Report

What the IT Revolution Means for Regional Economic Development

Daniel Carlson and Paul Sommers

Executive Summary

Information technology (IT) saturated American business in the 1990s, and countless new
companies sprang up around Internet applications. In response, economic development officials
across the country have tried to catch the “tech” wave by stimulating the growth of high technology
companies and “clusters.”

This effort has been impressive, but as this paper argues, it may have remained too narrow.
The IT revolution extends far beyond the technology sector, after all. All kinds of firms–not just
“tech” companies–are finding ways to cut costs dramatically by automating tasks, outsourcing
certain functions, and linking customers to the factory floor. IT is also accelerating the ongoing
fragmentation of large firms into separately located functional units, and the establishment of
strategic relationships with other firms to perform functions formerly kept in-house.

In view of these changes, this report seeks to give readers a look inside companies to see
how they are using IT, and to begin a conversation about what regional leaders can do to support
technology-based development. The study builds on interviews with the chief information officers
(CIOs) and information architects of 28 firms located in five metropolitan areas–Atlanta, Cleveland,
Minneapolis/St. Paul, Phoenix, and Seattle. Ultimately, it seeks to clarify the nature and direction of
key trends in order to explore their implications for public policy.

Several key insights emerge from this analysis that shed light on the impact of IT on regional
economic development:

  • Both “new” and “old” economy firms are embracing IT, which means that both
    Sunbelt and Rustbelt cities and metropolitan areas can benefit from the technology
    revolution.
    Several U.S. metropolitan areas–such as Seattle, Austin, and Washington,
    D.C.–have become well-known centers for high technology companies, and others continue
    to emerge. However, success in the new economy does not depend solely upon attracting
    or growing high tech clusters. Traditional industries in diverse sectors of the economy are
    also integrating new technologies into their operations. Companies like Parker Hannifin, a
    Cleveland engineering firm, employ computers and computer-controlled tools to design and
    manufacture products, and they increasingly use web-based purchasing technologies. That
    means that even manufacturing regions need to recognize companies’ shifting needs, and
    ensure that their economic development strategies respond to them.

  • IT enables the “fragmenting firm” to split off key functions throughout the U.S. and
    abroad, which presents both opportunities and challenges.
    The cluster phenomenon is
    still alive and well, but it increasingly revolves around portions of firms and functions within
    firms–from data processing to distribution–rather than whole companies and industries.
    Federated Department Stores, for example, maintains its headquarters in Cincinnati, but has
    located its design and product development operation in New York City, and its data and
    financial management group in Atlanta. Similarly, the Boeing Company recently moved its headquarters to Chicago, but left its commercial airplane production facilities in Seattle and
    Southern California–traditional sites for aerospace manufacturing. The upside of this trend
    is that metropolitan areas now gain an opportunity to specialize. All regions can now focus
    on and compete for key firm functions, whether they entail manufacturing, research and
    development, logistics, or sales. The downside: Cities like Seattle or Cleveland may lose
    high-powered intellectual capital–as well as beneficial civic leadership–as top executives
    move to headquarters meccas like New York and Chicago.

  • IT generates new criteria for firm locations, which may bring competitive advantage to
    some regions.
    Intel, for example, maintains a list of prerequisites when it chooses a site in
    the United States or abroad that includes a qualified, educated workforce; quality of life
    factors; infrastructure; availability of land; and tax incentives. Possessing extensive
    broadband capacity, a skilled labor force, and a good environment in which to live and work
    can give U.S. regions the edge they need to compete–not only domestically, but against
    developing countries that may have cheap labor, but lack technology infrastructure and other
    locational advantages.

  • IT helps firms go “global,” increasing the need for U.S. regions to market themselves
    internationally.
    To be sure, the globalization of manufacturing has been taking place for
    decades. But IT has also enabled financial and other business services firms to go global.
    Companies are increasingly outsourcing key functions to obtain a higher level of efficiency,
    profitability, or competitiveness. This means U.S. metropolitan areas must compete with
    regions all over the world for firms, portions of firms, and employment. Regions with
    particular niche capacities, and the ability to market them globally, have an opportunity to
    cultivate linkages with corporations abroad and improve their ability to compete on the
    international playing field. These global relationships may facilitate specialization in higher
    skill/higher wage operations, while at the same time reveal new markets for companies–
    products or services.

Ultimately, cities or metropolitan areas can do little to reduce the likelihood–accelerated by
IT–that firms will globalize, fragment, or relocate headquarters. Regional leaders can, however,
work to create a competitive setting for all business’ survival and success in a high tech era. This
means investing in IT infrastructure; providing the right education programs at adequate scale to
meet new skill requirements of employers; supporting innovative firms with research and
development programs at universities and institutes; and assuring adequate venture capital for
startup companies. Leaders also need to insist that their own organizations lead in the effective use
of new technologies, and that their metropolitan areas build strong relationships with regions abroad.

Those metropolitan areas that understand the changing nature of business–and respond
nimbly to its demands–will create the best environments for firm and economic growth.

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