Changing a field type 'string' to 'reference' is possible under specific circumstances.
You may only change a string field to be a reference field, if that field has no saved values on any record where the field may be found. For example, if you have two records where your 'Test String' field has a value saved to it, you cannot update the field type (unless those values are valid Sys IDs).
In order to change field type to reference (from string), all values where the field is used must be clear/empty.
**Error message seen: Type change not allowed. Invalid type conversion for field 'field_name' on table 'Incident'. Cannot convert from 'String' to 'Reference'. There exists data records (X) that are not a Sys ID.
*Again, this update is only valid if existing data records contain values that are not valid Sys IDs