25 Years in the Technology Industry - Essay Example

25 Years in the Technology Industry February 3, 2006 Introduction The world is in the midst of an all-purpose technological revolution based on information technology (IT), defined here as computers, computer software, and telecommunications equipment. The macroeconomic benefits of the IT revolution are already apparent in some economies, especially the United States. Historical experience has shown that such revolutions have often been accompanied by financial booms and busts, and the IT revolution has been no exception. But, while spending on IT goods is likely to remain weak in the immediate future, as past overinvestment unwinds, the longer-term benefits for the global economy are likely to continue, or even accelerate, in the years to come. The Bubble, Bust and Recovery Cycle While technological change is an ongoing process, there are periods during which technological progress is especially rapid, resulting in new products and falling prices of existing products that have widespread uses in the rest of the economy. Such periods are generally identified with all-purpose technological revolutions. Earlier examples include textiles production and steam power in the industrial revolution, railroads in the nineteenth century, and electricity in the early twentieth century (the automobile could also be included, but its development was relatively gradual). The effects of such revolutions have generally occurred in three (often overlapping) main stages. First, technological change raises productivity growth in the innovating sector; second, falling prices encourage capital deepening; and, finally, there can be significant reorganization of production around the capital goods that embody the new technology. Technology Bubble Period The growth of the information technology sector (IT) in the 1980s was an important development for the economy, but it spurred relatively little policy or media interest. True, IT was recognized as a driver of comparative advantage for the US and there were a few initiatives involving industrial policy and military preparedness, IT was of interest primarily to specialists. In the 1990's, however, things changed dramatically when the Internet became a topic of intense public discussion. Suddenly computers were not only a way to manipulate information, but also a way to communicate information. This led to a dramatic rise in the public and political awareness of the importance of information policy issues such as intellectual property, privacy, and security. A unique confluence of forces certainly came together in the 1990s: rapid technological advances in the information technology sector; widespread recognition that computers could be used to communicate information as well as process it; the rapid spread of a simple, inexpensive, and powerful wide-area computer network based on non-proprietary standards; and financial institutions ready to fund investment in advanced technology. These forces led to very rapid growth of the Internet. As firms and consumers flocked to the Internet in large numbers, it became evident that information policy issues, including importantly intellectual property, security, and privacy, required serious attention. Employment Statistics From 1993 to 2000 the number of workers in IT industries in the U.S. increased by close to 50 percent, almost two and a half times as fast as employment in non-IT producing industries. By 2000 there were some 5.4 million IT workers in the U.S., representing 4.9 percent of private sector employment. Number of Technology Firms Created The major companies that commenced operations during the boom period are listed below: Venture Capital The United States has the oldest and most developed venture capital industry in the OECD. Several successful high-technology companies in computers and communications, as well as in health-related sectors and services, were venture backed. Young high-growth firms also benefit from a continuum of complementary finance from business angels, institutional investors and second-tier stock markets. The US venture capital market is concentrated in high-technology sectors, particularly computers and communications, followed by health care and biotechnology. Between 1995 and 2000, around USD 145 billion was invested in Internet-related applications. Investments in the on-line industry constituted 61% of the total in 2000. Communications companies ranked first in terms of average investment per company at over USD 31 million. In 2001, these Internet-related investments decreased by 60% or more. Other sectors, including biotechnology and health, were not as affected and investments remained slightly over their 1999 levels. Economic Impact In particular, computer manufacturing, semiconductors and telecommunications, the three IT-producing sectors, contributed disproportionately to economic growth during the 1990s. These sectors accounted for eight percent of the GDP, but accounted for 36 percent of productivity growth (McKinsey). Both the size of these sectors as well as the gains in productivity made the IT-producing sectors extremely important to US productivity growth. According to the Federal Reserve Bank of San Francisco, technology companies in the U.S. accounted for only 7% of total stock market value in 1990 but by March 2000 this share had risen to 36%, a fivefold increase. However, the share of employment accounted for by the technology companies rose from 6% in 1990 to only 9% in March 2000, while their share of sales increased from 6% to 10% in the same period. Even though technology companies had faster sales growth than old economy companies, the latter had faster earnings growth. This again suggests the bubble nature of the technology stocks during the 1990s boom. Technology Slump Period New technologies set off a burst of innovation. Innovation, however, is not evenly distributed through time; it appears in groups or bunches. Entrepreneurs financed by credit make investments in the new technologies. If these innovation investments are successful, imitators follow and the economy embarks on an upward surge: prosperity. Then, an avalanche of goods falls on the market and dampens prices, rising costs squeeze profit margins, and the economy contracts: recession. Recessions are the normal process of adapting to the bunching of innovations during the preceding prosperity. (Schumpeter, 1934). Looking back over 2002 at the beginning of 2003 some parts of the IT sector (e.g., Internet and telecommunications companies) are still struggling. However, many IT and professional management workers in the region have been able to shift and acquire work (as employees and ever more so as contractors) with the larger employers in the region (e.g., large federal contracting firms and the larger management and consulting firms) for two reasons. One is that these firms have "deeper pockets" and thus have been able to acquire high skilled employees in buyers', rather than a sellers' market. A second is that these organizations with open federal contracts have ramped up with contract add-ons for a rapid response to homeland and national defense initiatives. In sum, we correctly anticipated the counter cyclical strength of federal sector spending and flexibility of the region's labor force, making it easier for job shifting from slow or declining sectors to growing sectors. Companies Winded up The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading Employment Statistics Since 2000 this pattern of rapid growth has reversed. During the 2001 recession there was a widespread decline in business investment spending that lead to layoffs in most IT-producing industries. Since the end of the recession both a more cautious approach to IT spending and the foreign outsourcing of IT work contributed to an ongoing weak job market for IT workers in the U.S. as a whole. From 2000 to 2003 employment in IT producing industries declined by 20 percent, compared to a 2.7 percent decline for all private sector industries. In 2003, there were some 1.1 million fewer workers at IT-related establishments in the U.S. than in 2000. Economic Impact When the dot-com bubble burst, most of the "investors" lost most of the money they gave the start-ups; dot-coms fled the lavishly furnished offices they had occupied with most of the furniture unmoved, and liquidated the offline businesses they had acquired. With mass layoffs, many restaurants and bars that served as hangouts for employees of those start-ups have closed or are not crowded any more; air planes have many more empty seats; hotels have many more empty rooms, and even highways in high-tech cities are now considerably less congested during normal rush hours. The sudden shutoff of the free and wild spending by the dot-coms, along with the corporate bookkeeping scandals that first become public due to the Enron accounting scandal, contributed to the onset of the economic downturn in the US and subsequently worldwide. As there is a silver lining to a cloud, the dot-com bust has had one positive impact on humans, in that the social malaise of the blind greed, envy, misguided notions about wealth creation that bordered on outright fraud have considerably subsided, and people and businesses have regained a sense of proportions and of traditional value. Recovery Phase Employment Statistics Unlike previous recovery cycles, this recovery is different: Payroll employment growth has been much weaker and the national unemployment rate still hovers just below 6%, significantly higher than the 4% unemployment rate in 2001. In current circumstances, the problem in the U.S. is that the economic recovery has so far been not just a "jobless recovery" but has actually been a "job-loss recovery". For example, even though the prestigious Bureau of National Economic Research declared that the recession of 2001 ended in November of that year, the U.S. has lost more than a million jobs since then. Based on the history of previous economic recoveries, the economy by now should have generated somewhere in the vicinity of three million new jobs. Works Cited National Venture Capital Association (NVCA) (2002), NVCA Yearbooks, Thomson Financial/Venture Economics. Read More