Everyone Wants the Next Silicon Valley

In January 1971 Electronics News published a series of articles that is credited with popularizing the name “Silicon Valley” for a semiconductor industry cluster in and near the Santa Clara Valley of California.   Over the subsequent 41 years, the US semiconductor industry has had its ups and downs and the Santa Clara Valley has mostly prospered and evolved with software, mobile device, and internet companies overtaking semiconductors as the most visible local industries.  The one constant has been the steady increase in the iconic stature of the concept of the next Silicon Valley.

It would be possible to create a two-hour global video montage composed entirely of 30-second clips of political leaders, industry executives, university presidents, and real estate developers announcing that their project would create the “next Silicon Valley.”  There are projects and announcements of this type ranging from China and Russia to Dubai and Cairo to Rio de Janeiro, to say nothing of all 50 US states and US cities ranging from Gary, Indiana to New York City.

While the aspiration to create the next Silicon Valley is understandable, it seems likely that most efforts will fail.   The economic processes that created Silicon Valley in the late 1960s and 1970s, and then re-created it in the 1980s and 1990s, were not unique but they were unusual and hard to replicate by policy design or public investment.

The development of Silicon Valley depended on simultaneous (or at least co-incident) developments:  a) paired global technological and economic opportunities; and b) a dense regional network of individuals, companies, and institutions capable of exploiting the opportunities.

The density of the network in Silicon Valley, the number of working connections between parties relative to the total number of potential connections, is a product of geography.  People literally live and work in “the valley,” creating a community of scientists and engineers, entrepreneurs, business people, and others with a common interest in tech-driven business success. 1 2

During the last 40 years, however, the global network of individuals and institutions engaged in basic and problem-oriented R&D, and in research-intensive higher education, has increased in size and density, and the frequency of interaction has risen dramatically.  This means that regional concentrations on industry, geographically defined clusters of economic and innovative activity, are demonstrably less important to regional development than they were when they mattered most to the creation of Silicon Valley in the 1970s and 1980s.

Today ideas (science, technology, intellectual property, applications/innovations), people, and finance are incredibly mobile and are already flowing in massive quantities through global information and transportation networks.  There is an evolving set of documented effective company responses to the increased density and speed of the global research and innovation network 3 4 but the understanding of how to tap the global R&D network for the public purposes of economic growth, education, and public welfare is less well developed.

There is, perhaps, general agreement that for public goals “place” increasingly matters less than access to the global network of R&D and higher education institutions.  It is proving hard, however, to move beyond the notion that physical clusters of economic activity are of paramount importance to the successful development of a region. To see forward clearly, it is probably useful first to look back at the history of economic competition among countries and regions.

A Quick History of Comparative Advantage and Competitive Advantage

In the late 1700s and early 1800s the most successful political economists saw a common enemy in mercantilism, the tendency of nations to use trade bans, tariffs, and import duties to protect or promote certain industries.   Adam Smith’s An inquiry into the Wealth of Nations (1776) and David Ricardo’s Principles of Political Economy and Taxation (1817), in which he lays out the theory of comparative advantage in trade, are both foundational works in economics but they were also aimed squarely at a critical policy issue of the time:  the unnecessary economic cost and market twisting characteristics of restraints on trade.

Throughout the 1800s and early 1900s there were trade wars, international financial crises, real wars, and abundant civic strife but not much new thinking about the economics of trade and the wealth of nations.   While it is not regarded as a landmark publication in economic literature on international trade, in 1942 Joseph Schumpeter published Capitalism, Socialism and Democracy and coined the phrase “creative destruction” to describe the impact of innovation on both companies and markets.

Schumpeter saw companies and markets as constantly re-made in different forms by innovation.   For Schumpeter innovation was not narrow technical advance but the pairing of technical advances with new or re-made companies engaged in new forms of production and competition.   New business models which are enabled by new technology, in other words.

Schumpeter was perhaps the earliest apologist for the central role of innovation (technological advances that allowed new forms of production and new business models) and entrepreneurs in an economy.  He articulated the concept of “creative destruction” when few corporations had any material civilian R&D activities, before the post-World War II boom in government spending on civilian research, before there was a venture capital industry and before Silicon Valley was even a gleam in anyone’s eye.

It easy to look back from today and see evidence of the market-changing creative destruction of innovation on a global scale.   Going back just 50 years to1960:

  • IBM generated more revenue from electric typewriters and electric tabulating equipment than computers or services;
  • Japan’s largest manufactured export categories were cotton fabric, chinaware, and stainless steel flatware with transistor radios appearing as a first high-tech export;
  • Intel would not be founded for another decade and no software industry existed (no Microsoft, no SAP, no “apps”)
  • The Internet did not exist (and therefore there were no Internet-based businesses or business models) and the founders of Google – one from America and one from Russia who met as graduate students at Stanford University – had not been born.

In 1966 Raymond Vernon, a Harvard Business School professor, published a hugely influential article on the international product life cycle 5 which updated Ricardo’s national “comparative advantage” from a static concept to one that linked changes in national economic advantage to product life cycles and technical advance.   Vernon’s model did not touch the type of creative destruction that Schumpeter envisioned but it was a fundamental step forward in linking national economic performance in international competition to technological advance and innovation.

Vernon updated his product life cycle theory over time 6 but also went on to address a major policy concern of the post-World War II era of US trade and international financial policy.  In the 1960s and 1970s there was widespread agreement that multinational corporations (MNCs) and market competition among MNCs and domestic corporations was important to economic development.  The concern, however, was that MNCs – in their various activities — eroded the sovereignty (autonomy and control) of nations. 7

Much of this debate and discussion was swept away in the 1980s by – in the United States at least – the rise of Japan as the base of fiercely competitive companies in industries that had been dominated by U.S. MNCs for decades. This created a new wave of policy and corporate strategy prescriptions that focused on how nations and companies can work together to succeed globally.

This wave of thinking reached its high water mark in 1990 with the publication of Michael Porter’s The Competitive Advantage of Nations. 8 9 Porter, another generation of Harvard Business School professor, brought technical innovation firmly to the table with regard to international trade and competition.  The springboard for that was the concern in the U.S. about losing market share in technically advanced products such autos and electronics to apparently “fair” competitors from other countries.

In Porter’s formulation, the natural endowments and stage of development of a country (the historic determinants of comparative advantage) were less important than corporate competitiveness, which included its ability to innovate: “A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.”  p. 73. 10 We were no longer afraid that MNCs would erode U.S. sovereignty because we needed them to be strong to compete effectively with the MNCs based in other nations.

Porter also became associated closely with the concept of “clusters” of related companies and economic activity as a source of regional or national innovative capacity and competitiveness in an industry.  The economic value of industrial network and value chain density had been well characterized by regional economists as economies of agglomeration 11 but the clusters concept extended beyond economic value to innovative capacity for an industry.

What Comes Next?

Since the publication of The Competitive Advantage of Nations, there has been a great deal of policy focus on analyzing, attempting to create, or forwarding the activities of meaningful clusters of economic activity and, similarly, local and regional ecosystems of tech-based innovation.

In 2012, however, the challenge has shifted.   Clusters of economic (and research and higher education) activity matter but they are more dispersed, permeable and probably more transient than ever.   The success of a company, region or university probably depends more on its ability to tap or collaborate with problem-oriented R&D and post secondary education resources around the world than it does on working with those down the street or across town.  This requires a new set of organizational capabilities and strategies that are only now being developed or discovered even as social networks blend with online education and e-commerce drives changes both local and global economic transformation.

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  1. AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128,  Harvard University Press, 1996
  2. Choon-Moon Lee, editor, The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship Stanford Business Books, 2000
  3. Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Press, 2003
  4. David Teece, Dynamic Capabilities and Strategic Management:  Organizing for Innovation and Growth, Oxford University Press, 2009
  5. Raymond Vernon, “International Investment and International Trade in the Product Cycle,”  The Quarterly Journal of Economics, May 1966, pp. 190-207.
  6. Raymond Vernon, “The Product Life Cycle Hypothesis in a New International Environment,”  Oxford Bulletin of Economics and Statistics, November 1979, Volume 41, Number 4.
  7. Raymond Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises, Basic Books, 1971
  8. Michael Porter, The Competitive Advantage of Nations, Simon & Schuster, June 1998.
  9. Michael Porter, “The Competitive Advantage of Nations”, Harvard Business Review, March-April 1990 pp. 73-93
  10. Porter, “The Competitive Advantage of Nations”, Harvard Business Review, March-April 1990
  11. Walter Isard and Eugene Schooler, “Industrial Complex Analysis, Agglomeration Economies, and Regional Development,” Journal of Regional Science, Volume 1, Issue 2, Pages 19-33, March 1959