United States

Small Business

Administration

Office of Advocacy

No. 198

June 2000

SMALL BUSINESS

RESEARCH

SUMMARY

Developing High-Technology

Communities: San Diego

by Diane Palmintera, Joan Bannon, Marci Levin, and Arturo Pagan

2000. [122] pages. Completed by Innovation Associates, Inc.

1608 Washington Plaza N., Reston, VA 20190,

under contract no. SBAHQ-97-M-0970.

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

The San Diego metropolitan area formerly depended

heavily on one source of employment — military

and defense contracting — that was controlled by

employers based outside the region. Unlike many

single-industry cities, however, San Diego was able

to diversify and become a leader in several hightechnology fields after its once-dominant employment source contracted sharply. Moreover, the city

achieved its success without large infusions of federal or state funding. Because San Diego’s success has

been the envy of many other cities, this study was

undertaken both to analyze how the economy there

adapted so well and to provide lessons for other

localities.

Scope and Methodology

Innovation Associates used a variety of techniques to

document the change in San Diego’s employment

base, to show the diversity of its present-day economy, and to understand how mutually reinforcing

interactions among university leaders and researchers, entrepreneurs, suppliers of capital, and local

government officials have created an atmosphere that

spawned a large number of new high-tech businesses. These businesses are grouped in a number of

“industry clusters” as defined by the San Diego

Association of Governments (SANDAG).

The report traces the transformation of the local

economy from the 1980s to 1998, using such data as:

employment by sector and industry cluster; number

of firms; local, state, and national comparisons of

unemployment rates, per-capita personal income, and

retail sales; regional imports, exports, and cross-border manufacturing; and comparisons with other metropolitan areas for patent grants, Small Business

Innovation Research awards, and venture capital

investments. The data come from both public sources

and special tabulations from numerous federal and

state agencies, SANDAG, and private companies.

The contractor interviewed more than 30 government, university, non-profit, and corporate leaders.

The report includes extensive details from an interview with University of California President Richard

Atkinson, who served from 1980 to 1995 as chancellor of the University of California at San Diego

(UCSD). In addition, there are profiles of key organizations and companies. Lessons for other communities are distilled into 16 findings.

Highlights

San Diego in the late 1980s and early 1990s was

hard hit by defense cutbacks that caused severe economic dislocations for the local work force, particularly in aerospace and supplier industries. Less than

10 years later, all of the lost jobs have been replaced,

mainly by new jobs in business services, high-technology clusters, and tourism. From 1990 to 1998,

high-tech clusters added over 46,000 new jobs to the

region. Jobs in biotechnology and pharmaceuticals
doubled, as did employment in software and computer services, while communications jobs grew by over

one-half.

Small firms created nearly all these jobs. Except

for a few major companies — such as Qualcomm,

which started in San Diego in 1985 — the terms

“technology firms” and “small firms” have become

synonymous in the San Diego region.

The success of the region’s ability to create and

expand high-tech businesses is due to multiple factors, including a rich research and development

(R&D) base, active university promotion of science

and technology to local businesses, availability of a

skilled work force, an involved business community,

and public support.

The technology growth was not the result of a

master strategic plan, and the region’s business, academic, and public sectors did not initially act in unison. A failed bid in the 1980s to attract major national R&D centers taught San Diego about the importance of community cohesiveness.

The San Diego Regional Economic Development

Corporation (EDC) took the lead in promoting

greater community participation by private-sector

leaders and involvement of the academic community

to reduce the region’s dependence on defense contracting. The EDC’s efforts resulted in better networking among business leaders, a closer working

relationship between UCSD and the business community, and improved communication among the

public, academic, and private sectors. These efforts

ultimately strengthened the region’s environment for

technology development.

San Diego’s defense industries provided the base

for spin-offs in fields such as wireless communications and computer and software services. Two of the

largest homegrown technology firms — Science

Applications International Corp. and Qualcomm —

started by serving the defense industry but have since

diversified. The rich R&D base left by the downsized

defense firms provided fertile ground for new technology growth aimed at meeting the demands of emerging commercial markets. San Diego’s world-renowned

research institutions — the Scripps Research Institute

and the Salk Institute for Biological Studies — also

fostered growth in medical services, biotechnology,

and medical device industries.

The development and growing prestige of UCSD

was particularly important in promoting the development of high-tech firms in the region. UCSD not

only trained many of the engineers and scientists

who later took positions with new and growing hightech firms, but also provided a valuable science and

technology base for these firms. According to

UCSD, most of the high-tech firms in the region

were based on technology developed at the university or founded by its faculty or graduates. Programs at

San Diego State University and San Diego City

College also helped deepen the work force’s entrepreneurial and technical skills.

A number of local organizations, each of which is

profiled in the report, added a key element in developing a supportive environment for high-tech industries. One ingredient of the region’s success has been

the inclusive, cooperative spirit of these industry

organizations.

Conclusions

San Diego’s future as a technology community looks

promising. Rapidly growing technology industries

have pushed the unemployment rate below the

national average and have set the stage for future

growth. The legacy of UCSD’s former chancellor,

who created a nationally recognized research university, and the commitment of business leaders to build

a technology region, should continue to provide a

healthy environment for new technology-driven

growth.

The high cost of living, transportation, and other

issues may slow growth somewhat. Moreover,

improvements in primary and secondary education,

particularly for a growing minority population, will

be essential to ensure a supply of skilled workers for

technology industries. But in the near future San

Diego’s economy shows every sign of remaining

healthy and growing, as it continues to diversify and

as technology clusters in emerging markets continue

to expand.

Ordering Information

The full text of this report, along with summaries of

other studies performed under contract to the U.S.

Small Business Administration’s Office of Advocacy,

is available on the Internet at www.sba.gov/advo/

research. Printed copies are available from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847; TDD: (703) 487-4639

Order number: pending

Price codes: pending