High-tech wages, venture capital culture has a downside

Updated: Oct 31 2005, 05:30am hrs
A new study suggests that high-technology wages and venture capital, two of the elements that have fueled booms in areas like Boston, can hurt such areas disproportionately during economic downturns.

High-tech hubs such as Boston and Silicon Valley suffer more than other regions when the economy declines, partly because their wages are high and theyre too dependent on venture capital, which flows to start-ups with unsound business models in the final stages of a boom, says the report. It was published last week by two professors at the University of New Hampshires Whittemore School of Business and Economics.

Business networks associated with venture capital fund flow might be detrimental at critical economic turning points, often resulting in a rush of dollars in a limited business sector, rather than a diversified set of entrepreneurial ventures, co-authors Ross Gittell, a management professor, and Jeffrey Sohl, director of the Center for Venture Research at UNHs Whittemore School, wrote in the study.

While previous research has noted that high-tech centers are more prone to boom-and-bust cycles than other areas, Gittell and Sohl examined the varying performance within the 25 top US technology centers in the aftermath of the late 1990s boom. They found that the areas with the highest concentrations of venture investment and the most narrowly focused tech sectors experienced the steepest declines. In the Boston area, one of the strongest regional economies during the high-tech boom, total employment plunged about 4.6%, or nearly 100,000 jobs, between December 2000 and March 2002, the most pronounced period of decline. That compared to an average employment drop of 2.8% among the top 25 tech areas.

Greater Boston lost a smaller share of its job base during those lean years than the San Jose, Calif., area, the heart of Silicon Valley, which lost 9.3%, or the San Francisco and Seattle areas, each of which lost 6.1%. Gittell cited the greater diversification of the Boston technology sector as well as the overall regional economy.