Is Silicon Valley’s Ecology of Innovation Sustainable?

At last count, there were nearly 59 technology regions around the world that include the “Silicon” moniker including "Silicon Alley" in New York City, "Silicon Alps" in Austria, and "Silicon Wadi" in Israel.  It is absolutely the greatest brand name that any tech region can have in the world.  Undoubtedly this is a testimony to the decades of continuous innovation and prolonged success of the original "Silicon Valley" in California, home of such renowned companies as Intel, Apple, Facebook and Twitter to name a few.

In seeking a better understanding of the Silicon Valley’s economy, I have concluded that an effective framework is that of an ecosystem. The ecosystem model helps define and describe how various elements in a region interact to generate economic vitality through innovation while ensuring its survival.  An innovation ecosystem is a dynamic adaptive organism which creates, consumes, and transforms knowledge and ideas into innovative products via the continuous formation of new businesses in a complex matrix of relationships among key elements.

The Innovation Ecosystem

In a speech entitled "Is Silicon Valley Sustainable?" which I delivered at the Triple Helix IX Conference, Stanford University, in Stanford, California, on July 14, 2011, I identified several “key elements” of the Silicon Valley’s innovation ecosystem:

1. Research Universities—the foundational element and a “wellspring” of research and ideas that trigger innovation; research universities also provide critical training for the region’s workforce and offer companies access to high-tech labs and equipment.

2. Entrepreneurs - the “biological hosts” that convert ideas into products. Without entrepreneurs, bold ideas would never see the light of day.

3. Investment Capital – the life blood of innovation. Venture capitalists and angel investors provide much-needed “nutrients” in the form of cash and business expertise to fuel the process of converting ideas into products.

4.  Workforce – the myriad of skilled and specialized “organisms” that get things done. No region can survive without a skilled and dedicated workforce.

5.  Social & Professional Networks – the “clusters” that create opportunities for the exchange of information, ideas, contacts and connections shared freely despite the highly competitive business environment.

6.  Business Environment – the “forces” that can contribute to enhance the health of an ecosystem. These include the prevailing attitudes of local, regional, state, and federal  governments  toward business and economic activity. Taxation systems, costs of living and other factors can affect the business environment of an innovation region quite profoundly. Other important factors include the presence of various business services such as accounting and legal firms, business banking, and various types of consultancies.

7.  Quality of Life – including a good climate, scenic beauty, good infrastructure, good schools, safety and security, cultural venues, good restaurants, etc.  Place matters - even in our digital age.  A high quality of life will attract the best and brightest from many lands to work and live in a region. Ultimately, innovation depends on creative and smart people living and working together harmoniously in a place that they and their families enjoy.

8.  Integrative Organizations (IO’s) – the “catalysts” that stimulate activity. Integrative organizations (IO’s) play a vital role in the success and sustainability of innovation regions as they bring all the other elements together and stimulate collaboration. Regions with one or more boundary-spanning, cross-professional networks are much better at supporting innovation than siloed ones. Integrative organizations can facilitate new relationships between other key elements. They can also be important sources of know-how, access to expertise and money. A good example is CONNECT in San Diego. CONNECT is a regional program that catalyzes the creation of innovative technology and life sciences products in San Diego County by linking inventors and entrepreneurs with the resources they need for success. Since 1985, CONNECT has assisted in the formation and development of more than 3,000 companies.

With this framework in mind, I will only examine the elements of the Silicon Valley innovation ecosystem that are at risk and may affect the sustainability of the region.

At-risk elements

Let me first discuss foundational Element #1: Research Universities. There are three world-class entrepreneurial research universities in the San Francisco Bay Area that support the Silicon Valley economy. These are Stanford University, the University of California at Berkeley, and UC San Francisco. Financially, Stanford, a private institution, is doing well. The other two state-supported institutions are under severe financial stress because of California’s severe budget problems. Nearly half a billion dollars have been lopped off the budget of the ten-campus UC system in 2011. This adversely affects UC system’s research budgets as well as retention of top research faculty members who are in a highly competitive global market for top talents. All three campuses engage in significant entrepreneurial activities via their tech-transfer programs as well as business startup programs.

The rise of entrepreneurial research universities (ERU’s) is no longer just an American phenomenon – this concept has gone global. To the surprise of many us today, the top ten ERU list includes only four American universities: Stanford, MIT, UC Berkeley, and UC Davis. The rest are located in northern Europe and Asia. ERU’s are ranked via an algorithm developed by YouNoodle.com. Ranking is based upon a university’s significance as a business startup community. The determining factors include the number and quality of startups formed, number of business plan competitions, availability of talent, investments in the startup creation process, and success of past startups.

In general, the global rise of startups is welcome from a worldwide prosperity and job creation perspective. The trend, however, also suggests a greater competitive challenge for regions like Silicon Valley. There is some risk for the innovation economy of Silicon Valley as other high tech regions in the US and abroad is increasingly becoming more competitive.

Let’s consider another major area of concern-- Element 4: Workforce.( I will skip elements 2 and 3 as they are not major areas of concern at this time.)

There has been a talent war raging in Silicon Valley for the last couple of years despite a slow-growing economy and high unemployment levels in the U.S. (9%) and California (>12%). Why? Because there is a major skills gap in the U.S. and in Europe. (Mary Walshok, Tapan Munroe, and Henry Devries, Closing America’s Job Gap, WBusiness Books, 2011).   The skills gap is particularly acute in science, technology, engineering, and mathematics – the STEM subjects. The skills of the American workforce are not aligned with where technology trends are heading and this trend is getting worse. The most obvious indicator I can cite to illustrate my point is the monthly job vacancy data published by the U.S. Bureau of Statistics. Despite a 9% unemployment level, there were nearly 3.1 million job vacancies in the U.S. in February 2011. Most of these jobs required a STEM background. That vacancy rate has persisted since early 2011.

Let me now consider Element # 6: Business Environment. My major concern here is that America’s severe fiscal crisis may deter any significant government investments in cleantech projects. The situation is likely to be further exacerbated by the recent failure of Solyndra Inc. that received a federal loan of half a billion dollars. Still, more intensive efforts should be undertaken to make cleantech one of the clusters for the Valley’s future.

Let us move on to Element # 7: Quality of Life. Silicon Valley is fortunate to have a salubrious climate, scenic beauty, fine wine, good coffee, numerous amenities and convenient access to San Francisco – one of the most attractive cities in the world. But there are problems even in this near paradise. They include:

1.    Increasing traffic congestion;

2.    Fragmented public transit; BART does not connect the Valley with San Francisco and the regional airports;

3.    High cost of housing;

4.    Declining educational performance of the Valley’s youth.

My final comments center on Element #8: Integrative Organizations (IO’s). There are few public-private partnership organizations in San Francisco Bay Area that provide such a function in a limited manner. To the best of my knowledge, the region does not have IO’s like San Diego’s CONNECT. This is an area where Silicon Valley would benefit from emulating other regions. In this connection it is important to remember the two world class entrepreneurial research universities in the region—Stanford and UC Berkeley- function as IO’s as well as innovation accelerators. Thus their presence effectively  compensates for the lack of an integrative organization such as CONNECT.

In conclusion, despite the many challenges and risks discussed above, Silicon Valley remains one of the top innovation regions in the world. It has a world class culture of innovation and collaboration. And, the Valley has an incredible record of sustained success through many boom bust cycles. No tech-region matches the entrepreneurial exuberance of Silicon Valley. But the region should not take its future for granted. Complacency is risky.

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Tapan Munroe is a seasoned author, columnist, and consulting Economist. His books include Dot.com to Dot Bomb—Understanding the Dot.com Boom, Bust, Resurgence;
What Makes Silicon Valley Tick?; and Closing America's Job Gap.

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