High Tech Firms Driving the National Economy; Connecticut Slowed as Other Regions Grew

If you’ve wondered why Connecticut has been devoting significantly increased economic development attention on high tech start-up businesses, encouraging and nurturing their development and offering financial incentives at every turn, a new national report on business start-ups in the sector may provide ample rationale.

High-tech startups are a key driver of job creation throughout the United States, according to research by technology policy coalition Engine and the EKauffman reportwing Marion Kauffman Foundation. The report, “Tech Starts: High-Technology Business Formation and Job Creation in the United States,” finds that high-tech startups are springing up at a higher rate than all private-sector businesses – and in more places around the nation.   A total of 384 metropolitan areas were analyzed, including four in Connecticut, using comprehensive data through 2010, the most recent available.

Relative to their share of firms in the economy, high tech is 23 percent more likely, and the ICT sector (Information and Communications Technology), as a segment of high tech, is 48 percent more likely, than the private sector as a whole to witness a new business formation.

usa Though they start lean, new high-tech companies grow rapidly in the early years, adding thousands of jobs along the way, according to the study findings. In fact, high-tech startup job creation is so robust that it more than makes up for the job destruction from early-stage businesses failures – a key distinction from the private sector as a whole where job losses from early-stage failures turns this group into net job destroyers, the report indicated.

However, as the density of high tech firms has grown in metropolitan areas across the country, it has not happened in Connecticut, as data reveals a reduction in the density of high tech firms in the state’s major metropolitan areas during the past two decades.  (The U.S. average is 1.0.)

New Haven-Milford’s start-up density went from 1.1 in 1990, when it was one of nearly 70 metropolitan areas above the national average, to .5 in 2010, while the ICT sector start-up density dropped from above average at 1.2 in 1990 to .5 twenty years later.    The Norwich-New London metropolitan area reflects a drop from 1.1 to .8 in high tech start-up density and 1.1 to .9 in the ICT sector comparing 1990 and 2010.

The data indicate that the Hartford-West Hartford-East Hartford area reflected decreases from .9 high tech start-up densities in 1990 to .6 in 2010, and .8 ICT start-up density in 1990 to .7 two decades later. The Bridgeport-Stamford-Norwalk metropolitan region showed a drop from 1.4 to .9 in high tech start-up density over the 20 year period, moving from above to below the national average, and a parallel drop of 1.6 to 1.1 in ICT start-up density.

The website Engine, which collaboratedstart up density in the report, observed that “Each of the high density metro areas has one of three characteristics, and some have a combination of them all: 1) They are well-known tech hubs with highly skilled workforces, 2) They have a strong defense or aerospace presence, and 3) They are university cities.”

The report noted that “”high-tech startups are being founded across the country fueling local and national economic growth…and are a pervasive force in communities throughout the country.”  The Top 10 Metro Areas for High-Tech Startup Density (1990 and 2010 data):

  1. Boulder, Colo.  (High-tech 4.0 to 6.3; ICT 4.7 to 6.1)
  2. Fort Collins-Loveland, Colo. (High-tech 1.0 to 3.2; ICT 1.1 to 2.6)
  3. San Jose-Sunnyvale-Santa Clara, Calif.  (High-tech 3.0 to 2.6: ICT 4.4 to 2.9)
  4. Cambridge-Newton-Framingham, Mass. (High-tech 2.0 to 2.4; ICT 2.0 to 2.3)
  5. Seattle, Wash.
  6. Denver, Colo.
  7. San Francisco, Calif.
  8. Washington-Arlington-Alexandria, DC-Va.-Md.
  9. Colorado Springs, Colo.
  10. Cheyenne, Wyo.

"This report confirms the dynamism of the technology sector and its disproportionate contributions to the U.S. economy. It also underscores the need for policies that enable and support that dynamism," said Dane Stangler, director of Research and Policy at the Kauffman Foundation.

The report, released earlier this year, used data from the Business Dynamics Statistics (BDS) series, which is compiled by the U.S. Census Bureau and tracks the annual number of new businesses (startups and new locations) from 1976 to 2011.  Ten of the 14 high-tech industries can be classified as information and communications technology (ICT), while the remaining four are in the disparate fields of pharmaceuticals, aerospace, engineering services and scientific research and development.

In explaining the report, Engine noted that “While high-tech firms start small, they scale rapidly in the early years. So much so that young high-tech firms--those aged one to five years--contribute positively to net job creation overall. The opposite is true across the private sector as a whole, where the substantial job losses stemming from early-stage business failures - about half of all firms fail in their first five years - make young firms as a whole net job destroyers. Even when we remove the job destruction from all early-stage firm failures, surviving young high-tech businesses create jobs at a rate twice that of surviving companies in the private sector as a whole.”

Manufacturing Goes High Tech; Key Segment of CT Economy

Factory jobs in Connecticut slumped from 477,000 in 1969 – accounting for about one-third of total employment in the state – to just 174,000, about 10 percent of jobs statewide, in 2011, according to U.S. Bureau of Economic Analysis data. In the new issue of The Connecticut Economy however, UConn economist Steven Lanza issues a “report card” on manufacturing that presents the sector as among the most dynamic in the state’s economy, transformed by advanced technologies linked to research and development that are providing a catalyst for economic growth.  The analysis notes that during the past two years, Connecticut manufacturing employment has remained steady at about 165,000 workers.

The manufacturing sector contributed 20 percent of the growth in the state’s economic output in the decade ending in 2010, Lanza estimates, while boosting productivity – the value of manufactured goods per worker – by more than 50 percent from 1990 to 2007, with 35 percent fewer workers.

“Expanding output and falling employment [over that timeframe] combined to raise productivity per worker from $57,900 to $135,800, an impressive 134 percent increase,” Lanza says. Enhanced productivity, in turn, also led to higher wages: in 2011, Connecticut factory workers – who are now more likely to have a graduate degree and wear a suit or lab coat to work – earned an average salary of $76,900, or 26 percent above the state’s all-industry average of $61,100.

Connecticut’s manufacturing profile has also changed drastically; high-tech firms now produce more than 70 percent of the state’s output with computer/electronic products and chemicals accounting for more than 13 percent and 30 percent, respectively, of the total output in 2010.

Lanza also details how the state is now a leader in the aerospace and defense-related transportation equipment field – largely in the production of aircraft engines, helicopters, and nuclear submarines – totaling 23 percent of the state’s manufacturing output in 2010, compared with 20 percent in 1997.

Lanza is executive editor of The Connecticut Economy, a quarterly journal published by the University of Connecticut’s Department of Economics that offers data, forecasts, and substantive, data-driven analyses of current events, longer-term trends, and public policies affecting Connecticut’s economy.