Saturday, June 23, 2007

The future of Silicon Valley

Last month, I participated in the Spring 2007 Jefferson Fellowship on “innovation offshoring” sponsored by the East-West Center in Honolulu, Hawaii, with funding from the Freeman Foundation. The Fellowship brought us to major innovation centers in Silicon Valley, China (Beijing, Shanghai) and India (Bangalore and Chennai) where we interacted with innovators, tech start-ups, venture capitalists, academics and experts on innovation offshoring. Below are some of my notes about the Silicon Valley.

SAN JOSE, California—Silicon Valley, says San Jose/Silicon Valley Journal editor Norman Bell, is more of a state of mind than a piece of geography. For such an imagined technological Shangri-La, Silicon Valley continues to transform the world’s economies all the way from the United States to Ireland, Israel, India and China through an expanding tangle of collaboration, innovation and entrepreneurship. Experts believe if the rest of the developing world like the Philippines could tap into the dynamics of this collaborative network, everybody else could flourish.

Well, Silicon Valley is a tangible piece of geography—only not anyone there could agree where its boundaries lie. Tales about its origins abound. Some say the term “Silicon Valley” emerged in the early ’70s when journalists tried to describe a concentration of electronics firms in Santa Clara County that flourished after Stanford University in Palo Alto leased a huge chunk of its campus to high-tech companies after World War II. (Silicon, which is derived from silica and silicates, is extensively used in the manufacture of microchips, hence the term Silicon Valley.) Stanford then was in dire financial straits and what better way to address this problem than by setting up an industrial park?

Thus, from a rural wilderness where prunes and apricots grew (the romantics used to call it “Valley of the Heart’s Delight”), it evolved into what it is today—a kaleidoscopic region whose fortunes and boundaries changed as companies suffered booms and busts as they leap from one “the next big thing” to another: semiconductors in the ’60s to the ’70s, personal computers and work stations in the ’80s, network computing and the Internet in the ’90s, and mobile computing, biotechnology and nanotechnology in the new millennium.

“Today the tech-focused kingdom has expanded up the peninsula and over the Santa Cruz Mountains,” says Bell, who was a participant in the Spring 2007 Jefferson Fellowship on innovation offshoring sponsored by the East-West Center in Hawaii. “It spreads from downtown San Francisco, down Highway 101, past the biotech campuses of South San Francisco and the corporate campuses to the IBM software labs in south San Jose and on to the RFID [radio frequency identification] works in Morgan Hill. To the west, most agree it has spread to the coast, where the University of California Santa Cruz is making a name for itself in gaming and nanotechnology.”

Marguerite Gong Hancock, associate director of the Stanford University Project on Regions of Innovation and Entrepreneurship, estimates that Silicon Valley today covers 1,500 square miles, covering 35 cities and four counties populated by 2.4 million people, about 40 percent of whom are foreign born. It employs 1.2 million workers, about a fourth of whom are doing high-skill occupation, with productivity rate 50 percent than the national average.

And for such a small place, Hancock says the Silicon Valley accounts for 5 percent of the US gross national product and a tenth of the total number of the US patents. Then again, it is home to the current icons of American global economic power and influence—Google, Yahoo, Sun Microsystems, Hewlett Packard, Oracle, Apple, Intel and YouTube.

“It’s a complex, dynamic region,” says Hancock, while presenting a map of the San Francisco Bay area running from San Francisco City all the way to San Jose. “It’s a proximate collection of independent cities, most of them small towns. It was unplanned, has no formal identity, no borders.”

Enduring strength
What makes Silicon Valley tick? And could it survive offshoring and outsourcing as global companies seek the cheapest locations worldwide?

These are the questions that confront Silicon Valley today but Hancock, who is currently studying innovative regions all over the world, points out that over time it has evolved “four pillars of enduring strength.” It’s a nexus of innovation and entrepreneurship; a fertile habitat for the best talents; it has supporting institutions (universities and research institutions, including Stanford and University of California); and a linkage of people, technology and capital—a network that spans across innovative cities in countries like Israel, China, Taiwan, India, Germany, Sweden, Singapore and Japan.

“People here are willing to take risks,” explains Hancock, stressing that entrepreneurs are not all afraid to fail. “When firms collapse, government doesn’t rescue them.”
Bell describes Silicon Valley as having the “frontier mentality” manifested by its “ever-changing cut-throat search for the next big thing.”

“The result is a boom-and-bust economy where serial entrepreneurs proudly list their failures and venture capitalists bet millions on companies with no customers and no revenues,” Bell writes in a paper for the Jefferson Fellowship.
The business environment is almost Darwinian: Those who have the best business ideas and models thrive because, according to Hancock, the Valley has a fertile business environment or “habitat” characterized by meritocracy, favorable government policy, open business environment, and the presence of specialized business service infrastructure that include venture capital, hotshot lawyers and accountants.
Hancock, though, admits that Silicon Valley is losing some jobs due to offshoring, as well as gains made by other centers of innovation in Israel, China, Taiwan and India.

Activities like mass manufacturing have long been gone. Back-office operations like office support, business and financial support, as well as the jobs of IT administrators, legal assistants and statistical analysts, are going to India and other offshore locations like China and the Philippines. Even jobs for entry-level computer and software engineers, quality assurance and test engineers, as well as product and process engineers, are vulnerable to offshoring.

According to economist Dieter Ernst, a senior research fellow of the East-West Center, there are fears that “innovation offshoring,” or the internationalization of product development and research toward the Asia-Pacific region, especially China and India, poses competition to Silicon Valley and other innovation centers in the United States.

Companies like Google, Yahoo, Cisco, Dell and others in the Fortune 500 are increasingly setting up R&D centers in China’s major cities like Shanghai and Beijing, while local companies like Huawei are increasing their capabilities to design and produce high-technology products, Ernst notes.

Fast changes
As early as 2003 Oracle CEO Larry Ellison already pronounced “the end of Silicon Valley as we know it.” Even further back, in 1991, the Los Angeles Times noted in an editorial that the “dreams of striking it rich are fading in Silicon Valley.”

But AnnaLee Saxenian, professor and dean of the University of California School of Information, is just amused by this kind of talk.

“In the ’80s I wrote a master’s degree thesis saying Silicon Valley is going to stop growing. I said that housing costs were too high, labor was expensive, and the roads were way too congested,” said Saxenian in a lecture to Jefferson Fellows.
She predicted that Silicon Valley was going to consolidate, that it would become like the car industry with only a few big companies surviving, and that new companies are not going to locate operations in the area. By the mid-’80s, however, the Silicon Valley’s economy was still booming, and fueled the robust growth in demand and production of personal computers. Among the leading companies at the time were Apple, Silicon Graphics and Sun Microsystems.

“I was wrong,” Saxenian concedes. “I had to revise my ideas.”

There were a couple of things she missed, she says. The first is the fact that companies in the region are part of what she considers a “regional ecosystem” built around a network of open collaboration, making firms operating in the valley more resilient and flexible. The flow of information among them is fast and smooth and this has accelerated technological change in the Valley. “They really tried to avoid hierarchy,” she notes.
This was not the case in the ’60s and ’70s. Saxenian says during those times IT companies competed based on vertical integration where they control all aspect of hardware and software production. “This kind of business organization couldn’t cope with the rapid phase of change,” she notes.

The Argonauts
The second factor she missed is the role of immigrants. Silicon Valley has a tremendous depth of talent, and about half them are foreign born, mainly Indians and Chinese. Since the ’70s and ’80s, thousands of students from developing countries, including Ireland, Israel, Taiwan, China and India, went to Stanford and other universities in California to study engineering and the sciences. Based on a 2000 survey, there are around 20,000 Indians studying in California, and another 20,000 Chinese.

Unsure of what awaits them back home, many of these students, armed with postgraduate degrees, ended up working in high-technology companies in Silicon Valley. Some of them even started setting up their own businesses in the area.
Today more than a quarter of Silicon Valley’s highly skilled workers are immigrants from several countries like China, Taiwan, India, the United Kingdom, Iran, Vietnam, the Philippines, Canada and Israel.

“By the end of the 1990s, Chinese and Indian engineers were running 29 percent of Silicon Valley’s technology businesses. By 2000, these companies collectively accounted for more than $19.5 billion in sales and 72,839 jobs. And the pace of immigrant entrepreneurship has accelerated dramatically in the past decade,” notes Saxenian.

After working a decade or more in Silicon Valley, many of these workers went back to their homeland and set up businesses, especially when the economies of their respective countries started to improve.

Saxenian admits she doesn’t have exact figures but she estimates that about 10 percent to 15 percent went home after having “marinated” in the Silicon Valley culture. Around 30 percent to 40 percent of them shuttled back and forth between Silicon Valley and their home countries, setting businesses mostly in high-technology industries, and serving as bridges to firms and innovators in both countries.

She calls them “the new Argonauts,” in reference to Greek mythology where Jason and his band sailed the high seas in search of wealth and adventure. These “Argonauts” are responsible for creating cross-Pacific collaborations that, for instance, fueled Taiwan’s rise in the 1990s as a global center of technology production.

“A similar process is now underway linking both Silicon Valley and the urban centers of Eastern China,” Saxenian said in another paper for Cornell University entitled “Brain Circulation and Capitalist Dynamics: The Silicon Valley-Shinchu-Shanghai Triangle.”

“And transnational communities have played a central role in the emergence and upgrading of software capabilities in India, Ireland and Israel.”

Tapping into this dynamic global network, she explained, could bring benefits to developing countries like the Philippines. To take advantage of the network, developing countries should invest in technical education.

The rise of innovation centers in Asia, many of which are manned by returning scientists, has been worrying some analysts, especially since this has often been associated with the loss of jobs, as well as the perceived decline in American technological superiority. According to East-West Center’s Ernst, numerous American companies are opening R&D centers all over India and China in a phenomenon called “innovation offshoring,” thus raising fears that China may eventually leap over the US in terms of technological superiority.

But Gregory Shea, president of the United States Information Technology Office representing high-technology companies in China, dismisses this view. He argues that these new R&D centers are more involved in development rather than research. Ultimately, he believes that offshoring and outsourcing will even strengthen American multinational companies.

“When you look closely at these [R&D centers], they usually involve less-than-leading-edge technology. Rather they are aimed at producing high-volume, relatively commoditized products and components for local and regional markets,” notes Shea. “These investments are critical for securing and building a strong market position in such a large and expansive market as China.”

He adds: “They are also critical to ensuring continued revenue growth for the company as a whole, which is vital to supporting high-end jobs in research, design, marketing, finance, legal and other areas of corporate administration in the headquarters [in the US] and other countries.”

Saxenian believes Silicon Valley serves as the hub of this global innovation network that reaches as far as Beijing, Shanghai, Bangalore, Ireland and Israel. “These [innovation centers] don’t compete; they complement each other,” she says.
She admits, however, that regional economies in the Asia-Pacific region will eventually develop their capabilities in innovation as they invest more in education and research, and form relevant institutions.

As such, Saxenian says Silicon Valley’s dominant role in innovation and technological change will eventually diminish. “This does not imply decline,” she quickly clarifies. “Rather it will become one of many nodes in a more open and distributed global network of differently specialized and complementary regional economies.”

Will Saxenian be proven wrong again? Only time will tell.
(Note: This article was published in BusinessMirror on 19 June 2007)

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