What Keeps Texas on Top
May 2 2012 by William J. Holstein
- Texas is luring businesses from other states with a powerful combination of state and local incentives
- A strong university system that concentrates on commercializing intellectual property is a key attraction
- Companies are able to persuade technology workers from East and West Coasts to relocate to Texas—or else find the right talent locally
Erica Douglass is a young, highflying technology entrepreneur who lived in Silicon Valley for years before selling her company to Sun Microsystems for $1 million and moving to San Diego. But now she’s had enough of California. In a blog on her website (Erica.biz) that attracted hundreds of viewings, she wrote, “Dear California, I’m leaving you” and went on to explain how the Golden State’s tax policies were costing her too much money. In December 2011, she picked up her new company, Whoosh Traffic, and moved to Austin, Texas with three employees. She has hired a fourth, a difficult-to-find programmer in the Python computer language, and business is booming. “I think Californians have an outdated view of Texas,” she says. “They think it’s all cowboys who have guns and drive pickups.”
Texas certainly boasts many cowboys with gun racks in their pickups, but Austin is different, thanks to the presence of the University of Texas, major technology companies, such as Dell and Samsung Electronics, a lively entertainment and gaming scene, art exhibits, food trailers, and clubs and bars aplenty. “Keep Austin weird,” the locals proclaim on t-shirts. Douglass was able to buy what she describes as a nice house just 15 minutes from downtown for $320,000, less than half of what a comparable house would have cost in Silicon Valley. The presence of startup venture funds and angel investors is also key. “The people who are doing startups here, we all know each other and we try to help each other,” says Douglass, who helps companies increase traffic to their websites. “I’m loving it.”
Texas is booming these days, reflected in the fact that readers of Chief Executive have ranked it the No. 1 State for Business for the eighth consecutive year. The state is growing its own companies but also is displaying remarkable success in luring investments from other states, particularly California, which once again ranks last in our survey. A raft of small, technology companies have either relocated to Texas or moved key operations there. (See Eastward Ho below.) Bigger California companies, such as Facebook, eBay and PetCo also have recently opened operations in Texas, and major manufacturers from different states, such as General Electric’s transportation unit and Caterpillar have located big new plants in Fort Worth and Victoria, respectively. (See Texas Big Company Wins) “Employers from around the nation and all over the world continue to look to Texas as the premier location for business expansion, relocation and job growth thanks to our low taxes, reasonable and predictable regulations, fair legal system and skilled workforce,” Gov. Rick Perry told Chief Executive.
But it’s not because of the old, country boy, homespun values that Perry espoused on the presidential-campaign trail. Instead, Texas is benefitting from a conscious strategy to combine big wealth and governmental sophistication. Call it “Texas Inc.” It starts with the fact that towns and cities are authorized to employ sales and use taxes to fund economic development corporations, which they use to promote themselves to companies all over the country—and then to o”er incentives. “That makes Texas completely different from the other 49 states,” says Andrew Levine, president of New York-based Development Counselors International, which helps states and regions market themselves.
Once Fort Worth or San Antonio starts negotiating with companies, the city gets a boost from the State Department of Commerce, which has been consolidated over the years and reorganized into the governor’s office, another difference from most states. The governor’s office runs a meeting every Thursday called the “matrix meeting” because it includes representatives from economic development, workforce, environmental and other agencies. They review deals and give quick, coordinated approvals, which few states can achieve as smoothly. They also have the Texas Enterprise Fund (TEF) to help match what other states may be offering to a company considering a major investment or relocation. It is the largest public fund in the nation, having invested more than $442 million in deals since it was created in 2003. It now has $178 million available for use. “The TEF, specifically, has been one of the most successful deal-closing funds in the country—so successful, in fact, that many other states are taking a page from our book and creating their own versions,” Gov. Perry says.
Another major component of the Texas Inc. game plan is universities with strong technology-transfer programs. The University of Texas at Austin, which gave birth to Dell and Whole Foods, has helped turn Austin into a semiconductor and high-tech powerhouse. Aside from the University of Texas, the state is home to Texas State University, Baylor, Rice, Texas A&M and Texas Tech, a concentration that few other states can claim. The Telecom Corridor in and around Dallas, where AT&T is now headquartered, also has emerged as a major telecommunications cluster, which is supported by a semiconductor industry spawned by Texas Instruments.
To support all this high-tech activity, one of the nation’s largest systems of community and technical colleges provides a steady flow of skilled labor, a last piece of the state’s strategy. “It’s been a constant collaboration between academia, government and the business community,” says John S. Butler, director of the IC Squared (IC 2) Institute at the University of Texas, which has helped engineer the Texas brand of capitalism. “Ann Richards understood it, as did George W. Bush, and Rick Perry gets it. We have done what many states have not done. We have made the entrepreneurs and the creative people the heroes.” The state’s wide-open attitude toward newcomers and immigrants helps. “We have economic freedom,” adds Butler. “You want to start a business? Start one.”
Most of the recent growth is urban-based, another contrast with Perry’s “aw-shucks” campaign tone. The nation’s energy capital of Houston, the sprawling Dallas-Fort Worth “metroplex” and San Antonio now rank as three of America’s 10 largest cities. The state’s population has grown rapidly to 25 million, behind No. 1 California, but substantially ahead of New York. Much of that growth has been the result of Hispanic immigration, and Texas has largely welcomed those newcomers, in sharp contrast with the tone that political leaders in California and Arizona have created.
In many ways, it is not surprising that manufacturers are moving to Texas from more expensive, unionized states up North. General Motors runs a plant in Arlington, between Dallas and Fort Worth, and Toyota makes pickup trucks near San Antonio. GE will build locomotives in Fort Worth and Caterpillar will build excavators at its $200 million plant in Victoria. The proximity to Mexico and other Latin American markets, partly thanks to major ports, is a key attraction. However, more surprising to outsiders are the first-class, technology centers that are growing in Texas. (See “Texas Tech Centers“.)
The bottom line? Texas has powerful momentum and it’s difficult to see what could halt it. The state is likely to continue attracting manufacturing and tech-related activity. The old Texas economy does depend on military bases and the petroleum industry, but a rapid downsizing of the U.S. military footprint could hurt towns, such as Abilene, home to an air force base that dispatches stealthy aircraft to the Mideast. A disruption in the world petroleum industry could hurt Texas refineries, but the state is rapidly embracing alternatives, such as wind power, as evidenced in the hundreds of windmills that line the hills near Albany, Texas. The sheer diversification in its economy—all the way from wheat farming to semiconductors—suggests that the state could absorb many punches and keep on rolling.
The bottom line? Don’t mess with Texas, as a popular saying goes. Instead, learn how it has established an impressive 21st century economy.
The following number among the many California companies and CEOs that have moved some—or all—of their operations to Texas:
- AccentCare/William Comte, CEO: A home health care provider that relocated its headquarters from Irvine, California, to Dallas in 2011. Reason: California not business-friendly
- Cenoplex/Gregory O. Welch, President and CEO: A creator of audio messages for wireless network operators to reach customers. Moved to Austin from San Francisco area in 2011. Reasons: Attracted to Austin’s educated workforce and infrastructure plus high quality of life and business-friendly environment.
- Corvalent/Ed Trevis, President & CEO: A maker of embedded, computing systems that moved headquarters from Silicon Valley to Cedar Park, near Austin in 2009. Reason: Austin’s rich technology resources and skilled workforce.
- Fallbrook Technologies/William G. Klehm III, President and CEO: A maker of continuously variable shifting systems for bicycles and other transmissions that retained headquarters in San Diego but has gradually shifted its technical, engineering and manufacturing functions to Austin. Reason: access to lower-cost technical talent.
- InCube/Mir Imran, Chairman and CEO: This life-sciences, research lab, chose San Antonio for its first incubation location outside of Silicon Valley in 2011 and moved three startup companies to San Antonio. Reasons: Access to intellectual property being generated by hospitals and a military trauma center plus nearly $20 million in funding.
- Xeris Pharmaceuticals/John Kinzell, CEO: This maker of injectable pharmaceuticals moved its headquarters from Larkspur, California, to Austin in 2011. Reasons: California regulations, Austin’s technology incubator and access to angel network capital.
- Whoosh Traffic/Erica Douglass, CEO: A business that helps companies increase traffic to their websites, Whoosh relocated from San Diego to Austin in 2011. Reason: California’s heavy taxation policies.