Economic Checkup

Economic Checkup
Bay Area Showing Wear and Tear, Report Finds
By Pete Carey/Mercury News
Article Launched: 04/06/2008



The economy in the Bay Area, including Solano County, is ailing, but biotech, like the Genentech facility shown here in Vacaville, is a bright spot. (Courtesy photo)

The Bay Area got the results of an economic physical this week - it's healthy but aging, has some hardening of the traffic arteries and there are concerns it could lose its global competitive edge.

An economic profile released by the Bay Area Council, a regional policy group, found that the nine-county area continues to be a magnet for the world's largest companies, but that places like Singapore, Bangalore, India, and Shanghai and Guangzhou, China, are gaining.

Competition for workers and companies is building overseas, researchers for the council's Bay Area Economic Profile found. London, Shanghai, Singapore, Stockholm and Tel Aviv are grabbing their share, making it tougher for Bay Area companies to recruit.

The study has been done every other year since 1995 by the consulting firm McKinsey & Co. and the Bay Area Council. But it looked for the first time this year at how the region measures up to other high-tech centers.

It found the usual strengths - a massive Bay Area concentration of skills and talent, venture capital and innovation - but also a need to improve a frayed infrastructure and educational systems.

There are 21 Fortune 1,000 companies based in the region, along with 645 foreign subsidiaries. The Bay Area still draws 35 percent of all venture capital invested in the United States, the study found. That amounted to $9.5 billion in 2006, or about $1,370 per resident, far outranking second-place Singapore's $180 per capita and New York's $107.

Its five top universities drew $2.5 billion in research and development in 2004, including nearby University of California, Davis which ranked 17th in the state for R&D expenditures.

And the area has the largest share of people with a bachelor's degree of comparable metropolitan regions. Also, growth in foreign investment in the Bay Area is helping to develop ties with other global tech centers.

"Like high tech, biotech and life sciences capitalize on the region's core strengths: a deep talent base, venture capital, a concentration of research institutions, and specialized industry infrastructure," the report noted. "The region's 820 life science companies, including industry leaders like Genentech, Chiron, Gilead Sciences, Bayer, Berlex, Applied Biosystems, Exelixis, and Genencor, employ 85,000 people and have a collective market cap of more than $140 billion.

"The depth and diversity of technological and human resources in the Bay Area, and its forward-looking thinking, place it in a strong position to compete through innovation."

But, "There's a reason to be concerned about our longer-term competitiveness in an economy that is globalizing very, very quickly," said Sean Randolph, president of the Bay Area Council Economic Institute.

"A lot of other places are investing heavily in their infrastructure, research and development," Randolph said. "They are coming up the scale very, very quickly."

Among the challenges the report says are faced by the Bay Area:

• The region is having trouble retaining college graduates, who increasingly move to jobs in other parts of the world. The area gained 146,000 college graduates from 1985 to '90 but lost 46,000 between 2000 and '05, the study reported.

• Education lags behind other international locations, leaving local students from kindergarten through high school behind in math, science, reading and problem solving.

• It's an expensive place to run a company. The cost of doing business in the Bay Area is comparable to those of Boston and New York, but second only to London among international economic centers. The tax rate is 44 percent, comparable with the rest of the country but more than many global centers.

• The population is aging, with 15 percent approaching retirement, leaving an opening for younger countries.

And, if you hadn't noticed, housing is expensive and traffic is terrible.

Many of these problems have characterized the region for years, in up cycles and down, but the new element is rapidly rising global competition, the council said.

"We're in a world in which talent can flow wherever it wants to go," said McKinsey director and BAC chairman Lenny Mendonca, who is visiting Singapore. "There are very attractive opportunities in India, China, the Philippines and Singapore, and we are more at risk of losing our talent advantage because of our unattractiveness and the attractiveness of other places."

Singapore is building a major biotech center, and Southeast Asia, Shanghai and the Yangtze River Delta are becoming key centers for technology and finance. Guangzhou is a growing manufacturing center and Bangalore has developed as a powerful information technology hub.

"We could be challenged in the future if we don't get our act together," said Jim Wunderman, president and CEO of the Bay Area Council.

Stephen Levy of the Center for Continuing Study of the California Economy, who was not involved in the study, said the region needs to fix its problems. "I would make the case that competitiveness is more threatened by lack of infrastructure and education, than by high taxes.

"The region is being challenged not only by other countries but by itself, in the sense that we're less able to provide housing that's affordable to workers, unable to provide schools that are adequate in our communities, and we are challenged in our infrastructure," he said.