This section of the paper will identify promising industry sectors that have been or should be further developed as part of the effort to cultivate Hawaii's information economy. As much as it is possible, this section will also discuss how the private and public sectors can support the development of each of the industry sectors. It would be extremely helpful to have readers provide input to this segment in particular. Finally, Part II concludes with a discussion on the limitations of the law's role and why certain industry sectors will not thrive in Hawaii.

I. AREAS FOR POTENTIAL DEVELOPMENT

A. Agriculture and Aquaculture

Hawaii's predictable climate and natural resources make it the ideal site for various types of agriculture and aquaculture projects. Many companies have already found that the state's natural resources can help create opportunities and generate high revenues without damaging the physical environment. Some of them have benefited significantly from the support of local research and technical parks such as the Natural Energy Laboratory of Hawaii (NELHA); all of them realize the important and unique role Hawaii's natural environment play in the development of their products and companies.

Kona Bay Oyster and Shrimp Company, for example, has been able to produce blue shrimp and Pacific and American oysters by co-producing the shrimp and oysters in a symbiotic system which reduced the amount of labor needed while increasing product output. Kona Bay Oyster has also demonstrated that certain compounds extracted from the marine algae Chaetoceros are effective against many significantly harmful bacteria.

Other companies have also taken advantage of the natural resources without damaging the environment. On the Big Island, Kona Cold Lobsters imports Maine lobsters - which are out of the water during shipment for approximately 24 to 30 hours - and rejuvenates them using deep seawater off the coast. These lobsters are subsequently inspected, weighed and fed before being shipped to local customers and Asian destinations. Also on the Big Island, Uwajima Fisheries has developed an artificial environment utilizing a structure of concrete, pimping and plumbing systems to grow a flounder known as "Hirame," which is used by the Japanese as sashimi.

The resources available to companies in this industry sector are fairly strong; in addition to the budding entrepreneurial atmosphere generated by these companies and others, the characteristics of Hawaii's natural environment and the support of institutions such as NELHA are making inroads to new technologies, products and businesses. The success of these companies creates technical and non-technical jobs for residents in Hawaii, but the real benefit created by these businesses is the service they provide to average people. While only a handful of people may eat oysters, shrimp, lobsters or sashimi on any given day, many more use air conditioners on a regular basis. Researchers at NELHA have developed a process for using cold deep seawater to air-condition buildings with only one-tenth the amount of electricity used for typical compressor-based systems. The possible applications of agricultural and aquaculture resources in Hawaii are not fully realized, and will only expand as new technologies are created.

B. Biotechnology

Hawaii's natural environment and climate are also suitable for research on proteins, pharmaceutical development, disease-resistant produce, and other biotechnology-related fields. One local company, Aquasearch, has created a technology which allows it to produce large amounts of microalgae in a closed system. One of the company's first products is astaxanthin, a pigment produced from microalgae that provides salmon and shrimp a pink color. Aquasearch has also developed a new photobioreactor technology, the Aquasearch Growth Module, which may provide new uses for more than 30,000 species of microalgae.

Cyanotech, another local biotech company, has taken advantage of the minimal rainfall, intense sunlight and deep seawater along the Kona coast to develop products such as spirulina, a microalgae frequently sold as a food supplement because of its high protein levels and beta-carotene. Cyanotech also produces astaxanthin and phycobiliproteins, fluorescent pigments used in immunological diagnostics.

What needs to happen before biotech will grow stronger in Hawaii? The problem is not a lack of research. Researchers at the University of Hawaii College of Tropical Agriculture have led the state biotech industry to new developments in, for example, caffeine genetics and disease-resistant papaya. There are at least six large companies breeding corn using natural and transgenic techniques. A new Marine Bioproducts Engineering Biotechnology Center will soon be established by the University of Hawaii and the University of California. This Center will serve a crucial role as there is not yet a business park or incubator in Hawaii designed exclusively for biotechnology companies. The problem is not location. Hawaii's location and environment are, if anything, the primary attraction for many of these biotech companies.

There are a few problems, it seems, that are more related to general business issues than to the biotech industry in particular. Still, they are sources of concern for many biotech businesses. First, while a number of biotech companies have succeeded in Hawaii, most businesspeople in the state are reluctant to take risks, which, arguably, is a prerequisite for starting a biotech company. Second, venture capital in Hawaii is limited. While some are able to attract in-state funding, many of the VC sources are on the mainland. Third, for a variety of reasons, it is expensive to start and operate a business in Hawaii.

What needs to happen? The Dean of the College of Tropical Agriculture and Human Resources offered a few suggestions from working group meetings that took place before the state conference on building the technology industry. First, he suggested that the University of Hawaii create a Virtual Biotechnology Consortium, ostensibly including the College of Tropical Agriculture, the Office of Technology Transfer and Economic Development., and other related departments. This may alleviate some of the fears of risk-averse researchers who are looking to start a business. Being surrounded on a regular basis by others with similar ideas and encouraging thoughts may give these entrepreneurs the faith needed to take a few risks, particularly if they are given the assurance that the financial blow may not be as severe as they think. This first suggestion raises two issues. First, there is some question as to whether facilities in different departments at UH need to be renovated or at least upgraded somewhat. Furthermore, the university must also look at how the currently successful Office of Technology Transfer can expand its services to further facilitate transfer agreements with the private sector and revisit indemnification requirements. These are problems the university needs to address. Second, even if entrepreneurs have encouragement from their colleagues and peers, the facilities are improved, and technology transfer is made simpler and more cost-efficient, the more critical issue of the financial impact on startups needs to be addressed, probably by the state. Specifically, as Dean Charles Laughlin's working group has suggested, the state should create a Hawaii Biotech Institute as a for-profit partnership between the university and the private sector. The state, possibly through the Department of Business, Economic Development and Tourism, should also look to create a development fund of $5 million per year for ten years with industry matching funds. Similar to a VC fund, this fund would finance certain costs of companies depending on their business plan proposals. This suggestion, in concert with a more aggressive state intellectual property policy which should be developed by state legislators in collaboration with the private sector, may alleviate the cost concerns of biotech companies.

Another major barrier to the development of biotechnology in Hawaii is the importation of germplasm and microorganisms. While more relaxed policies would certainly encourage industry development, these benefits should be studied - possibly by a team made up of representatives from the private sector and the State Department of Agriculture - and weighed against the costs that may be imposed upon the natural environment.

C. Communications and Media

Where do the Communications and Media (CM) industries fit in Hawaii's information economy? The answer depends on the services provided by the company. This is a simplistic response, but probably the only appropriate one. The category of CM industries includes but is definitely not limited to entities such as newspapers, television and radio stations, musicians and multimedia companies.

These CM companies are distinct from those included in the category of Telecommunications since the focus of CM companies is almost exclusively on the end user or consumer and not divided - as with utilities companies or internet service providers - on both the consumer and the technology itself. Because of the range of services provided within the CM industries, the fit really does depend on the particular mission of each organization. Note too that although these companies are part of traditional industries- newspapers, for example, are familiar and accessible to practically all people and have been that way for much longer than the more untraditional internet companies or newsgroups - there is a need for them to expand their services by creating new business models.

This is an important industry sector not because they are as economically powerful as other types of companies, but because they influence the thinking of the average person on a much more regular basis than most private sector organizations. In other words, if it is true that the development of a state technology industry depends in part on public attitudes toward technology generally, then the media, which informs most people on a daily basis, plays a major role in building the industry.

There are already a variety of news and media sources online, some of them offering information more regularly than others. Among the local newspapers that have expanded their services online are the Honolulu Star-Bulletin, Honolulu Weekly, Lahaina News, LeahiNet News, Maui News, MidWeek, and West Hawaii Today. Local television stations that have made their way to the web include KGMB (CBS), KHNL (NBC), KHON (FOX) and KITV (ABC). Despite their online presence, these newspapers and stations cover technology stories rarely, if ever, probably because (1) technology does not have as much of a presence in Hawaii as it does in, say, California or Massachusetts, (2) local media is usually loathe to report on something encouraging, such as a growing industry, since warm and fuzzy stories sell less than dramatic social, economic or political stories, and (3) technology is not something that the media, as an industry, has identified as important enough to justify more than a few seconds of coverage. Thus, while the creation of a new tourism commission may command considerable attention, coverage of a large-scale technology conference may take a few seconds at most. While there are few reports on successful technology companies that stay in Hawaii, large companies that leave the state become newsworthy. While the bankruptcy proceedings of an established retail institution attract significant attention, growing technology companies receive little, if any, coverage at all. Of course, most people outside of the media industry, including myself, know little about media economics, but it is still probably fair to say that good news in Hawaii amounts to practically no news for many stations or news sources. The argument is not that these companies should provide an inordinate or unwarranted focus on technology; after all, the media should be balanced and evenhanded in its reporting and story selection. The argument, instead, is that these companies should try to be more balanced in their reporting and less eager to find discouraging news.

What does this mean for the development of the industry? If the strength of the media, relative to the development of the technology industry, is its ability to influence viewers, listeners and readers by making them more familiar with technology companies in Hawaii, then the television stations and print media can contribute to the industry by discussing technology issues more often. This, of course, assumes that media companies find technology and economic diversification important. And, in fact, there are a number of journalists and media sources that do make significant commitments to reporting on technology in Hawaii. Burt Lum, for example, writes a regular column in the Honolulu Advertiser called Bytemarks. The column, which reports on various technology issues, is also published on Lum's web site, www.brouhaha.net. Ryan Kawailani Ozawa, a student at the University of Hawaii, has also been spending a considerable amount of time using the available technology to disseminate information about Hawaii since 1995, when he published Ka `Upena, the state's first online newspaper. Ka `Upena has become part of Ozawa's web site, www.leahi.net, which provides its visitors with a compendium of news sources across Hawaii. In short, there are active voices in the industry talking about and utilizing the available technology. These voices do have an impact on the acceptance of technology as a feasible industry in Hawaii, but it would be beneficial if other media sources followed along and devoted more time to technology issues in the state.

D. Energy and Environmental Technology

The three sectors that are tied to Hawaii's physical health are (1) agriculture and aquaculture, (2) biotechnology, and (3) energy and environmental technology (ET). This nexus between the natural environment and economic development in the energy and ET industry sector, as is true for the other two environment-related sectors, is delicate and requires cautious planning. In other words, energy and ET companies show strong potential for growth in Hawaii. There are resources available to companies that require research and development support at organizations such as the Hawaii Natural Energy Institute (HNEI) at the University of Hawaii. HNEI offers support through its various programs for work in fields such as biomass, geothermal energy, hydrogen, materials and related applied science, ocean resources, solar energy, transportation and wind.

For example, Pacific Biodiesel, a Maui-based company, has made use of the resources available to Hawaii-based energy and ET companies by developing a bioconverter which converts organic waste into useful products such as biogas. Biogas may be used to, among other things, power gas stoves and produce energy. Biogas is also biodegradable and emits less carbon dioxide and soot when burned, relative to regular petroleum-based diesel fuel. However, as with other environment-related companies, the success of Pacific Biodiesel in developing new technologies based on the resources available from Hawaii's natural resources needs to be tempered by an understanding of the negative environmental impact. While it is biodegradable and emits less carbon dioxide, biodiesel does increase emissions of nitric oxides, which contribute to smog. Furthermore, the cost of biodiesel is approximately $2.50 a gallon, more than double the price of a gallon of standard diesel fuel.

Pacific Biodiesel is one of many Hawaii-based companies in the environment industry sectors. Its experience is not atypical insofar as it raises new technical and economic possibilities as well as important environmental concerns. In general, energy and ET offer the potential for creating new alternatives for both economic growth as well as energy uses, but these benefits must be weighed by both policymakers as well as businesspeople against the economic cost to consumers and the impact on Hawaii's natural environment.

E. Health Care and Telemedicine

Hawaii has the potential to further expand the health care services it provides to residents and non-residents alike. Health tourism, health information technology, and health care education are three industry sectors decision makers may choose to pursue. This section on health care discusses a fourth industry sector, telemedicine, which seems to offer the greatest potential for economic and social benefit if developed appropriately.

What is telemedicine? Telemedicine is the use of telecommunications by physicians or institutions to provide care to patients in remote areas using quantitative data, still images and live audio and video transmissions. Satellite uplinks and fiber optic connections are used to facilitate the sharing of images, medical record information, and other important data used to diagnose ailments while minimizing travel expenses and reducing the time required to consult patients. This is valuable for Hawaii not only because it will improve the quality of care given to underserved patients on any island, but also because it provides Hawaii with the opportunity to access the large Asian market.

While the decision to move into the fields of telemedicine will undoubtedly provide hospitals and other healthcare organizations with the opportunity to significantly enhance the quality and variety of services provided to patients, it should be tempered with a recognition of the significant costs that accompany the use of such technology. The attraction of economic growth in the biotechnology sector should be weighed against the threats posed by introducing foreign germplasm, microbial strains, plant tissue cultures and other species from overseas. Similarly, administrators should invest in telemedicine technologies and develop strategies for optimizing services, but only after considering critical issues such as confidentiality, licensure, and reimbursement.

1. Why Hawaii is Ideal for Telemedicine

Despite the problems with which advocates of telemedicine must deal, telemedicine offers significant growth potential for the state generally and health care providers specifically. Hawaii enjoys a number of unique strengths, which could make the state a national or global leader in telemedicine technologies. First of all, Hawaii's location in the Pacific makes it an ideal gateway for Asian providers looking to acquire the expertise of western medicine practitioners. While the technology could ostensibly make communication with hospitals in, say, Minnesota a possibility, the direct fiber optic connection many Asian centers share with Hawaii may make transmission of video and data cleaner and faster. The quality of the transmission is extremely important for maintaining the integrity of data and the resolution of the video, which is critical for physicians attempting to visually diagnose the condition of patients. Second, even if the infrastructure were such that a transmission from Tokyo to Minneapolis were comparable to the transmission from Tokyo to Honolulu, Hawaii's Asian-influenced culture makes its physicians more socially and culturally familiar to Asian doctors and patients. This is extremely important for telemedicine, particularly because trust between patients or their physicians must be built with foreign doctors with whom they may have never actually seen in person. Third, existing technologies in Hawaii such as the supercomputer at the Maui High Performance Computing Center make videoconferencing, imaging and other means by which telemedicine is actually performed extremely efficient and reliable.

2. Barriers to Telemedicine Development in Hawaii

One of the most immediate hurdles for health care companies is the initial cost of investing in telemedicine technologies. This amount obviously depends on the significance of the health care company's commitment to delivering telemedicine services. Fixed costs could include databases, space, and equipment such as a Codec and peripherals. Immediate variable costs could include employee compensation, training, and communication costs such as I-Mux, cabling, UPS, installation, and circuit charges. A second barrier to the development of telemedicine in Hawaii is the noncollaborative sentiment pervading the healthcare industry. It is difficult to quantify the cost of noncollaboration, but it is simple enough to recognize that joint ventures between established and competing health care institutions in Hawaii are rare at best. A third challenge to telemedicine development is the state's lack of clinical experience with telemedicine. There may be questions about the possible applications of the technology, or even about the technical use of the machinery, which may prevent providers from fully realizing the benefit of the technology. A fourth barrier to telemedicine development is the lack of physician acceptance of the technology. This problem is not unique to telemedicine; in practically every industry sector, it would probably be fair to say that most people who would be affected by a technological application in Hawaii are not familiar with or accepting of the technology itself.

3. Telemedicine and Legal Issues

Three critical legal issues that leaders in the public and private sectors need to address are confidentiality, licensure, and reimbursement.

a. Confidentiality

Federal and state case law have established basic principles of patient confidentiality and privacy in traditional health care markets. The rise of new technologies such as telemedicine, however, introduces new situations that existing state laws may not be able to properly address. For example, if patient information travels over digital lines across state borders, and is disclosed or otherwise improperly used, there is some question as to which state laws govern and which state courts retain jurisdiction. Confidentiality issues also arise when health information is misappropriated by hackers or others who either compromise computer security systems or abuse their access by selling sensitive information.

Obviously, health care administrators concern themselves with similar security issues with respect to non-digital information. Doctors or nurses may abuse their access to information and professional criminals may find ways to physically access files or papers. Still, although digital methods of security may not be absolutely impenetrable, providers and administrators should invest an appropriate amount of resources to ensure the best possible level of security and confidentiality for patient records and other critical information.

Some forms of safeguards include encryption, digital signatures, and sophisticated network security standards. Encryption is the process of encoding digital information either in transit or while it is stored on a hard drive. Digital signature technology authenticates transmissions to guarantee that senders know that recipients are who they claim to be, that recipients know that senders are not misrepresenting their identities, and that the information - whether it is a document, a video transmission, or an image - has not been altered or tampered with at any time during delivery. The level of security provided by network standards varies, depending on the available technology and the expertise of the organization's information technology specialists and network administrators.

b. Licensure

Suppose a physician in California asks a cardiologist in Honolulu to review a rare condition suffered by a patient in San Diego. Suppose another doctor in Beijing asks an orthopedic surgeon in Hawaii to assist with a particular operation. Suppose a psychiatrist in Lahaina consults a patient in Boise over the telephone. Are any of these doctors subject to penalties for practicing without a license?

Physicians are required to obtain licenses in the state in which they practice. In Hawaii, H.R.S. §453-2(b)(3) extends an exemption to the state license requirement

to any practitioner of medicine and surgery from another state when in actual consultation, including but not limited to in-person, mail, electronic, telephonic, fiber-optic, or other telemedicine consultation, with a licensed physician of this State if the physician from another state, at the time of such consultation, is licensed to practice in the state in which the physician resides; provided that:

(A) The physician from another state shall not open an office, or appoint a place to meet patients, or receive calls within the limits of the State; and
(B) The licensed physician of this State retains control and remains responsible for the provision of care for the patient; and provided further that the laws and regulations relating to contagious diseases are not violated[.]

This exemption, while allowing physicians outside of Hawaii to practice in Hawaii, does not similarly provide an exemption for Hawaii doctors who are not licensed in another state. Physicians and providers in Hawaii, therefore, need to consult the laws of the state in which they are advising doctors and patients using telemedicine technology.

It may also be instructive for Hawaii physicians to inquire as to whether certain services are within the scope of the definition of "practice of medicine" for purposes of their telemedicine activities. For example, if radiologists in Hawaii view and draws conclusions from an image of a patient in Oregon without having direct contact with the patient, it is possible that they are not "practicing medicine." However, an argument can be made that Hawaii-based surgeons guiding certain procedures during an operation in Austin are "practicing medicine," which means they either need to be licensed in Texas or exempt under state telemedicine laws of Texas.

c. Reimbursement

The development of telemedicine obviously has implications for the insurance industry, as there is some uncertainty as to whether telemedicine falls within the definition of "practice of medicine." If a decision were made that telemedicine is not within the scope of the definition, it would be more difficult for providers to collect insurance payments. The Hawaii State Legislature addressed this issue of reimbursement in the last legislative session. It enacted at least three related bills in 1998. H.B. 2852 and S.B. 2855 provide for the reimbursement of telemedicine services by insurance plans and health maintenance organizations. S.B. 2258 appropriates $500,000 to plan and develop a Hawaii Geriatic Research and Training Center at Kula Hospital, which would use telemedicine services.

F. Electronic Commerce And Traditional Businesses

Electronic commerce is driving the growth of the national economy. According to Forrester Research, global electronic commerce sales will total approximately $3.2 trillion in 2003. In a recent digital commerce study by IntelliQuest, 81% of those surveyed intended to shop or buy online in the coming 12 months. According to eMarketer, 16.8 million Americans - or 7.8% of all Americans age 14 and above and 31% of all active internet users - have purchased at least one product or service online in the past year. By the end of 1999, the number of online buyers will double to 36.1 million Americans, or 16.6% of the US population older than 14.

With Hawaii's existing strengths in retail and service coupled with its terrestrial and non-terrestrial telecommunications infrastructure, there is no question that electronic commerce will be the primary building block on the state's new economy if policymakers and business leaders take the appropriate steps. The world-wide customer base is available to Hawaii's multilingual retail companies. The expanding opportunities in electronic trading create possibilities for local investors to start online brokerage firms, despite the time difference between Hawaii and established exchanges. Strategic alliances that Hawaii-based companies establish with manufacturers and distributors in Asia and the mainland US can provide local entrepreneurs with a multibillion dollar marketplace, without significant shipping costs. The Internet may supply Hawaii all of these opportunities, but only if they are taken. Companies on the mainland US have already established an online presence in such industries as real estate, travel, stock trading, web hosting, and book retail. These types of companies may exist in Hawaii as well. Part III will discuss further the potential of electronic commerce for Hawaii.

G. Professional Services

1. A Hypothetical Situation

The professional services industry in Hawaii has an incredible market that has yet to be tapped. There are many technology companies, mostly at the emerging growth level, that require services ranging from legal support to printing to accounting. Many of them, not able to find support in-state, look to the mainland for their professional needs. Consider the following hypothetical. Entrepreneur Kelly has an idea for a new software program and starts working on a business plan. She finds some friends who can help write the software code, and looks for different ways of financing her business. For a number of reasons, the venture capital funds in Hawaii are not able to provide her with the funding she needs. She then turns to Silicon Valley, and finds a venture capitalist (VC) who is willing to invest, say, $1 million in the project in exchange for a 40% ownership stake in the company and a solid exit strategy. Kelly decides to go with the Silicon Valley VC, who then tells her that she should locate a team of attorneys to assist her with protecting her intellectual property. She would prefer to work with a local attorney, but the VC quickly suggests that she contact an attorney in Palo Alto who has both experience working with both the VC as well as the particular type of software that Kelly and her company are producing. A few years after some preliminary legal work is done and the product goes out to the market in boxes that she was actually able to have printed in Hawaii, Kelly decides she wants to take her company public. The VC again recommends and she agrees that she work with underwriters who understand her technology, since they will be the ones initially assisting her with the publicity and the road show surrounding the initial public offering. After some legal securities work is completed by the Bay Area firm, Kelly's company goes through the pre-filing, waiting, then post-effective periods, and her company's stock is eventually sold on the exchange.

This scenario is not far from the reality of many technology companies in Hawaii. Local law firms lose the opportunity to work with the new client, which may eventually become a multinational company with full-service needs. Honolulu advertising firms fail to bring in another client. Local banks do not see much of the company's money because it is deposited elsewhere; Kelly could have been disappointed with the local banks anyway because none of them would give her a loan for her information-based, rather than asset-based, company. Local investment banks without technology experience lose the commission they could have realized if they were equipped. VC firms in the state, for different reasons, are unable to accommodate the needs of Kelly's company. In short, this possibly successful software company has started in Hawaii but, in large part because of the absence of professional services, has taken her business' work to firms out of state. It would also be understandable if Kelly decided to move her company to another state, closer to her VC and other support services. This amounts to a major loss for Kelly, who wanted to stay in Hawaii, and perhaps even more so for the professional services firms, which failed to see the long-term potential of investing in new practice groups because of the short-term costs.

2. What is to be Done?

a. The Role of the Private Sector

What do the private and public sectors need to do to prevent the corporate migration out of state? First, professional service firms should identify the role they could play in Hawaii's new economy. These companies include law firms, advertising agencies, accounting firms, banks, investment banks and venture capital firms, just to name a few. The decision to target technology companies is, understandably, a difficult one. It would be easier to wait until the technology industry is larger before investing substantial funds; after all, if there are no clients to make up for the sunk costs, it would be less than cost-effective to develop a focus on technology companies. It would be instructive, however, and perhaps even profitable, for companies to keep in mind that new business models accompany this new economy. A few years ago, if you needed a car, and you had limited funds, you would buy the cheaper car instead of the new, high-performance vehicle, which you could probably afford with a tighter budget and a modest loan. That reasoning still makes obvious sense. Today, however, if you need a computer, it makes more sense to purchase the fastest machine with the most memory you could possibly afford than to buy the cheaper, and slower, desktop PC. The reason for making the larger up-front investment is that the industry is moving at a pace that requires the latest technologies. If you want to use the latest networking application, you will probably need a set of computers with more speed and memory than was available five years ago. Similarly, if you want to serve the new technology niche, you will need to invest in the expertise and technical infrastructure that the technology companies expect from their professional service firms, even if the investment is substantial and antecedent to the growth of the industry. After all, the industry will not grow if there is no one there to support it.

One venture capitalist has said that reform will not always happen at the public sector, and that companies should not always expect government to solve the problems. He has also explained in an interview that the infrastructure is not set up for venture deals. Attorneys, accountants, banks and underwriters based in Hawaii have not recognized Hawaii as a haven for technology firms and, accordingly, have not developed groups to service such companies. This perpetuates a cyclical problem of companies failing because they lack professional support and professional service companies refusing to invest in such practices because they lack a client base.

b. The Role of the Public Sector: Keuning's Tax Break

If firms do begin to recognize the importance of this industry and the potential work they could do for these new clients, they need to have the initial financial impact alleviated, if it creates a short-term loss. The state government can help professional service firms cope with the risk involved with servicing technology companies. Perhaps the most effective way for the state to assist professional service companies is by offering a tax incentive.

Originally proposed by David Keuning of Postcard Software, Inc., a Hawaii-based software firm, this tax incentive could take one of two forms. In one scenario, the state could grant the firm a general excise tax exemption for all revenue generated by work done for eligible technology company clients. That is, firms would be able to claim the exemption only if their client were previously approved by the state. The criteria for eligibility would have to reflect that the company is adding value to the state in some way, in order to compensate at least in part for the general excise tax exemption granted to the firms. Since many technology companies may be better off financially moving out of state, and are generating job opportunities and various types of revenue for the state and its residents, the fact that they remain in Hawaii is itself a value added. While this seems presumptuous and perhaps even ridiculous, keep in mind that the general excise tax is a tax for the "privilege of doing business in Hawaii," a presumptuous and perhaps even ridiculous reason for imposing a tax. It would make sense, at least to the author, that the criteria for eligibility therefore be that the company be classified as a technology company as defined by the state legislative bill that presents this proposed tax incentive. As a result of a bill such as this, firms will have an incentive to invest in a technology practice, technology companies will have a simpler time finding local firms to support them, and the state will benefit from the presence of technology companies in ways that exceed the tax revenue that would have otherwise been generated by the professional service firms.

In a second scenario, professional service companies would be able to claim the general excise tax exemption if they generate a certain amount of revenue by providing services to technology businesses. The amount requirement would be determined as a percentage of the total amount of revenue generated overall by the firm. This presents some immediate problems. Although this tax proposal would provide firms with an incentive to actively seek technology clients, it may also have the negative effect of encouraging firms to overextend themselves, perhaps creating lower-quality work for the technology companies.

H. Software and Information Technology

One of the more promising industry sectors that may be developed in Hawaii is software and information technology. There are thousands of users and companies in Hawaii that rely on relational databases, and a greater number who use computers on a daily basis. Similarly, there are many on the mainland who would probably use software developed by local programmers, if it were designed and marketed appropriately. These are obvious statements, but the more fundamental question of how to encourage the software industry remains. The first step in developing this industry sector is by creating, or expanding, the local workforce. This first effort requires a two-step approach. First of all, the state's academic institutions need to create an environment for students interested in programming to thrive. At the University of Hawaii, for example, there is a two-semester course at the Information and Computer Science (ICS) department that requires students to find a local organization that needs software. The students then determine the design requirements, and possibly build a software application that the organization can use. The organization pays only the amount that is required for materials and other production costs. Law offices, a domestic violence hotline, and TheBus are examples of organizations that have benefited from this course. To create an environment for these students to thrive in the real world, the university should encourage the business school and the ICS department to create a curriculum or a year-long course that would teach students simultaneously about how to develop software (at ICS) and how to run a startup (at the business school). If this proposition were successful, students would be able to graduate and apply what they know by starting their own company, working at a local company, or doing anything that would both make use of their talents in a productive and meaningful way and keep them in the state. Second, corporations need to invest in the schools to encourage the development of the workforce that they need. Cisco Systems, for example, signed an agreement in December 1998 to make Hawaii Community College a "regional academy" that would provide teachers with training programs, equipment, and other tools to enable teachers at HCC to provide students with skills they would need in certain technology companies. Obviously, having companies from out of state invest in local schools is a good thing because it provides funding for programs that will train students who would not other wise have that opportunity. On the other hand, it also provides an opportunity for out of state companies to market themselves and make moving more appealing to students than remaining in Hawaii.

In addition to encouraging private and public investment in schools - which, admittedly, is no small task - software companies at all levels of growth need to be encouraged to remain in Hawaii. This form of encouragement may take one of two forms. First, a tax incentive may be provided to software companies that start up in Hawaii and remain in the state for 10 years. While tax incentives are one of the most frequently used ways of providing an incentive for technology companies, they may also be the most appropriate for two reasons. First of all, they are cost-efficient. The number of technology companies that would qualify for certain tax breaks such as this is relatively low, so the tax base that is being reduced as a result is small. Second, these tax breaks are designed to encourage companies that would more than compensate for the loss in tax revenue by either or both paying other taxes and providing job opportunities for people who could invest their money elsewhere in the state, whether it be at a local grocery store or a Hawaii-based fund.

The second form of encouragement that may be provided to software companies is the formation of collaborative partnerships with international companies. If a company in Hawaii worked on software code from, say, 9 a.m. to 5 p.m., it could send the code at 5 p.m. to Germany, which is 11 hours ahead of Hawaii, or to Israel, which is 12 hours ahead of Hawaii. Programmers would receive the code when they start work in Germany or Israel at 9 a.m. (10 p.m. or 9 p.m. Hawaii time) and send it back to Hawaii at 5 p.m. (4 a.m. or 5 a.m. Hawaii time). The software would be worked on for at least 16 hours every day, for at least 5 days a week, significantly reducing the time-to-market for many local companies. The question to be answered, then, is how to create these partnerships. It would be reasonable to incorporate into a technology industry marketing effort several target locations, including Germany and Israel. Obviously, American cities on the east coast would serve a similar purpose, and may be just as adept. However, by targeting foreign locations, companies in Hawaii would be able to expand the likelihood that they could create a strategic alliance with a partner company.

II. PROBLEMS AND LIMITATIONS OF INDUSTRY AND THE LAW

While there are potential areas for development, there are also real considerations for policymakers and business people to address. It would be difficult for many decision makers to regulate or implement policies to address many of these problems, but they are significant enough to remember as the industry is developed. One of the problems that extends beyond the reach of the private sector and the law is risk aversion. Many people in both the private sector and the public sector recognize that one of the barriers to the development of an information economy in Hawaii is the aversion to risk that accompanies technology ventures. James Dator, Professor at the University of Hawaii, has explained in the context of technology and the state that "the job is to get people out of the present, and to be visionary about the future [and] creating alternative futures." Right now, he explained, "Hawaii's people don't control their own economic future."

Another reason why Hawaii has had a difficult time developing its technology industry is that the state has a reputation - earned in large part by the state government's visitor marketing machine - for being a tourist destination. That is, many people consider the state to be a place to relax, where most residents surf and enjoy themselves, and not a place where software programmers write code or where researchers study genes. Because this self-created problem is not as tied to Hawaii's corporate or organizational culture, it is a wart that may be lanced with relative ease. Tony Clapes, of Hawaii-based Technology Law Network, has suggested that the state should develop a concentrated marketing effort to attract businesses from out of state. There are a number of problems that he has identified that necessitate the development of such an effort. Among them are Hawaii's distance from the mainland United States and from Asia, which presents "a challenge in attracting trained personnel with ties in those regions," and Hawaii's perception among nonresidents. The image, he says, is critical because "tourists come here to relax, and so associate Hawaii with relaxation, not a work ethic." Hawaii is one of the few states that has thought about developing a technology industry without developing a significant marketing effort. As part III will explain, it will require the effort of high-level officials, strong relationships and repeated marketing efforts for such a marketing strategy to convince most people abroad that Hawaii is more than a tourist destination. It will also require that the state government recognize that tourism will not carry the state economy any more than it is today. That latter consideration is probably more critical than the effort itself; it would be difficult for a mainland businessperson to believe that technology is going to be a stronger industry than tourism if that idea is not believed even by the governor of Hawaii. Whatever the reason for the tourism and work ethic image, the fact remains that businesses, skilled workers and executives find it hard to justify a move to Hawaii to their families or shareholders if the tourist perception and economic depression is so strong.

There are other reasons why it has been difficult for Hawaii to develop its technology industry that are more a function of industries and economics. For example, manufacturing was never one of Hawaii's strongest industries, and will probably not be in the near future. Although semiconductors are much smaller and easier to ship than t-shirts, they would still be harmful to the environment and expensive to send abroad. However, it would be possible for Hawaii-based companies to find ways to partner with manufacturers in Asia or the US mainland in such a way that designs could be made in Hawaii and products manufactured abroad. That would also allow companies to ship directly from manufacturers to consumers - whether they be t-shirt buyers or original equipment manufacturers looking for a good chip - without incurring the overseas shipping cost.

As an example of how businesses can profit from this strategy, consider an example from AnnaLee Saxenian's Regional Advantage. In her book, she discusses the shift from consignment manufacturing to turnkey manufacturing in part by providing illustrations of companies that contracted with other technology companies to manufacture products. Consignment manufacturing is the process under which companies give a consignment manufacturer certain design plans and the choice of materials and products they would like to see used for the products. Under turnkey manufacturing techniques, the turnkey manufacturer chooses the parts and part producers itself, creating a more risky but potentially more efficient system of manufacturing. Flextronics, a Silicon Valley firm, assembled products for client companies. In 1980, Flextronics' work was based entirely on consignment business; by 1988, however, the company generated more than 85 percent of its revenue from turnkey manufacturing. According to Saxenian, this shift created a competitive advantage for Flextronics over other companies that failed to engage in a networked system because the company, as a result, became more responsible for the quality and functioning of the end product. This allowed Flextronics to move away from "a low-value-added, low-loyalty subcontracting strategy to a high-value-added, high-trust approach." The primary reason it was able to make this transition initially is because of relationships that were cultivated over a long term with Sun executives involving "an immense amount of sharing." The benefit of this arrangement is that it reduced Sun's time-to-market and gave Flextronics a steady and reliable source of work.

It would not be difficult, in theory at least, for companies based in Hawaii to create similar arrangements with manufacturers in Asia or the US mainland. For example, the Massachusetts Technology Collaborative - an economic development organization founded by the state and guided by a 23-member Board of Directors appointed by the Governor and representing senior officials from academia, and the public and private sectors - recently started a program called FEDTech. FEDTech was designed to help the research community locate the funding it needs and assist in formation of strategic relationships to bring new technologies to market. If Hawaii had a similar program, it would likely be of great use to startups in the research and technology parks looking for financial support or larger corporations with which they could partner.

In short, there are many barriers to the development of Hawaii's information economy, most of which are beyond the power of corporate charters or public sector regulators. While these problems are beyond the scoe of the law, they are not permanent. The problems may be alleviated by the commitment of private actors. However, this one-sentence solution demands that people take risks. These risks may involve financial investment in "high-risk" companies, information-sharing in risky partnerships, a willingness to take risks in starting a company, or a risk to give something up (read: tourism) in order to get something else (read: technology).

Go to Part III.

© 1999 Kalama M. Lui-Kwan
Last updated 3.22.99