California's Future as a High-Tech Leader

August 21, 2008

Milken Institute


Ross DeVol


With the world's eighth-largest economy, California might appear to be immune from challenges to its high-tech leadership. But as the latest edition of the Milken Institute's State Technology and Science Index reveals, its edge is eroding.

For the third edition in a row, Massachusetts claims the top spot in the State Technology and Science Index, while California has slipped into 4th place overall. California still has the nation's preeminent entrepreneurial ecosystem, and has emerged as a leader in nanotechnology and clean technology. But its systemic problems are becoming ever more apparent.

At a recent Forum, Ross DeVol, director of Regional Economics, presented the study's findings and issued a wake-up call regarding California's neglect of its human capital.

After ranking 4th in the study's composite measurement of Human Capital Investment as recently as 2002, California has now tumbled to 13th place in this category. It is now only 16th in the nation in the percentage of its population age 25 and older holding at least a bachelor's degree.

Student visa restrictions instituted after 9/11 have made it harder to attract top foreign talent — and given recent tuition hikes, the UC system is no longer such a bargain for out-of-state and international graduate students.

"The other major human capital challenge is that California simply isn't producing enough college-ready high school graduates. Our public schools are failing many Latino and other minority children," he insisted. "This is our future work force."

He noted the tremendous strains on California's education system, and recommended addressing funding levels as well as structural reforms such as teacher compensation.

While California continues to excel at producing the entrepreneurs and capital necessary to convert research into commercially viable products and services, its share of federal R&D dollars has declined, DeVol said, and its academic R&D spending slipped to 19th place this year.

Despite its concentrations of biomedical, electronics and computer hardware engineers, California also declined in the composite measuring Technology and Science Work Force. The state's intensity of computer and information science experts has declined, as many support operations have been outsourced.

In the composite measuring technology outcomes (in terms of high-tech employment and payroll, net establishment births and growth), California dipped to 7th in the nation. Even with its remarkable diversity of high-tech sectors, the state is stalling in indicators for growth and business formation.

Maryland and Colorado, with more attractive cost structures, have already surpassed California in overall results since the 2004 report was published. Virginia and Utah are poised to do the same if California cannot staunch the outflow of high-tech workers and shore up its educational base.

"In technology, achieving critical mass is the key to continued momentum, and its sheer breadth of components keeps California ahead," observed DeVol. But relying on existing industry ties and the benefits of clustering rather than developing human capital is a huge gamble. "The old formula isn't going to work anymore."

"The clear trend in 2008 is increased competition," DeVol argued. "More states are making major investments and adjusting their economic development strategies. There's a lot of competition out there — not just from other states but also from abroad."