, i t 's more accurate to say that we'r e living in the age of the customer," c o n t e n d s Anne Busquet of American Express. 38 T h e ultimate promise o f the Web is a once-and-for-all transfer of power: c o n s u m e r s and business customers will have the power to g e t what they want, w h e n and how they want it, a n d even at the price they want. A n d before long, g ove r n m e n t w i l l have to conform to this relationship model as households accustomed to the Web's service and conven i e n c e become intolerant of the off-line services being offered by government. To make matters worse, t h e p u b l i c sector will soon be struggling with another problem familiar to businesses: H ow to anticipate what customers want next. Fo r communities, r e g i o n s, a n d states, t h e big challenge is identifying what the next generation will want in terms of life style, wo r k setting, a n d community. T h i s means listening closely to the n e w economy's workers (increasingly Generation X, p l u s Asian and Latino immigrants) and the new economy's " i nv i s i b l e" c o m p a n i e s (those actually driving the economy, n o t such population-driven areas as real estate). 8 . K i c k the "Go it Alone" H a b i t C o l l a b o r a t i o n is the new economy way of getting things done--acting alone simply limits what can be a c c o m p l i s h e d. B u s i n e s s is learning that if it wants to compete aggressively, i t has to collaborate generously. C i t y and state governments, e d u c a t i o n a l institutions, a n d community organizations should be similarly s e e k i n g ways to partner to help position the region or state--and in turn, t h e m s e l v e s -- a s a global competitor. T h e idea of public-private or city-city collaboration is not new, b u t the problem is, i t is not a l w a y s easy. T h e barriers seem to be everywhere: p o l i t i c a l boundaries and fiefdoms, v o c a b u l a r y, p r o c e s s , l o n g - s t a n d i n g adversarial relations, i n c i v i l i t y, l a c k of time, a n d churning population. B u t , t h e r e are plenty of e x a m p l e s today of communities that have overcome these and other barriers to respond quickly and effectively to opportunities in the new economy. P l a c e s like California's Silicon Valley, A u s t i n , Te x a s , a n d C h a t t a n o o g a , Te n n e s s e e , h a v e recognized the power of collaboration and are finding ways to work across b u s i n e s s , g o v e r n m e n t , e d u c a t i o n , a n d community to form new relationships, i n f o r m a t i o n networks, a n d s h a r e d purpose that will increase the region's resilience and role in the global economy.



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Fa s t Company, o p . c i t .



Making Public Policy Choices for People and Places



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9. K n o w Where the Real Competitive Advantages Are S p e c i a l i z e d suppliers, h i g h l y skilled workers, i n fo r m a t i o n networks, a n d responsive government: t h e y 'r e the s t u f f of regional competitiveness in the new economy, s ay s Michael Porter of the Harvard Business School.39 C i t y and state policy makers who still see companies as desiring locations where they can find low taxes and c h e a p electricity and labor are thinking in terms of the old economy. I n today's services and technology e c o n o m y, i t 's getting harder and harder to create competitive advantage by simply providing low-cost business sites. T h e rules for the new economy, e x p e r t s say, a r e really about locating a business strategically t o benefit from a critical mass of competitors, s u p p l i e r s , a n d customers, a strong talent pool, u n i q u e institut i o n s , a n d regional quality of life. S u c h local features can be used by firms to their competitive advantage, s o long as rivals cannot match them. T h u s , k n o w i n g how to create competitive advantage out of items such a s an R&D base, s k i l l e d workers, a n d presence of suppliers is becoming vitally important for both companies a n d communities. T h e key to getting it right for a region, Po r t e r says, i s to understand that productivity and i n n o v a t i o n , n o t low wages and low taxes, a r e the real secrets to competitiveness in the new economy. 1 0 . R e t h i n k the Revenue Base R e g a r d l e s s of their industry, s i z e, o r location, c o m p a n i e s today are having to pay attention to revenue g r o w t h . D u r i n g the past decade, m o s t U.S. c o m p a n i e s were clearing debris, u s i n g downsizing, r e - e n g i n e e r i n g, d e l ay i n g, a n d consolidating to increase efficiency and cut costs. B u t "the gains of such yard work have largely b e e n realized," w r i t e s University of Michigan professor Dave Ulrich in Harvard Business Review, a n d "execu t i v e s are now looking to find profitability through growth." 41 T h e challenge of revenue