For 50 years, the experts have tried to figure out what makes Silicon Valley tick. The answer is people.
By Vivek Wadhwa
By 1960, Silicon Valley had already captured the attention of the world as a teeming technology center. It had spawned the microwave electronics industry and set a pattern for industry-academic partnerships. French president Charles de Gaulle paid a visit and marveled at its sprawling research parks set amid farms and orchards south of San Francisco.
Stanford University, which is at the heart of Silicon Valley, had given birth to leading companies such as Hewlett-Packard, Varian Associates, Watkins-Johnson, and Applied Technologies. These companies were pushing the frontiers of technology. There was clearly something unusual happening here—in innovation and entrepreneurship.
Soon enough, other regions were trying to copy the magic. The first serious attempt to re-create Silicon Valley was conceived by a consortium of high-tech companies in New Jersey in the mid-1960s. They recruited Frederick Terman, who was retiring from Stanford after having served as provost, professor, and engineering dean.
Terman, sometimes called the “father of Silicon Valley,” had turned Stanford’s fledgling engineering school into an innovation engine. By encouraging science and engineering departments to work together, linking them to local firms, and focusing research on the needs of industry, he created a culture of coöperation and information exchange that has since defined the region.
That was the mixture that New Jersey wanted to replicate. It was already a leading high-tech center—home to the laboratories of 725 companies, including RCA, Merck, and the inventor of the transistor, Bell Labs. Its science and engineering workforce numbered 50,000. But because there was no prestigious engineering university in the area, its companies had to recruit from outside, and they feared losing their talent and their best technologies to other regions. (Even though Princeton University was nearby, its faculty generally shunned applied research and anything that smelled of industry.)
New Jersey’s business and government leaders, led by Bell Labs, decided that the solution was to build a university much like Stanford. And that is what they hoped Terman would do.
Terman drafted a plan, but he could not get it off the ground, largely because industry would not collaborate. This history was documented by Stuart W. Leslie and Robert H. Kargon in a 1996 paper titled “Selling Silicon Valley.” They tell of how RCA would not sign up for a partnership with Bell Labs, how Esso didn’t want to share its best researchers with a university, and how Merck and other drug firms wanted to keep their research dollars in house. Despite common needs, companies would not work with competitors.
Terman would later try again in Dallas. But he failed for similar reasons.
In 1990, Harvard Business School professor Michael Porter proposed a new method of creating regional innovation centers—this time around an existing research university. He observed that geographic concentrations of interconnected companies and specialized suppliers gave certain industries productivity and cost advantages. Porter postulated that by bringing these ingredients together into a cluster, regions could artificially ferment innovation (see “In Innovation Quest, Regions Seek Critical Mass”).
Porter and legions of consultants following his methodology prescribed top-down clusters to governments all over the world. The formula was always the same: select a hot industry, build a science park next to a research university, provide subsidies and incentives for chosen industries to locate there, and create a pool of venture capital.
Sadly, the magic never happened—anywhere. Hundreds of regions all over the world collectively spent tens of billions of dollars trying to build their versions of Silicon Valley. I don’t know of a single success.
What Porter and Terman failed to recognize is that it wasn’t academia, industry, or even the U.S. government’s funding for military research into aerospace and electronics that had created Silicon Valley: it was the people and the relationships that Terman had so carefully fostered among Stanford faculty and industry leaders.
University of California, Berkeley, professor AnnaLee Saxenian understood the importance of people, culture, and connections. Her 1994 book Regional Advantage: Culture and Competition in Silicon Valley compared the evolution of Silicon Valley with that of Route 128—the ring around Boston—to explain why no region has been able to replicate the California success story.
Saxenian noted that until the 1970s, Boston was far ahead of Silicon Valley in startup activity and venture capital investments. It had a huge advantage because of its proximity to East Coast industrial centers. By the 1980s, Silicon Valley and Route 128 looked alike: a mix of large and small tech firms, world-class universities, venture capitalists, and military funding. And then Silicon Valley raced ahead and left Route 128 in the dust.
The reasons were, at their root, cultural. It was Silicon Valley’s high rates of job-hopping and company formation, its professional networks and easy information exchange, that lent the advantage. Valley firms understood that collaborating and competing at the same time led to success—an idea even reflected in California’s unusual rule barring noncompete agreements. The ecosystem supported experimentation, risk-taking, and sharing the lessons of success and failure. In other words, Silicon Valley was an open system—a giant, real-world social network that existed long before Facebook.
It also doesn’t hurt that Silicon Valley has excellent weather, is close to mountains and the ocean, and has a myriad of state-park hiking trails. These help foster a culture of optimism and openness.
Note that from 1995 to 2005, 52.4 percent of engineering and technology startups in Silicon Valley had one or more people born outside the United States as founders. That was twice the rate seen in the U.S. as a whole. Immigrants like me who came to Silicon Valley found it easy to adapt and assimilate. We were able to learn the rules of engagement, create our own networks, and participate as equals. These days, the campuses of companies such as Google resemble the United Nations. Their cafeterias don’t serve hot dogs; they serve Chinese and Mexican dishes, and curries from both northern and southern India.
This is the diversity—a kind of freedom, really—in which innovation thrives. The understanding of global markets that immigrants bring with them, the knowledge they have of different disciplines, and the links that they provide to their home countries have given the Valley an unassailable competitive advantage as it has evolved from making radios and computer chips to producing search engines, social media, medical devices, and clean energy technology.
The Valley is a meritocracy that’s far from perfect, however. And some of its flaws tear at the very fabric that makes it unique. Women and certain minorities like blacks and Hispanics are largely absent from the ranks of company founders and boards. Venture capitalists have a herd mentality and largely fund startups that produce short-term results—leading to a preponderance of social-media and photo-sharing apps. Real-estate prices are so high that most Americans can’t afford to relocate there.
All these things slow the Valley down, but they won’t stop it. The only serious challenge I see to Silicon Valley is, ironically, from the same government that once catalyzed its development. Silicon Valley is starved for talent. Restrictions on work visas prevent foreigners from filling its openings. The latest data indicate more than one million foreign workers on temporary work permits now waiting to become permanent residents. The visa shortage means some will have to leave, and others are getting frustrated and returning home.
This brain drain could bleed the life out of Silicon Valley’s companies. Then indeed we will have real competitors emerging in places like New Delhi and Shanghai. But it won’t be because they discovered some recipe for innovation clusters that finally works. It will be because we exported the magic ingredient: smart people.
Vivek Wadhwa is the author of The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent (Wharton Digital Press, 2012). Follow him on Twitter @wadhwa.
This is a repost of an article that appeared in the MIT Technology Review on July 3, 2013.