April 2009 - Spring Issue
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Arizona’s High-Tech Industry Drivers

William P. Patton, PhD

Arizona’s high tech industries are a source of jobs, incomes, and high wages. They also represent industry sectors with strong growth potential and the ability to compete in the global market. Given their importance to the state’s economy, the attraction, expansion and retention of high tech industries is a major component of the economic development strategies at the state, regional and local levels. Economic development organizations are constantly attempting to finds ways to be more competitive with other regions in growing high tech industry clusters.

High tech firms make their business location decisions based on many of the same location factors as non-high tech firms. These factors would include things like low operating costs (labor, taxes, materials, transportation, etc.), proximity to major markets, proximity to critical inputs, and so forth.

However, high tech firms have additional requirements that can be even more important than the factors above. The most important location factor to high tech firms is the availability of a highly educated, highly skilled workforce. They also value being near major universities and R&D activity. Finally, since many high tech firms are startups and spinoffs with new products and services, it is important to have access to venture capital and other sources of early stage financing.

Table of Contents

Purpose
Arizona High Tech Industry Presence
Arizona Public School Performance and Financing
Arizona Higher Education Performance Measures
Arizona Workforce Preparedness
Arizona Research and Development Activity
Arizona Venture Capital Activity
Conclusion

Purpose

This article examines the correlation between high tech location factors and the level of high tech employment as a percent of total employment in each U.S. state.  This allows us to determine which of the factors have the strongest relationship with the level of high tech employment in each state.  

The data source for this report is from the National Science Foundation, “2008 Science and Technology Indices.” State level information from the NSF report is used to make comparisons between various indices related to education, workforce, R&D activity and venture capital and the level of high tech employment by state.

Arizona High Tech Industry Presence

Arizona ranks high relative to other states in its level of high tech activity (see Table 1).  It ranks 15th out of 50 states in the ratio of high tech business establishments to total establishments. It ranks 9th in net high tech business formation relative to total establishments. It ranks 16th in the percentage share of high tech employment relative to total employment.

Table 1

Arizona Public School Performance and Financing

Public schools in Arizona are underperforming and underfinanced relative to other states, as measured by 4th and 8th grade science and math proficiency rankings and by the amount of spending per student.

Table 2 shows the Arizona ranks on math and science proficiency in 4th and 8th grades. The last two columns of the table show the percentage of Arizona students who are proficient on standardized tests and the percentage of U.S. students who demonstrate math and science proficiency. Arizona ranks in the bottom one-third of all states in math and science proficiency.

Table 2

Arizona ranks next to last in the amount of public school spending per student (see Table 3). Arizona spends $6,184 per student, well below the U.S. average of $8,701. It ranks 40th in terms of public school expenditures as a percent of gross state product. However, Arizona teacher salaries rank roughly in the middle of the states.

Table 3

Some people might argue that the amount of public school spending is unrelated to school performance. However, when state math and science proficiency performance is compared to the amount of spending per student, it is apparent that states that spend more per student tend to have better performance (see Figures 1-4). It is apparent from the figures that Arizona has both low performance and low spending per student as compared with other states.

Figure 1: 4th Grade Math Profficiency vs.
Public School Spending per Student

Figure 2: 4th Grade Science Profficiency vs.
Public School Spending per Student

Figure 3: 8th Grade Math Profficiency vs.
Public School Spending per Student

Figure 4: 8th Grade Science Profficiency vs.
Public School Spending per Student

While there is a high degree of variation in the proficiency performance and spending per student among the states, the R2 for each of the regression equations indicate that 14% to 17% of the variation in proficiency performance is explained by spending per student levels.

Many economic development officials argue that it is critical to have high quality schools to attract and retain high tech companies in the region. If the amount of spending per student is related to the quality of the state’s school system, then the ratio of high tech employment to total employment should increase as expenditures per student rise.

Figure 5 shows the relationship between spending per student and high tech share of total state employment. The regression line shows that there is a weak positive relationship between high tech employment and expenditures per student.

Figure 5: High-Tech Employment vs.
Public School Spending per Student

Arizona Higher Education Performance Measures

Arizona’s universities have mixed performance in terms of some the indicators used by the National Science Foundation to track factors that might be important to high tech industries. Arizona ranks 10th in the nation in the number of bachelors degrees and bachelors in science and engineering conferred per thousand 18-24 years in the state. Arizona also ranks 14th in the number of science and engineering (S&E) doctorates conferred per thousand S&E doctorate holders.

Arizona ranks near the bottom of all states in S&E degrees as a share of higher education degrees conferred, S&E degrees per thousand 24-34 year olds, and advanced S&E degrees as a share of S&E degrees conferred (Table 4).

Table 4

Figure 6 shows a scatter graph of high tech employment as a percent of total employment vs. the number of bachelors degrees conferred. There is virtually no relationship between the number of bachelors degrees conferred and the high tech employment concentration in each state. Similarly, Figure 7 shows a scatter graph of high tech employment concentration and the number of science and engineering degrees conferred. Once again, there is little correlation between the two variables.

Figure 6: High-Tech Employment vs. Bachelor Degrees

Figure 7: High-Tech Employment vs. Science and Engineering
Bachelor's Degrees

Arizona Workforce Preparedness

Arizona ranks favorably with other states on workforce preparedness.  Arizona ranks 10th in the number of engineers as a percent of the total workforce and 20th in the number of individuals in science and engineering occupations as a percent of the workforce. Arizona ranks roughly in the middle of the 50 states on the percentage of bachelors degrees that potentially are available for the workforce.

Arizona ranks in the bottom third of states on the number of people aged 25-44 who hold associates degrees or higher, and the share of doctorate holders as a percent of the total workforce (Table 5).

Table 5

The relationships between some of these variables and the concentration of high tech employees are shown in Figures 8-11 below. There is a relatively strong correlation between the concentration of high tech employment and the concentration of engineers in the workforce.  There is a relatively strong correlation between the concentration of high tech employment in the workforce and the number of bachelors degree holders as a percent of the workforce.  The equation for engineers has an R2 of 46.1% and the equation for bachelor’s degrees has an R2 of 48.4%. This indicates the almost half of the variation in high tech employment concentration is associated with variation in each of these variables taken separately. The relationship between high tech employment concentration and associates degrees or science and engineering doctorates is present, but not as strong. The R2s for these two variables are 18.2% and 28.0%, respectively.

Figure 8: High-Tech Employment vs. Associate
Degrees or Higher

Figure 9: High-Tech Employment vs. Bachelor
Degrees in Workforce

Figure 10: High-Tech Employment vs. Engineers in Workforce

Figure 11: High-Tech Employment vs. Science and
Engineering Doctorates in Workforce

Arizona Research and Development Activity

The amount of research activity in a region is thought to be related to the amount of high tech activity. Table 6 shows several indicators of R&D activity. Arizona ranks in the top quartile in academic article output per 1,000 doctorate holders and patents awarded per 1,000 individuals in science and engineering occupations.

Arizona ranks roughly in the middle of all states on R&D as a share of Gross State Product and on the number patents awarded per 1,000 doctorate holders (Table 6).

Table 6

The scatter graph in Figure 12 shows the relationship between high tech employment concentration and the ratio of R&D to Gross State Product. There is a positive relationship between these two variables. The regression equation resulted in an R2 of 30.6%.

Figure 12: High-Tech Employment vs. R&D
Share of Gross State Product

Arizona Venture Capital Activity

Arizona ranks 16th in the amount of venture capital dispersed per $1,000 of Gross State Product and 3rd in terms of the average size of venture capital deals. Figure 13 shows the relationship between high tech employment concentration and venture capital per $1,000 of Gross State Product.

Figure 13: High-Tech Employment vs. Venture Capital
per $1,000 of Gross State Product

Conclusion

This report examines the relationship between the concentration of high tech employment in the workforces of the 50 states and various factors that are thought to affect high tech employment location decisions.

The report calculates regression lines based on the relationship between the percentages of high tech employment to total employment in each state vs. selected explanatory variables. The regression equations are not meant to imply any direction of causality between the variables in the equations, nor are the coefficients in the equations examined for statistical significance.

The R2 statistics calculated for each regression equation are used to determine the relative strength of these relationships in terms of goodness of fit. The higher the R2 is, the higher the degree of correlation between the concentration of high tech employment in each state’s workforce and the individual explanatory factors.  Table 8 summarizes the R2 statistics (goodness of fit) for each of the location factors we regressed against high tech employment concentration.

Table 8

It is not clear from this analysis whether the presence of bachelor’s degrees, engineers, R&D and/or venture capital attracts high tech industry into a state or whether the presence of high tech industry attracts those variables into the region.

It is clear from the results that the variables that tend to have the highest correlation with the concentration of high tech employment in each state tend to be the amount of bachelor degree holders and the percentage of engineers in the workforce, followed by the amount of R&D activity and access to venture capital. Other variables had lower degrees of correlation with high tech employment concentration in each state.

State and local governments and economic development organizations that want to nurture high tech industry in their region should actively pursue strategies designed to improve the quality of the workforce, attract venture capital and support research and development activity in the region.