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February 20, 1989
"Not So Dependent on Defense"
San Jose Mercury News
By Timothy Taylor
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MANY people are certain there's a strong relationship between defense spending and high technology industry. They just aren't sure whether the relationship is positive or negative.

On one hand, people worry that high levels of U.S. defense spending sop up scarce resources of brainpower and capital, making it harder for the U.S. to compete with Japan in consumer-oriented high technology business.

On the other hand, people worry that if defense spending is cut sharply, high technology enclaves like Silicon Valley or the Route 128 corridor in Massachusetts will suffer a great deal.

So is high technology industry (and Silicon Valley in particular) dependent on high levels of defense spending, or not? Some of the relevant evidence was accumulated by Lynn E. Browne, vice president of the Federal Reserve Bank of Boston, and reported in a recent issue of the New England Economic Review.

The first step is to put together a list of all "defense- dependent industries." With a little work, one can compile a list of 55 industries that sell at least 10 percent of their output to the Defense Department. These range from copper ores (11 percent of output to defense) to explosives (65 percent to defense) to metal forming types of machine tools (15 percent) to aircraft (66 percent) and many others.

Next, one can compile a list of high technology categories, defined as those groups of industries with a high proportion of technology-oriented workers and higher-than-average spending on research and development. This list of industries ranges from those not always seen as high tech -- like agricultural chemicals, pharmaceuticals and petroleum refining -- to industries more familiar to Silicon Valley ears, like office and computing machines, electronic components and measuring instruments.

The two lists overlap somewhat, but not a lot. Only about half of the defense-dependent industries are high-tech industries. Of the 26 broad categories of high technology, only 10 contain some industries that are dependent on defense.

However, Browne notes that many of the industries that are defense-dependent industries today would not have been considered defense-dependent before the increased defense spending of the early 1980s. To investigate the long-term ties between defense and high technology, she created a shorter list of 25 industries that were dependent on defense even during the relatively low defense spending of the Carter presidency. In describing this period, she writes:

"While almost all defense-related industries are high tech, the reverse is not true. Not all high-tech industries are defense related. Most of the chemicals industry is not defense- related. Measuring and controlling instruments and medical instruments are not defense-related. Computers and semiconductors are not defense-related today, even if they were at one time." In short, the people who believe that the high- technology industry is a mere barnacle on a great whale of defense spending are living in the past. In the early 1960s, when 90 percent or more of the semiconductors produced in this country went to the Department of Defense, high tech was certainly dependent on defense.

But today, only about 5 percent of U.S. semiconductor production goes to defense. Whether defense spending was cut by half or raised by half, the chip industry will have to depend on civilian applications.

The chart shows how this general lesson applies to Silicon Valley industry. It shows the top 16 manufacturing industries in Santa Clara County, ranked by the value of their shipments, and then categorizes each industry as either high tech or defense dependent, or both.

Twelve of the top 16 industries are high technology, including the top six. However, only two of those 12 high-tech industries are dependent on defense. Nationwide, about 20 percent of the output of the "electronic components" industry is bought for defense purposes, and about 86 percent of the output of the "ordnance and accessories" industries goes to defense.

Most types of high technology industry are simply not dependent on defense, even if they used to be at one time, because the number of civilian applications now far outstrips the number of military ones.

As a result, both of the generalizations at the start of this article are probably wrong. Cutting defense spending might help the U.S. compete with Japan in high technology, but it will only help indirectly, depending on how the saved resources are spent. While lower defense spending would certainly sting some Silicon Valley companies, it isn't likely to injure the overall development of high technology industry.

The connection between defense spending and high technology, for better or worse, is by no means as clear as many people assume.


in millions



Electronic computers $4,335 Yes No
Computer peripheral equipment $2,625 Yes No
Semiconductors, related devices $1,921 Yes No
Electronic components $1,634 Yes Yes
Computer terminals $1,311 Yes No
Electricity-measuring instruments $1,281 Yes No
Motor vehicles, passenger car bodies $926 No No
Telephone, telegraph apparatus $760 Yes No
Canned fruits and vegetables $679 No No
Ordnance and accessories $679 Yes Yes
Dehydrated fruits, vegetables, soups $485 No No
Industrial machinery $326 No No
Pharmaceutical preparations $326 Yes No
Computer storage devices $293 Yes No
Search and navigation equipment $204 Yes No
Measuring and controlling devices $202 Yes No

Sources: Shipments estimates from Sales and Marketing Management, April 25, 1988. High tech and defense dependent columns from New England Economic Review, Sept./Oct. 1988.

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