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Chapter II Characteristics of Regional GrowthâRegional Economic Implications Associated with the Location of R&D Institutions Some Characteristics of Regional Growth and Industrial Location In an open and growing economy, varying rates of regional and community development are inevitable. Some areas are much more attractive for certain types of industries and kinds of people than others; locational decisions tend to be based on such comparative advantages. On the whole, such decisions, and the shifts they entail, are important in generating improvements in pro- ductivity and in incomes. An industry will choose a location for its productive activitiesânormally when it wants to increase the volume of its output by substantial amountsâ by picking a site that will enable it to operate at the most profitable level. Pro- duction costs and revenues differ from one site to another, depending upon variations in access to basic inputs and markets. Sometimes access to inputs is dominant in determining the location of an activity, and sometimes market access; sometimes neither is dominant, with the result that location would be intermediate or indeterminant. This has led economists to characterize pro- duction activities as being input-oriented, market-oriented, oriented to inter- mediate sites or, when none of these apply, as "footloose." In recent years, important shifts in the national economy have taken place, and these in turn have had profound effects on the economy of various regions. As Harvey Perloff has very plausibly indicated: 20
21 A highly important factor for the growth of areas has been the fact that the primary activitiesâfarming, mining, forestry, and fishingâwhich are largely oriented to natural resources inputs, have greatly declined in relative impor- tance. The location of manufacturing activities, while in some cases still tied to raw materials or semi-processed inputs, increasingly have become market- oriented. "Tertiary" or service activitiesâdealing as they do with such func- tions as transportation and communications, construction, trade, finance, gov- ernment, the professions and recreationâare by and large closely tied to markets. The industries which during the past decades have had the greatest relative growth have in very large part been of the market-oriented type or footloose.21 The impact of mechanization and automation has been, on the one hand, to accelerate the trend to tertiary or service industry and, concomitantly, to accelerate the trend toward urbanization. There has been a trend, as the man- ufacturing process has become more and more complex, toward the agglomer- ation of industries and services that depend on one another for their continued productivity. The tremendous growth of metropolitan areas and, in particular, the tendency for R&D activities to aggregate in these centers have been char- acteristic geographic features of modern economic development. Many regions aspire to a "high-technology" economy, which has come to be regarded throughout the country as synonymous with growth and prosper- ity. There is a belief that federal science funds and the placement of federal science installations can help regions attain that goal. This belief requires some examination. In the national economy, most employment growth is within two sectors: The service sector, including education, health services, government, which between 1950 and 1960 provided almost exactly the number of new jobs (9 million) required to employ the total increase in workers entering the labor force. "High-growth" industries associated with a high level of input from research and development (though proportionally these account for a small fraction of the labor forceâsee Chapter V). There is a correlation between the location of service employment (i.e., metropolitan centers) and the location of so-called high-technology enterprise. A review of the evidence indicates that the rapid-growth regions, which include the concentrations of technology-intensive industries, are also the regions with high research and development expenditures and concentrations of scientists, engineers, and technicians. The regions of the United States in which the availabilities of urban services and amenities are limited are also the regions deficient in high-growth, high-
22 technology enterprise. Yet many metropolitan centers within these regions, proportionate to population, have their "fair share" of such activities. There appears to be a correlation between lack of urbanization and an underdevel- oped economy. Appalachia is a case in point. This large region is only 40 percent urban, compared with 70 percent for the nation. In 1960, 60 percent of the national labor force was engaged in service employment; in Appalachia only 50 percent was so engaged. One third of the Appalachian labor force is employed in manu- facturing, while only one fourth is so engaged in the United States. Between 1950 and 1960, national employment grew substantially, by 14 percent. Appalachia suffered a decline in employment during the same period, typified by its deficiencies in service employment. Studies of the economy of Appalachia have shown that it is characterized by substantial base-industry employment, which is serviced to an unusual degree by service industries out- side the region. Appalachia lags behind the country in another way. Although it has more than its proportionate share of the nation's manufacturing, its share consists of the slow-growth industries. In 1954, value added per worker in manufacturing in Appalachia was almost 10 percent below the national average. By 1963, it was more than 20 percent below.* Two main problems confront regions such as Appalachia in attracting and supporting a high-growth, technologically advanced economy: Finding techniques for accelerating their urbanization and taking advantage of the growth opportunities provided by service industries in such centers. Developing, in addition, the network of institutions and attitudes required to support an advanced economy. As is indicated in the following section, the factors that affect the develop- ment of a modern technologically based economy are not related simply to the level of R&D activity, but involve the entire regional or community environment. Factors Affecting the Introduction of High-Technology Enterprise In the development of an advanced economy, technology is usually perceived as an important stimulant, if not an essential ingredient. However, high- technology enterprise can not be a stimulus to a region's economy; indeed it can not even be brought into the region unless a number of other factors are present: * Ralph Widner, private communication.
23 Social and cultural factors. A region must have incentives for the utilization of technology in the solution of major problems as well as patience with regard to the time required. If it is to be willing to invest in high-risk, delayed-payoff ventures, a society must have both social stability and future-orientation. Whether or not a given community includes scientists and development engi- neers, it must contain a significant professional labor force. In order to attract or to retain talented professionals, the region must provide an inviting cultural environment as well as a pleasant physical environment. Human resources. The incorporation of new technologies typically implies that old ways of doing things must be modified. This calls for intellectual adaptability among individuals and a hospitable intellectual climate in the communities in which they live. Thus, the provision of a well-articulated, broadly based system of primary, secondary, and higher education is a basic prerequisite for a high-technology economy. Technical skills are called for at both the professional and the non-professional levels. Increasingly, the rapid rate of change associated with the incorporation of technology in the nation at large suggests the need for the continuing acquisition of new skills and con- tinuing education throughout individual careers. Political factors. Frequently the most important influences upon regional de- velopment are social and political in origin, since they may determine whether innovation and change are to be sought or are powerfully resisted. To para- phrase a remark by Paul Hoffman, "Technological know-how can not be ex- ported; it must be imported." A region must provide political leadership as well as a framework for the constructive interaction of individuals and institu- tions to attain regional goals. The availability of venture capital. Although capital can flow across political boundaries with ease, and there is a great amount of risk capital available in the United States, it is nevertheless true that lenders often are reluctant to in- vest in distant enterprises. In particular, the small entrepreneur must usually rely upon local sources of capital. Lagging regions are often limited by the re- luctance of their lenders to participate in high-risk, high-technology enterprise. Natural resources. The availability of, or access to, natural resources has tra- ditionally been an important ingredient in a region's economy. Indeed, the character of its agricultural and mineral resources was the key factor that his- torically differentiated the economy of one region from another. In recent years, new technology applied to the extraction industries has critically affected both the methods used and the job opportunities, typically reducing the man- power required. Thus, to attain optimum economic value from the availability
24 of basic raw materials the region must attract value-adding processing and other "linked" manufacturing industries that relate to these resources. Al- ternatively, R&D may be incorporated either in the extractive or transporta- tion phase in order to provide a comparative advantage over other sources of raw materials. 0t Physical environment. Geographically, most growth in the United States during the past two decades has occurred in the so-called "amenity regions," primarily those with pleasant climate. There is little doubt that the physical attractiveness of such communities as Phoenix, Denver, or the San Francisco Bay area has been a major factor in affecting the decisions to locate new high- technology facilities or to enlarge existing plants in those metropolitan areas. Since the critical resource in many professionally dominated fields is the avail- ability of highly trained talent, access to the amenities of pleasant living may override other locational considerations. However, man-made features of the physical environment have played an increasingly significant role. Air- conditioning, for example, has made a major change by helping to offset some of the disadvantages of a hot or humid climate in some regions. It is a prime example in which widespread diffusion of a technological innovation has sub- stantially altered the comparative economic advantage of regions. Other tech- nological developments have similar profound effects on the environment, either for better or for worse. The automobile has made possible access to pleasant residential suburbs, but it has also brought traffic congestion, air pol- lution, and ugly urban sprawl. These features of the physical environment greatly affect a community's potential for attracting or retaining highly mo- bile professional personnel. They are increasingly subject to man-made decisions. In the above listing of human, man-made, and natural resources, it is inter- esting to note that financial and human resources are relatively mobile and can be imported into a region if there is motivation to do so. By contrast, na- tural resources and state political structures are geographically fixed. Like the forests and fields, the political leaders in a given state or region are tied to the geography of their constituencies. In addition to the above general factors, the development of new enterprise is typically dependent on entrepreneurshipâon the innovative leadership of unique individuals or groups of individuals. In the Committee's review of many instances in which regions or communities succeeded in revitalizing their econ- omies, it was possible in virtually every case to identify some key individual who played a particularly vital role. In other words, even when many of the other factors may be available, it takes the entrepreneur, the social inventor or innovator, to recognize the opportunities. From the above discussion, it is apparent that by itself, federal science poli- cy can not guarantee a given region an economic payoff. While the incorporation
25 of modern technology can be a vital stimulus to the economy of a region, this cannot be effected in the absence of other significant factors. When such fac- tors are present, they are conducive not only to the economic development but also to the general improvement of the quality of life in a community. Regional Economic Implications Associated with the Location of R&D Institutions The term "R&D institutions," as used here, is meant to denote the establish- ments and organizational entities that are directly charged with the perfor- mance of R&D. R&D institutions include laboratories and test facilities of industrial, governmental, university, and non-profit organizations, establish- ments engaged in analytic studies and a large range of establishments not desig- nated as laboratories but engaged in the development of new materials, pro- cesses, and devices, e.g., electronics divisions of major companies. Local and regional political leaders, public utilities, chambers of commerce, and other development organizations have traditionally acted as agents for the encouragement of various industrial and other employing organizations to lo- cate within the vicinity. In recent years, there has been a growing concentration in the efforts of such groups to attract R&D establishments of all kinds to their communities. This has occurred despite the fact that R&D institutions in them- selves do not necessarily encompass large numbers of jobs. It is evident, there- fore, that the efforts to attract industrial or government-supported R&D organizations are based on strong beliefs that they have a large positive effect on the long-term economic development of a region. Recent examples of this interest and the extent of efforts devoted to it are found in the events leading up to the decisions to locate the 200 BeV accelerator in Weston, Illinois, and NASA's Electronics Research Center in Cambridge, Massachusetts. To analyze the ways in which R&D institutions may affect the economic development of regions in which they are located, it is convenient to group the economic implications into three main categories: The creation of effective demandâdirect employment of laboratory personnel and the purchases that are made locally by the R&D installations and their employees. The effects of the R&D installation on the ability of a region to attract or generate new industryâan environmental asset that, like good water or trans- portation, enlarges the potential of a region for further development. Giving rise to new enterprisesâ^ a result of the R&D performance by the installation.
26 1. Direct Economic Effects (The R&D Institution as a Generator of Effective Demand) Of the above three categories, the contribution to immediate effective demand is the most obvious and direct. The payrolls associated with employment and the purchases made locally are translatable into local rounds of spending and the generation of additional local employment as a result of this spending. In this regard, an R&D organization is much like any other organization: its direct local impact depends on payments to its employees and on the amount of purchases that are made locally. Few enterprises over the past 40 years have been more dependable in their contributions to the local economy than universities, central laboratories of large industrial corporations, and many federal research laboratories. In con- trast, some of the major development programs, particularly in the military- space area, have resulted in more volatile impacts. One congressional commit- tee studying these economic impacts reported the following: During its visit to Ogden, Utah, another community whose economic life de- pends mainly on one defense-space-oriented company, the committee saw the sad spectacle of snaggle-toothed streetsâevery other or every third dwelling in a certain residential area unoccupied. The explanation was failure of the com- pany to receive renewal of research and development contracts from one of the large Federal agencies.22 Thus, there are wide variations in the continuity and character of the economic effects of an R&D institution, depending on the nature and work of the institution. In addition, there is a significant variation in the direct economic effect de- pending on the character of the community. Where a highly developed sup- porting industry exists in the area, relatively large proportions of the subcontracts awarded by a prime R&D contractor are performed in the area. Such is the case in large R&D complexes, notably Boston and Los Angeles, where the local "employment multiplier" of R&D work is quite high. In other communities, such as Seattle and St. Louis, where supporting tech- nical industry is less highly developed, a far greater share of the subcontracts is awarded to firms outside of the area. This "leakage" reduces the size of the local employment multiplier resulting from the award of an R&D contract to a local firm, compared with other activity in the region or with other R&D centers. There seems little doubt that a dominant position of one industrial corporation in a given region tends to decrease the external multiplier effect. For example, in a study23 made of the urban employment multiplier of new jobs in the aerospace industry in St. Louis, a city in which there is one major aerospace firm, it was found that the local employment multiplier for the aerospace industry was only 1.8 as compared with a multiplier for other in-
27 dustry in St. Louis of approximately 2.5 and for the military-space industry in Los Angeles of 4.6. 2. Social and Political Effects Some of the most profound effects of R&D institutions on a community may be found in their social and political impacts. In a study of the defense R&D industry in Denver, Tucson, and Orlando, it was found that: In each of the areas the managerial and professional workers and their families appeared to take a relatively active part in the civic and cultural life of the community. . . . Substantial pressures for improvement and expansion of school curricula had been brought to bear on the public and private schools of the areaâ In one suburban community in that area . . . there had not only been an increase in the number and quality of courses offered, but employees of the company had been elected to the local school board.24 A study of a large federal R&D facility in Tullahoma, Tennessee, provided further specifics: The impact of the Arnold Engineering Development Center (AEDC) on Tul- lahoma ... in terms of new industrial jobs had been slight in the 14 years of the center's existence at the time of the Committee's study (453 new jobs, of which only 28 were related to R&D), but the impact on the local educational system had been profound. ... In 1963 the local superintendent of education for Tullahoma received a salary surpassed, in Tennessee, only by those of the superintendents of Memphis and, significantly, Oak Ridge. One third of the teachers in the Tullahoma school system are members of the families of AEDC employees.* The social impact of R&D institutions on their local communities is found in the entry of newcomers (comprised of a relatively high percentage of scien- tists and engineers and other professionals) into many aspects of the cultural and political life of the communities in which they are living. They have been particularly involved in organizations classified as hobby, cultural, and recreational. The presence of more than one R&D institution within the community, particularly in smaller cities, is of significant economic and social value to the individual scientist or engineer. It is of considerable worth, particularly to the younger man with a family of growing children, to be able to seek employment in another firm without having to move to another community. Large numbers of higher-income engineers and scientists also change the local pattern of demands for consumer goods and public services. One effect *A1 Shapero, private communication.
28 is a rise in the local wage structure, thus increasing both incomes and living costs. On balance, the R&D institution typically is seen as a desirable social and cultural factor in the community. This is particularly true of universities, in which the social and cultural advantages are associated not only with the pro- fessional level of employees but also with the function of the institution itself. 3. The R&D Institution as a Generator of New Industry The recent history of industrial development includes many examples of in- dustries and corporations that are direct outgrowths of research and develop- ment. New corporations have been formed and older companies have gained new impetus from the development of such new technologies as solid-state circuitry, ultra-high vacuum, microwaves, and nuclear reactors. Some new en- terprises have been initiated by groups breaking away from older industrial corporations or government laboratories; some have been initiated by university professors. The role of the university as a generator of industrial development has oc- casioned much discussion. The spin-offs from the laboratories of MIT and Stanford University have been dramatic. Nevertheless, there is little systematic basis for concluding that a university with strong engineering and physical sciences departments and large R&D laboratories will inevitably generate new local R&D industry or even that it is essential for such a development. The university can contribute substantially, particularly in enhancing the social and cultural attractiveness of a community and providing education at various levels of undergraduate and graduate work. In regions of the country in which industrial complexes (civilian as well as military-space) have developed in the absence of institutions of higher education, strong pressures have since devel- oped for establishing new universities or building graduate programs in existing institutions. Universities associated directly with industrial spin-off have provided not only a cultural and educational contribution but also often key entrepreneurs. However, relatively few academic institutions have encouraged students or faculty to venture into the commercial world with academically derived prod- ucts or ideas. Nor are the attitudes or policies of many institutions favorable to the formation of companies by employees of universities. In this context it should be pointed out that encouraging entrepreneurship among faculty members and graduate students is not always an unmixed blessing. It may well confer direct economic advantages on a region, and in some cases it undoubtedly has; but it also tends to distract faculty and students from their main educational missions and to create divided loyalties on campus. The spirit of entrepreneurship and involvement with the outside world is likely
29 to be of great value to the society that supports higher education, but it is less likely to encourage the deepest scholarship or eminence in basic research. Industrial spin-off has occurred also from government laboratories, not- for-profit corporations, and established industrial laboratories. The conditions under which it is likely to occur are as much characterized by communities as by the parent institutions. For example, relatively few spin-offs have occurred in cities dominated by single major corporate enterprises. Such communities seem to lack factors essential to the encouragement and survival of newly formed technological enterprises, nor are there many alternatives, such as re-employment opportunities, available to entrepreneurs in the event of failure. In many cases, the particular stimulus for the formation of a new enterprise is the imposition of institutional obstacles on the individual in the course of his commitment to a new idea: for example, the cancellation of his employer's major contract, or frustration with the failure of corporate management to accept a new idea. Since the spin-off of new corporations from existing ones is seldom considered a successful accomplishment by parent companies, this source of new enterprise is generally underemphasized. 4. How Does an R&D Complex Develop in an Area? How an R&D complex is developed has intrigued many individuals and per- plexed numerous communities. From the studies available, it appears that no one factor or circumstance can be singled out as dominant. The presence of individuals with entrepreneurial skills and the availability of venture capital are often emphasized. A set of studies of military-oriented R&D complexes by the Stanford Research Institute yielded the following findings: An essential process in the transformation of a community into a defense R&D complex is an increase in the number of local contractors with or without a parallel increase in the dollars awarded, to provide a multiplicity of potential growth points. ... a larger number of prime contractors means a larger number of manage- ments making technical decisions from independent viewpoints, thereby in- creasing the probability of achieving technical variety. The presence of a large, locally dominant defense R&D establishment does not provide the conditions required for an increase in the number of local prime contractors. Domination by one organization may even be considered a negative factor.25 The nature of the market for the larger corporation that functions as a prime contractor for defense, space, or other major federal development programs differs substantially from the market for the smaller firm. The large company is often a prime contractor and is relatively independent of its local environ- ment with regard to access to its market, sources of material, and financial
30 support. Indeed, it is often found that the large defense R&D company is in- dependent of the local financial community for both its equity and its working capital requirements. In contrast, a small R&D company is usually highly de- pendent on its local financial community. The small defense company is pri- marily a sub-contractor and its markets are the large defense prime contractors or the major sub-contractors. It must seek out the market wherever it is lo- cated, and bid competitively within it. As a consequence, its cost of sales and sales effectiveness are much more critical to its performance than are those of the large company. A local environment that aids in lowering the cost of sales may be critical to its existence; a significant factor may be the number of de- fense prime contractors in its immediate vicinity. The small R&D sub-contractor often provides very special services or products. It tends to hedge against market uncertainty by locating in a large defense complex where it can have continuous access to a number of potential customers. Furthermore, many sub-contracting efforts in small companies are done on development contracts in which informed, word-of-mouth interchange of information tends to be the most effective mode of communication. These considerations emphasize the advantage of a community with a multiplicity of prime contractors and sub-contractors. The community that first attains the status of a major high-technology complex has a natural ad- vantage over the area with only a single large prime contractor. Thus, we find little collateral R&D industrial development in Seattle and St. Louis, each of which is dominated by a single, large, prime contractor performing advanced defense and space R&D work valued at billions of dollars. The question of whether an R&D complex has more to offer a community in terms of economic development than do other kinds of industry is still an open one, but one that is worthy of more rational consideration from a na- tional policy viewpoint than it has received generally to date.