Mass Insight Corporation

Massachusetts has been an industrial and research leader in technology and defense since the early part of the 20th century. Innovations such as radar, the mainframe computer, microwave technology, the Internet and nanotechnology all have roots in the Commonwealth’s universities, companies, research labs, or military installations.

The Massachusetts information technology, communications and defense (ITCD) sector employs 331,000 people – 10 percent of overall state employment and roughly four times the number employed in the state’s life sciences industry, which gets more attention from the media and state lawmakers. ITCD also accounts for 15 percent of annual economic output. In the period since the 2001 recession, the ITCD sector had stronger growth and employment than the overall state economy.

Despite the success of the technology sector, there are troubling trends that need to be addressed for Massachusetts to maintain and enhance its leadership position in high-tech and defense. First is growth, which fell to 4.3 percent annually between 2001 and 2006, only one-third the rate of the previous 5 years. Moreover, virtually all the growth over the last 10 years was productivity-driven: since 2001, information technology, communications and defense companies in Massachusetts shed a net 64,000 jobs, about a 3.5 percent drop in sector employment and nearly double the rate of job loss across the overall U.S. ITCD sector. The largest losses have been among high-value-added workers, including engineers and managers, suggesting an erosion of the Commonwealth’s tech leadership.

Indeed, more alarming than slowed growth is the state’s declining influence in the global high-tech sector. The time when Route 128 held an equivalent position to Silicon Valley in public perception is fading from memory. Through mergers, acquisitions and attrition, the roster of Fortune 1000 tech companies headquartered in Massachusetts has fallen from nine to six since 2002. In the same period, California saw a net gain of three, bringing its total to forty-two. Massachusetts has also fallen behind in the creation of new tech companies, with the relative number of company births declining from 11.4 percent of all ITCD establishments in 2002 to 9.9 percent in 2004. While California, New York and Washington have seen increases in high-tech venture investments since 2002, VC investment in Massachusetts has continued its drop from the dot-com bubble, particularly in early-stage companies.

Without robust new-firm creation and strategies to retain existing firms, the Commonwealth is in danger of becoming a high-tech outpost and a start-up boutique, with diminishing influence over investment and hiring within its borders.

These developments have negative implications for the Massachusetts economy, which has already felt the effects of the tech slowdown. Since 2001, the Commonwealth has lagged the U.S. in GDP growth every year except 2003 and has trailed in household income growth, a metric on which it used to beat national averages. Other leading sectors of the Massachusetts economy, financial services (11 percent of GDP) and health care (9 percent), cannot be counted on to pick up the slack.

In short, the vitality of the Massachusetts high-tech sector is critical to the state’s economic future. To address these challenges, Mass Insight Corporation recommends public/private initiatives on three fronts to ensure the ongoing success of the high-tech sector. Taken together, these measures can encourage new company formation and attract new tech investments.

If Massachusetts can stem the projected trend and return to its pre-1999 job growth rates in ITCD (3 percent annually from 1994 to 1999), 21,800 new jobs would be incrementally added – over 2,700 jobs annually, and almost $5 billion to state GDP by 2015. Alternatively, without a strategy, these sectors could see job losses over the next decade as alternative local and global locations become more attractive.

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