Washington's High-Tech Future

Sector Fueling Job Growth in Area May Be Hindered by a Lack of Nurturing

by Daniel Southerland and Sandra Sugawara

Monday, January 17, 1994

In a fundamental change that is transforming the Washington area economy, high-technology industries have emerged as the main generator of growth in the region's private sector, according to government officials and development experts.

Setting aside the federal government, which remains the area's largest employer, the high-tech sector has taken the leading economic role from comparatively stagnant industries such as commercial real estate, retailing and banking.

Companies in the computer, telecommunications and medical technology businesses -- continuing an expansion that began in the 1980s -- are likely to create more local jobs in this decade than firms in other types of business, analysts said.

"Technology-related industries in this area ... form the engine to drive exceptional job growth over the next decades," said Georgetown University business school professor John F. Dealy, a longtime observer of the local high-tech scene.

But that kind of expansion is not guaranteed. There is wide concern among state and local officials, and private specialists, that the Washington area might hurt its own economic future by neglecting to nurture the high-tech sector. That is especially true in light of increasing competition from other regions of the country eager to attract technology companies and the high-paying jobs they offer.

The sector faces several obstacles in the Washington area. In particular, there is a shortage of financing for high-tech firms, partly because local banks are not accustomed to lending to them.

Other barriers are cultural and psychological. This government town, historically a home for bureaucrats, lawyers and lobbyists, does not typically foster the risk-taking, entrepreneurial mentality often needed to survive in the quickly changing world of commercial technology, according to some private experts.

"In Washington, people don't want to leave their secure jobs with the National Institutes of Health" to launch or work for risky but potentially profitable medical technology companies, said Brian Dovey, a partner with a New Jersey firm that finances such firms.

By contrast, in California there are so many start-up companies that "people don't really see working for them as a high-risk proposition," Dovey said.

Ed Bersoff, president and chief executive of Vienna-based BTG Inc., an information technology company, said of the area: "We have all the ingredients of a first-class technology cluster except for venture {capital investment} money and a more ideal business climate."

Dealy called for stimulative tax and regulatory policies, and greater cooperation between the public and private sectors to increase financing for technology companies.

"It's going to be competitive, both nationally and internationally," said Dealy. "If this region doesn't {use} its assets, other regions will."

About one-fifth of the workers in the greater Washington metropolitan area -- or roughly 400,000 of 2 million workers -- are employed in technology or technology-related jobs, according to estimates by Dealy. And he forecasts that their share will expand to one-third by the year 2000, far outpacing job growth in any other sector.

Dealy, in addition to working as a professor at Georgetown, is chairman of a technology advisory board for Maryland and senior counsel of the law firm of Shaw, Pittman, Potts and Trowbridge. He is a former president of Fairchild Industries Inc.

Examples abound of local technology companies that are growing dynamically:

Univax Biologics Inc. of Rockville, which develops drugs to fight infectious diseases, has more than tripled its staff to 130 in less than two years. Despite a constant struggle to raise cash, it has built a new vaccine production facility and has several products in the pipeline.

American Mobile Satellite Corp. in Reston, which is developing a nationwide satellite communications system for mobile telephones, has grown from 20 to 103 employees over the past two years, and says it will have 218 employees by the end of 1994.

America Online Inc. in Vienna, less than a decade old, has become the nation's most rapidly growing commercial computer on-line business. It provides news, weather reports, stock quotes, electronic mail and other services via a customer's personal computer and modem.

Two local information technology companies, American Management Systems Inc. in Arlington and Legent Corp. in Vienna, are recognized as leaders in their fields and have grown steadily, adding hundreds of high-wage, high-skill computer software jobs over the past few years.

A primary reason for the increased importance of high-tech industries is simply the relative decline of other business sectors. Some industries, such as office building construction, boomed in the 1980s but grew too fast and now are expanding slowly at best.

Another reason is a large, local pool of professional talent, from which high-tech companies can draw. According to some estimates, the number of scientists and engineers here, including those employed by federal laboratories and other government agencies, is higher even than in well-known technology centers such as California's Silicon Valley and the Route 128 corridor outside Boston.

Both the Virginia and Maryland governments have become enthusiastic promoters of high-tech industrial development, and allocated millions of dollars to support it. They have done so in part because high-tech companies tend to pay better than those in other industries. A recent study found that while technology firms accounted for almost 16 percent of the private sector work force in Northern Virginia, they accounted for almost 22 percent of private sector income.

"All through the 1980s, we always thought that {real estate} developers were the movers and shakers in Northern Virginia," said Virginia's Lt. Gov. Donald S. Beyer Jr. "But with the real estate crash, we discovered that what made the real estate developers so successful was that they were providing office space for the growing technology companies. When technology growth started to slow, it hurt the developers. So the way to bring about recovery is not by focusing on real estate but by focusing on the technology business."

Mark Wasserman, secretary of Maryland's Department of Economic and Employment Development, or DEED, said: "Technology is driving our agenda."

The local technology sector began to grow in the 1980s. A gush of federal dollars, especially in the defense industry, fueled the expansion.

The Washington-Baltimore region generated an estimated 94,000 new high-tech jobs from 1980 to 1988, a volume that rivaled Silicon Valley and Boston during that period, according to the Washington/Baltimore Regional Association.

A report on economic development in Montgomery County showed that even during the recession and ensuing slow growth from 1990 to 1992, the county's technology industry continued to expand while other industries were forced to downsize.

The majority of high-tech firms in the Washington area can be loosely lumped into four groups: computer-driven information technology, telecommunications, aerospace and biotechnology. Some experts add a fifth category, environmental engineering.

Some of the most dramatic local growth has come in the information technologies sector. Employment in that field in Maryland grew by 74 percent from 1980 to 1987, far outpacing the 25 percent gain nationwide. In Northern Virginia, the growth of information technology was probably even faster during the period, because of the presence of the big-spending Pentagon, according to economists.

Despite cutting back in many areas, the Pentagon has increased its spending on computers in recent years. Local firms with alphabet-soup names such as BDM International Inc., BTG, CACI International Inc. and PRC Inc. have succeeded in this field.

In aerospace, although the government has slashed funds for major projects such as the space station, a number of area firms have succeeded by working on aircraft electronics, support and maintenance systems, and the upgrading of existing aerospace systems.

One small aerospace company, Orbital Sciences Inc. located near Dulles airport and founded in 1982 by three young entrepreneurs from the Harvard Business School, entered a field long dominated by aerospace giants and quickly established a niche for itself. The company, which makes and deploys rockets and other spacecraft, is launching a small-satellite communications network this year, and has formed an alliance with two defense-contracting firms to provide satellite photographs for commercial use.

In telecommunications, the Federal Communications Commission has been a magnet for companies. Because telecommunications companies often find regulatory hurdles as difficult to overcome as the technological ones, they like to be near federal decision makers to shepherd cases in which the companies are interested.

The local biotechnology industry continues to grow. It includes about 120 companies in the Washington-Baltimore area, many of them clustered along I-270 and in Montgomery County near the National Institutes of Health. This has become the third-largest concentration of biotech firms in the nation.

Most of these firms are small, employing a total of only 5,000 to 6,000 people. And some are losing millions of dollars a year while seeking to develop drugs that may not work.

But one expert, Charles Newhall, a partner at New Enterprise Associates, a financial firm in Baltimore, says 10 of the local biotech firms have "big company potential." They could produce blockbuster drugs, transforming them into Fortune 500 pharmaceutical companies, enriching their investors and creating thousands of jobs.

Like other experts, Newhall pointed to the local business culture as an obstacle.

"California has a culture that's respectful of the entrepreneur. Here the culture is respectful of someone with a secure job in a big bank," Newhall said. "If you go to a cocktail party in California, you're likely to meet three successful entrepreneurs and three people trying to become successful entrepreneurs."

But he said the attitude in the Washington area "is changing now, and will change with more success stories."

Fellow high-tech financier Dovey said Washingtonians will feel more enthusiastic about launching high-tech start-ups, or working for them, when they "know a guy who was a janitor who landed up with $100,000, and a vice president who made a couple of million" by working for a young technology company.

Newhall and Dovey work for venture capital firms, which typically provide much of the financing for risky young high-tech companies. Such companies receive a stake in ownership of a firm, and thus the opportunity to reap large profits if it succeeds.

It is the enormous venture capital industry clustered in Silicon Valley that is credited with much of that region's phenomenal growth. There are about 50 venture capital companies on one road alone in Menlo Park, Calif. In contrast, there are about 40 venture capital firms in the entire Washington-Baltimore region.

In addition, most of the Washington-Baltimore area venture capital firms are small with limited resources. High-tech executives also complain that many of the local financiers do not have the detailed understanding of technology that is found in California.

Worsening the problem, local banks have not traditionally been oriented toward financing high-tech companies.

"Many local companies feel they don't get the attention from the local banking community that they deserve," said Kenneth Wilcox, a senior vice president of Silicon Valley Bank of Santa Clara, Calif. The bank recently began making loans in the Washington area because it was so impressed by the growth of the area's technology sector.

Wilcox said he thought the Washington area would overcome the obstacles. He listed three conditions for an area to sustain itself as a dynamic technology cluster for the long term: universities that spawn ideas, financial and services firms that provide capital and technical support, and a critical mass of companies that can attract technology-oriented people.

"I think this area has the potential to bring all those elements together," Wilcox said.

PROJECTED CHANGES IN AREA HIGH-TECHNOLOGY

EMPLOYMENT, BY CATEGORY

JOB..............................1985 ACTUAL..........2000 PROJECTED

SCIENTISTS AND ENGINEERS

Aeronautical engineers................ 2,295.................. 3,326

Electronic engineers................. 15,683................. 24,391

Mechanical engineers...................4,973.................. 7,484

Nuclear engineers..................... 1,339.................. 1,940

Biological scientists................. 5,164...................6,652

Chemists.............................. 4,016.................. 5,266

Physicists............................ 4,208.................. 5,266

Mathematical scientists............... 4,208.................. 5,266

TECHNICIANS

Electronics technicians.............. 10,328................. 15,799

Mechanical engineering technicians.... 4,399.................. 5,543

Medical lab technologists............. 2,466.................. 3,800

Computer programmers................. 14,726................. 23,559

System analysts, EDP................. 23,906................. 38,527

MECHANICAL

Computer operators.................... 7,268................. 13,027

Office machine services............... 2,104.................. 4,158

TOTAL FOR SELECTED OCCUPATIONS.......107,083................ 164,004

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