the team at startup Fairchild Semiconductor

The team at Fairchild Semiconductor, shown here in 1960 in San Jose, California, would produce the first integrated circuit from silicon. Two, Gordon Moore and Robert Noyce, would later found Intel.

For 50 years, the experts have tried to figure out what makes Silicon Valley tick. The answer is people.

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 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.


Link to article on MIT Technology Review’s website

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  • sakky

    If I may be allowed to make another comment, if it is really true that the magic ingredient of Silicon Valley is smart people, then why don’t Silicon Valley firms simply pay smart people better? I find it both fascinating and disconcerting that Silicon Valley, for all its wealth, nevertheless refuses to pay its smart employees as well as, say, the investment banks and strategy consulting firms of New York City or San Francisco. Every year, boatloads of smart Silicon Valley engineers leave for top MBA programs never to return, instead switching careers to banking or consulting because those industries pay better.

    So if it is indeed true that the braindrain of smart people will bleed the life out of Silicon Valley’s companies, well, what about the aforementioned braindrain from Silicon Valley engineering to NYC/SF banking/consulting? If Silicon Valley firms paid as well as the banks and consulting firms
    do, then we wouldn’t continue to see the annual exodus of SV engineers
    to banking and consulting. Why doesn’t anybody seem to be particularly motivated to plug that braindrain?

    • EricB

      Reward isn’t just money. People in Silicon Valley are likely to be doing work they enjoy, and has the potential to improve the lives of millions.

      I’m not saying that bankers don’t make a contribution to human happiness, but the ones who make the big bucks tend to be the creators of the very instruments that led to the 2008 crash. Similarly, consultants can provide real benefits to the wider community; I just doubt that those who focus on complex tax-efficient structures deliver enough to society to give them the kind of satisfaction one gets from developing a neat program or gadget.

      • sakky

        I agree that money isn’t everything…but it is certainly *something*. The higher-paying a particular career happens to be, the more desirable that career will be. Again, that is why many of the best students at the top colleges don’t really want to be engineers, but would rather pursue higher paying alternative careers, such as consulting or banking. Before the crash, nearly half of all undergrads from MIT who entered the workforce took jobs not in engineering or science but rather in consulting or banking, and even after the crash, nearly a third still do.

        Nevertheless, I agree with your point that personal satisfaction and quality of life are also determinants of career desirability. So if Silicon Valley firms really want to retain the ‘magic ingredient’ of their people, then why don’t they improve the desirability and satisfaction of their engineering jobs? Give the engineers more interesting job responsibilities and a faster career track. Let those who want to work with teams and on cross-company projects be allowed to do so, rather than be stuck in a cubicle all day long.

        Consider this quote in Time Magazine:

        “…Even at M.I.T., the U.S.’s premier engineering school, the traditional career path has lost its appeal for
        some students. Says junior Nicholas Pearce, a chemical-engineering major from Chicago: “It’s marketed
        as–I don’t want to say dead end but sort of ‘O.K., here’s your role, here’s your lab, here’s what you’re
        going to be working on.’ Even if it’s a really cool product, you’re locked into it.” Like Gao, Pearce is
        leaning toward consulting. “If you’re an M.I.T. grad and you’re going to get paid $50,000 to work in a
        cubicle all day–as opposed to $60,000 in a team setting, plus a bonus, plus this, plus that–it seems like a no-brainer.”