Tax credits help nurture Hawaii high tech

Henk Rogers' lawyer told him he'd be crazy not to set up his mobile game company in Hawaii. So he gave it a try.

Three and a-half years later, his Honolulu studio buzzes with some 50 programmers, designers and testers making games played by millions of mobile phone owners around the world.

In April, Rogers sold Blue Lava Wireless to JAMDAT Mobile Inc. of Los Angeles for $137 million. And he extracted a promise from the mainland company not to move the unit from the islands.

"We in Hawaii want to prove ourselves to the rest of the world that we are just as good as they are," Rogers said. "We're going to go out there and kick butt. We did, we have, and we're still doing it."

Hawaii, a state more famous for its languid tropical climate than its robust business climate, is quietly nurturing a bevy of businesses like Rogers'. The 50th state can thank generous tax credits for high-technology investment and a senior senator in Washington, D.C., whose political muscles bring home research and development contracts for the state.

Statistics measuring the growth of the high-technology sector in Hawaii are scarce. But the anecdotal evidence is mounting.

There are many more in the fields of software, astronomy, optics, marine sciences, and communications.

A half-dozen entrepreneurs and industry insiders interviewed by the Associated Press said Hawaii's generous tax credit was a powerful lure to set up shop in the state.

A law known as Act 221 (later modified under Act 215) allows individuals and companies to get a 100 percent return over five years on investments of up to $2 million made in Hawaii-based high-technology companies.

It also allows companies to win a cash return if they can show 20 percent of their revenue is going into technology research and development.

According to the state-run High Technology Development Corp., this is more than double the credit offered by any other state.

While critics have attacked the credit for unintentionally subsidizing Hollywood movies filmed in the islands, executives say the law is a major reason why they are here instead of places like California.

In 2003, Hawaii high-technology tax credits ballooned to $37.85 million from $9.6 million in 2001, the state Department of Taxation said.

Many of the state's fledgling companies also owe a great deal to the ability of eight-term Democratic Sen. Daniel Inouye, one of the most senior members of the U.S. Senate, to steer federal research and development contracts to Hawaii.

"He has literally been a one-person economic development venture capitalist for this place," said Michael Fitzgerald, the head of Enterprise Honolulu, a nonprofit that helps high-technology startups.

"It's amazing that an economy as small has Hawaii's would have that many technology-based sectors. He's the reason most of those are here," Fitzgerald said.

Others say Hawaii's unique blend of Asian, Polynesian, and mainland U.S. cultural influences makes the islands an inviting place for clients and engineers from all over the world.

But Hawaii still has its problems.

Dustin Shindo, chairman and co-founder of Hoku Scientific, said many companies have trouble accessing funds to help them grow beyond infancy.

"If you're a venture capitalist in Silicon Valley, you don't even want to drive to the East Bay. The last thing you want to do is get on a plane to manage a company in Hawaii," Shindo said. "So everything else being equal, you're not going to invest here."

Several Hawaii companies, such as wireless network pioneer Firetide Inc., have had to move to California after receiving cash from Silicon Valley venture capitalists.

State legislators have mulled creating a $100 million dollar fund to compensate for the lack of local venture capital but haven't been able to agree on the initiative.

Experts also worry whether Hawaii's high housing costs will ward off potential entrepreneurs and whether its schools will be able to supply high-technology companies with the workers they need.

Fitzgerald said the people of Hawaii will have to act fast if they want high technology to become a third pillar of the economy after the low-wage tourism industry and defense spending.

"We have to be quick to do this if we are going to preserve what's here and build upon it," Fitzgerald said. "If we are still having this debate five or 10 years from now, these companies are going to be dead or gone. And new ones that would start here will pass us by."