When it comes to locating their plants and offices, businesses have always had a good eye for what matters most to their success. But the rules of the economic-development game have changed. In the past, companies built plants near raw materials or good transportation or in areas where costs were low. Today, however, when businesses make location decisions, they are on the lookout not for iron ore or forests, rivers or highways, but for people with ideas. The key to success in the knowledge-based economy is what economists call high human capital—what most of us would call talent.
Harvard University economist Edward Glaeser has provided ample empirical evidence that firms gather in particular regions to gain advantages from common labor pools. Nobel prize-winning economist Robert Lucas maintains that the driving force in the growth and development of cities and regions can be found in the productivity gains associated with the clustering of talented people.
But what brings talented workers to those areas? How do they make their residential decisions? What sets high-technology centers such as San Francisco, Boston, and New York apart from other metropolitan areas? Why have some cities—many home to some of the nation’s most prestigious university research centers and college graduates—been unable to attract talented technology workers?
Our theory is that a city’s diversity—its level of tolerance for a wide range of people—is key to its success in attracting talented people. Diverse, inclusive communities that welcome unconventional people—gays, immigrants, artists, and free-thinking “bohemians”—are ideal for nurturing the creativity and innovation that characterize the knowledge economy.
Testing the Theory
Using 1990 census numbers, we constructed four indices to capture the level of diversity and tolerance within the nation’s 50 most populous metropolitan areas. Our first two indices—the gay index and the bohemian index—measure the representation of, respectively, gay male couples and bohemians (artists, musicians, writers, actors, directors, designers) in a metropolitan area. The third—the foreign-born index—measures the share of immigrants in a metro area. The fourth—the composite diversity index—is a sum of the rankings of the other three.
To see how well more and less diverse metro areas stack up with fast-growing high-tech areas, we compare our indices with the Milken Institute’s “Tech Pole,” a measure of high-technology industry concentration and growth, developed in a July 1999 study titled America’s High-Tech Economy. Using 1998 data, the Tech Pole measures a city’s “gravitational pull” on high-tech industries. It ranks metropolitan areas based on a combination of two factors: an area’s high-tech industry output expressed as a share of U.S. high-tech industry output and a ratio of an area’s high-tech industry output to U.S. high-tech industry output. The first measure favors large metropolitan areas; the second, small cities with large technology sectors. By combining the two, the Tech Pole favors neither.
Gays and Growth
Perhaps our most striking finding is that a leading indicator of a metropolitan area’s high-technology success is a large gay population. Frequently cited as a harbinger of redevelopment and gentrification in distressed urban neighborhoods, the presence of gays in a metro area signals a diverse and progressive environment and provides a barometer for a broad spectrum of amenities attractive to adults, especially those without children. To some extent, the gay and lesbian population represents what might be called the “last frontier” of diversity in our society.
As table 1 shows, 11 of the top 15 high-tech metropolitan areas (column 1) also appear in the top 15 of the gay index (column 2). The five metro areas with the highest concentration of gay residents—San Francisco, Washington, Austin, Atlanta, and San Diego—are all among the nation’s top 15 high-tech areas. In our statistical analyses, the gay index does better than other individual measures of social and cultural diversity as a predictor of high-tech location. The correlations are exceedingly high and consistently positive and significant. The results of a variety of multivariate regression analyses support this finding. The gay index is positively and significantly associated with the ability of a region both to attract talent and to generate high-tech industry.
Gays predict not only the concentration of high-tech industry, but also its growth, as we found when we compared our gay index with the Milken Institute Tech-Growth Index, which measures growth in output of high-tech industries within metropolitan areas from 1990 to 1998 relative to the national growth rate in output of high-tech industries during the same period. Five of the cities in the top 10 in the Tech-Growth Index also rank in the top 10 for the gay index. What’s more, the correlation between the gay index (measured in 1990) and the Milken Tech-Growth Index increases over time, suggesting that the benefits of diversity may actually compound as time goes on by increasing a region’s high-tech prosperity.
To counter the possibility that the influence of San Francisco (which ranks first on both the high-tech and gay indices) creates a false association between the two measures, we repeated the analyses without San Francisco. That second analysis strengthened slightly the influence of the gay index on high-tech growth, increasing our confidence that the concentration of gays predicts high-tech concentration and growth.
Bohemians and Immigrants
High concentrations of ‘bohemians’ are also strongly linked to a metropolitan area’s high-technology success, as our bohemian index shows (table 1, column 3). Ten of the top 15 bohemian metro areas also rank among the nation’s top 15 high-tech areas, notably Seattle, Los Angeles, New York, Washington, San Francisco, and Boston.
It has long been thought that talented people are attracted to amenities such as restaurants, museums, symphonies, art galleries, and a vibrant street-level culture. Our bohemian index offers considerable improvement over traditional measures of amenities that make for popular cities, because it provides a direct measure of the producers of those amenities that support and showcase creativity and artistic expression.
Metropolitan areas with high concentrations of immigrants also rank high as technology centers. In Silicon Valley, the world’s leading high-tech center, nearly a quarter of the population is foreign-born. As noted elsewhere in this issue by AnnaLee Saxenian, a large share of Silicon Valley’s high-tech scientists and engineers hail from foreign countries. Earlier research by Saxenian found that roughly a quarter of new Silicon Valley businesses established since 1980 had a Chinese or Indian-born founder. That figure increased to more than 30 percent between 1995 and 1999. The actual extent of immigrant influence may be even greater, because firms with a non-Asian co-founder are not counted.
The correlation between the Tech-Pole index and our foreign-born index (column 4) is also strong. Nine of the top 15 (and 8 of the top 10) metropolitan areas with the largest share of foreign-born residents were also among the nationÕs top 15 high-technology areas: Los Angeles, New York, San Francisco, San Diego, Chicago, Houston, Boston, Washington, and Seattle.
Our argument about diversity is simple and straightforward. Diversity of human capital is a key component of the ability to attract and retain high-tech industry. When we summed the rankings of our three diversity indices to make our composite diversity index (CDI), the result strongly correlated with the Milken Tech-Pole ranking. As column 5 of the table demonstrates, the top 11 metro areas on the CDI are also among the top 15 Milken Tech-Pole regions. The statistical correlation between the Tech Pole and CDI is higher than the correlation between the Tech Pole and any of our individual diversity measures, and higher than that between the Tech Pole and simpler measures such as the share of college graduates in the population.
Even more compelling, the CDI strongly predicts high-tech growth, as we learned by comparing it with the Milken Institute’s Tech-Growth Index. When we estimated the effect of the CDI on high-tech growth and factored in the share of college graduates in the region, population, and measures of culture, recreation, and climate, we found that our diversity measure has a positive and significant effect on high-tech growth from 1990 to 1998. These results offer strong evidence of the importance of the combined effects of social, cultural, and ethnic diversity for both high-tech location and growth.
Tolerance and diversity clearly matter to high-tech concentration and growth. Having large representations of gays or bohemians or immigrants in a population does not, of course, directly cause a technology industry to spring up. Instead, people in technology businesses appear to be drawn to places characterized by inclusiveness, open-mindedness, and cultural creativity—attributes whose presence is often signaled by, and therefore strongly correlate with, a cosmopolitan and diverse local population. The point isn’t that high-tech jobs follow gays; it’s that gays and high-tech jobs both gravitate to the same kinds of places.
Austin, Texas, like many other university towns that aspire to high-tech growth, has made the traditional investments in research and development and business incubation with major facilities like Sematech and MCC. But Austin has also invested heavily in its lifestyle and music scene—from the clubs and bars of Sixth Street to Austin City Limits and the South-by-Southwest film and music festival. When a high-tech company, Vignette, recently expanded into a new facility downtown, part of its deal was to establish a million-dollar fund to support the local music scene. Austin Mayor Kirk Watson has been the driving force behind a strategy that aims to capitalize on the “convergence” between technology, talent, and tolerance, as he puts it.
There’s a message here for cities. Talent powers economic growth, and diversity and openness attract talent. Companies remain important but no longer call the shots. The location decisions of people are just as important—maybe even more so. In fact, companies increasingly will go where talented people are.
Building a vibrant technology-based region requires more than investing in R&D, supporting entrepreneurship, and generating venture capital. It requires creating an environment that attracts talented people. From the evidence, that seems to mean opening the doors to as wide a range of people as possible.