An economic vision: Silicon States

As they meet in Washington, governors discuss future prosperity - andsome look to Silicon Valley as a model.

Northern California's Silicon Valley is famous around the world. Its concentration of high-tech jobs has made it the envy of economic planners everywhere.

But is it too small? Or, more accurately, does it need to keep expanding rapidly if it is to remain a dynamic engine of business growth?

Maybe. The US economy of the next century could see the rise of Silicon States - whole states with a critical mass of a certain type of industry that's big enough to make the area a world-class competitor.

That's what some of the nation's governors believe, anyway. As they gather in Washington for the National Governors' conference much attention has been given to the fringe on Jesse Ventura's buckskin coat, and the Minnesota governor's message to Washington to drop partisan politics. Yet the serious business of those who run the nation's statehouses lies elsewhere: in comparing notes and laying strategies to keep economic growth roaring for their constituents.

The old approach of luring factories and other existing businesses with tax breaks and sewer links may no longer be enough.

"States' policies need to become more adaptable and flexible to accommodate the rapidly changing economy," says Delaware Gov. Thomas Carper, chairman of the National Governors' Association (NGA).

A message the governors took away from their long hours of economic meetings was both exciting and daunting - in a world where cyberspace sometimes seems to threaten the importance of real space, states have become the basic building blocks of the US economy.

Cities may be too small.

"States are the core economic unit" in the country, Harvard Business School professor Michael Porter told the governors during a two-hour session.

Furthermore, state economic growth is closely correlated with the number of jobs that an area has in small, fast-growing firms - what one economist called "gazelle" companies.

And not all gazelles are software-game developers or World Wide Web start-ups. Innovation - such as a metal-casting firm that uses computer-aided manufacturing to cut costs - is the key.

The new economy "is about more than high technology and the Internet," Robert Atkinson, Progressive Policy Institute technology director, told the governors. "Most firms, not just those producing technology, are organizing work" around new information technologies.

Many states yearn to develop a high-tech region such as Silicon Valley, or Massachusetts' Route 128. But attempting to bootstrap a couple of local Internet providers into a high-tech region is unlikely to work, economists told the governors. It smacks too much of industrial policy - the somewhat-discredited strategy of government picking sunrise industries to nurture, while letting old-line firms fend for themselves.

What states need to do is try to help existing clusters of similar businesses to grow into a world-class unit, insisted Mr. Porter. Thus the next century might see "Mutual-Fund Massachusetts," as the concentration of financial services grows, or "Medical-Device Minnesota."

"The enduring competitive advantages in a global economy lie increasingly in local things - knowledge, relationships, motivation - that distant rivals cannot match," writes Porter.

These local advantages are often the result of several events. Nebraska's large telemarketing industry owes much to the US Air Force decision to put its Strategic Air Command (SAC) near Omaha, according to Porter. SAC command pushed the local phone operating company to install the nation's first fiber-optic communications cables and maintain a very capable network. That service, combined with Nebraska's central location, convinced many calling firms to locate in the state.

California's computer-development dominance is well-known. Less publicized is the fact that the San Diego area has stolen much of the golf-club business away from its old center of New England. Many new clubs are made from advanced composite materials, not steel, and San Diego happens to have a cluster of advanced-materials manufacturers with their roots in the region's aerospace business.

Not all experts think there is much states can do to turbocharge clusters of industry into state economic mainstays. The free market seems to do just fine in setting up economic concentrations, such as the pharmaceutical industries that huddle near Philadelphia or the textile manufacturers that bestride the Carolinas.

Furthermore, there are obvious dangers in such job concentration. Michigan booms with the auto industry in the good times, and hurts in the bad times. Detroit's group-think insularity once spawned such clunky products as the Ford Pinto, Chevy Vega, and AMC Gremlin.

But economists told governors there were a number of relatively noncontroversial things they could do to boost competitive clusters. Among them: investing in higher eduction, particularly science and engineering, and boosting or creating research and development tax credits.

Above all, keep your eyes open, and think differently. Iowa's decision to not provide a state loan and business assistance to a young entrepreneur named Ted Waitt in the early 1980s is now a famous misstep. Iowa felt Mr. Waitt wasn't big enough - so he moved across the state line to South Dakota to set up his mail-order computer company.

Today it is Gateway Computers, one of South Dakota's largest employers.

"Governors recognize the necessity of blazing a new trail in state government," said Gov. Michael Leavitt of Utah, NGA vice chairman. "Old methods are changing, and we are looking for the most effective means to transform the way we forge partnerships in our communities and provide service to our citizens."

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