This section is designed to provide an overview of the existing infrastructure as it supports the technology industry in Hawaii today, and will serve as the foundation upon which further discussion about industry development will be based. It is divided into three segments. First, a summary of the Hawaii's technical infrastructure will be provided, outlining the state's telecommunications capabilities, dual-use technologies, and astronomical devices. Second, a synopsis of the commercial infrastructure will follow, reviewing the state of venture capital, and technology and research parks in Hawaii. Third, the state regulatory infrastructure as it relates to the information economy will be reviewed.
Note that parts of this section, particularly the discussion regarding Hawaii's technical infrastructure, will read more like a catalogue than a business plan because their primary function is to provide a compendium of existing resources to which people may refer when making suggestions for development.
I. TECHNICAL INFRASTRUCTURE
A. Telecommunications
One of the comparative advantages that Hawaii enjoys relative to other potential information economies is its geographic position. With its location between the mainland United States and Asia, Hawaii has been and will likely continue to be the optimal surfacing location for cables running between the two continents. Currently, there are four undersea cables linking Hawaii to destinations in North America and Asia: the Trans-Pacific 3 (TPC-3), the Hawaii 4 (HAW4), the Hawaii 5 (HAW5) and the fiber optic TPC5-Cable Network. The TPC-3 provides approximately 30,000 voice equivalent circuits, while the HAW4 supports 40,000 and the HAW5 70,000. The newest of these four, the TPC5, adds roughly 130,000 circuits to the network, thereby serving as a redundant connection to support the other cables in case of failure. Supplied by KDD, AT&T and MCI, the TPC5 also services Japan's internet connection to the United States.
In addition to the fiber optic network connecting the islands to Asia and the mainland US, the State of Hawaii is internally wired with several other terrestrial telecommunications networks. A digital microwave system developed by GST Telecom Hawaii connects the Big Island, Maui, Molokai, and Oahu. GST is also responsible for the fiber optic network connecting the six major islands to each other. GTE Hawaiian Telephone has also contributed significantly to the development of local networks. It installed the first fiber optic cable network in the state in 1994, linking Kauai, Oahu, Maui and the Big Island. The remainder of the telecommunications infrastructure GTE Hawaiian Tel operates is made up of both microwave and fiber optic cables. Oceanic Cable also has developed a fiber optic network on the island of Oahu with plans to expand service on the outer islands. Among the uses to which Oceanic has put its fiber optic network is cable modem Internet access.
Complementing the infrastructure installed by GTE Hawaiian Telephone, the City of Kapolei has developed its own network with more than 25,000 linear feet of fiber optic cable. This fiber optic network supports the activities of GTE Hawaiian Tel while also providing a feeder system to the Kapolei Teleport, a satellite-based center providing a variety of telecom capabilities including FM radio, microwave transmission, television broadcasting, cellular and PCS capabilities, aeronautical radio and satellite downlinking. GTE has set up a 5ESS digital central office, manufactured by AT&T, to which allows Kapolei offices may connect in order to send digital information to other areas within the state and beyond to Asia and the U.S. mainland. The City of Kapolei also takes advantage of a dedicated T-3 connection between Oahu and Maui to access the technologies available at the Maui High Performance Computing Center.
The State government operates a number of other telecommunication networks in Hawaii. Among these is Skybridge, a one-channel, two-way analog interactive network designed to provide interactive video capabilities to the three islands within Maui County. Hawaii Interactive Television System (HITS), now managed by the University of Hawaii, is a 4-channel analog state-wide system with 2 return channels from each island. Finally, the State Department of Budget and Finance's Information and Communication Services Division manages a system known as the Hawaii Wide Area Integrated Information Access Network (HAWAIIAN), which provides data, voice and videoconferencing capabilities to several state agencies.
The mature terrestrial network is coupled with a sophisticated satellite network, which enables users to send both international and domestic transmissions. The University of Hawaii, for example, provides public telecom services to the Pacific region with its Pan-Pacific Education and Communication Experiments by Satellite program (PEACESAT). PEACESAT, based at the Social Science Research Institute at UH, is a satellite network that connects educational institutions, governments, and regional organizations throughout the Pacific Islands region. Using the capabilities of PEACESAT, UH enables Pacific states to share information related to health and medical services, environmental emergency management, distance learning, economic development and technical assistance. NASA currently operates an Advanced Communications Technology Satellite (ACTS) which provides Ka-band point-to-multi-point connectivity, facilitating the transfer of voice, video, and multimedia data between Hawaii and the mainland United States. This capability allows the state to engage in telemedicine, remote astronomy, and remote education. ACTS is linked to an INTELSAT terminal at the Kapolei teleport, allowing Hawaii to transfer high quality images - for remote movie production, for example - between Japan and the mainland U.S.
B. Dual-Use Technologies
Frequently mentioned in any discussion about information technology in Hawaii is the capacity and strength of the Maui High Performance Computing Center (MHPCC). Less frequently mentioned are the exact specifications of the actual hardware that makes up the "supercomputer" and the applications of that hardware. The computer system itself is made up of 563 IBM SP nodes, which provide more than 82.5 gigabytes of memory, 1.4 terabytes of internal disk space, and 158 gigaflops of processing power. In addition, the facility offers a Silicon Graphics Onyx Reality Engine system with 256 megabytes of total memory, 4 gigabytes of internal disk space, a 4-megabyte frame buffer and 2.4 gigaflops of processing power. A number of workstations are also provided at the center, including Silicon Graphics Indigo2 systems, an IBM RS/6000 graphics system and SUN SPARC systems. The facility is linked to the defense Research and Engineering Network by a T-3 connection, and is connected to the internet at speeds of up to 45 megabits of data per second. The MHPCC also supports a wide area network for clients in various educational, research, military, technology, and government institutions.
Practically speaking, the MHPCC is used for four primary applications. First, the supercomputer center allows users to convert raw data from seismic instruments, radars, satellites and electro-optic sensors into meaningful information. This image and signal processing capability allows military agencies observe objects in space, petroleum engineers to locate and produce new oil fields, environmentalists to track natural disasters, and astronomers to explore the solar system. Second, the MHPCC facilitates decision-making based on logical representations derived from certain data-, computer- and input/output intensive routines of models, emulators, simulations and prototypes. This ability allows clients to create digital animations for educational and entertainment uses, high-resolution representations for use in disaster mitigation and combat situations, and three-dimensional imagery for medical and scientific use. Third, the MHPCC provides users with the ability to predict future trends and behaviors based on the assessment of preexisting data. This process of data mining allows retail, defense, and health organizations to make knowledge-driven decisions based on data analysis. Fourth, the capacity of the computer facility to provide a variety of programming tools, software applications and mathematical and scientific libraries allows the Department of Defense and academic researchers to discover further uses of parallel computing technologies.
C. Astronomy
The Lunar Ranging Experiment (LURE) observatory on Mount Haleakala was built in 1974, and makes "time of flight" measurements of short pulses of laser light that travel between observatories on Earth and reflectors, left by three Apollo missions and two Soviet spacecraft robots, on the Moon. The data collected are used to measure movement of the tectonic plate son Earth, the rate of change in the Earth's daily rotation, and the Earth's polar motion.
The University of Hawaii operates a 2.2-meter telescope, constructed in 1970, on the summit of Mauna Kea. A limited number of proposals for observing time on the optical/infrared telescope are regularly accepted by a principal investigator at UH.
The Gemini Project is a multinational collaboration involving the United States, the United Kingdom, Canada, Argentina, Australia, Brazil and Chile. The goal of the initiative is to provide sharp views of the universe using new technologies and two 8.1-meter observatories located at the top of Mauna Kea in Hawaii and Cerro Pachón in Chile.
Construction continues on Mauna Kea for the SUBARU, an optical-infrared telescope in the world billed as the largest planned telescope in the world. The 8.3-meter telescope, constructed and operated by the National Astronomical Observatory under the Ministry of Education of Japan, will be fully operational by the year 2000.
Located at the summit of Mauna Kea, the Caltech Submillimeter Observatory consists of a 10.4-meter diameter Leighton radio dish and is operated by Caltech under a contract from the National Science Foundation. The observatory has been operational since 1988.
The Submillimeter Array (SMA) is a collaborative project of the Smithsonian Astrophysical Observatory of the Harvard-Smithsonian Center for Astrophysics and the Institute of Astronomy and Astrophysics of the Academia Sinica of Taiwan. The SMA is an exploratory instrument for high-resolution observations at submillimeter wavelengths ranging from the millimeter band to the far-infrared regime accessible only from airplane or space. The eight 6-meter SMA antennas are located at Mauna Kea.
Located at an elevation on Haleakala of 3,054 meters, the C.E.K. Mees Solar Observatory observes the Sun using a diverse set of optical instrumentation. The Mees Observatory has been operational since 1964.
The James Clerk Maxwell Telescope, located at an altitude of 4,092 meters, close to the summit of Mauna Kea, the 15-meter diameter telescope is the largest facility in the world designed to operate within the submillimeter wavelength region. It is operated by the Joint Astronomy Centre and owned jointly by the Particle Physics and Astronomy Research Council in the United Kingdom, the National Research Council of Canada, and the Netherlands Organization for Scientific Research.
The Very Long Baseline Array (VLBA) is a system of ten telescopes remotely controlled from an operations center in New Mexico. Each of the ten VLBA stations includes a 25-meter diameter dish antenna and a control building where the station computer, tape recorders and other equipment for collecting the radio signals gathered by the antenna.
At 3.8 meters, the United Kingdom Infrared Telescope (UKIRT) is the world's largest telescope dedicated exclusively to infrared astronomy. It is located at the top of Mauna Kea at an altitude of 4,194 meters. The Joint Astronomy Centre, which also operates the James Clerk Maxwell Telescope, staffs the UKIRT, which is also owned by the Particle Physics and Astronomy Research Council of the United Kingdom.
The 3.6-meter optical/infrared Canada-France-Hawaii Telescope, located at the top of Mauna Kea, is jointly owned and operated by a team comprised of representatives from the National Research Council of Canada, the Centre National de la Recherche Scientifique of France, and the University of Hawaii.
The NASA Infrared Telescope Facility (IRTF) is a 3-meter infrared telescope situated at the summit of Mauna Kea. Established by NASA in 1979 to provide infrared observations to support NASA's programs, the IRTF is managed and operated by the University of Hawaii's Institute for Astronomy under a contract with NASA. Presently, 50% of the observing time is reserved for studies of solar system objects.
The W.M. Keck Observatory and Telescopes provide the facilities necessary for the world's largest optical and infrared telescopes. Each of the two Keck Telescopes is 10 meters in diameter with a mirror composed of 36 hexagonal segments that work together as a single piece of reflective glass. The Keck I telescope was operational in May 1993, and the Keck II Telescope was operational in October 1996. Established with grant funds from the W.M. Keck Foundation, the observatory is operated by the California Institute of Technology, the University of California, and NASA. The Keck mirrors are controllable to 30 nanometers and allow scientists to view distant galaxies down to the 28th magnitude.
II. COMMERCIAL INFRASTRUCTURE
A. Venture Capital
There are currently four venture capital (VC) firms investing in Hawaii-based companies. HMS Hawaii Management Partners is an early-stage fund managed by General Partners William K. Richardson and Richard Grey. The fund has invested in at least seven companies in the areas of internet services, telecommunications, and aquaculture. One HMS portfolio company has raised approximately $22 million in VC fundraising from firms in Hawaii and abroad. Another company partially funded by HMS provides satellite connectivity to the internet and has a valuation of $10 million. HMS, which invests a minimum of $500,000, has a minimum capitalization of $10 million and a maximum of $25 million.
Hawaii Venture Fund, managed by Michael J. Coy, has been able to make investments in companies with funds from sources such as the Hawaii Strategic Development Corporation. With $500,000 from HSDC, for example, Hawaii Venture Fund has been able to invest in a medical device firm which completed an IPO on the London Stock Exchange and received approval from the U.S. Food and Drug Administration for its product.
Keo Kea Hawaii (KKH) invests in Hawaii-based companies, most of which have a focus on technology. While KKH portfolios include software developers and biotech ventures, they also beverage companies. Managed by Randy Havre, the fund began in 1995 and currently provides seed and early stage investments of roughly $50,000 per investment.
Tangent Growth Hawaii (TGH) usually provides later stage mezzanine financing to companies seeking expansion capital. Managed by Alexander Schilling, Jr., Michael Conaton, and Jeffrey K.D. Au, TGH is based in San Francisco and has invested approximately $500,000 in each of its Hawaii portfolio companies. TGH has been licensed by the Small Business Administration as a Small Business Investment Company (SBIC), allowing it to tap into federal investment funds ranging from $20 to $30 million.
Complementing, and often times financing, the local VC firms is the Hawaii Strategic Development Corporation (HSDC), an attached agency of the state Department of Business, Economic Development & Tourism. HSDC was established by the State Legislature in 1990 to support Hawaii's emerging growth companies through VC investment and other financing and assistance programs. HSDC has provided financing to at least 21 companies, and has committed a total of $4.25 million to the four above-mentioned limited partnerships, which have leveraged $3 million of the $4.25 million to investments totaling more than $20 million in emerging growth companies.
The four VC firms, HSDC, and SBICs such as Pacific Century SBIC and Pacific Venture Capital SBIC represent the backbone of venture investment in Hawaii. According to a local VC, Hawaii could probably sustain three $25 million funds. However, for a number of reasons, the amount of venture capital in the state has been noticeably lower than venture capitalists and entrepreneurs would like to see. There are a number of reasons why capital formation has been a significant problem in Hawaii, and these will be discussed in more detail in Part III.
B. Technology and Research Parks
The resources and the business environment provided by technology and research parks are critical to the growth of many startup companies. There are at least six such centers in Hawaii that service the needs of many startups as well as established corporations. These include the Kapolei Business Park, Laupahoehoe Teleservice / Telework Center, Manoa Innovation Center, Maui Research and Technology Center, Mililani Technology Park, and the Natural Energy Laboratory of Hawaii.
Kapolei Business Park (KBP) services the needs of companies by offering competitively priced leases, foreign trade zone designation, enterprise zone status, and access to the sophisticated fiber optic and satellite networks at the Kapolei Teleport. KBP is ideally suited for mature companies, and is open to companies in a variety of industries. Tenants such as Allegiance Healthcare Corporation have taken advantage of the fiber optic cable networks to link its local area network with its mainframe system on the US mainland. Others such as Neiman Marcus are attracted to the space available at KBP; it recently opened a 33,000 square-foot center to service the needs of its store at the Ala Moana Shopping Center.
The Laupahoehoe Teleservice / Telework Center is a 1000-square foot incubator operated by the Hamakua / Hilo Coast High Technology Task Force. Tenants of this facility have access to a technology "lab," an educational center, and various shared office equipment.
The Manoa Innovation Center (MIC), a 46,000 square-foot business incubator for technology ventures, is home to more than thirty tenants. In addition to facilitating technology transfer between the University of Hawaii, private companies, non-profit organizations, and MIC's tenants, the Center also provides centralized and shared support to companies by providing administrative staff, voice mail, and facsimile and photocopying services. Tenants at MIC may also receive business plan assistance and management consulting. The campus landscape and wiring at MIC provides companies with 250 to 1000 square feet of office space, internet access, conference rooms, and presentation equipment. Tenants at MIC include Neugenesis Corporation, the UH Office of Technology Transfer and Economic Development, and WorldPoint Interactive, Inc.
The Maui Research and Technology Center (MRTC) provides assistance to technology companies in a variety of ways. In addition to offering shared resources and reasonably priced office space, the MRTC gives to its tenants access to its Business Resource Library, Remote Learning Center, Small Business Development Center, and its Video Teleconferencing Center. MRTC is also affiliated with other related organizations on Maui, including the Maui Economic Development Board, the Maui High Performance Computing Center, and Maui Community College.
Mililani Technology Park (MTP), a project of Castle & Cook, provides to technology companies a variety of capabilities and services including fiber optic connections, access to the University of Hawaii ethernet network and the IBM SP2 supercomputer at the Maui High Performance Computing Center. MTP enjoys both enterprise zone status as well as foreign trade zone designation. Currently, tenants at MTP include BBN Corporation, Oceanic Cablevision, and Inter-National Research Institute.
The Natural Energy Laboratory of Hawaii (NELHA) at Keahole Point on the Big Island provides to its ocean-related tenant companies support and facilities to conduct research and develop business products. By pumping deep sea water from depths of more than 2000 feet below the surface, companies at NELHA have been able to desalinate water, grow lobsters, produce algae, grow cold climate vegetables and fruit, produce energy, develop deep seawater air conditioning methods, and create high protein algae health food supplements.
Technology companies in other states have gathered around particular cities depending on the location of various resources such as research centers, universities, investors, and both competitor and partner companies. This is apparent in areas such as California's Silicon Valley, North Carolina's Research Triangle, and Massachusetts' Route 128. If Hawaii is to develop a strong infrastructure to support the innovation and research of technology companies at all stages of growth, it will have to continue to nurture the ability of these research and business parks to service the needs of their various tenants.
III. REGULATORY INFRASTRUCTURE
One of the critical segments, and arguably one of the most entangled, to the broader picture of economic development is state regulation. This section will briefly review state tax laws that have stunted the growth of existing companies and prevented out-of-state companies from moving to Hawaii. This section will continue with a discussion of other regulatory topics. However, although each bears equal weight to taxation, these topics are far more complicated to outline here, and will be discussed in a future paper. These regulatory topics include education, agriculture, utilities, education, banks and financial institutions, corporations and partnerships, and other business entities.
A. Taxation
Of the three reasons why it is costly to do business in Hawaii, tax laws are arguably the most burdensome for both startup and established companies. The other reasons, general cost of living and worker's compensation, are somewhat beyond the scope of this paper; in any case, taxes are easier to manipulate than the cost of living and are less valuable than worker's compensation to most people. There are fourteen kinds of state taxes; three of these may be imposed on a technology business, and will be mentioned here.
1. Net Income
Net income tax rates for individuals, estates, trusts and corporations range from 2.0% to 10.0%, and are governed by Chapter 235, Sections 235-1 to 235-130. For corporations specifically, the tax rate is 4.4% for up to $25,000 of net income, 5.4% over $25,000 but less than $100,000, and 6.4% over $100,000. In general, the tax is payable at the time of filing returns, but estimates must be submitted quarterly.
2. General Excise
The general excise tax, perhaps the most controversial of the relevant schemes, is a tax imposed on businesses for the "privilege" of doing business in Hawaii. It is covered by Chapter 237, Sections 237-1 to 237-49, of the Hawaii Revised Statutes. The tax rate is 1/2 of 1% on wholesaling and intermediary services, producing, manufacturing, sugar processing and pineapple canning. All other business activities - including professional services and business retailing, contracting, amusement, theatre, radio, interest, commissions, and rentals - are taxed at a rate of 4%, except for insurance commissions received by general agents, subagents and solicitors who are taxed at 0.15%. This tax, in other words, is a tax on gross income. It is not a sales tax. Businesses, however, may pass the 4% excise tax on to their customers since it is considered to be a cost of doing business. Adding insult to injury, businesses are required to register for the tax and pay a one-time filing fee of $20.00.
3. Unemployment Insurance
The unemployment insurance tax is a tax on wages paid by employers with 1 or more employees. The unemployment tax rate is based on a multi-contribution schedule system. Each year, 1 of 8 contribution schedules is applicable, depending on the condition of the Unemployment Insurance Trust Fund. An employer's contribution rate varies between 0.00% and 5.40%. In addition, there is a .05% employment and training fund assessment on taxable wages paid to those employees whose contribution rates are between 0.00% and 5.40%. The unemployment insurance tax is covered by Chapter 383, Sections 383-1 to 383-176, of the Hawaii Revised Statutes.
B. Topics For Further Review
Education policy is a key component to the development of Hawaii's information economy because it will determine the quality of the workforce produced by secondary schools and the university. The character of the state's graduates will affect the decisions made by out-of-state companies to move to Hawaii as well as the quality and quantity of new entrepreneurs and startup companies. One is as important for the stability of the state's economic health as the other is for the possibilities of the state's economic future. In other words, while economic powerhouses have contributed to the growth of Northern California's economy, startup companies that spin off from these larger corporations contribute to the seemingly cyclical economic engine driving California. Hewlett Packard executives, for example, were solely responsible for starting more than eighteen companies between 1974 and 1984.
Agricultural reform will determine the strength, and the direction, of the biotechnology sector in Hawaii. While the state is ideally suited for developing certain bioproducts, relaxing regulations governing the importation of certain germplasm and microorganisms may have deleterious effects on the state's environment. Obviously, the state benefits from investments in biotechnology research, but those financial benefits should be weighed against the more ambiguous environmental costs.
Laws falling under transportation and utilities are also critical to the state's economic development, insofar they affect the telecommunications industry. The telecommunications backbone of Hawaii's technical infrastructure may potentially and literally provide the state with a road towards large-scale economic reform. Telecommunications and Hawaii's technical framework are important because they will provide the state with the opportunity to develop and expand electronic commerce companies, call centers, and network-based companies.
Regulations governing banks and financial institutions, corporations and partnerships, and other business entities are important for providing technology companies not only with certain corporate incentives, but also with the support of professional service companies such as law firms, accounting firms, marketing and ad agencies, venture capital firms, banks and investment banks.
One of the most expensive labor costs for companies is worker's compensation. While worker's compensation is something that most companies in Hawaii would like to reform, it is also a protection for employees who enjoy one of the most progressive, and expensive, laws in the nation. While this is definitely an issue, it is certainly not going to be solved here. Given the protection it provides for workers, it is not clear that the cost far outweighs the benefit anyway.
Finally, if electronic commerce is to thrive, one of the first steps
the legislature could take would be to pass Senate Bill 961. This piece
of legislation would make digitally-signed documents as enforceable "as
if it had been written on paper." Digital signatures essentially allow
parties to authenticate their documents when communicating online. This
is particularly useful for parties who want to know that there contract
is enforceable, or for companies that want to be assured that customers
with whom they are dealing online are truthfully represent themselves. There
are a number of applications of digital signatures as an authentication
method. For example, an emailed offer of employment would constitute an
offer, just as if it were sent in writing and signed by the employer. Companies
who receive credit card numbers online by email or other transmission method
would be able to verify the true identity of senders by referring to the
digital signature. Parties to a business agreement could negotiate deals
more quickly with digital signatures because they would be able to tell
whether their transmissions to each other were tampered with in transit
and whether the information they receive was truly sent by the other named
party and not by an imposter. At present, this bill is pending final approval
from the House Committee on Consumer Protection & Commerce (CPC). It
has already been recommended by the Senate Commerce, Consumer Protection,
and Information Technology, Senate Judiciary, and Senate Ways and Means
Committees. If the House CPC approves the bill, it continues to the House
Judiciary Committee, and, finally, to the House Finance Committee. Under
current state law, digital signatures may only be used to electronically
file court documents.
© 1999 Kalama M. Lui-Kwan
Last updated 3.22.99