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Key Takeaways:

• California could use tax incentives and strategic investing to further develop its technology industries, following in the footsteps of Estonia, Taiwan, South Korea, or Massachusetts.
• Proven strategies to alleviate housing and cost-of-living pressures in Massachusetts could be applied to Los Angeles and Silicon Valley.
• California could adopt a Taiwanese or South Korean approach of carefully growing a domestic industry by leveraging trade policy and government investment.

   

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California’s economy, the fifth largest in the world, benefits from and invests heavily in technological development. The results are admirable: It received $21 billion in federal funding for research and development in 2018 — more than any other state in that year (BEC 2020). California’s businesses lead the nation in receiving venture capital investment and garner more than half of total VC investment in the U.S. California inventors receive the most patents of any state. And “Silicon Valley” is shorthand for “innovation.”

But this promise is threatened by problems. Overpriced housing, regulatory bureaucracy, and educational disparities conspire to discourage companies and choke a flow of new talent.

Luckily, California can look to role models that have addressed those hurdles and paved a prosperous way forward.

By examining Estonia’s modernization of public-sector services, Taiwan’s approach to investment and state control in high-tech manufacturing, South Korea’s trade strategy in automotive technology, and Boston’s infrastructural development of a biotechnology and innovation hub, California can learn important lessons that will guide its progress in the decades ahead.

Researchers at SIEPR are working with California 100, a statewide initiative focused on inspiring a vision and strategy for California’s next century, to ensure policymakers have the knowledge they need to navigate the Golden State’s economic future. This policy brief is intended to help map some of the way forward.

Lessons from Estonia: Creating a digital revolution

When Estonia gained independence from the Soviet Union in 1991, its telephone exchange was 50 years old. Ten percent of its 1.4 million citizens were unemployed and its GDP lagged that of its Nordic neighbors thirtyfold (DESI 2018).

Today, Estonians get free Wi-Fi. Online voting, medical prescription filling, and tax filing are enabled by digital identity cards. And an innovation-friendly ecosystem fosters the third-highest number of startups per capita in Europe. These benefits are also available to e-residents; anyone with a government-issued ID, 120 euros, and a credit card can apply for e-residency, which allows the opening and operation of a business in Estonia.

With no preexisting technological infrastructure, Estonia may serve as a better model for the rural and remote regions of California that missed out on the technology boom.

Estonia’s rapid digitization was driven by consensus and government leadership, enacting a strategy that began with internet access and digital literacy in schools in the early 90s. That was followed by the digitization of tax filing (in 2000) and identity cards (in 2002). Meanwhile, the country built a cohort of young digital natives who would drive progress as they aged. Today, 89 percent of Estonian adults are online, compared with 28 percent in 2000 (CPI 2021). This sustained momentum has ensured that government services and data are easily accessible, interconnected, and interoperable.

Rather than attempt to reach everyone all at once, Estonia started with school children and retirees (via digital literacy education offered to 10 percent of the population at the beginning of Estonia’s reforms, at the cost of 2.5 million euros) (Heath 2019). That created a swell of internet users who would bring others along on the technology adoption curve. This baseline of 10 percent adoption required for an idea to spread in a population is borne out by research on mathematical models of social movements (Xie 2011).

Digital education was supported and funded by private-sector institutions, banks, and telecommunications companies that would benefit from the widespread adoption of digital ID cards and digital signatures. Digital ID cards were introduced in 1998, but failed to gain widespread adoption until the industry-funded education program was well underway, demonstrating the benefit of industry support.  

Estonia’s digital transformation began as a policy paper by a small group of technologists, academics, and politicians. This paper gained traction within government and was developed into information policy principles approved by the Estonian Parliament (DESI 2018).

The first steps of implementation were taken by Estonia’s president, minister of education, and ambassador to the U.S. They coordinated a program with 150 million euros of investment to introduce the internet in schools, train students how to use it, and then promote internet use in businesses across Estonia (Vassil 2016). Simultaneously, the government partnered with universities to establish a system to connect all of its departments to the internet.

Progress was well sustained. Between 2000 and 2002, Estonia launched compulsory digital ID cards, free Wi-Fi across the country, and free adult digital literacy courses. The ID cards gave citizens entrée to online systems to vote, file taxes, and manage their health information, which saved time and money (2 percent of GDP annually) (Heath 2019). Estonia’s Public Information Act of 2000 mandates a single data repository across the country, the X-Road system. The law prohibits requesting duplicate information for public services, thereby mandating information sharing (Vassil 2016).

Estonia’s technological development demonstrates that governments do not need to replicate the trajectories others have taken to reach a level of technological sophistication. Rather, they can choose to join their prospective peers at the forefront of deployment. Projects that connect services and will be used by a broad swath of society both build momentum and create network effects. Analysis of the X-Road system, which sequentially linked data repositories from government agencies, suggests that exponential growth in querying takes off around the 50th data repository linked.

Lessons from Taiwan: Foreign investment and capital controls in the semiconductor industry

Taiwan is the leader of the global semiconductor market, producing more than 50 percent of total supply and accounting for over $115 billion of output (Chang 2021). Taiwan’s dominance in semiconductor manufacturing is the result of a considered decision by the government to establish the industry through technology transfer, direct investment in the absence of foreign interest, and the establishment of competitors.

To initiate competition in semiconductor manufacturing, the government incorporated a second manufacturer, compelled a private company to join its investment as a majority stakeholder, and repeated this strategy to spin out a third company, after which the production of spin-off companies continued independently.

Taiwan’s plan started with an agreement between RCA, a U.S.-based company developing semiconductors, and the economic minister of Taiwan. Once they agreed on a ballpark amount of investment required for Taiwan to enter the market, a tech-transfer deal was signed and Taiwanese engineers were sent to learn semiconductor manufacturing at RCA. Taiwan’s nascent semiconductor companies also negotiated to attract U.S.-trained talent to lead the companies and develop new methods of manufacturing.

As a takeaway for California’s tech industry, this model of growing talent through training at other companies could be used to ameliorate talent shortfalls due to educational disparities or labor market shortages.

Recognizing the unsustainability of importing all of the integrated circuit components used by Taiwan’s electronics industry, its minister of economic affairs established the Electronics Research and Service Organization of the Industrial Technology Research Institute (ERSO-ITRI). This public research entity produced its first silicon wafer in 1977 after obtaining engineering expertise and training from RCA (Breznitz 2007).

Between 1979 and 1983, a heavily government-funded company, United Microelectronics Corporation (UMC), was spun out of ERSO-ITRI, and technology transfer from U.S. companies continued alongside domestic innovation at ERSO-ITRI (Breznitz 2007). Taiwan Semiconductor Manufacturing Company (TSMC) was the second partially government-funded company spun off from ERSO-ITRI in 1987, and TSMC’s manufacturing facilities and foundries attracted foreign semiconductor companies to open operations in Taiwan (NRC 2003).

Five-year projects launched in 1990 and 1996 created supply-chain and technology-development alliances among the semiconductor companies operating in Taiwan, leading to the formation of additional companies. These indicators of a thriving semiconductor industry, as well as a shift to a trade surplus and a 46 percent profit rate, allowed the Taiwanese government to step away from subsidies and directional development plans and toward tax incentives and investment (NRC 2003, Chang 2021).

Taiwan has continued to invest into the fifth decade of the industry, recently committing $107 billion over the next five years (approximately 3 percent of GDP) to expand current capacity, build new factories, develop new manufacturing facilities, and continue to recruit talent (Chang 2021).

Taiwan’s continued growth and commitment to an industry in which it has been a dominant player over the past two decades is support for California continuing to invest in industries, such as software development and aerospace technology, in which it plays a leading role but could beneficially deploy public funding that provides strategic direction for growth. 

Lessons from South Korea: Leading the automotive market

South Korea is the world’s fifth-largest automobile producer, and the ubiquity of the country’s cars goes back to two policies implemented in 1962. These policies contradicted common wisdom that industrializing countries needed to build national companies that could compete in a global market.

The Automobile Industry Promotion Policy and the Automobile Industry Protection Act were protectionist policies that prohibited foreign manufacturers from operating independently in the country and restricting imports (Green 1992). The initial products of South Korean auto manufacturers were assemblages of foreign parts and design, exported to South and Central America. Domestic startups entered the industry, including the companies that are now Kia and Hyundai.

In 1982, the Automobile Industry Rationalization Policy was adopted to reduce excessive manufacturing capacity among South Korea’s four automakers, simplify the supply chain for parts, and encourage the development of higher-quality vehicles designed and manufactured in house (Yoon 2021). South Korea taxes automobiles and gasoline heavily, encouraging exports and designs focused on an international market while attempting to curb pollution and congestion domestically.

The Automobile Industry Rationalization Policy draws an interesting parallel with Taiwan’s establishment of a semiconductor industry. When should government suppress versus encourage competition? In Taiwan, UMC and TSMC focused on slightly different aspects of manufacturing technology (with TSMC focusing on very large-scale integrated circuits), but competed on technological development rather than on price or talent. 

The Hyundai Pony was the first South Korean car to be exported, first to South and Central America and later to the United States, where its low price led to sales records, but its low quality led to a poor reputation (Green 1992). The Pony was still produced via an amalgamation of foreign parts, but its success as an export galvanized the development of more in-house design and manufacturing.

As domestic production increased, investment in research and design also increased, leading Hyundai and Samsung Motors to improve their reputation and brand quality. But concerns over pollution and fuel supply have meant that domestic sales are limited compared with foreign sales, leading manufacturers to change their designs to appeal more to foreign market tastes.

Despite external shocks, including a recession brought on by global instability in the fuel supply chain, South Korea was able to respond by pushing back repeal deadlines and implementing policies to cushion the industry from destabilizing forces. California has been a “first mover” in several policy areas, including consumer data privacy, vehicle emissions standards, and livestock welfare. However, where policies may exacerbate instability, California should reserve the option to delay policies or implement revised ones.

Lessons from Boston: If you integrate it, they will come (for the real estate, investment, and jobs)

South Boston’s waterfront was an industrial harbor home to warehouses and whale watching tours until a program driven by the city’s mayor launched in 2010. The program dedicated 1,000 acres to the development of an Innovation District that would combine co-working spaces, resources for startups and technology education, networking events, improved transit, traffic management, lighting, and waste management, new housing, and tax incentives (MassBio 2021).

The Innovation District has brought in 4,000 new jobs and more than 400 new companies since 2010, and established companies like GE and Reebok have decided to move their corporate headquarters there (Boston Planning and Development Agency 2021).

What did Boston recognize about attracting tech companies and startups? It needed to demonstrate the availability of funding (through VCs and banks), R&D (through proximity to major research universities and teaching hospitals), and a fluid labor market (through a density of employers and easy connections to housing, retail, and entertainment by highways or public transportation). The latter consideration when situating a new startup hub allows a young workforce to commute however they choose, without feeling like they’ve irrevocably committed to one employer by moving next to its suburban campus.

The city approved $3.2 billion in mixed-use housing and retail development between 2014 and 2015, aiming to build apartments that would attract young workers and allow them to live within walking distance of their workplaces (Boston Planning and Development Agency 2021).

While real estate development, transit improvements, and a location convenient to tech-focused universities helped make Massachusetts an attractive destination for startups, the state also created two agencies (MassVentures and MassDevelopment) to provide funding for startups and emerging tech companies.

Massachusetts also implemented workforce development, funding, and tax credit incentives to draw companies. With biotech as a particular focus, Massachusetts identified 84 “BioReady” municipalities across the state that have committed to making buildings available for biotech companies, with appropriate industrial permitting and utilities.

The commonwealth’s investment into two innovation districts was highlighted in 2019 as a guiding example for the EU’s Smart Specialization Strategy of “non-neutral” innovation policy favoring specific technologies or industries (Katz 2014). Over 10 percent of Massachusetts labor is now employed in the tech industry, and one in every 14 Massachusetts jobs is in tech. To encourage the ongoing development of this industry, Massachusetts continues to provide a workforce training fund, two R&D tax credits of 3 to 5 percent, investment tax credits of up to 10 percent for job creation, and a 10 to 15 percent R&D tax credit (MassBio, State of Massachusetts).

California can learn from Massachusetts’ successes and also its challenges. As Boston found in the Seaport district, investing in the local community through transportation infrastructure and utilities is just as important as offering attractive condos and fancy co-working cafes. Ideally, investment in startup spaces can also attract local talent, building a jobs pipeline from preexisting communities to newly arrived tech companies.

The road ahead

Just as California’s iconic grizzly bear was driven to extinction 100 years ago by an absence of thoughtful environmental and wildlife policies, the state’s iconic technology economy is threatened by neglect. The state needs to take steps now to chart a safe path forward to preserve this robust sector for the next century.

Other governments’ strategic directions for building up tech industries demonstrate reasonable options for California:

• A Taiwanese or South Korean approach of carefully growing a domestic industry by leveraging trade policy and government investment;
• An Estonian approach of rapidly modernizing and centralizing governmental data and services;
• A Massachusetts model of identifying and developing innovation hubs across the state that can draw talent and companies from centrally generative pools and providing infrastructure and incentives for in-state growth and development.

Evaluating and driving any of these strategies could benefit from the introduction of an executive-level scientific advisor reporting to the governor, the strengthening of advisory bodies like the California Council on Science and Technology, or the formation of a California version of the Office of Technology Assessment to identify industries in which California could use a concerted development push.

This is a difficult time for California to commit to large-scale, long-term planning, as the state is beset by climate change, drought, and wildfires. Pandemic recovery, sustained unemployment, high housing costs, and aging demographics also pose significant challenges. But science and technology have been driving forces of California’s remarkable successes since the mid-20th century. Investing in long-term strategies to sustain and grow these industries is an acknowledgment of the state’s strengths and a commitment to their continuation.

A statewide science and technology strategy longer than a single budget period or election cycle would be a good place to start. The next century of California’s development is too complex and important to figure out one year at a time.

References

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Heath, Nick, et al. “” TechRepublic, February 2019.

Katz, B., and Wagner, J. “The Rise of Innovation Districts: A New Geography of Innovation in America.” Brookings Metropolitan Policy Program, May 2014.

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State of Massachusetts tax codes. Mass.gov., November 2021.

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